FLYHT Aerospace Solutions Annual Report 2014

FY2014 Annual Report · FLYHT Aerospace Solutions

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n n u al Report
FLYHT
AEROSPACE
SOLUTIONS LTD.

H
E
F
U

C TIVIT

OF CON N E

Table of Contents

LETTER TO SHAREHOLDERS .......................................................................................................19

MANAGEMENT DISCUSSION & ANALYSIS .............................................................................21

NON-GAAP FINANCIAL MEASURES ..................................................................................21
FORWARD-LOOKING STATEMENTS ...................................................................................21
OVERVIEW ...................................................................................................................................21
TRENDS AND ECONOMIC FACTORS .................................................................................24
CONTRACTS AND ACHIEVEMENTS OF FISCAL 2014 .....................................................24
RESULTS OF OPERATIONS ....................................................................................................25
• SELECTED RESULTS .......................................................................................................25
• FINANCIAL POSITION ....................................................................................................26
• COMPREHENSIVE INCOME ........................................................................................29
• OTHER ................................................................................................................................34

INDEPENDENT AUDITORS’ REPORT ........................................................................................37

CONSOLIDATED FINANCIAL STATEMENTS ............................................................................38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS .............................................42

CORPORATE INFORMATION ......................................................................................................67

The Future of
Connectivity

Commonly Used Financial Terms
& Aviation Acronyms

ACARS: Aircraft Communications

IATA:

International Air Transport

Addressing and Reporting System

Association

ADCC: Aircraft Data Communication

ICAO:

International Civil Aviation

Corporation

Organization

AFIRS: Automated Flight Information

ICE:

Iridium Compatible Equipment

Reporting System

IFRS:

International Financial

ANAC: National Civil Aviation Agency

Reporting Standards

of Brazil

ITU:

International Telecommunications

BEA:

Bureau d’Enquetes et d’Analyses

Union

(French authority for safety

investigations in civil aviation)

CAAC: Civil Aviation Administration

of China

COMAC: Commercial Aircraft

Corporation of China, Ltd.

EASA: European Aviation Safety Agency

ECAA: Egyptian Civil Aviation Authority

FAA:

Federal Aviation Administration

FIRST: Fuel Initiative Reporting
System Tracker

MD&A: Management Discussion
and Analysis

NCAA: Nigerian Civil Aviation Authority

OEM:

Original Equipment Manufacturer

R&D:

Research and Development

SADI:

Strategic Aerospace and

Defence Initiative

SFP:

Statement of Financial Position

STC:

Supplemental Type Certificate

TCCA: Transport Canada Civil Aviation

GAMA: General Aviation Manufacturers

YTD:

Year-to-date

Association

GAAP: Generally Accepted Accounting

Principles

FLYHT AEROSPACE SOLUTIONS LTD.

ANNUAL REPORT 2014

Investment
Highlights

AN UNPARALLELED
TECHNOLOGY that
saves money, time
and drives efficiencies
previously unavailable
to the airline industry.

UNIQUELY
POSITIONED to
support the industry in
upcoming regulations
such as mandates on
real time flight tracking.

FLYHT AEROSPACE SOLUTIONS LTD.

MULTIPLE
REVENUE
STREAMS for high
monthly revenue per
aircraft.

TECHNOLOGY
INSTALLED on over
400 aircraft.

HIGH MARGIN
OPERATIONS – 75-
85% gross margin with
recurring revenues,
resulting from multi-
year contracts.

LONGEVITY OF
TECHNOLOGY in
the aviation industry
means that once a
technology has been
accepted, it remains
for an extended
period of time.

ANNUAL REPORT 2014

2014
FLYHT Plan
Review

INCREASE INSTALLATIONS IN CHINA
TO MEET MANDATE;

EXPAND SERVICE MODULES TO
INCREASE REVENUES;

• While slower than expected,
the main regions are still
expected to install by
2017 based on government
regulations. AFIRS has been
installed on 42 aircraft in China.

• There is a large market in
China and we continue to build
relationships with airlines.

INSTALL ON TWO BUSINESS
AIRCRAFT OEMs;

• The activities of last year after MH370 took
many resources away from sales and into
industry committee work. Those resources
have made great headway in the areas that
count to have more than just tracking be
the issue of the day for the industry. Business
aviation is behind the importance of that work
but will be resumed at an appropriate time.

• We developed three new programs
to improve customers’ operations.

• FLYHTFollow: Aircraft Situational Display
to enable real-time flight tracking.

• FLYHTSafe: Provides operational safety
alerts to the airline.

• FLYHTLink: iPad link enables EFB
connectivity with onboard systems.

PURSUE ADDITIONAL COMMERCIAL
OEM OPPORTUNITY;

• Moving forward on this front with meetings
and presentations.

POSITIVE CASH FLOW FROM
OPERATIONS.

• Not cash flow positive in 2014 and still
working towards that goal for late 2015 to
early 2016 because of the slow-down in
sales in 2014.

FLYHT AEROSPACE SOLUTIONS LTD.

2015
FLYHT Plan:

• Increase sales force and focus on major markets

• Capture a major carrier

• In China: continued vigilance in order to meet mandate

for satellite communications in 2017; add an AFIRS repair depot

• Respond to commercial OEM requests for alerting and
streaming technology

• Continue to participate in industry groups to make changes

in regulations for aircraft alerting and streaming

• Development: expand application to mobility platforms,

lay groundwork for high bandwidth solution

ANNUAL REPORT 2014

Revenue Sources

6.6%

10.5%

53.1%

29.8%

Voice & data services

AFIRS sales

Parts sales

Services

Dollar amounts available on page 29

AFIRS UpTime Usage Growth

HOURS

350000

300000

250000

200000

150000

100000

50000

DOLLARS

$4,000,000

$3,500,000

$3,000,000

$2,500,000

$2,000,000

$1,500,000

$1,000,000

$500,000

2009

2010

2011

2012

2013

2014

Flight Hours

Recurring Revenue

FLYHT AEROSPACE SOLUTIONS LTD.

Revenue Based
on Location

4.6%
$317,112

48.2%
$3,321,408

NORTH
AMERICA

4.4%
$304,449

EUROPE

CENTRAL
& SOUTH
AMERICA

AFRICA
& MIDDLE
EAST

17.4%
$1,194,644

15.8%
$1,086,049

ASIA

AUSTRALASIA

9.6%
$658,366

TOTAL

$6,882,028

ANNUAL REPORT 2014

FLYHTStream
Industry leading: automated,
aircraft-driven alerting

SINCE 2009 FLYHT HAS DEMONSTRATED ITS COMMERCIALLY AVAILABLE, REAL-TIME
DATA STREAMING PROGRAM TO INDUSTRY WORKING GROUPS, GOVERNMENTS
AND INDUSTRY PANELS. WHILE THE INDUSTRY AND AIRLINES DISCUSS TRACKING
SOLUTIONS FOR AIRCRAFT, FLYHT IS THE ONLY COMPANY TO ENABLE AUTOMATED
AIRCRAFT-DRIVEN ALERTS. AFIRS’ FLYHTSTREAM APPLICATION CAN STREAM
BLACK BOX DATA FROM AN AIRCRAFT IN REAL-TIME.

THE TAMPER-PROOF
TECHNOLOGY
BOASTS WORLDWIDE
DATA STREAMING
COVERAGE WITH
AMPLE BANDWIDTH
VIA THE IRIDIUM
SATELLITE NETWORK.

Black box data streaming can
be triggered automatically
in the event of an abnormal
situation, or triggered
manually by the pilot or by
crews on the ground. This
data provides the airline

with important situational
information, allowing the
airline to provide immediate
support to the flight crew
or, at the very least, to
immediately dispatch search
and rescue crews to the
location of the aircraft. All of
these features come at a cost
to the airline of $10/minute
when streaming.

FLYHT’s technology enables
operators to have a detailed
awareness about their aircraft.

For many operators, simply
knowing the location of the
aircraft is not enough, they
need to know what the pilots
know. In an emergency it’s
not enough to know that the
aircraft is not where it should
be, they need to know what’s
happening. FLYHTStream
provides this information
and is at the forefront of
the industry for automated
communications from the
aircraft for health and safety
monitoring.

FLYHT AEROSPACE SOLUTIONS LTD.

Our customers demand a high
level of connectivity. In April
of 2014, FLYHT’s customer,
First Air, announced it would
be the first airline in the world
to implement real-time data
streaming capabilities on
its entire fleet. FLYHT looks
forward to providing this
solution to other airlines as
they recognize the added
safety and cost savings
benefits AFIRS provides. The
Future of Connectivity is here!

FLYHT did underestimate the
industry’s response to the
missing aircraft and accidents of
the past year. The industry has
waited to see what regulations
would be set before making any
changes to their operations.
We understand the caution
on some levels, in order to
make sure the technology is
the right fit for the set industry
regulations, though we continue
to push the boundaries on every
level to increase adoption of
our technology. We have the
industry’s needs and demands
in mind, including adding
features to our technology such
as increased simplicity and
mobility. We believe our vision
of connectivity is the way of the
future and are determined to
bring benefits to more airlines,
increasing efficiencies and
reducing accidents.

ANNUAL REPORT 2014

FLYHT’s Latest and Greatest:
FLYHTFollow, an aircraft
situational display

IN 2014, THE COMPANY
DEVELOPED ITS OWN
AIRCRAFT SITUATIONAL
DISPLAY OR ASD.
SIMPLY DESCRIBED AS
AN ELECTRONIC MAP
ON WHICH AIRLINES
DISPLAY AND FOLLOW
THEIR AIRCRAFT USING
THE IRIDIUM SATELLITE
NETWORK. IT PROVIDES
FLYHT’S CUSTOMERS WITH
IMPROVED BENEFITS AND
ENHANCED TOOLS FOR
COMMUNICATING WITH
AND TRACKING THEIR
AIRCRAFT.

FLYHT AEROSPACE SOLUTIONS LTD.

FLYHTFollow is a unique application that
integrates real-time flight following,
routine aircraft notifications, aircraft health
exceedance alerts and the ability to call or
send text messages immediately to the
aircraft. The program supports a number of
aviation-specific tools including charts and
weather information. It also provides the
aircraft operator with the ability to enable
FLYHTStream black box data streaming on
their airborne aircraft anywhere in the world,
at any time.

A majority of the value AFIRS provides
FLYHT’s customers lies in creating improved
awareness about aircraft activities and
location. Airlines require connectivity
in remote regions where they operate
and FLYHTFollow provides the airlines’
operational control centres with greater
awareness about their aircraft.

Previously, AFIRS fed other ASD systems.
FLYHTFollow presents customers with the
whole package, customized and integrated
with AFIRS and UpTime.

ANNUAL REPORT 2014

2014
Major Announcements

Contracts

April 15

In 2014 FLYHT signed a total of five contracts
with customers worldwide. Of the aircraft
contracted 12 were for the AFIRS 220 and 15
were for AFIRS 228 as described below:

February 3

FLYHT announced the appointment of Matt
Bradley as President. Mr. Bradley had been with
the company since 2008.

February 13

FLYHT was recognized as a top ten performer
in the Technology & Life Sciences Category of
the 2014 TSX Venture 50 ®. The list is a ranking
of strong performing companies trading on the
TSX Venture Exchange.

March 4

FLYHT signed a contract with the Middle
Eastern based operations group of an
international cargo airline for the AFIRS 228B
on four Boeing 757 aircraft.

March 5

FLYHT signed a contract with an Asian charter
airline for the AFIRS 220 on four Bombardier
CRJ aircraft.

March 28

FLYHT received the STC for the AFIRS 228 on
the ATR – 42/72 series aircraft from the National
Civil Aviation Agency of Brazil. This is FLYHT’s
first certification from Brazil and will allow the
Company to proceed with its first AFIRS 228
Brazilian customer for 12 ATR-200.

FLYHT announced that its customer, First
Air, added FLYHTStream’s automatically
triggered, real-time data and live black box
streaming capability to its current fleet of
B737, ATR and B767 aircraft. First Air operates
throughout the Canadian Arctic in some of the
harshest conditions on earth, and as a result is
continually striving to improve the safety and
operational efficiency of the airline. Enabling
FLYHTStream raises the standard of tracking
and automated alerting that is unsurpassed in
the industry.

Brock Friesen, President and CEO of First Air
said, “FLYHT’s Automated Flight Information
System (AFIRSTM) ensures we have 100%
visibility on our aircraft at all times. We are
proud to be industry leaders in adopting the
FLYHTStream capability to ensure First Air
has the highest level of operational awareness
available on any aircraft flying today. It is
another important step in our continual
process of enhancing safety.”

April 23

FLYHT’s technology, AFIRS, reached a major
milestone having surpassed one million flights
onboard customer aircraft.

Bill Tempany, CEO of FLYHT said: “The steady
growth of flights is exciting. The value received
by our customers using AFIRS continues
to grow as we add services to our existing
applications. FLYHT’s focus for the coming
years will be to increase the applications
available to our customers and the value we
can bring to them on each and every flight.”

FLYHT AEROSPACE SOLUTIONS LTD.

ANNUAL REPORT 2014

FLYHT AEROSPACE SOLUTIONS LTD.

May 29

FLYHT signed a contract with a Nigerian airline
for the sale and delivery of the AFIRS 220 on
five Boeing 737 aircraft.

“Our recent meetings at the African Airlines
Association conference in Kenya have proven
to be invaluable and we continue to build on
these relationships to increase our client base,”
remarks Matt Bradley, President of FLYHT.
“This latest customer will see the benefits of
improved operations and increased safety
that AFIRS provides and we look forward to
working with them.”

June 18

FLYHT announced the settlement of legal
action and outstanding claims with Sierra
Nevada Corporation. The companies also
renewed their strategic relationship by
updating their license and manufacturing
agreement and adding a value-added reseller
agreement.

“We are pleased and excited to renew our
relationship with FLYHT. We believe that
the need for AFIRS in the military and
government aircraft industry is significant
and the multi-feature offering of the AFIRS
unit is critical in today’s budget-constrained
environment. AFIRS can improve the
efficiencies of operating and maintaining
aircraft while also reducing the operation
and maintenance cost and improving flight
safety.” said Greg Cox, corporate vice president
for SNC’s Communication, Navigation and
Surveillance/Air Traffic Management business
area.

June 24

FLYHT announced that it commenced trading
on OTCQX in order to increase accessibility for
U.S. based shareholders, under the symbol
FLYLF.

“Upgrading to OTCQX was a logical step
for FLYHT to increase accessibility for our
shareholder base in the U.S.,” said Bill Tempany,
CEO of FLYHT. “As part of the international
aviation community, it makes sense to open
our doors for investment outside of Canada
and make investment in FLYHT easier for U.S.
investors.”

July 15

FLYHT announced its partner L-3 Aviation
Recorders has received Airbus’ formal
notification of certification for the L-3
Automated Flight Information Reporting
System (“AFIRS”) 228S for the Airbus A320
family of aircraft.

July 17

FLYHT signed a contract with the national
carrier of an African airline for the sale and
delivery of AFIRS for its fleet of 11 planes. AFIRS
220 will be installed on three B737-500 aircraft,
while the AFIRS 228 will provide solutions for
DHC-8-Q400, B737-700 and ERJ190 aircraft.

July 21

FLYHT received a re-issued STC for the Hawker
Beechcraft 700/800/900 model aircraft from
the FAA to add the AFIRS 228 to its existing
STC.

“We continue to expand and develop the
AFIRS 228 STCs to reach popular aircraft
types in operation by several of our existing
customers as well as prospective customers,”
said Matt Bradley, President of FLYHT.

ANNUAL REPORT 2014

August 20

October 9

FLYHT appointed Mr. John Belcher to the Board
of Directors.

Bill Tempany, CEO of FLYHT stated, “We were
delighted when John accepted a position on
our board to help steer the Company through
what we expect to be a strong growth phase.
John’s success with ARINC, his Canadian
roots and prior work with Transport
Canada and as CEO of Hughes Aircraft of
Canada gives him a unique understanding
of the challenges businesses like ours face
in managing commercial goals in a very
rigid regulatory environment. The contacts
and knowledge John will contribute to our
board of directors will bring invaluable
insight and experience that management
and our employees will benefit from and help
us further drive the success of our growing
business collectively.”

August 20

FLYHT appointed Mr. Barry Eccleston to the
Board of Directors.

Bill Tempany, CEO stated, “We are very excited
to have a person of Barry’s caliber join our
Board at this important time in FLYHT’s
evolution. The Company is entering a growth
phase, and we are confident his contribution
will be significant to our success in the coming
years. We have worked for years to develop
technologies to help the aviation industry
improve its financial performance and – with
the guidance of our new board members –
we hope to increase the adoption rate of our
technologies.”

August 20

FLYHT announced the resignation of Mr.
Richard Hayden from the Company’s board.
He remained with the Company as Director of
Strategic Programs.

September 16

FLYHT announced the retirement of CFO, Mr.
Thomas French, CGA, and the appointment of
Ms. Nola Heale, CA.

FLYHT presented its AFIRS and FLYHTStream
technologies at the National Transportation
Safety Board’s (NTSB) public Emerging
Flight Data & Locator Technology Forum in
Washington, DC.

“FLYHT is pursuing every opportunity to
offer its expertise and participate in the
industry discussion on the future of aircraft
tracking, real-time data streaming and
communications,” stated FLYHT President,
Matt Bradley. “We have an internationally-
recognized data streaming technology
that is available to the industry now and
are committed to advocating for its full
implementation.”

November 13

FLYHT signed a contract with a North American
cargo customer for activation of the AFIRS 220
already installed on two of the airline’s recently
acquired B767-300 aircraft and for purchase of
three additional AFIRS 228 for their B767-200
aircraft.

November 19

FLYHT received the STC for AFIRS 228 on the
Airbus A320 aircraft from EASA.

December 9

FLYHT received the STC for AFIRS 228 on the
Boeing 767-300 from the FAA.

December 22

FLYHT announced that extension of the 8%
convertible debentures maturing on December
23 had been approved by a majority of the
debenture holders. The debenture maturity
was extended from December 2014 to
December 2016; the right of debenture holders
to convert the debentures to ordinary shares of
the Company at $0.40 per share was extended
to December 2015.

FLYHT AEROSPACE SOLUTIONS LTD.

ANNUAL REPORT 2014

To our
shareholders

2014 was the 100th anniversary of commercial aviation,
a celebration of the achievements and growth in the
industry. However, the loss of three commercial jets
highlighted the reality that we must still continue to push
the envelope in advancing technology in the industry. At
FLYHT, we believe our technology will satisfy and exceed
the industry’s need for aircraft tracking, alerting and
real-time data. While the Company did not have a record
financial year, we have solidified our presence within the
industry with regulators, customers, strategic partners
and other stakeholders with a number of positive
outcomes to report.

Throughout the year FLYHT participated in many industry
discussions and working groups hosted by organizations
including ICAO, IATA, the NTSB, ITU and the FAA. In
every instance our goal was to share our proprietary
real-time data streaming technology, FLYHTStreamTM
in addition to educating the industry that it is, in many
cases, possible to prevent disasters by alerting the airline
of abnormal events when they occur, a standard feature
of FLYHT’s equipment. We believe we were successful
in our efforts to demonstrate that this technology is
available today; it is certified, cost effective, tamper-
proof and has the bandwidth and global coverage to
communicate data from aircraft via the Iridium Satellite
Network. Our customer, First Air, led the industry in April
when it became the first airline to enable FLYHTStream
on all of its aircraft, providing added awareness on the
routes flown in Northern Canada.

On the public side of this issue, the pressure is mounting
from passengers and crew for airlines to enlist better
technologies. FLYHT has received a steady stream of
global media coverage highlighting these concerns.
The important thing to understand is that the aviation
industry is as safe as it is because it takes its time to
implement safety regulations to ensure all airlines have
the time and resources to comply. FLYHT’s goal is to
push the industry and airlines to adopt sooner in order
to be on the cutting edge, but not prejudice safety and
standards in the process.

While the air disasters of 2014 generated media attention
around our Company and technology, from a business
stand point, FLYHT saw a slow-down in AFIRS sales.
Unexpectedly, airlines put the brakes on spending for
these types of technologies in order to wait for regulators
to set guidelines that they can better understand and
follow. It wasn’t until early February of 2015 that we
heard the initial recommendations from ICAO. These
haven’t been set in stone yet as regulations, but are a
starting point and contain the same parameters as
the recommendations made by the NTSB in late 2014/
early 2015. The good news for our shareholders is AFIRS
meets and exceeds all of the recommendations, which
includes providing 15 minute aircraft tracking standard;
a standard that is performance-based not prescriptive,
meaning airlines would be able to use any technology
and procedure they deem suitable to meet the other
conditions; and a three-tiered approach covering
normal, abnormal and distress situations.

FLYHT AEROSPACE SOLUTIONS LTD.

RESULTS AND FINANCIAL CONDITION

GOING FORWARD

During 2014, we earned revenue on 44 units compared
to 62 units that earned revenue in 2013. These numbers
will fluctuate based on airline activities such as timing
of c-checks, which is when airlines are able to install
AFIRS during regular maintenance. Our overall revenue
was $6.9m from $8.0m in 2013; due mainly to very high
services revenue in 2013 when services were invoiced to
L-3 AR.

In 2014, we again saw a growth in the number of
flight hours and flights, although we did experience
a slowdown in recurring revenue growth with one of
our larger airline customers transitioning its fleet to a
different aircraft type. Receipt of the European (EASA)
STC for the ATR 72 has been disappointingly slow, but is
scheduled for 2015 which will then allow for the return of
those aircraft as units earning recurring revenue.

While we were still not cash flow positive in the year, as
was hoped at the beginning of the year, our financial
position remains strong, ending the year with $3.9
million cash as well as $7.2 million in current assets
against $4.2 million current liabilities. The approval
received from debenture holders late in 2014 to extend
maturity on the convertible debentures from December
2014 to December 2016 facilitated retention of up to an
additional $3 million dollars for FLYHT.

SHIPPING UPDATE

In terms of contracted regions, shipments to China were
slower than initially anticipated for the year. So far we
have shipped 44 units and installed 42 in total, and are
expecting a steady stream of orders and shipments into
2015, considering a shipment doesn’t always mean the
unit will be turned on and used promptly. Install schedules
and coordination amongst the airline personnel can
cause delays. Our sales director on the ground has done
an excellent job of building relationships with airlines and
industry groups in the region thereby further solidifying
our presence in this important market.

In August we appointed two well respected and well
known industry members, Barry Eccleston, President of
Airbus Americas, Inc. and John Belcher, former Chairman
and CEO of ARINC, to our board of directors. Both
enhance governance, business strategy and contribute
valuable industry knowledge.

the

their

initial
industry groups sharing
With
recommendations, the activities in the market seem
to be picking up from forward thinking customers. We
are proud to be leading the industry with real-time
black box data streaming and believe it, in combination
with enhanced tracking, is the future of the industry.
It is important to note that in addition to tracking, our
customers enjoy the benefits of AFIRS to increase
improve productivity, maximize
passenger safety,
efficiency and enhance profitability in their day to day
operations. We continue to innovate what data can be
collected, how it can be used and how to add value to
our customers and revenue to our company.

We want to thank our shareholders for their ongoing
support, our management and staff for the dedication
to deliver superior products in this challenging industry
and our customers for steering our product to provide
the most value to them.

Yours truly,

Bill Tempany, Chief Executive Officer

ANNUAL REPORT 2014

Management Discussion & Analysis

This management discussion and analysis (“MD&A”) is as of April 7, 2015
and should be read in conjunction with the audited annual consolidated
financial statements of FLYHT Aerospace Solutions Ltd. (“FLYHT” or the
“Company”) as at and for the years ended December 31, 2014 and 2013
and the accompanying notes. Additional information with respect to FLYHT
can be found on SEDAR at www.sedar.com. The Company has prepared its
December 31, 2014 consolidated financial statements and the notes thereto
in accordance with International Financial Reporting Standards (“IFRS”),
as issued by the International Accounting Standards Board (“IASB”). The
Company’s accounting policies are provided in note 3 to the consolidated
financial statements.

NON-GAAP FINANCIAL MEASURES

The Company reports its financial results in accordance with International
Financial Reporting Standards (“IFRS”) or Generally Accepted Accounting
Principles (“GAAP”). It also uses certain non-GAAP financial measures, such
as working capital, modified working capital, non-current financial liabilities,
and loss before research, development and certification engineering
expenses (“R&D”). FLYHT defines working capital as current assets less
current liabilities. The Company defines modified working capital as current
assets less current liabilities not including customer deposits or the current
portion of unearned revenue. A clearer picture of short-term net cash
requirements can be drawn by excluding these two items because those
customer deposits and unearned revenue are nonrefundable. The company
defines non-current financial liabilities as non-current loans and borrowings
plus non-current finance lease obligations. Loss before R&D is defined as
the net loss before the direct costs associated with R&D. These non-GAAP
financial measures are always clearly indicated. The Company believes
that these non-GAAP financial measures provide investors and analysts
with useful information so they can better understand the financial results
and perform a better analysis of the Company’s growth and profitability
potential. Since non-GAAP financial measures do not have a standardized
definition, they may differ from the non-GAAP financial measures used by
other companies. The Company strongly encourages investors to review its
financial statements and other publicly filed reports in their entirety and not
rely on a single non-GAAP measure.

FORWARD-LOOKING STATEMENTS

This discussion includes certain statements that may be deemed
“forward-looking statements” that are subject to risks and uncertainty.
All statements, other than statements of historical facts included in this
discussion, including, without limitation, those regarding the Company’s
financial position, business strategy, projected costs, future plans, projected
revenues, objectives of management for future operations, the Company’s
ability to meet any repayment obligations, the use of non-GAAP financial
measures, trends in the airline industry, the global financial outlook,
expanding markets, R&D of next generation products and any government
assistance in financing such developments, foreign exchange rate outlooks,
new revenue streams and sales projections, cost increases as related to

marketing, R&D, administration expenses, and litigation matters, may be
or include forward-looking statements. Although the Company believes
the expectations expressed in such forward-looking statements are based
on a number of reasonable assumptions regarding the Canadian, U.S., and
global economic environments, local and foreign government policies/
regulations and actions, and assumptions made based upon discussions to
date with the Company’s customers and advisers, such statements are not
guarantees of future performance and actual results or developments may
differ materially from those in the forward-looking statements.

Factors that could cause actual results to differ materially from those in the
forward-looking statements include but are not limited to production rates,
timing for product deliveries and installations, Canadian, U.S., and foreign
government activities, volatility of the aviation market for FLYHT’s products
and services, factors that result in significant and prolonged disruption of
air travel worldwide, U.S. military activity, market prices, foreign exchange
rates, continued availability of capital and financing, and general economic,
market, or business conditions in the aviation industry, worldwide political
stability or any effect those may have on the Company’s customer base.
Investors are cautioned that any such statements are not guarantees of
future performance, and that actual results or developments may differ
materially from those projected in the forward-looking statements.

Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that
such expectations will prove to have been correct. The Company cannot
assure investors that actual results will be consistent with any forward-
looking statements; accordingly, readers should not place undue reliance
on forwardlooking statements. The forward-looking statements contained
herein are current only as of the date of this document. The Company
disclaims any intentions or obligation to update or revise any forward-
looking statements or comments as a result of any new information, future
event or otherwise, unless such disclosure is required by law.

FLYHT OVERVIEW

FLYHT is a designer, developer and service provider of innovative solutions
to the global aerospace industry. The Company’s solutions improve the
productivity and profitability of its customers and enable communication
between pilots and ground support. FLYHT’s tools deliver data and voice
communication between the aircraft and operations groups on the
ground, on demand. The Company’s products are available for commercial,
business and military aircraft. FLYHT’s triggered data streaming program,
FLYHTStreamTM, can stream position reports and data from an aircraft in
flight to ground support in real time.

FLYHT’s products and services are marketed globally by a team of employees
and agents based in Canada, the United States, China, the United Kingdom,
Singapore, Ireland and Abu Dhabi.

FLYHT AEROSPACE SOLUTIONS LTD.

AFIRSTM AND UPTIMETM

FLYHT’s Automated Flight Information Reporting System (“AFIRS”) is a
device installed on aircraft that monitors hundreds of essential functions
from the aircraft and the black box. AFIRS sends the information to the
UpTime server on the ground, which stores and relays the data to the
airline in real time. Airlines use this information to increase passenger
safety, improve productivity, maximize efficiency and enhance profitability.
In addition to its data monitoring functions, AFIRS provides voice and text
messaging capabilities that give pilots the ability to communicate with
ground support. FLYHT’s value-added applications such as FLYHTStream,
FLYHTSafe and FLYHTFuel run on the AFIRS hardware and its UpTime
servers, and are unique to FLYHT hence available only to our customers.
FLYHT utilizes global satellite coverage through the Iridium satellite
network, providing service to whoever needs it, when they need it,
anywhere on the planet.

The AFIRS 220 became FLYHT’s signature product in 2004. The unit
received regulatory certification for installation in a large number of widely
used commercial aircraft brands and models (see STC table on pg. 23). The
AFIRS 228 incorporates improvements over the AFIRS 220 in processing
capacity, data transmission characteristics and programmability. The AFIRS
228’s features cater to the evolving needs of airlines by providing a flexible
product that is programmed for the information they need. AFIRS 228 is an
addition to FLYHT’s product line, not a replacement for the AFIRS 220. The
Company will continue to sell its AFIRS 220.

Where compliance has not been met, associated costs, in a dollar amount,
are shown. The tool is de-identified to meet pilot union requirements, but
can be filtered to display performance by pilot if desired. It is an intuitive
tool that enables fuel managers to act on information instead of compiling
and analyzing data.

FLYHTSafeTM

Provides real-time operational safety alerts from AFIRS. With FLYHTSafe
airlines are notified immediately on occurrence of an operational safety
event that may have implications for the safety of the flight. AFIRS is the
only product that has an embedded logic application (“ELA”) onboard that
can identify with pinpoint accuracy when a specific event has taken place;
enabling airlines to take steps that require immediate action or further
investigation. FLYHTSafe can be used to assist in the development of
safety policies, training programs and standard operating procedures.

FLYHTFollowTM

A unique application that integrates real-time flight following, routine
aircraft notifications, aircraft health exceedance alerts and the ability to
send text messages immediately to the aircraft. FLYHTFollow is an aircraft
situational display that shows the aircraft position reports from AFIRS and
Dragon devices via the Iridium Satellite Network. The program supports a
number of aviation-specific tools including charts and weather information.
It also provides the aircraft operator with the ability to start black box data
streaming on their airborne aircraft anywhere in the world and, at any time.

FLYHTStreamTM

THE DRAGONTM

FLYHTStream is a revolutionary, industry-leading technology that performs
real-time triggered alerting and black-box data streaming in the event
of an abnormal situation on an aircraft. FLYHTStream can be triggered
automatically by a set of pre-determined factors, by the pilots or on the
ground by airline operations. It uses AFIRS’ onboard logic and processing
capabilities in combination with UpTime’s ground-based servers to
interpret and route alerts and messages from the aircraft in trouble to key
groups on the ground, such as the airline, operation centers and regulators.
An animation software converts the raw flight data recorder (FDR) info
into visual data that can be viewed from any computer, providing ground
personnel a view of the controls and awareness of what’s happening
onboard the aircraft.

FLYHTFuelTM

A powerful way to focus attention on areas of greatest savings potential
automatically, and to provide the information necessary to make decisions
about the operation. Most airlines currently rely on a system of manually
generated and analyzed reports to make fuel savings decisions within the
operation. This is time-consuming and relies on the user to calculate areas
of potential by cross-referencing a great number of queries. FLYHTFuel is
both a report-generation tool and a dynamic, interactive application that
generates alerts and provides the user with the ability to quickly identify
trends. The dashboard compares how pilots are operating the aircraft to
how they could be flying in order to maximize efficiency and fuel savings.
The unique application highlights exceptions to best practices, provides
quick drill downs to spot the root cause of issues, and identifies trends.

The Dragon is a revolutionary lightweight portable satellite communications
device that blends existing FLYHT technology with that of the iPad. FLYHT
developed the product to meet a growing demand from small aircraft,
business jet and helicopter operators for a satellite communications
solution similar to AFIRS.

The device is portable, allowing operators the flexibility to use it where and
when they need it. Since the Dragon is not permanently installed on the
aircraft, there is no need for STCs. The Dragon facilitates flight following
and real-time voice and data communications. It is enabled by the Iridium
satellite network and connected through the cockpit and the pilot’s headset,
but does not have data analysis or the safety services capabilities of other
AFIRS products. An iPad application acts as an interface for the user in the
cockpit to send and receive messages, such as weather updates, from the
ground.

UNDERFLOOR STOWAGE UNIT

The Underfloor Stowage Unit offers the flight crew additional stowage
space in the cockpit. With this addition, manuals are always within reach of
the seated crew and are kept safe, dry and clean inside the stowage unit.
In addition, safety equipment and other items required by the flight crew
can be accessed any time throughout the flight without leaving the cockpit.
The stowage unit is certified to be installed in Bombardier CRJ series,
Challenger and DHC-8s and can also be installed in other aircraft types.

ANNUAL REPORT 2014

SYSTEM APPROVALS

A STC is an airworthiness certification required to modify an aircraft from
its original design and is issued by an aviation regulator. FLYHT’s AFIRS
equipment is an addition to an aircraft and therefore an STC is required prior
to installation. FLYHT has received or applied for AFIRS product approvals
from TCCA, the FAA, EASA, ANAC, ECAA and the CAAC for various aircraft
models, depending on customer requirements.

FLYHT’s expertise in airworthiness certification enabled it, in October 2008,
to join a select group of Canadian companies who are approved by TCCA as
a Design Approval Organization (“DAO”). Very few organizations achieve
DAO status because of the time and expertise required to meet TCCA
standards. FLYHT’s DAO status, along with the delegations it has received,
allows the Company to obtain and revise its own STCs with minimal TCCA
oversight. This speeds up the process by lessening wait times, and reduces
cost and reliance on contractors.

In addition to its DAO status, the Company has an engineer on staff with
delegated authority, allowing him to approve electrical design aspects
of an airworthiness certification. If an issue is encountered during the
STC process, the delegated staff member has the authority to approve
necessary changes and continue the process without the involvement of
an external party.

The process to receive a STC takes time to complete but always starts
with an application for the STC through any one of TCCA, FAA or EASA.
Generally, FLYHT starts the process with TCCA by opening an application
with the regulator, after which an STC data package is created. The data
package consists of the engineering documents that outline how the
AFIRS equipment will be installed on the aircraft. Once the data package
is prepared and first stage approvals granted by the regulator, ground and
flight tests take place. To fulfill the flight test requirement, FLYHT must
have access to the appropriate type and model of aircraft. This is done
in cooperation with an existing or potential customer. Once these tests
are completed, FLYHT submits an activation data package to TCCA that
enables the AFIRS unit to be integrated with the aircraft systems. If TCCA
approves the submission, an STC is issued. To obtain an STC from another
regulator, FLYHT prepares an application, which is sent through TCCA to the
regulator such as FAA, EASA, ANAC, ECAA or CAAC along with the STC
package previously approved by TCCA. The regulator reviews the package
and issues the STC.

The time required for the approval process through TCCA varies depending
on the aircraft and workloads. A general rule of thumb is approximately
three months, with a minimum of another three months if an STC is required
from another regulator.

The Company will be filing the necessary documents over the next several
years to obtain approval for the AFIRS 228 in parallel to the majority of
current 220 STCs, depending on market requirements.

TCCA
TCCA

FAAFAA

EASA
EASA

CAAC
CAAC

ANAC
ANAC

220

228

220

228

220

228

220

228

220

228

228
220

228

Airbus A319, A320, A321

Airbus A330

ATR-42, -72 - 200/300

ATR-42, -72- 600

Boeing B737 -200

Boeing B737 -300, -400, -500

Boeing B737 -600, -700, -800

Boeing 747-200

Boeing 757 -200

Boeing 767 -200, -300

Boeing B777

Bombardier DHC 8 -100, -200, -300

Bombardier DHC 8 -400

Bombardier CRJ 100, 200, 440

Bombardier CRJ -700, 900

McDonnell Douglas DC-10 (KC-10 military)

McDonnell Douglas MD-83

Fokker 100

Hawker Beechcraft -750, 800XP, 850XP, 900XP

Viking Air DHC -7 (LSTC)

Embraer EMB 190

Embraer Legacy 600 and EMB – 135/145

AFIRS 220 or 228 model

A = Approved
P = Pending (We have received a Provisions STC and are in the final stages
before receiving a full STC)

I = In Progress
U= Upcoming STC applications that have been submitted or will be
submitted in 2015.

FLYHT AEROSPACE SOLUTIONS LTD.

TRENDS AND ECONOMIC FACTORS

FLYHT examines the results of growth and measurements made by leading
aviation groups in order to determine the health of the industry. AFIRS is a
technology that can be installed on commercial, business or military aircraft
and the Dragon is available to the general aviation market.

Passenger traffic (measured in Revenue Passenger Kilometers or “RPK”)
saw a 5.9% increase in 2014 compared to the previous year. The 2014
performance was also above the 10-year average growth rate of 5.6% and
the 5.2% growth experienced in 20131. All regions saw demand growth in
2014 and load factors, how close to capacity the flights were for the year,
were up to 79.7% or 0.2% over 2013. Demand in international markets at
6.1% was higher than domestic travel at 5.4%. Overall, a record 3.3 billion
passengers traveled in 2014, 170 million more than in 2013. Global freight
traffic (measured in Freight Tonne Kilometers or “FTK”) increased by 4.5%
in 2014 which was more than expected and above the 1.4% growth in
20132. RPK and FTK measure passenger and freight contributions to airline
revenue. These are significant measures to determine the health of the
industry because the larger the increase, the more people are flying and
shipping freight, suggesting growth in the industry.

Large commercial aircraft manufacturers recorded solid numbers for
deliveries and new orders in 2014. Airbus delivered 629 aircraft for 89
customers, an increase from 626 aircraft in 2013. 2014 was Airbus’ 13th
year in a row of surpassing the previous year’s deliveries3. Boeing delivered
723 aircraft in 2014, a 12% increase from the previous year.4 Embraer
delivered a total of 92 commercial and 116 executive jets (92 light and 24
large), in 2014, very close to the 2013 results.5 Bombardier delivered 290
aircraft in 2014, compared to 238 in 2013.6

The General Aviation Manufacturers Association (“GAMA”) reported that
numbers in worldwide general aviation airplane shipments rose a consistent
4.3% to 2,454 shipments in 2014 from 2,353 in the same period of 2013.7

FLYHT continues to be a leader in providing airlines with increased
operational control and aircraft situational awareness. Until the recent
industry events and missing aircraft of Malaysian Airlines flight MH370 and
Air Asia flight QZ8501, the world did not believe that a commercial airplane
could go missing. Since 2009, FLYHT has had the technology to stream
black box data in real-time. As a result of industry events and accidents
during 2014, FLYHT has participated in working groups and demonstrated
the AFIRS technology and FLYHTStream capabilities on industry panels.
Multiple working groups included sessions with the Malaysian Government,
ICAO, IATA, the NTSB and ITU. FLYHT will continue to participate in industry
working groups to advance engineering and technical requirements and
prepare for future development of the AFIRS product line to meet industry
needs.

The weakening of the Canadian dollar relative to the U.S. dollar throughout
2014 had a positive impact on the Company’s revenue and income compared
to 2013. As a result of these currency movements, the Company’s revenues,
which are substantially all denominated in U.S. dollars, were higher than
they would have been had the foreign exchange rates not changed. It is
the standard of the aviation industry to conduct business in U.S. dollars.
While the majority of the Company’s operating and overhead costs are
denominated in Canadian dollars, a significant portion of the cost of sales,
marketing and distribution costs are U.S. dollar denominated, and therefore
a natural hedge exists against fluctuations of the Canadian dollar.

CONTRACTS AND ACHIEVEMENTS
OF FISCAL 2014

Contracts

FLYHT Aerospace Solutions Ltd. signed a total of five contracts on 27
aircraft with customers worldwide. 12 were for the AFIRS 220 and 15 for
the AFIRS 228, as described below:

• In March, FLYHT signed a contract with the Middle Eastern based
operations group of an international cargo airline for the AFIRS 228B on

four Boeing 757 aircraft.

• In March, FLYHT signed a contract with an Asian charter airline for the
AFIRS 220 on four Bombardier CRJ aircraft.

• In May, FLYHT signed a contract with a Nigerian airline for the sale and
delivery of the AFIRS 220 on five Boeing 737 aircraft.

• In July, FLYHT signed a contract with the national carrier of an African
airline for the sale and delivery of AFIRS for its fleet of eleven planes.
AFIRS 220 will be installed on three B737-500 aircraft, while the AFIRS
228 will provide solutions for DHC-8-Q400, B737-700 and ERJ190
aircraft.

• In November, FLYHT signed a contract with a North American cargo
customer for service on the AFIRS 220 that were already installed on
two of the airline’s recently acquired B767-300 aircraft and sale and
service on three additional AFIRS 228 for their B767-200 aircraft.

1 http://www.iata.org/pressroom/pr/Pages/2015-02-05-01.aspx

2 http://www.iata.org/pressroom/pr/Pages/2015-02-04-01.aspx

3 http://www.airbus.com/newsevents/news-events-single/detail/airbus-
exceeds-targets-in-2014-and-prepares-for-the-future/

4 http://boeing.mediaroom.com/2015-01-28-Boeing-Reports-Record-2014-
Revenue-Core-EPS-and-Backlog-and-Provides-2015-Guidance

5 http://www.embraer.com/en-US/ImprensaEventos/Press-releases/noticias/
Pages/Embraer-atinge-backlog-recorde-e-entrega-19-jatos-comerciais-e-15-
executivos-no-30-trimestre-de-2014.aspx

6 http://www.bombardier.com/en/media-centre/newsList/details.bombardier-

inc-20150212bombardierq42014financialresults.bombardiercom.html

7 http://gama.aero/media-center/press-releases/content/gama-releases-2014-
year-end-shipment-and-billings-numbers-annual. Note that the 2013 numbers
were updated by GAMA which accounts for the discrepancy from FLYHT’s 2013
Annual Report.

ANNUAL REPORT 2014

ACHIEVEMENTS

• FLYHT announced the appointment of Matt Bradley as President. Mr.
Bradley had been with the Company since 2008.

• FLYHT was recognized as a top ten performer in the Technology & Life
Sciences Category of the 2014 TSX Venture 50 ®. The list is a ranking
of strong performing companies trading on the TSX Venture Exchange.

• FLYHT received the STC for AFIRS 228 on the ATR – 42/72 series
aircraft from the National Civil Aviation Agency of Brazil.

• FLYHT announced that its customer, First Air, added FLYHTStream’s
automatically triggered, real-time data and live black box streaming

capability to its current fleet of B737, ATR and B767 aircraft.

• FLYHT’s technology, reached a major milestone having surpassed one
million flights onboard customer aircraft.

• FLYHT announced the settlement of legal action and outstanding
claims between the company and Sierra Nevada Corporation. The
companies also renewed their strategic relationship by updating their
license and manufacturing agreement and adding a value-added
reseller agreement.

• FLYHT announced commencement of trading on the OTCQX, a
marketplace for qualified companies, under the symbol FLYLF.

• FLYHT announced its partner L-3 Aviation Recorders has received
Airbus’ formal notification of certification for the L-3 Automated Flight
Information Reporting System (“AFIRS”) 228S for the Airbus A320
family of aircraft.

• FLYHT received a re-issued STC for the Hawker Beechcraft
700/800/900 model aircraft from the FAA to add the AFIRS 228 to

its existing STC.

• FLYHT appointed Mr. John Belcher and Mr. Barry Eccleston to the
Board of Directors.

• FLYHT announced the appointment of Ms. Nola Heale as Vice President

Finance and Chief Financial Officer.

• FLYHT received the EASA STC for AFIRS 228 on the Airbus A320
aircraft.

• FLYHT received the FAA STC for AFIRS 228 on the Boeing 767-300.

Results of Operations
Years Ended December 31, 2014 and 2013

Results of Operations – Years Ended December 31, 2014 and 2013

SELECTED RESULTS

Selected Results

2014

Assets
Non-current financial liabilities
Revenue
Loss
Loss before R&D
Loss per share (basic & fully diluted)
2013

Assets
Non-current financial liabilities
Revenue
Loss
Loss before R&D
Loss per share (basic & fully diluted)
2012

Assets
Non-current financial liabilities
Revenue
Loss
Loss before R&D
Loss per share (basic & fully diluted)

Financial Position

FLYHT AEROSPACE SOLUTIONS LTD.

Liquidity and Capital Resource

Q4
$
8,275,546
5,506,179

2,218,681
1,305,712
532,986
0.01

Q4
$
8,435,962
1,992,028

1,936,757
1,438,795
745,444
0.01
Q4
$
4,968,972
3,118,142

2,220,401
621,446
40,436
0.00

Q3
$
8,968,372
2,728,769

1,808,794
1,653,147
805,028
0.01

Q3
$
4,192,184
5,398,965

2,183,037
615,950
174,987
0.00
Q3
$
6,124,540
3,110,508

1,549,761
133,102
290,563
0.00

Q2
$
10,281,225
2,433,044

1,505,767
46,925
1,324,716
0.00

Q2
$
4,414,400
5,096,611

2,163,434
1,038,283
680,936
0.01
Q2
$
6,147,716
400,997

1,584,475
1,954,303
1,183,274
0.02

Q1
$
9,734,630
2,262,812

1,348,786
1,273,101
838,406
0.01

Q1
$
4,164,481
3,191,685

1,717,136
970,136
281,570
0.01
Q1
$
3,817,825
423,878

1,115,169
2,174,901
961,742
0.02

Total
$
8,275,546
5,506,179
6,882,028
4,278,885
3,501,136
0.03

Total
$
8,435,962
1,992,028
8,000,364
4,063,164
1,882,937
0.03
Total
$
4,968,972
3,118,142
6,469,806
4,883,752
2,476,015
0.04

The Company’s cash at December 31, 2014 decreased to $3,910,962 from $5,184,803 at December 31, 2013. The Company has

an available and undrawn operating line of $250,000 at Canadian chartered bank prime plus 1.5%, secured by assignment of cash

collateral and a general security agreement.

At December 31, 2014, the Company had positive working capital of $3,009,025 compared to negative $894,887 as of December

31, 2013, an improvement of $3,903,912. Neither customer deposits, nor the current portion of unearned revenue are refundable,

and if those two items are excluded in the working capital calculation, the resulting modified working capital at December 31, 2014

would be positive $5,283,775 compared to positive $760,174 at December 31, 2013.

The Company funded 2014 operations primarily through cash received from sales and proceeds from the exercise of share options

and warrants. If the costs associated with R&D were factored out, there would have been an increase in cash of $1,310,558. It is

expected that R&D expenses will continue to decrease as the AFIRS 228 project moves into the next phase of enhancements and

the finished product continues to generate revenues. The resulting increase in cash inflows from sales will reduce the requirement

for further funding. The Company believes that if funding is required to meet cash flow requirements in 2015, it will be raised either

through debt or equity instruments.

FINANCIAL POSITION

Liquidity and Capital Resource

The Company’s cash at December 31, 2014 decreased to $3,910,962 from $5,184,803 at December 31, 2013. The Company has an available and undrawn
operating line of $250,000 at Canadian chartered bank prime plus 1.5%, secured by assignment of cash collateral and a general security agreement.

At December 31, 2014, the Company had positive working capital of $3,009,025 compared to negative $894,887 as of December 31, 2013, an improvement of
$3,903,912. Neither customer deposits, nor the current portion of unearned revenue are refundable, and if those two items are excluded in the working capital
calculation, the resulting modified working capital at December 31, 2014 would be positive $5,283,775 compared to positive $760,174 at December 31, 2013.

The Company funded 2014 operations primarily through cash received from sales and proceeds from the exercise of share options and warrants. If the costs
associated with R&D were factored out, there would have been an increase in cash of $1,310,558. It is expected that R&D expenses will continue to decrease
as the AFIRS 228 project moves into the next phase of enhancements and the finished product continues to generate revenues. The resulting increase in cash
inflows from sales will reduce the requirement for further funding. The Company believes that if funding is required to meet cash flow requirements in 2015, it
will be raised either through debt or equity instruments.

Cash and cash equivalents
Restricted cash
Trade and other receivables
Deposits and prepaid expenses
Inventory
Trade payables and accrued
liabilities
Unearned revenue
Loans and borrowings
Finance lease obligations
Current tax liabilities
Working capital

Unearned revenue
Customer deposits
Modified working capital

2014
$
3,910,962
250,000
959,786
183,750
1,917,249
(2,129,622)

(1,484,345)
(572,782)
(25,973)
-
3,009,025

1,484,345
790,405
5,283,775

2013
$
5,184,803
250,000
784,426
145,554
1,308,243
(3,704,496)

(1,103,834)
(3,745,513)
(13,175)
(895)
(894,887)

1,103,834
551,227
760,174

Variance
$
(1,273,841)
-
175,360
38,196
609,006
1,574,874

(380,511)
3,172,731
(12,798)
895
3,903,912

380,511
239,178
4,523,601

The Company settled an ongoing dispute with Sierra Nevada Corporation (“SNC”) on June 16, 2014 whereby both parties mutually
The Company settled an ongoing dispute with Sierra Nevada Corporation (“SNC”) on June 16, 2014 whereby both parties mutually released all claims against
released all claims against each other. FLYHT and SNC entered into a License and Manufacturing Agreement (‘L&M Agreement”)
each other. FLYHT and SNC entered into a License and Manufacturing Agreement (“L&M Agreement”) as well as a Value Added Reseller Agreement (“VAR
as well as a Value Added Reseller Agreement (“VAR Agreement”) and for the execution of those agreements SNC withdrew
Agreement”) and for the execution of those agreements SNC withdrew invoices totaling a Canadian equivalent of $1,950,957. The L&M Agreement provides
invoices totaling a Canadian equivalent of $1,950,957. The L&M Agreement provides for SNC to manufacture and/or sell to military
for SNC to manufacture and/or sell to military end users and unmanned aerial vehicles. FLYHT will receive a fee for each unit manufactured and sold to an end
end users and unmanned aerial vehicles. FLYHT will receive a fee for each unit manufactured and sold to an end user and a
percentage of UpTime Service fees paid to SNC by the end user. These fees will commence once SNC realizes revenue of $2.5
user and a percentage of UpTime Service fees paid to SNC by the end user. These fees will commence once SNC realizes revenue of $2.5 million USD. As well,
million USD. As well, a VAR Agreement was entered into which allows SNC to market and sell FLYHT’s AFIRS units and UpTime
a VAR Agreement was entered into which allows SNC to market and sell FLYHT’s AFIRS units and UpTime Services. Under the terms of the VAR Agreement
Services. Under the terms of the VAR Agreement FLYHT will pay SNC an agreed commission. Based on the terms of the
FLYHT will pay SNC an agreed commission. Based on the terms of the agreements FLYHT derecognized the accounts payable liability with an off-setting
agreements FLYHT derecognized the accounts payable liability with an off-setting recovery of research and development
recovery of research and development expenses of the same amount.
expenses of the same amount.
In 2014 warrant and option exercises together with convertible debenture conversions resulted in the Company issuing a total of 13,362,867 shares for total
In 2014 warrant and option exercises together with convertible debenture conversions resulted in the Company issuing a total of
proceeds of $3,952,015, including:
13,362,867 shares for total proceeds of $3,952,015, including:

a) 151,987 warrants exercised at $0.20 per share for proceeds of $30,398

b) 8,885,600 warrants exercised at $0.30 per share for proceeds
of $2,665,680

a) 151,987 warrants exercised at $0.20 per share for proceeds of $30,398
b) 8,885,600 warrants exercised at $0.30 per share for proceeds of $2,665,680
c) 1,405,780 warrants exercised at $0.40 per share for proceeds of $562,312
d) 2,774,500 options exercised at $0.25 per share for proceeds of $693,625
e) 145,000 convertible debentures converted at $0.40

c) 1,405,780 warrants exercised at $0.40 per share for proceeds
of $562,312
As at April 7, 2015, FLYHT’s issued and outstanding share capital was 172,460,135.

d) 2,774,500 options exercised at $0.25 per share for proceeds
of $693,625

e) 145,000 convertible debentures converted at $0.40

ANNUAL REPORT 2014

scale back operations to create positive cash flow from existing revenue and/or raise the necessary financing in the capital

markets. It is the Company’s intention to continue to fund operations by adding revenue and its resulting cash flow as well as

continue to manage outgoing cash flows. If the need arises due to market opportunities, the Company may meet those needs via

the capital markets. These material uncertainties may cast significant doubt upon the Company’s ability to continue as a going

concern.

Financial Instruments

The Company is exposed to fluctuations in the exchange rates between the Canadian dollar and other currencies with respect to

assets, sales, and purchases. The Company monitors fluctuations and may take action if deemed necessary to mitigate its risk.

The Company is exposed to changes in interest rates as a result of the operating loan bearing interest based on the Company’s

lenders’ prime rate. All outstanding debentures have a fixed rate of interest and therefore do not expose the Company’s cash flow

to interest rate changes.

There is a credit risk associated with accounts receivable where the customer fails to pay invoices. The Company extends credit to

credit-worthy or well-established customers. In the case of agreement consideration or product sales, the invoiced amount is

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014

As at April 7, 2015, FLYHT’s issued and outstanding share capital was 172,460,135.

The achievement of positive earnings before interest and amortization is necessary before the Company can improve liquidity. The Company has continued
to expand its cash flow potential through its continued marketing drive to clients around the world. Management believes that the Company’s installation
momentum, conversion of installations to recurring revenue, new revenue streams, and ongoing sales will be sufficient to meet standard liquidity requirements
going forward. To continue as a going concern, the Company will need to attain profitability and/or obtain additional financing to fund ongoing operations. If
general economic conditions in the industry or the financial condition of a major customer deteriorates, then the Company may have to scale back operations
to create positive cash flow from existing revenue and/or raise the necessary financing in the capital markets. It is the Company’s intention to continue to fund
operations by adding revenue and its resulting cash flow as well as continue to manage outgoing cash flows. If the need arises due to market opportunities,
the Company may meet those needs via the capital markets. These material uncertainties may cast significant doubt upon the Company’s ability to continue
as a going concern.

Financial Instruments

The Company is exposed to fluctuations in the exchange rates between the Canadian dollar and other currencies with respect to assets, sales, and purchases.
The Company monitors fluctuations and may take action if deemed necessary to mitigate its risk.
generally payable before the product is shipped to the customer. The Company assesses the financial risk of a customer and
based on that analysis may require that a deposit payment be made before a service is provided. For monthly recurring revenue
The Company is exposed to changes in interest rates as a result of the operating loan bearing interest based on the Company’s lenders’ prime rate. All
the Company has the ability to disable AFIRS UpTime where the customer has not fulfilled its financial obligations.
outstanding debentures have a fixed rate of interest and therefore do not expose the Company’s cash flow to interest rate changes.

There is a credit risk associated with accounts receivable where the customer fails to pay invoices. The Company extends credit to credit-worthy or well-
Contractual Obligations
generally payable before the product is shipped to the customer. The Company assesses the financial risk of a customer and
established customers. In the case of agreement consideration or product sales, the invoiced amount is generally payable before the product is shipped to the
based on that analysis may require that a deposit payment be made before a service is provided. For monthly recurring revenue
The following table details the contractual maturities of financial liabilities, including estimated interest payments.
customer. The Company assesses the financial risk of a customer and based on that analysis may require that a deposit payment be made before a service
the Company has the ability to disable AFIRS UpTime where the customer has not fulfilled its financial obligations.
is provided. For monthly recurring revenue the Company has the ability to disable AFIRS UpTime where the customer has not fulfilled its financial obligations.
Contractual Obligations
Contractual Obligations
2-5 years
December 31, 2014
The following table details the contractual maturities of financial liabilities, including estimated interest payments.
The following table details the contractual maturities of financial liabilities, including estimated interest payments.
$

2-12
months

< 2 months

1-2 years

> 5 years

Total

Accounts payable
December 31, 2014
Compensation and
statutory deductions

Finance lease liabilities
Accounts payable
Accrued liabilities
Compensation and
Loans and borrowings
statutory deductions
Total
Finance lease liabilities

Accrued liabilities

638,598
< 2 months
406,298
$
4,970
638,598
43,641
406,298
-

1,093,507
4,970

43,641

12,114
2-12
months
110,584
$
24,849
12,114
115,030
110,584
585,146

847,723
24,849

115,030

-
1-2 years
-
$
29,818
-
-
-
5,819,600

5,849,418
29,818

-
2-5 years
-
$
15,794
-
12,953
-
360,335

389,082
15,794

12,953

-
> 5 years
-
$
-
-
-
-
1,370,267

650,712
Total
516,882
$
75,431
650,712
171,624
516,882
8,135,348

1,370,267
-

9,549,997
75,431

171,624

Loans and borrowings

585,146

5,819,600

360,335

1,370,267

8,135,348

Total

389,082

847,723

9,549,997

5,849,418

1,370,267

1,093,507

Under SADI, the Company has, at December 31, 2014, an outstanding repayable balance of $1,899,278, compared to $1,967,507
at December 31, 2013. The amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment
on April 30, 2014 was 3.5% of the total contribution received and the payment increases yearly by 15% until April 30, 2028 when
the final payment will be 24.5% of the total contribution received.
Under SADI, the Company has, at December 31, 2014, an outstanding repayable balance of $1,899,278, compared to $1,967,507 at December 31, 2013. The
amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment on April 30, 2014 was 3.5% of the total contribution
Under SADI, the Company has, at December 31, 2014, an outstanding repayable balance of $1,899,278, compared to $1,967,507
The debenture issued December 23, 2010 had an original face value of $3,159,000 and was set to mature on December 23, 2014.
at December 31, 2013. The amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment
received and the payment increases yearly by 15% until April 30, 2028 when the final payment will be 24.5% of the total contribution received.
On December 22, 2014 approval was received to extend the maturity date of the $3,014,000 debentures then remaining
on April 30, 2014 was 3.5% of the total contribution received and the payment increases yearly by 15% until April 30, 2028 when
outstanding from four to six years, now maturing on December 23, 2016. The debenture continues to bear interest at a rate of 8%
The debenture issued December 23, 2010 had an original face value of $3,159,000 and was set to mature on December 23, 2014. On December 22, 2014 approval
the final payment will be 24.5% of the total contribution received.
per annum, accrued and paid annually in arrears. The debentures are convertible into common shares at a conversion rate of
was received to extend the maturity date of the $3,014,000 debentures then remaining outstanding from four to six years, now maturing on December 23, 2016.
$0.40 per share at any time up to December 23, 2015 and carry a face value after conversions of $2,859,000 at April 7, 2015.
The debenture issued December 23, 2010 had an original face value of $3,159,000 and was set to mature on December 23, 2014.
The debenture continues to bear interest at a rate of 8% per annum, accrued and paid annually in arrears. The debentures are convertible into common shares at
On December 22, 2014 approval was received to extend the maturity date of the $3,014,000 debentures then remaining
a conversion rate of $0.40 per share at any time up to December 23, 2015 and carry a face value after conversions of $2,859,000 at April 7, 2015.
FLYHT entered into two finance lease agreements in 2014, the first covering equipment required for a security system in the new
outstanding from four to six years, now maturing on December 23, 2016. The debenture continues to bear interest at a rate of 8%
premises effective March 1, 2014, and the second covering computer hardware. Both agreements have a lease term of 36 months
per annum, accrued and paid annually in arrears. The debentures are convertible into common shares at a conversion rate of
FLYHT entered into two finance lease agreements in 2014, the first covering equipment required for a security system in the new premises effective March 1,
and the option to purchase the equipment at the end of the lease term.
$0.40 per share at any time up to December 23, 2015 and carry a face value after conversions of $2,859,000 at April 7, 2015.
2014, and the second covering computer hardware. Both agreements have a lease term of 36 months and the option to purchase the equipment at the end of
the lease term. Minimum lease payments are as follows.
Minimum lease payments are as follows.
FLYHT entered into two finance lease agreements in 2014, the first covering equipment required for a security system in the new
premises effective March 1, 2014, and the second covering computer hardware. Both agreements have a lease term of 36 months
and the option to purchase the equipment at the end of the lease term.

Year

Total
$
Minimum lease payments are as follows.
29,818
2015
29,818
2016
Total
Year
15,795
2017
75,431
Total
$
29,818
2015
29,818
2016
15,795
2017
75,431
Total
FLYHT AEROSPACE SOLUTIONS LTD.

Customer Deposits

FLYHT’s revenue recognition for AFIRS sales and Parts sales occurs in a series of steps. The process begins with the receipt of
customer deposits, followed by shipment, installation and finally customer usage of the AFIRS product.
Customer Deposits
Customers are required to pay for installation kits prior to the planned shipment date. This prepayment is recorded as a customer
deposit, which is recognized as an accrued liability upon receipt. Upon shipment of an installation kit, the customer deposit is

FLYHT’s revenue recognition for AFIRS sales and Parts sales occurs in a series of steps. The process begins with the receipt of

reclassified to unearned revenue, where it will remain until the AFIRS UpTime solution has been installed and is fully functional, at

customer deposits, followed by shipment, installation and finally customer usage of the AFIRS product.

which point the installation kit is recognized as AFIRS sales revenue.

Customers are required to pay for installation kits prior to the planned shipment date. This prepayment is recorded as a customer

When customers order spare parts or Underfloor Stowage Units a prepayment is required; it is also recorded as a customer

deposit, which is recognized as an accrued liability upon receipt. Upon shipment of an installation kit, the customer deposit is

deposit. When the shipment of the ordered part or unit occurs, the customer deposit is recognized as Parts sales.

reclassified to unearned revenue, where it will remain until the AFIRS UpTime solution has been installed and is fully functional, at

which point the installation kit is recognized as AFIRS sales revenue.

Customer deposits are amounts received for AFIRS sales and parts that have not yet been shipped to the customer, and services

that have not yet been completed. These deposits are nonrefundable, and are included on the Statement of Financial Position

When customers order spare parts or Underfloor Stowage Units a prepayment is required; it is also recorded as a customer

(“SFP”) in trade payables and accrued liabilities.

deposit. When the shipment of the ordered part or unit occurs, the customer deposit is recognized as Parts sales.

Customer deposits are amounts received for AFIRS sales and parts that have not yet been shipped to the customer, and services

10-

that have not yet been completed. These deposits are nonrefundable, and are included on the Statement of Financial Position

(“SFP”) in trade payables and accrued liabilities.

10-

Customer Deposits

FLYHT’s revenue recognition for AFIRS sales and parts sales occurs in a series of steps. The process begins with the receipt of customer deposits, followed by
shipment, installation and finally customer usage of the AFIRS product.

Customers are required to pay for installation kits prior to the planned shipment date. This prepayment is recorded as a customer deposit, which is recognized
as an accrued liability upon receipt. Upon shipment of an installation kit, the customer deposit is reclassified to unearned revenue, where it will remain until the
AFIRS UpTime solution has been installed and is fully functional, at which point the installation kit is recognized as AFIRS sales revenue.

When customers order spare parts or Underfloor Stowage Units a prepayment is required; it is also recorded as a customer deposit. When the shipment of the
ordered part or unit occurs, the customer deposit is recognized as parts sales.

Customer deposits are amounts received for AFIRS sales and parts that have not yet been shipped to the customer, and services that have not yet been
completed. These deposits are nonrefundable, and are included on the Statement of Financial Position (“SFP”) in trade payables and accrued liabilities.

The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2014 and 2013. Payment was
The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2014
and 2013. Payment was received for 9 installation kits in the fourth quarter of 2014 compared to 10 received in the fourth quarter of
The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2014
received for 9 installation kits in the fourth quarter of 2014 compared to 10 received in the fourth quarter of 2013, bringing 2014 year-to-date (“YTD”) total
2013, bringing 2014 year-to-date (“YTD”) total payments for installation kits to 57, compared to a total of 42 in 2013.
and 2013. Payment was received for 9 installation kits in the fourth quarter of 2014 compared to 10 received in the fourth quarter of
payments for installation kits to 57, compared to a total of 42 in 2013.
2013, bringing 2014 year-to-date (“YTD”) total payments for installation kits to 57, compared to a total of 42 in 2013.
YTD 2013
YTD 2013
$
$
797,070
797,070
1,204,677
1,204,677
(1,450,520)
(1,450,520)
551,227
551,227

Opening balance
Opening balance
Payments received
Payments received
Moved to unearned revenue
Moved to unearned revenue
Balance, December 31
Balance, December 31

Variance
Variance
$
$
(245,843)
(245,843)
1,762,412
1,762,412
(1,277,391)
(1,277,391)
239,178
239,178

YTD 2014
YTD 2014
$
$
551,227
551,227
2,967,089
2,967,089
(2,727,911)
(2,727,911)
790,405
790,405

Q4 2014
Q4 2014
$
$
1,070,854
1,070,854
744,042
744,042
(1,024,491)
(1,024,491)
790,405
790,405

Variance
Variance
$
$
448,772
448,772
555,233
555,233
(764,827)
(764,827)
239,178
239,178

Q4 2013
Q4 2013
$
$
622,082
622,082
188,809
188,809
(259,664)
(259,664)
551,227
551,227

December 31

Unearned Revenue
Unearned Revenue
Unearned Revenue
The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2014
The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2014
and 2013. Revenue was recognized for 12 installation kits in 2014’s fourth quarter compared to 15 in the fourth quarter of 2013.
The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2014 and 2013. Revenue was
and 2013. Revenue was recognized for 12 installation kits in 2014’s fourth quarter compared to 15 in the fourth quarter of 2013.
YTD, revenue has been recognized for 44 installation kits in 2014, as compared to 62 in 2013 due mainly to delayed installation
recognized for 12 installation kits in 2014’s fourth quarter compared to 15 in the fourth quarter of 2013. YTD, revenue has been recognized for 44 installation
YTD, revenue has been recognized for 44 installation kits in 2014, as compared to 62 in 2013 due mainly to delayed installation
dates and slow installs in China. In 2014, 57.1% of the unearned revenue balance at December 31, 2013 was recognized as
kits in 2014, as compared to 62 in 2013 due mainly to delayed installation dates and slow installs in China. In 2014, 57.1% of the unearned revenue balance at
dates and slow installs in China. In 2014, 57.1% of the unearned revenue balance at December 31, 2013 was recognized as
earned revenue (2013: 77.7%).
December 31, 2013 was recognized as earned revenue (2013: 77.7%).
earned revenue (2013: 77.7%).

Q4 2014
Q4 2014
$
$
1,272,206
1,272,206
1,024,491
1,024,491
15,960
15,960
(614,411)
(614,411)
(22,500)
(22,500)
-
-
1,675,746
1,675,746

Q4 2013
Q4 2013
$
$
1,494,153
1,494,153
259,664
259,664
25,090
25,090
(578,936)
(578,936)
(31,757)
(31,757)
(64,380)
(64,380)
1,103,834
1,103,834

Variance
Variance
$
$
(221,947)
(221,947)
764,827
764,827
(9,130)
(9,130)
(35,475)
(35,475)
9,257
9,257
64,380
64,380
571,912
571,912

YTD 2014
YTD 2014
$
$
1,103,834
1,103,834
2,727,911
2,727,911
92,084
92,084
(2,146,871)
(2,146,871)
(101,212)
(101,212)
-
-
1,675,746
1,675,746

YTD 2013
YTD 2013
$
$
2,717,245
2,717,245
1,450,520
1,450,520
414,228
414,228
(2,694,292)
(2,694,292)
(526,347)
(526,347)
(257,520)
(257,520)
1,103,834
1,103,834

Variance
Variance
$
$
(1,613,411)
(1,613,411)
1,277,391
1,277,391
(322,144)
(322,144)
547,421
547,421
425,135
425,135
257,520
257,520
571,912
571,912

Opening balance
Opening balance
AFIRS sales: shipped, not
AFIRS sales: shipped, not
accepted
accepted
Voice and Data services:
Voice and Data services:
prepaid
prepaid
AFIRS sales: revenue
AFIRS sales: revenue
recognized
recognized
Voice and Data services:
Voice and Data services:
revenue recognized
revenue recognized
License fees: revenue
License fees: revenue
recognized
recognized
December 31
Balance, December 31
Balance, December 31

Comprehensive Income
Comprehensive Income

Revenue
Revenue
For the categories listed in the revenue sources chart, Voice and data services is the recurring revenue from customers’ usage of
For the categories listed in the revenue sources chart, Voice and data services is the recurring revenue from customers’ usage of
data they receive from AFIRS and use of functions such as the satellite phone. Usage fees are recognized as the service is
data they receive from AFIRS and use of functions such as the satellite phone. Usage fees are recognized as the service is
provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales as well as
provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales as well as
the parts required to install the unit along with Dragon hardware sales, Upon shipment, these amounts are deferred as unearned
the parts required to install the unit along with Dragon hardware sales, Upon shipment, these amounts are deferred as unearned
revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and the customer has
revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and the customer has
accepted the system, the deferred amount is fully recognized as AFIRS sales revenue and the work in progress as cost of sales.
accepted the system, the deferred amount is fully recognized as AFIRS sales revenue and the work in progress as cost of sales.
Parts sales includes the sale of spare AFIRS units, spare installation parts, L-3 AR revenue, and Underfloor Stowage Units.
Parts sales includes the sale of spare AFIRS units, spare installation parts, L-3 AR revenue, and Underfloor Stowage Units.
Services revenue includes technical services, repairs and expertise the Company offers including the installation of operations
Services revenue includes technical services, repairs and expertise the Company offers including the installation of operations
control centres (FLYHT has set up two in Nigeria).
control centres (FLYHT has set up two in Nigeria).

ANNUAL REPORT 2014

Revenue sources
Revenue sources

Voice and data services

AFIRS sales

Parts sales

Services

Total

11-

Q4 2014
Q4 2014
$

915,602

619,776

455,297

228,006

Q4 2013
Q4 2013
$

1,080,503

592,483

79,716

184,055

2,218,681

1,936,757

Variance
Variance
$

(164,901)

27,293

375,581

43,951

281,924

YTD 2014
YTD 2014
$

3,657,300

2,054,251

718,567

451,910

6,882,028

YTD 2013
YTD 2013
$

3,624,719

2,707,839

655,561

1,012,245

8,000,364

Variance
Variance
$

32,581

(653,588)

63,006

(560,335)

(1,118,336)

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014

The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2014

and 2013. Payment was received for 9 installation kits in the fourth quarter of 2014 compared to 10 received in the fourth quarter of

2013, bringing 2014 year-to-date (“YTD”) total payments for installation kits to 57, compared to a total of 42 in 2013.

Opening balance

Payments received

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

1,070,854

744,042

622,082

188,809

448,772

555,233

551,227

797,070

(245,843)

2,967,089

1,204,677

1,762,412

Moved to unearned revenue

(1,024,491)

(259,664)

(764,827)

(2,727,911)

(1,450,520)

(1,277,391)

Balance, December 31

790,405

551,227

239,178

790,405

551,227

239,178

Unearned Revenue

The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2014

and 2013. Revenue was recognized for 12 installation kits in 2014’s fourth quarter compared to 15 in the fourth quarter of 2013.

YTD, revenue has been recognized for 44 installation kits in 2014, as compared to 62 in 2013 due mainly to delayed installation

dates and slow installs in China. In 2014, 57.1% of the unearned revenue balance at December 31, 2013 was recognized as

earned revenue (2013: 77.7%).

Opening balance

AFIRS sales: shipped, not

accepted

prepaid

Voice and Data services:

AFIRS sales: revenue

recognized

Voice and Data services:

revenue recognized

License fees: revenue
recognized
Balance, December 31

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

1,272,206

1,494,153

(221,947)

1,103,834

2,717,245

(1,613,411)

1,024,491

259,664

764,827

2,727,911

1,450,520

1,277,391

15,960

25,090

(9,130)

92,084

414,228

(322,144)

(614,411)

(578,936)

(35,475)

(2,146,871)

(2,694,292)

547,421

(22,500)

(31,757)

9,257

(101,212)

(526,347)

425,135

(64,380)

64,380

(257,520)

257,520

1,675,746

1,103,834

571,912

1,675,746

1,103,834

571,912

Comprehensive Income
COMPREHENSIVE INCOME

Revenue
Revenue
For the categories listed in the revenue sources chart, Voice and data services is the recurring revenue from customers’ usage of data they receive from
For the categories listed in the revenue sources chart, Voice and data services is the recurring revenue from customers’ usage of
AFIRS and use of functions such as the satellite phone. Usage fees are recognized as the service is provided based on actual customer usage each month.
data they receive from AFIRS and use of functions such as the satellite phone. Usage fees are recognized as the service is
AFIRS sales includes the income from AFIRS hardware sales as well as the parts required to install the unit along with Dragon hardware sales, Upon
provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales as well as
shipment, these amounts are deferred as unearned revenue and corresponding expenses are recorded as work in progress. When the system is fully functional
the parts required to install the unit along with Dragon hardware sales, Upon shipment, these amounts are deferred as unearned
revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and the customer has
and the customer has accepted the system, the deferred amount is fully recognized as AFIRS sales revenue and the work in progress as cost of sales. Parts
accepted the system, the deferred amount is fully recognized as AFIRS sales revenue and the work in progress as cost of sales.
sales includes the sale of spare AFIRS units, spare installation parts, L-3 AR revenue, and Underfloor Stowage Units. Services revenue includes technical
Parts sales includes the sale of spare AFIRS units, spare installation parts, L-3 AR revenue, and Underfloor Stowage Units.
services, repairs and expertise the Company offers including the installation of operations control centres (FLYHT has set up two in Nigeria).
Services revenue includes technical services, repairs and expertise the Company offers including the installation of operations
control centres (FLYHT has set up two in Nigeria).
Revenue sources

Revenue sources

Q4 2014
$

Q4 2013
$

Variance
$

YTD 2014
$

YTD 2013
$

Variance

Voice and data services

915,602

1,080,503

(164,901)

3,657,300

3,624,719

32,581

AFIRS sales

Parts sales

Services

Total

619,776

455,297

228,006

592,483

27,293

2,054,251

2,707,839

(653,588)

79,716

375,581

718,567

655,561

63,006

184,055

43,951

451,910

1,012,245

(560,335)

2,218,681

1,936,757

281,924

6,882,028

8,000,364

(1,118,336)

Overall, total revenue decreased 14.0% from $8,000,364 in 2013 to $6,882,028 in 2014. Voice and Data services increased by 0.9%, Parts sales increased by
11-
9.6%, AFIRS sales decreased by 24.1%, and Services revenue decreased by 55.4%.

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014

Voice and Data services increased compared to last year, due to a higher number of aircraft producing recurring revenue and higher per aircraft return.
Recurring revenue accounted for 41.3% of revenue in Q4 2014 (Q4 2013: 55.8%), and 53.1% YTD 2014 (YTD 2013: 45.3%). Recurring revenue from FLYHT’s
existing client base is expected to continue to expand throughout 2015 and future years.

AFIRS sales decreased in 2014 as compared to 2013 due to a decreased number of installation kits meeting the requirements for revenue recognition. YTD,
revenue has been recognized for 44 installation kits, compared to 62 in 2013. In the fourth quarter, sales revenue increased despite a decreased number of
installation kits meeting the requirement for recognition, because of a higher value per installation kit. Revenue was recognized for 12 installation kits in Q4
2014 compared to 15 in Q4 2013.

Parts sales increased both in the quarter and YTD in 2014 from 2013 as the result of differing demand for spare units and parts. There were three larger orders
for spare units in Q3 and Q4 2014, which cumulatively were larger than four one-time large spare unit sales that occurred in Q4 2013.

Services revenue increased in the quarter while decreasing YTD in 2014 compared to 2013. In Q4 and YTD 2014 higher revenue was earned on engineering
documentation required for our Chinese customers. Throughout 2013 higher revenue was earned on our contract with L-3 which was not repeated in 2014.

FLYHT AEROSPACE SOLUTIONS LTD.

Geographical sources of revenue

Geographical sources of revenue
Geographical sources of revenue
The following revenue split is based on the geographical location of customers.
The following revenue split is based on the geographical location of customers.
The following revenue split is based on the geographical location of customers.

Q4 2014

Q4 2014
$

Q4 2013

Q4 2013
$

YTD 2014

YTD 2013

YTD 2014
$

YTD 2013

North America
South/Central America
North America
Africa/Middle East
South/Central America
Europe
Africa/Middle East
Australasia
Europe
Asia
Australasia
Total
Asia
Total

1,215,724
67,265
1,215,724
369,309
67,265
54,078
369,309
143,922
54,078
368,383
143,922
2,218,681
368,383
2,218,681
Q4 2014
%
Q4 2014
54.9
%
3.0
54.9
16.6
3.0
2.4
16.6
6.5
2.4
16.6
6.5
100.0
16.6
100.0

731,995
167,765
731,995
590,523
167,765
41,488
590,523
187,923
41,488
217,063
187,923
1,936,757
217,063
1,936,757
Q4 2013
%
Q4 2013
37.8
%
8.7
37.8
30.5
8.7
2.1
30.5
9.7
2.1
11.2
9.7
100.0
11.2
100.0

3,321,408
304,449
3,321,408
1,194,644
304,449
317,112
1,194,644
658,366
317,112
1,086,049
658,366
6,882,028
1,086,049
6,882,028
YTD 2014
%
YTD 2014
48.2
%
4.4
48.2
17.4
4.4
4.6
17.4
9.6
4.6
15.8
9.6
100.0
15.8
100.0

3,853,788
460,184
3,853,788
1,391,446
460,184
549,718
1,391,446
697,249
549,718
1,047,979
697,249
8,000,364
1,047,979
8,000,364
YTD 2013
%
YTD 2013
48.1
%
5.8
48.1
17.4
5.8
6.9
17.4
8.7
6.9
13.1
8.7
100.0
13.1
100.0

North America
South/Central America
North America
Africa/Middle East
South/Central America
Europe
Africa/Middle East
Australasia
Europe
Asia
Australasia
Total
Asia
Total
Gross Profit and Cost of Sales
Gross Profit and Cost of Sales
Gross Profit and Cost of Sales
FLYHT’s cost of sales includes the direct costs associated with specific revenue types, including the AFIRS unit, installation kits,
training and installation support, as well as associated shipping expenses and travel expenses for the Company’s engineering
FLYHT’s cost of sales includes the direct costs associated with specific revenue types, including the AFIRS unit, installation kits, training and installation
FLYHT’s cost of sales includes the direct costs associated with specific revenue types, including the AFIRS unit, installation kits,
personnel while performing on-site installation support. Installations on aircraft are performed by third parties at the customer’s
training and installation support, as well as associated shipping expenses and travel expenses for the Company’s engineering
support, as well as associated shipping expenses and travel expenses for the Company’s engineering personnel while performing on-site installation support.
expense. Cost of sales as a percentage of revenue in the fourth quarter of 2014 was 38.3% compared to 39.6% in 2013’s fourth
personnel while performing on-site installation support. Installations on aircraft are performed by third parties at the customer’s
Installations on aircraft are performed by third parties at the customer’s expense. Cost of sales as a percentage of revenue in the fourth quarter of 2014 was
quarter. A review of the annual results shows the cost of sales as a percentage of revenue also decreased from 40.8% in 2013 to
expense. Cost of sales as a percentage of revenue in the fourth quarter of 2014 was 38.3% compared to 39.6% in 2013’s fourth
38.3% compared to 39.6% in 2013’s fourth quarter. A review of the annual results shows the cost of sales as a percentage of revenue also decreased from
37.1% in 2014. The decrease was due to a difference in the mix of revenue sources, as Voice and Data services, Parts sales, and
quarter. A review of the annual results shows the cost of sales as a percentage of revenue also decreased from 40.8% in 2013 to
40.8% in 2013 to 37.1% in 2014. The decrease was due to a difference in the mix of revenue sources, as Voice and Data services, Parts sales, and Services
Services have higher margins than AFIRS sales. Gross margin will fluctuate quarter over quarter depending on customer needs
37.1% in 2014. The decrease was due to a difference in the mix of revenue sources, as Voice and Data services, Parts sales, and
have higher margins than AFIRS sales. Gross margin will fluctuate quarter over quarter depending on customer needs and revenue mix.
and revenue mix.
Services have higher margins than AFIRS sales. Gross margin will fluctuate quarter over quarter depending on customer needs
and revenue mix.
Gross margin for the last eight quarters was:
Gross margin for the last eight quarters was:
Gross margin for the last eight quarters was:

Q4 2014 Q3 2014
Q4 2014 Q3 2014
63.7
63.7
36.3
36.3

61.7
61.7
38.3
38.3

Q2 2014 Q1 2014
Q2 2014 Q1 2014
67.4
67.4
32.6
32.6

59.8
59.8
40.2
40.2

Gross Margin %
Gross Margin %
Cost of Sales %
Cost of Sales %
Other Income
Other Income
Other Income
Other income in 2013 consists of the recognition of the SNC license fee that was deferred as unearned revenue when received in 2008, to be recognized over
Other income in 2013 consists of the recognition of the SNC license fee that was deferred as unearned revenue when received in
the initial five-year term of the agreement. The amount was fully recognized by December 31, 2013.
2008, to be recognized over the initial five-year term of the agreement. The amount was fully recognized by December 31, 2013.
Other income in 2013 consists of the recognition of the SNC license fee that was deferred as unearned revenue when received in
2008, to be recognized over the initial five-year term of the agreement. The amount was fully recognized by December 31, 2013.

56.9
56.9
43.1
43.1

60.4
60.4
39.6
39.6

54.5
45.5

66.6
33.4

54.5
45.5

66.6
33.4

Q4 2013 Q3 2013 Q2 2013
Q4 2013 Q3 2013 Q2 2013

Q1 2013

13-
13-

30
FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014
FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014

ANNUAL REPORT 2014

Distribution Expenses
Distribution Expenses

Consist of overhead expenses associated with the delivery of products and services to customers, and marketing.
Consist of overhead expenses associated with the delivery of products and services to customers, and marketing.

Major Category

Salaries and benefits
Share based
compensation
Contract labour
Office
Travel
Equipment and
maintenance
Depreciation
Marketing
Other

Total

Q4 2014
$

364,083
10,470

97,574
66,654
84,291
5,764

1,733
12,306
347,775

990,650

Q4 2013
$

388,747
-

79,900
87,594
106,426
9,157

11,817
15,797
134,890

834,328

Variance
$

(24,664)
10,470

17,674
(20,940)
(22,135)
(3,393)

(10,084)
(3,491)
212,885

YTD 2014
$

1,652,340
84,971

YTD 2013
$

1,506,626
85,071

354,320
275,427
449,215
22,180

26,910
55,610
472,018

275,059
366,439
403,319
25,413

46,129
41,441
206,949

156,322

3,392,991

2,956,446

Variance
$

145,714
(100)

79,261
(91,012)
45,896
(3,233)

(19,219)
14,169
265,069

436,545

Distribution expenses increased compared to 2013 due mainly to higher people costs and bad debt reserve.
Distribution expenses increased compared to 2013 due mainly to higher people costs and bad debt reserve.
Salaries and benefits increased in 2014 as compared to 2013 mainly due to a decreased allocation of distribution staff costs to R&D, partially offset by a
Salaries and benefits increased in 2014 as compared to 2013 mainly due to a decreased allocation of distribution staff costs to
decrease resulting from the non-renewal of a sales director’s employment agreement.
R&D, partially offset by a decrease resulting from the non-renewal of a sales director’s employment agreement.
Contract labour increased compared with the same periods last year, with the addition in early 2014 of sales representation based in Singapore.
Contract labour increased compared with the same periods last year, with the addition in early 2014 of sales representation
based in Singapore.
Office expenses decreased 2014 from 2013 mainly as the result of decreased rent with the move to the new office space, and lower communication costs,
partially offset by increased participation in an industry group.
Office expenses decreased 2014 from 2013 mainly as the result of decreased rent with the move to the new office space, and
lower communication costs, partially offset by increased participation in an industry group.
Travel expenses increased in 2014 versus 2013 largely as the result of increased travel associated with sales and customer satisfaction activities. Travel
expenses vary significantly depending on the location of customer contracts and regions served.
Travel expenses increased in 2014 versus 2013 largely as the result of increased travel associated with sales and customer
satisfaction activities. Travel expenses vary significantly depending on the location of customer contracts and regions served.
Depreciation expense has decreased due to a decrease in the usage of capital equipment for distribution activities.
Depreciation expense has decreased due to a decrease in the usage of capital equipment for distribution activities.
Marketing expense has increased due to an increased presence at industry tradeshows.
Marketing expense has increased due to an increased presence at industry tradeshows.
Other expenses increased due to an increase in bad debt reserve and a non-recurring employee relocation.
Administration Expenses
Other expenses increased due to an increase in bad debt reserve and a non-recurring employee relocation.
Administration Expenses
Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of
services or sales.
Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of services or sales.

Major Category

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

Salaries and benefits
Share based compensation
Contract labour
Office
Legal fees
Audit and accounting
Investor relations
Brokerage, stock exchange,
and transfer agent fees
Travel
Equipment and
maintenance
Depreciation
Other

$
352,434
2,022
60,860
62,895
42,787
31,500
85,807
10,106

54,140
46,270

760
30,458

$
520,345
8,558
25,250
76,660
12,636
27,000
67,432
2,865

24,368
16,025

5,980
18,396

$
(167,911)
(6,536)
35,610
(13,765)
30,151
4,500
18,375
7,241

29,772
30,245

(5,220)
12,062

$
1,468,711
417,278
245,678
276,983
151,566
141,438
372,423
74,066

215,660
98,438

15,217
71,060

$
1,498,854
260,091
141,271
305,104
36,405
122,625
243,975
27,377

96,585
55,462

23,920
47,453

$
(30,143)
157,187
104,407
(28,121)
115,161
18,813
128,448
46,689

119,075
42,976

(8,703)
23,607

Total

780,039

805,515

(25,476)

3,548,518

2,859,122

689,396

Administration expenses were higher than 2013 due to additional investor relations, increased travel, relocation of the office,
expense in listing on the OTCQX and people cost on issue of options, staff recruitment and staff retirement.

FLYHT AEROSPACE SOLUTIONS LTD.

Salaries and benefits were lower in 2014 compared with 2013, mainly as the result of an internal reorganization to increase
efficiencies which moved several resources from Administration to R&D together with a reduction in variable compensation,
partially offset by separation payments for our retiring CFO.

14-

Share based compensation increased compared with the same periods last year, due to a higher number of options granted and

a higher estimated fair value in 2014 compared to 2013.

Contract labour increased compared to 2013 as a result of recruitment fees paid in the second half of 2014, along with expenses

resulting from increased involvement in industry groups following the disappearance of Malaysian Airlines flight MH370.

Office expenses decreased throughout 2014 compared to 2013 mainly as the result of decreased rent with the move to the new

office space and a change in rent allocation consequent on an internal reorganization to increase efficiencies.

Legal fees increased from 2013 due to requirements relating to the Company’s listing on the OTCQX in 2014, together with a

settlement on the SNC legal claim and an increase in general corporate legal reviews and intellectual property legal advice.

Audit and accounting increases are mainly due to increased audit costs consequent on increased complexity in FLYHT’s

business, and increased requirements for international tax consulting.

Investor relations expenses increased due to the addition of a third IR consultant in early 2014, together with costs associated

with obtaining a listing on the OTCQX.

Brokerage, stock exchange, and transfer agent fees increases are the result of the exercise of warrants and options throughout

2014.

Travel expenses increased as a result of an increase in travel requirements relating to investor relations, including travel expenses

associated with participation in industry group meetings following the disappearance of Malaysian Airlines flight MH370.

Equipment and maintenance increases were the result of additional equipment required for the new office premises in 2014.

Other increases were relating to the office move in 2014.

Research, Development and Certification Engineering Expenses (Recovery)

15-

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014

Administration expenses were higher than 2013 due to additional investor relations, increased travel, relocation of the office, expense in listing on the OTCQX
and people cost on issue of options, staff recruitment and staff retirement.

Salaries and benefits were lower in 2014 compared with 2013, mainly as the result of an internal reorganization to increase efficiencies which moved
several resources from Administration to R&D together with a reduction in variable compensation, partially offset by separation payments for our retiring CFO.

Share based compensation increased compared with the same periods last year, due to a higher number of options granted and a higher estimated fair
value in 2014 compared to 2013.

Contract labour increased compared to 2013 as a result of recruitment fees paid in the second half of 2014, along with expenses resulting from increased
involvement in industry groups following the disappearance of Malaysian Airlines flight MH370.

Office expenses decreased throughout 2014 compared to 2013 mainly as the result of decreased rent with the move to the new office space and a change in
rent allocation consequent on an internal reorganization to increase efficiencies.

Legal fees increased from 2013 due to requirements relating to the Company’s listing on the OTCQX in 2014, together with a settlement on the SNC legal
claim and an increase in general corporate legal reviews and intellectual property legal advice.

Audit and accounting increases are mainly due to increased audit costs consequent on increased complexity in FLYHT’s business, and increased requirements
for international tax consulting.

Investor relations expenses increased due to the addition of a third IR consultant in early 2014, together with costs associated with obtaining a listing on
the OTCQX.

Brokerage, stock exchange, and transfer agent fees increases are the result of the exercise of warrants and options throughout 2014.

Travel expenses increased as a result of an increase in travel requirements relating to investor relations, including travel expenses associated with participation
in industry group meetings following the disappearance of Malaysian Airlines flight MH370.

Equipment and maintenance increases were the result of additional equipment required for the new office premises in 2014.

Other increases were related to an office move in 2014.

Research, Development and Certification Engineering Expenses (Recovery)

Major Category

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

Salaries and benefits
Share based compensation
Contract labour
Office
Travel
Equipment and maintenance
Components
Government grants
SRED credit
Depreciation
Other
SNC litigation settlement

$
427,690

-
172,201
87,376
11,226

39,409
35,708
-
(324)
(561)
-
-

$
412,139

-
145,480
94,731
8,210

1,799
25,622
-
-
4,415
955
-

Total

772,725

693,351

15,551

1,874,482

1,536,904

-
26,721
(7,355)
3,016

37,610
10,086
-
(324)
(4,976)
(955)
-

79,374

86,341
538,874
288,686
37,882

56,555
52,308
-
(241,677)
23,195
12,060
(1,950,957)

13,542
533,107
188,579
48,734

33,154
264,587
(130,801)
(326,195)
17,661
955
-

337,578

72,799
5,767
100,107
(10,852)

23,401
(212,279)
130,801
84,518
5,534
11,105
(1,950,957)

777,749

2,180,227

(1,402,478)

Research and Development expense was low in 2014 due to recovery of a provision on settlement of the SNC litigation, offset by
Research and Development expense was low in 2014 due to recovery of a provision on settlement of the SNC litigation, offset by additional people cost on
additional people cost on options and engineering time on customer and STC projects.
options and engineering time on customer and STC projects.
Salaries and benefits expended in this category increased from 2013 to 2014, partially due to in the time committed to the
increasing revenue sources for UpTime applications, along with an internal reorganization to increase efficiencies which moved
several resources from Administration to R&D. People costs will fluctuate with customer and industry demands for new products
and enhancements of existing products.

Share based compensation increased YTD, due to a higher number of options granted and a higher estimated fair value in 2014
compared to 2013.

Contract labour has increased YTD, mainly as the result of Q2 and Q3 2014 increased use of certification engineering
consultants to complete time-sensitive STC’s, and the use of a software development consultant for two short-term projects and
additional testing, offset by a reduced utilization of consultants for hardware development in Q1 2014.

ANNUAL REPORT 2014

Office expenses increased as a result of increased costs associated with patent application costs, an increase in rent allocation,

and a requirement for legal resources to finalize the settlement with SNC.

Travel expenses decreased as a result of decreased requirements for travel with regards to hardware testing and test flights.

Equipment and maintenance expenses increased from 2013 as the result of investments in enhancing FLYHTStream

capabilities, partially offset by a decreased requirement for software directly related to development of AFIRS 228 software.

Components requirements were lower in 2014 than in 2013 due to the reduced requirement for test parts for the development of

the AFIRS 228, offset partially by a recovery in Q2 2014 when remaining Dragon parts were moved to production.

Government grants were nil in 2014, compared to $130,801 in 2013 which was the grant portion of the final payment received

through the SADI program in Q3 2013.

SRED credit YTD variance is due to a decrease in the expenses that qualify for the refundable tax credit under the Canada

Revenue Agency Scientific Research and Experimental Development (“SRED”) in 2014 compared to 2013. Annual claims will

fluctuate based on differences in R&D activities and associated costs.

Other expenses increased in 2014 due to an employee relocation cost in early 2014.

SNC litigation settlement recovery shown in 2014 was the result of the settlement in Q2 2014 of the dispute with SNC and the

release of the related liability accrual – refer also to Liquidity and Capital Resource section for further detail.

16-

Salaries and benefits expended in this category increased from 2013 to 2014, partially due to in the time committed to the increasing revenue sources for
UpTime applications, along with an internal reorganization to increase efficiencies which moved several resources from Administration to R&D. People costs
will fluctuate with customer and industry demands for new products and enhancements of existing products.

Share based compensation increased YTD, due to a higher number of options granted and a higher estimated fair value in 2014 compared to 2013.

Contract labour has increased YTD, mainly as the result of Q2 and Q3 2014 increased use of certification engineering consultants to complete time-sensitive
STC’s, and the use of a software development consultant for two short-term projects and additional testing, offset by a reduced utilization of consultants for
hardware development in Q1 2014.

Office expenses increased as a result of increased costs associated with patent application costs, an increase in rent allocation, and a requirement for legal
resources to finalize the settlement with SNC.

Travel expenses decreased as a result of decreased requirements for travel with regards to hardware testing and test flights.

Equipment and maintenance expenses increased from 2013 as the result of investments in enhancing FLYHTStream capabilities, partially offset by a
decreased requirement for software directly related to development of AFIRS 228 software.

Components requirements were lower in 2014 than in 2013 due to the reduced requirement for test parts for the development of the AFIRS 228, offset
partially by a recovery in Q2 2014 when remaining Dragon parts were moved to production.

Government grants were nil in 2014, compared to $130,801 in 2013 which was the grant portion of the final payment received through the SADI program
in Q3 2013.

SRED credit YTD variance is due to a decrease in the expenses that qualify for the refundable tax credit under the Canada Revenue Agency Scientific Research
and Experimental Development (“SRED”) in 2014 compared to 2013. Annual claims will fluctuate based on differences in R&D activities and associated costs.

Other expenses increased in 2014 due to an employee relocation cost in early 2014.

SNC litigation settlement recovery shown in 2014 was the result of the settlement in Q2 2014 of the dispute with SNC and the release of the related liability
accrual – refer also to Liquidity and Capital Resource section for further detail.

Net Finance Costs
Net Finance Costs

Major Category

Interest (income)

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

$
-

$
(2,000)

$
(2,221)

221

Net foreign exchange (gain) loss

(137,326)

75,619

(212,945)

(154,265)

165,432

(319,697)

Bank service charges

Interest expense

Government grant accretion

Debenture interest and accretion

Debenture cost amortization

Net finance costs

5,353

1,088

4,772

1,315

38,928

35,413

199,937

200,748

23,777

21,822

581

(227)

3,515

(811)

1,955

21,995

3,885

149,001

784,404

88,530

21,388

10,187

123,460

657,620

84,136

607

(6,302)

25,541

126,784

4,394

131,757

339,689

(207,932)

891,550

1,060,002

(168,452)

Net foreign exchange gain will vary between periods due to fluctuations in the value of the Canadian dollar in relation to the U.S.
Net foreign exchange gain will vary between periods due to fluctuations in the value of the Canadian dollar in relation to the U.S. dollar. A weakening of the
dollar. A weakening of the Canadian dollar has given rise to increased foreign exchange gains on U.S. dollar denominated sales
Canadian dollar has given rise to increased foreign exchange gains on U.S. dollar denominated sales and purchases, in combination with fluctuations in U.S.
and purchases, in combination with fluctuations in U.S. denominated assets and liabilities.
denominated assets and liabilities.
Government grant accretion is the recognition of the effective interest component of the SADI grant. The increase from 2013 to
Government grant accretion is the recognition of the effective interest component of the SADI grant. The increase from 2013 to 2014 relates to accreting
2014 relates to accreting additional funding received in September 2013.
additional funding received in September 2013.
Debenture interest and accretion increases are the result of increased interest accretion on the debentures issued in December
Debenture interest and accretion increases are the result of increased interest accretion on the debentures issued in December 2010, and the accretion of
2010, and the accretion of interest throughout 2014 on the debentures issued in April and May 2013.
interest throughout 2014 on the debentures issued in April and May 2013.
Net Loss

Major Category

Net loss

Net loss without R&D

FLYHT AEROSPACE SOLUTIONS LTD.

Foreign Exchange

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

1,305,712

1,438,795

(133,083)

532,986

745,444

(212,458)

$
4,278,885
3,501,136

4,063,164

215,721

1,882,937

1,618,199

All international and a majority of domestic sales of the Company’s products and services are denominated in U.S. dollars.

Accordingly, the Company is susceptible to foreign exchange fluctuations. In 2014, 95.5% of the Company’s gross sales were

made in U.S. dollars, compared to 95.4% in 2013. The Company expects this to continue as the aviation industry conducts the

majority of its transactions in U.S. dollars, thus limiting the opportunity for sales in Canadian dollars or other major currencies. The

Company also contracts in U.S. dollars for certain services and products related to cost of sales, which creates a natural hedge.

Other

Recent Accounting Pronouncements

The following new standards, interpretations, amendments and improvements to existing standards issued by the IASB or

International Financial Reporting Interpretations Committee ("IFRIC") were adopted as of January 1, 2014 without any material

impact to FLYHT’s financial statements: IFRS 7 / IAS 32 – Offsetting Financial Assets and Liabilities, IAS 1 – Presentation of

Financial Statements, IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting, and IFRIC 21 - Levies.

The following new accounting pronouncements have been issued but are not effective and may have an impact on the Company.

All of the following new or revised standards permit early adoption with transitional arrangements depending upon the date of initial

application:

IFRS 9 – Financial Instruments replaces the current multiple classification and measurement models for financial assets and

liabilities with a single model that has only two classification categories: amortized cost and fair value. (January 1, 2018).

IFRS 15 – Revenue from Contracts with Customers replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 -

Customer Loyalty Programs, IFRIC 15 - Agreements for the Construction of Real Estate, IFRIC 18 - Transfer of Assets from

Customers, and SIC 31 - Revenue – Barter Transactions Involving Advertising Services. The standard contains a single model

17-

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014

Net Finance Costs

Major Category

Interest (income)

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

(2,000)

(2,221)

221

Net foreign exchange (gain) loss

(137,326)

75,619

(212,945)

(154,265)

165,432

(319,697)

Bank service charges

Interest expense

Government grant accretion

Debenture interest and accretion

Debenture cost amortization

Net finance costs

5,353

1,088

4,772

1,315

38,928

35,413

199,937

200,748

23,777

21,822

581

(227)

3,515

(811)

1,955

21,995

3,885

149,001

784,404

88,530

21,388

10,187

123,460

657,620

84,136

607

(6,302)

25,541

126,784

4,394

131,757

339,689

(207,932)

891,550

1,060,002

(168,452)

Net foreign exchange gain will vary between periods due to fluctuations in the value of the Canadian dollar in relation to the U.S.

dollar. A weakening of the Canadian dollar has given rise to increased foreign exchange gains on U.S. dollar denominated sales

and purchases, in combination with fluctuations in U.S. denominated assets and liabilities.

Government grant accretion is the recognition of the effective interest component of the SADI grant. The increase from 2013 to

2014 relates to accreting additional funding received in September 2013.

Debenture interest and accretion increases are the result of increased interest accretion on the debentures issued in December
2010, and the accretion of interest throughout 2014 on the debentures issued in April and May 2013.

Net Loss
Net Loss

Major Category

Net loss

Net loss without R&D

Foreign Exchange
Foreign Exchange

Q4 2014

Q4 2013

Variance

YTD 2014

YTD 2013

Variance

1,305,712

1,438,795

(133,083)

532,986

745,444

(212,458)

$
4,278,885
3,501,136

4,063,164

215,721

1,882,937

1,618,199

All international and a majority of domestic sales of the Company’s products and services are denominated in U.S. dollars. Accordingly, the Company is
All international and a majority of domestic sales of the Company’s products and services are denominated in U.S. dollars.
susceptible to foreign exchange fluctuations. In 2014, 95.5% of the Company’s gross sales were made in U.S. dollars, compared to 95.4% in 2013. The Company
Accordingly, the Company is susceptible to foreign exchange fluctuations. In 2014, 95.5% of the Company’s gross sales were
expects this to continue as the aviation industry conducts the majority of its transactions in U.S. dollars, thus limiting the opportunity for sales in Canadian dollars
made in U.S. dollars, compared to 95.4% in 2013. The Company expects this to continue as the aviation industry conducts the
majority of its transactions in U.S. dollars, thus limiting the opportunity for sales in Canadian dollars or other major currencies. The
or other major currencies. The Company also contracts in U.S. dollars for certain services and products related to cost of sales, which creates a natural hedge.
Company also contracts in U.S. dollars for certain services and products related to cost of sales, which creates a natural hedge.
OTHER
Other
Recent Accounting Pronouncements

Recent Accounting Pronouncements
The following new standards, interpretations, amendments and improvements to existing standards issued by the IASB or International Financial Reporting
Interpretations Committee (“IFRIC”) were adopted as of January 1, 2014 without any material impact to FLYHT’s financial statements: IFRS 7 / IAS 32 – Offsetting
Financial Assets and Liabilities, IAS 1 – Presentation of Financial Statements, IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting, and IFRIC
The following new standards, interpretations, amendments and improvements to existing standards issued by the IASB or
International Financial Reporting Interpretations Committee ("IFRIC") were adopted as of January 1, 2014 without any material
21 - Levies.
impact to FLYHT’s financial statements: IFRS 7 / IAS 32 – Offsetting Financial Assets and Liabilities, IAS 1 – Presentation of
Financial Statements, IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting, and IFRIC 21 - Levies.
The following new accounting pronouncements have been issued but are not effective and may have an impact on the Company. All of the following new or
revised standards permit early adoption with transitional arrangements depending upon the date of initial application:
The following new accounting pronouncements have been issued but are not effective and may have an impact on the Company.
All of the following new or revised standards permit early adoption with transitional arrangements depending upon the date of initial
IFRS 9 – Financial Instruments replaces the current multiple classification and measurement models for financial assets and liabilities with a single model
application:
that has only two classification categories: amortized cost and fair value. (January 1, 2018).

IFRS 9 – Financial Instruments replaces the current multiple classification and measurement models for financial assets and
IFRS 15 – Revenue from Contracts with Customers replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 - Customer Loyalty Programs, IFRIC 15
liabilities with a single model that has only two classification categories: amortized cost and fair value. (January 1, 2018).
- Agreements for the Construction of Real Estate, IFRIC 18 - Transfer of Assets from Customers, and SIC 31 - Revenue – Barter Transactions Involving
Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point
IFRS 15 – Revenue from Contracts with Customers replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 -
in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized.
Customer Loyalty Programs, IFRIC 15 - Agreements for the Construction of Real Estate, IFRIC 18 - Transfer of Assets from
New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard
Customers, and SIC 31 - Revenue – Barter Transactions Involving Advertising Services. The standard contains a single model
applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs
(January 1, 2017).

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2014

17-

The Company has not completed its evaluation of the effect of adopting these standards on its consolidated annual financial statements.

Critical Accounting Estimates

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada. The preparation of these
consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and
expenses. These estimates are based on management’s historical experiences and various other assumptions that are believed by management to be reasonable
under the circumstances. Such assumptions are evaluated on an ongoing basis and form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

The following are the Company’s critical accounting policies, significant estimates, and assumptions used in preparing our financial statements:

1. The Company maintains an allowance for doubtful accounts for estimated losses that may occur if customers are unable to pay trade balances owing to the
Company. This allowance is determined based on a review of specific customers, historical experience, and economic circumstances.

2. The Company evaluates its deferred tax assets at each reporting date and recognizes deferred tax assets to the extent that it is probable that future taxable

profits will be available against which they can be utilized. At December 31, 2014, no deferred tax assets were recognized.

3. The Company records amounts for warranty based on historical warranty data. A provision is recognized upon shipment of the underlying products.

4. Intangible assets are stated at cost less accumulated amortization and comprise of a license, customer contracts, and customer relationships. The license
has an indefinite life. The customer contracts and relationships are amortized using the straight line method over the remaining life of the assumed contract.
Indefinite lived intangible assets are subject to an annual impairment test unless if events or circumstances change that indicate that the carrying value may
not be recoverable then impairment is evaluated more frequently.

ANNUAL REPORT 2014

5. Consideration received for installation kits is deferred as unearned revenue and corresponding expenses are recorded as work in progress until the system
is fully functional and customer acceptance has been obtained, at which time the full deferred amount is recognized in revenue along with the work in
progress as cost of sales. Revenue from UpTime usage fees is recognized at the end of each month and is based on actual usage during that month.

6. Revenue from the sale of Dragons, Underfloor Stowage Units and other parts is recognized when the unit is shipped, title is transferred, and collection is
reasonably assured. Certain customers have prepaid for products or services not yet delivered. These amounts are included in trade payables and accrued
liabilities on the Statement of Financial Position, and are recorded as revenue in the period in which such products or services are delivered.

7. Technical services are provided based upon orders and contracts with customers that include fixed or determinable prices that are based upon daily, hourly

or contracted rates. Revenue is recognized as services are rendered and when collectability is reasonably assured.

Risks and Uncertainties

FLYHT operates in the aviation industry and part of the business involves risks and uncertainties. The Company takes steps to manage these risks, though it is
important to identify risks that could have a material effect on business or results of operations. Such risks are listed below; the areas defined are not inclusive.

Installations at c-checks

The Company’s products, AFIRS 220 and 228, can take approximately 200 person-hours or more to install on an aircraft, depending on the aircraft type and
crew. As the box needs a longer period to be installed, the installation is usually scheduled when the aircraft is undergoing its routine c-check or scheduled
maintenance. The timing of c-checks depends on how many segments the aircraft has flown and is based on the manufacturer’s guidelines; it can take as long
as two or three years before an aircraft is out of service for an extended period. Waiting for a c-check for AFIRS installation is a risk to the Company because it
results in a delay in initial revenue from the sale of the box and the Company does not receive recurring revenue connected with the monthly service offerings
until the device is installed and running.

The Company takes steps to mitigate this risk by encouraging customers to install AFIRS at their aircraft’s earliest availability and works with them to provide
the box at the right time for installation, preferably while the aircraft is down for normal service. The goal is to reduce aircraft downtime and save the customer
as much money as possible. Another risk mitigation tool used by the Company is to offer special discounts to airlines that pay for all units up front. This discount
decreases FLYHT’s gross margin slightly, but allows the Company to bring in cash immediately after signing an agreement. As well, the terms of the Company’s
standard agreement states that payment is due a minimum of 45 days prior to the shipment of kits.

Foreign currency fluctuations

The Company does a majority of its business in U.S. dollars so there is a risk of currency fluctuation. The major portion of the operating and overhead costs
are denominated in Canadian dollars, though a significant portion of costs of goods sold, marketing and distribution costs are U.S. dollar denominated, and
therefore create a natural hedge against fluctuations of the Canadian dollar.

General economic and financial market conditions

In an industry, such as the aviation industry, finances are tied to global trends and patterns. As an airline’s spending is tied to their income, they may be
unwilling or unable to spend money, particularly on a value-added product such as AFIRS.

In order to address this risk, the sales team has developed a number of strategies. One is a global sales presence. FLYHT has established sales agents on
every continent. While some economies of the world may be in a slump or downturn, there is a place for FLYHT in growing markets. FLYHT also demonstrates
to potential customers the impressive return on investment model, how quickly potential customers can improve operational efficiency, and ultimately how
much AFIRS will save them in operating cost.

Dependence on key personnel and consultants

FLYHT’s ability to maintain its competency in the industry is dependent on maintaining a specialty skilled workforce. The Company’s DAO status, delegated by
TCCA, enables a smooth implementation of STCs, required to install AFIRS on aircraft. Key staff with TCCA delegation status enable the Company to complete
STCs in a timely and cost efficient manner. The Company has worked over the past few years to distribute the specified knowledge among a number of key
individuals. This reduces risk and ensures the Company can still function effectively were it to lose specialized staff.

FLYHT AEROSPACE SOLUTIONS LTD.

Dependence on new products

Over the past few years, the Company has been in the R&D stage of its next generation product, AFIRS 228. FLYHT is confident the product fills a gap in the
industry, as evidenced by sales of the AFIRS 228 throughout 2013 and 2014. Through 2014 FLYHT has been working to increase certification of the 228 from an
‘E’ to a ‘D’ level certification at the request of customers; once certified it will again increase the market for the Company’s product. FLYHT released the Dragon
in the fall of 2013, expanding into the sector within the industry that required a portable satellite communications device to meet general aviation operators’
need for increased connectivity. The Company’s success will ultimately depend on the success of both products, and future enhancements made to both.

Availability of key supplies

FLYHT produces and builds all AFIRS 220 units in-house, while AFIRS 228 units are built by a contract manufacturer. The Company relies on partners, suppliers
and special parts to complete unit builds. Certain parts can be delayed in shipping or availability, which can cause a delay in building the AFIRS 220 or in
receiving AFIRS 228 completed units. FLYHT aims to avoid the risk of not having the necessary supplies by managing inventories and storing extra key parts.
The contract manufacturer is a global supplier with the ability to meet FLYHT’s requirements. Additionally, the Company maintains close communication with
its partners and suppliers to ensure all key components for the AFIRS units will be available into the future.

Proprietary protection

Patent rights are extremely important to the continuation of the Company because the AFIRS technology is the Company’s primary revenue source. The
Company relies on contract, copyright and trademark laws and has received patents from the United States, Chinese, Turkish and European patent offices.
These patents are generally respected in other international jurisdictions as well. The risks involved with proprietary protection lie in other companies infringing
on FLYHT patents or claiming patent infringement by FLYHT, though the Company has defended patent claims in court and been successful. FLYHT conducted
due diligence on its technology and the conditions of its patent before applying and maintains that it holds unique characteristics from other technologies in
the marketplace and does not infringe on the rights of any third parties.

Transactions with Related Parties

Throughout 2014, the Company engaged in transactions with a company owned by a former director to supply consulting services in promoting the Company’s
product as a preferred solution for enhanced aircraft tracking and triggered data transmission.

Included in contract labour:

Included in accounts payable and accrued liabilities:

For the three months ended
December 31

For the year ended
December 31

2014
$

5,621

2013
$

Consulting fees

Total

2014
$

74,418

2013
$

December 31

2014
$

2013
$

All of the transactions with the related parties were at exchange amounts that approximated fair value. All other transactions with related parties were normal
business transactions related to employee and director positions within the Company. These transactions included expense reimbursements for business
travel and expenses paid by the related party, and were measured at exchange amounts paid to a third party as substantiated with a third party receipt.

ANNUAL REPORT 2014

Independent Auditors’ Report

To the Shareholders of FLYHT Aerospace Solutions Ltd.

We have audited the accompanying consolidated financial statements of FLYHT Aerospace Solutions Ltd., which comprise the consolidated
statements of financial position as at December 31, 2014 and December 31, 2013, the consolidated statements of comprehensive income (loss),
changes in equity (deficiency) and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other
explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

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

Auditors’ Responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.

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

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of FLYHT Aerospace
Solutions Ltd. as at December 31, 2014 and December 31, 2013, and its consolidated financial performance and its consolidated cash flows for the
years then ended in accordance with International Financial Reporting Standards.

Emphasis of Matter

Without modifying our opinion, we draw attention to Note 2 (d) in the consolidated financial statements, which indicates that FLYHT Aerospace
Solutions Ltd. has a net loss and negative cash flows from operating activities for the year ended December 31, 2014 and is dependent upon
obtaining profitable operations and/or additional financing to fund its ongoing operations. These conditions, along with other matters as set forth
in Note 2 (d) in the consolidated financial statements, indicate the existence of a material uncertainty that may cast significant doubt about FLYHT
Aerospace Solutions Ltd.’s ability to continue as a going concern.

Chartered Accountants
April 7, 2015
Calgary, Canada

FLYHT AEROSPACE SOLUTIONS LTD.

Consolidated Statement of Financial Position

December 31, 2014
$

December 31, 2013
$

Assets
Current assets
Cash and cash equivalents (note 6)
Restricted cash (note 13)

Trade and other receivables (note 7)

Deposits and prepaid expenses

Inventory (note 8)

Total current assets

Non-current assets

Property and equipment (note 9)
Intangible assets (note 10)
Inventory (note 8)

Total non-current assets

Total assets

Liabilities
Current liabilities

Trade payables and accrued liabilities (note 11)

Unearned revenue (note 12)

Loans and borrowings (note 13)
Finance lease obligations
Current tax liabilities (note 25)

Total current liabilities

Non-current liabilities
Unearned revenue (note 12)

Loans and borrowings (note 13)
Finance lease obligations
Provisions (note 15)

Total non-current liabilities

Total liabilities

Equity (deficiency)
Share capital (note 16)
Convertible debenture – equity feature (note 13)
Warrants (note 16)
Contributed surplus
Deficit

Total (deficiency)

Total liabilities and deficit

3,910,962
250,000
959,786
183,750
1,917,249

7,221,747

217,186
34,992
801,621

1,053,799

8,275,546

2,129,622
1,484,345
572,782
25,973
-

4,212,722

191,401
5,462,701
43,478
235,019

5,932,599

10,145,321

53,496,969
220,700
163,771
7,865,143
(63,616,358)

(1,869,775)

8,275,546

5,184,803
250,000
784,426
145,554
1,308,243

7,673,026

191,695
34,992
536,249

762,936

8,435,962

3,704,496
1,103,834
3,745,513
13,175
895

8,567,913

-
1,992,028
-
148,428

2,140,456

10,708,369

48,318,003
231,318
1,057,652
7,458,093
(59,337,473)

(2,272,407)

8,435,962

See accompanying notes to consolidated financial statements. Going concern (note 2d)

On behalf of the board

Director – Douglas Marlin

Director – Paul Takalo

ANNUAL REPORT 2014

Consolidated Statement of Comprehensive Income (Loss)

For the year ended December 31

Revenue (note 18)

Cost of sales

Gross profit

Other (income) (note 19)

Distribution expenses (note 21)

Administration expenses (note 22)

Research, development and certification engineering expenses (note 23)

Loss from operating activities

Finance (income) (note 24)

Finance costs (note 24)

Net finance costs

Loss before income tax

Income tax expense (note 25)

Loss for the period

Total comprehensive loss for the period

Loss per share

Basic and diluted loss per share (note 17)

See accompanying notes to consolidated financial statements.

2014
$

6,882,028

2,550,051

4,331,977

3,392,991

3,548,518

777,749

(3,387,281)

(156,265)

1,047,815

(891,550)

(4,278,831)

(4,278,885)

(0.03)

2013
$

8,000,364

3,264,786

4,735,578

(257,520)

2,956,446

2,859,122

2,180,227

(3,002,697)

(2,221)

1,062,223

(1,060,002)

(4,062,699)

465

(4,063,164)

(0.03)

FLYHT AEROSPACE SOLUTIONS LTD.

Consolidated Statement of Changes in Equity (Deficiency)

For the years ended December 31, 2014 and 2013

Share
Capital
$

Convertible
Debenture
$

Warrants
$

Contributed
Surplus
$

Deficit
$

Total Equity
(Deficit)
$

Balance at December 31, 2013

Loss for the period

48,318,003
-

231,318
-

1,057,652
-

7,458,093
-

(59,337,473)
(4,278,885)

(2,272,407)
(4,278,885)

Total comprehensive loss
for the year

Contributions by and
distributions to owners

Issue of common shares

Share-based payment transactions
Share options exercised
Warrants exercised
Warrants expired

Total contributions by and
distributions to owners

(4,278,885)

58,000
-
1,008,573
4,112,393
-

(10,618)
-
-
-
-

-
-
-
(854,003)
(39,878)

93,531
588,589
(314,948)
-
39,878

5,178,966

(10,618)

(893,881)

407,050

-
-
-
-
-

140,913
588,589
693,625
3,258,390
-

4,681,517

Balance at December 31, 2014

53,496,969

220,700

163,771

7,865,143

(63,616,358)

(1,869,775)

Balance at December 31, 2012

Loss for the year

39,877,966
-

231,318
-

3,340,222
-

6,957,809
-

(55,274,309)
(4,063,164)

(4,866,994)
(4,063,164)

Total comprehensive loss
for the period

Contributions by and
distributions to owners

Issue of common shares

Share issue cost
Share options exercised
Share-based payment transactions
Warrants exercised
Warrants expired

Total contributions by and
distributions to owners

157,280
(3,121)
148,007
-
8,137,871
-

8,440,037

-
-
-
-
-
-

(4,063,164)

-
-
-
-
(2,085,885)
(196,685)

-
-
(55,107)
358,706
-
196,685

(2,282,570)

500,284

-
-
-
-
-
-

157,280
(3,121)
92,900
358,706
6,051,986
-

6,657,751

Balance at December 31, 2013

48,318,003

231,318

1,057,652

7,458,093

(59,337,473)

(2,272,407)

*Accumulated other comprehensive income (loss) - See accompanying notes to consolidated financial statements.

ANNUAL REPORT 2014

Consolidated Statement of Cash Flows

For the year ended December 31

Cash flows from operating activities

Loss for the period
Depreciation – PPE
Depreciation - AFIRS units
Amortization of intangible assets
Convertible debenture accretion
Payment of debenture interest

Amortization of debenture issue costs
Government grant accretion
Government grant

Loss on disposal of property & equipment
Equity-settled share-based payment transactions

Change in inventories
Change in trade and other receivables
Change in prepayments
Change in trade and other payables
Change in provisions
Change in unearned revenue
Unrealized foreign exchange

Interest expense
Interest paid
Income tax expense
Income tax paid

Net cash used in operating activities

Cash flows from investing activities
Acquisitions of property and equipment

Interest income
Interest received

Net cash used in investing activities

Cash flows from financing activities
Share issue costs

Proceeds from issue of debenture
Proceeds from issue and exercise of share options and warrants
Proceeds from grant: SADI
Repayment of borrowings

Payment of finance lease liabilities

Net cash from financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning

Effect of exchange rate fluctuations on cash held

Cash and cash equivalents, ending

See accompanying notes to consolidated financial statements.

FLYHT AEROSPACE SOLUTIONS LTD.

2014
$

(4,278,885)
65,322
-
-
784,404
(502,487)
88,530
149,001
-
-
588,589
(874,377)
(195,614)
(38,195)
(1,486,537)
86,591
571,912
(212,393)
3,885
(3,885)
54
(950)

(5,255,035)

(10,236)
(2,000)
2,000

(10,236)

-
-
3,952,015
-
(80,592)
(24,300)

3,847,123

(1,418,148)

5,184,803

144,307

3,910,962

2013
$

(4,063,164)
87,710
11,735
27,631
657,620
(406,836)
84,135
123,460
(130,801)
26,991
358,706
547,199
400,326
(46,090)
(87,174)
101,976
(1,613,411)
173,240
10,187
(10,187)
465
(3,648)

(3,749,930)

(38,680)
(2,221)
2,221

(38,680)

(3,121)
1,918,813
6,302,166
196,751
(82,400)
(19,963)

8,312,246

4,523,636

676,246

(15,079)

5,184,803

Notes to the Consolidated Financial Statements

1. REPORTING ENTITY

FLYHT Aerospace Solutions Ltd. (the “Company” or “FLYHT”) was founded in 1998 under the name AeroMechanical Services Ltd. FLYHT is a public company
incorporated under the Canada Business Corporations Act, and is domiciled in Canada. The Company has been listed on the TSX Venture Exchange since
March 2003, first as TSX.V: AMA and as TSX.V: FLY since 2012 and has been listed on the OTCQX marketplace since June 2014 as OTCQX: FLYLF. The
Company’s head office is located at 300E, 1144 – 29th Avenue NE, Calgary, Alberta T2E 7P1.

The consolidated financial statements of the Company as at and for the years ended December 31, 2014 and 2013 consist of the Company and its subsidiaries.

FLYHT is a designer and developer of products and software, and a service provider to the global aerospace industry. The Company supports aviation
customers in different sectors including commercial, business, leasing and military operators. FLYHT’s headquarters are located in Calgary, Canada with sales
representation in the United States, China, the United Kingdom, Singapore, Ireland, and Abu Dhabi.

2. BASIS OF PREPARATION

(a) Statement of compliance

These consolidated annual financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These
consolidated financial statements were approved by the Board of Directors on April 7, 2015.

(b) Basis of measurement

The consolidated financial statements have been prepared on a historical cost basis except for financial instruments at fair value through profit or loss, which
are measured at fair value in the statement of financial position (“SFP”).

These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.

(d) Going concern

These consolidated financial statements have been prepared on the basis that the Company will continue to realize its assets and meet its obligations in
the ordinary course of business. As at December 31, 2014, the Company had positive working capital of $3,009,025, a deficit of $63,616,358, a net loss of
$4,278,885 and negative cash flow used in operating activities of $5,255,035 for the year.

The Company has incurred significant operating losses and negative cash flows from operations over the past years. The Company’s ability to continue as a
going concern is dependent upon attaining profitable operations and/or obtaining additional financing to fund its ongoing operations. The Company’s ability
to attain profitable operations and positive cash flow in the future is dependent upon various factors including its ability to acquire new customer contracts,
the success of management’s continued cost containment strategy, the completion of research and development (“R&D”) projects, and general economic
conditions. It is the Company’s intention to continue to fund operations by adding revenue and its resulting cash flow as well as continue to manage outgoing
cash flows. If the need arises due to market opportunities the Company may meet those needs via the capital markets. These material uncertainties may cast
significant doubt upon the Company’s ability to continue as a going concern.

There is no assurance that the Company will be successful in attaining and sustaining profitable operations and cash flow or raising additional capital to meet
its working capital requirements. If the Company is unable to satisfy its working capital requirements from these sources, the Company’s ability to continue as
a going concern and to achieve its intended business objectives will be adversely affected. These consolidated financial statements do not reflect adjustments
that would otherwise be necessary if the going concern assumption was not valid, such as revaluation to liquidation values and reclassification of statement
of financial position items.

(e) Critical Accounting Estimates

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada. The preparation of these
consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses. These estimates are based on management’s historical experiences and various other assumptions that are believed by management to be
reasonable under the circumstances. Such assumptions are evaluated on an ongoing basis and form the basis for making judgments about the carrying value
of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

ANNUAL REPORT 2014

2. BASIS OF PREPARATION (CONTINUED)

(e) Critical Accounting Estimates (continued)

The following are the Company’s critical accounting policies, significant estimates, and assumptions used in preparing our financial statements:

8. The Company maintains an allowance for doubtful accounts for estimated losses that may occur if customers are unable to pay trade balances owing to

the Company. This allowance is determined based on a review of specific customers, historical experience, and economic circumstances.

9. The Company evaluates its deferred tax assets at each reporting date and recognizes deferred tax assets to the extent that it is probable that future

taxable profits will be available against which they can be utilized. At December 31, 2014, no deferred tax assets were recognized.

10. The Company records amounts for warranty based on historical warranty data. A provision is recognized upon shipment of the underlying products.

11. Intangible assets are stated at cost less accumulated amortization and comprise of a license, customer contracts, and customer relationships. The license
has an indefinite life. The customer contracts and relationships are amortized using the straight line method over the remaining life of the assumed
contract. Indefinite lived intangible assets are subject to an annual impairment test unless if events or circumstances change that indicate that the carrying
value may not be recoverable then impairment is evaluated more frequently..

12. Consideration received for installation kits is deferred as unearned revenue and corresponding expenses are recorded as work in progress until the system
is fully functional and customer acceptance has been obtained, at which time the full deferred amount is recognized in revenue along with the work in
progress as cost of sales. Revenue from UpTime usage fees is recognized at the end of each month and is based on actual usage during that month.

13. Revenue from the sale of Dragons, Underfloor Stowage Units and other parts is recognized when the unit is shipped, title is transferred, and collection
is reasonably assured. Certain customers have prepaid for products or services not yet delivered. These amounts are included in trade payables and
accrued liabilities on the Statement of Financial Position, and are recorded as revenue in the period in which such products or services are delivered.

14. Technical services are provided based upon orders and contracts with customers that include fixed or determinable prices that are based upon daily, hourly

or contracted rates. Revenue is recognized as services are rendered and when collectability is reasonably assured.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated annual financial statements. These
accounting policies have been applied consistently by FLYHT’s subsidiaries.

(a) Basis of consolidation

(i) Business combinations

For acquisitions of businesses, the Company measures goodwill as the fair value of the consideration transferred including the recognized amount of any non-
controlling interest in the acquiree, less the net recognized amount (fair value) of the identifiable assets acquired and liabilities assumed, all measured as of
the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

The Company will elect on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the
recognized amount of the identifiable net assets, at the acquisition date.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination
will be expensed as incurred.

(ii) Subsidiaries

Subsidiaries are entities controlled by FLYHT. The financial statements of subsidiaries are included in the consolidated financial statements from the date
that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the
policies adopted by the Company.

These consolidated financial statements consolidate the accounts of FLYHT and its wholly owned subsidiaries, FLYHT Inc., AeroMechanical Services USA Inc.,
FLYHT Corp., FLYHT India Corp and TFM Inc. The latter four subsidiaries are inactive.

(iii) Transactions eliminated on consolidation

Intra-group balances, transactions, and any unrealized income and expenses arising from intra-group transactions are eliminated in preparing the consolidated
financial statements.

FLYHT AEROSPACE SOLUTIONS LTD.

(b) Financial instruments

(i) Non-derivative financial assets

The Company initially recognizes loans, receivables and deposits on the date they are originated. All other financial assets (including assets designated at fair
value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the rights to receive the
contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.
Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal
right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially
at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the
effective interest method, less any impairment losses.

Loans and receivables comprise trade and other receivables, and cash and cash equivalents.

(ii) Non-derivative financial liabilities

The Company initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including
liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual
provisions of the instrument.

The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.

The Company has the following non-derivative financial liabilities: debentures, trade payables and accrued liabilities, loans and borrowings, and finance lease
obligations.

These financial liabilities are recognized initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial
liabilities are measured at amortized cost using the effective interest rate method.

(iii) Share capital

Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction
from equity, net of any tax effects.

Warrants are classified as equity. Incremental costs directly attributable to the issue of warrants are recognized as a deduction from equity, net of any tax
effects.

The fair value of warrants is estimated using the Black-Scholes option pricing model.

(iv) Compound financial instruments

Compound financial instruments issued by the Company comprise convertible secured subordinate debentures that can be converted to common shares at the
option of the holder, and the number of shares to be issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion
option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value
of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying
amounts.

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method.
The equity component of a compound financial instrument is not re-measured subsequent to initial recognition.

Interest relating to the financial liability is recognized in profit or loss. On conversion, the financial liability is reclassified to equity and no gain or loss is
recognized.

ANNUAL REPORT 2014

Inventories are measured at the lower of cost and net realizable value. The cost of inventories includes expenditures incurred in acquiring the inventories,
production or conversion costs, and other costs incurred in bringing them to their existing location and condition. The amount of inventory that is expected to
be recovered more than 12 months after the reporting date is presented as a non-current asset.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Any
writedown to net realizable value is recognized as an expense. Reversals of previous writedowns are recognized in profit or loss in the period when the reversal
occurs.

AFIRS raw material inventories include general parts, which are held pending installation and sales to customers. The weighted average cost method is used.

The carrying cost of AFIRS assembled finished goods includes AFIRS raw material component costs plus a standard labour allocation. AFIRS finished goods
consists of AFIRS units that have been assembled or purchased and are held pending sale to customers. The weighted average cost method is used for
components, while the labour component allocated to each unit is valued using a standard cost.

Installations-in-progress includes product costs, and other direct project costs. When the system is fully functional, the installations-in-progress balance is
recognized as cost of sales to correspond with the full unearned revenue amount then recognized as revenue.

The production of Underfloor Stowage Units and Dragons is outsourced and the weighted average cost method is used..

(d) Property and equipment

(i) Recognition and measurement

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset including those that are directly attributable to bringing the asset to the
location and working condition for its intended use.

Software that is integral to the functionality of the related equipment is recognized as property and equipment, otherwise it is considered an intangible asset.

Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of
property and equipment. Net gains (losses) are recognized in profit or loss..

(ii) Subsequent costs

The cost of replacing a part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic
benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized.
The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred.

(iii) Depreciation

Depreciation is calculated using the depreciable amount, which is the cost of an asset less its residual value. Depreciation is recognized in profit or loss at rates
calculated to write-off assets over their estimated useful lives since this most closely reflects the expected pattern of consumption of the future economic
benefits embodied in the assets.

Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership
by the end of the lease term.

The depreciation rates are as follows::

Computers

Software

Equipment

Leasehold improvements

30% declining balance

12 months straight line

20% declining balance

Term of lease (7 years)

Estimates of depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Any changes in these
estimates are accounted for prospectively.

FLYHT AEROSPACE SOLUTIONS LTD.

(iv) Research and development (“R&D”)

Expenditure on research activities is expensed as incurred.

R&D costs consist primarily of consulting expenses and parts related to the design, testing, and manufacture of Automated Flight Information Reporting
System (“AFIRSTM”) and the design and testing of UpTime, FIRST, FLYHTStream, and FLYHT Fuel Management System. Other R&D costs include testing and
certification.

Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is
capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits
are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized
includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use, and borrowing costs
on qualifying assets. Other development expenditure is recognized in profit or loss as incurred.

Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses..

(v) Subsequent expenditure

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other
expenditures are recognized in profit or loss as incurred.

(vi) Amortization

Amortization is calculated based on the asset’s cost less its residual value.

Estimates of amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Any changes in these
estimates are accounted for prospectively.

(e) Leased assets

Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased
asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition,
the asset is accounted for according to the accounting policy applicable to that asset. Other leases are operating leases and the Company does not recognize
the leased assets in its statement of financial position. Initial direct costs for operating leases are expensed immediately.

As a lessee, FLYHT has several finance leases for computer hardware and leasehold improvements.

As a lessee, FLYHT has an operating lease for its premises..

(f) Intangible assets

Intangible assets that are acquired by the Company and have finite useful lives are measured at cost less accumulated amortization and accumulated
impairment losses.

Acquired intangible assets with indefinite useful lives are stated at cost and are not amortized.

The license with Bombardier that allows FLYHT access to technical documents has an indefinite life and is not amortized. The Company presently has dealings
with Bombardier and sees no end to that relationship.

An intangible asset is derecognized on disposal or when no future economic benefits are expected from its use or disposal.

ANNUAL REPORT 2014

(g) Government assistance

(i) Government grants

Government grants related to qualifying research expenditures are recognized in profit or loss to match the costs that they are intended to compensate when
there is reasonable assurance that they will be received and the Company will comply with the conditions associated with the grant.

(ii) Government loans

Low-interest or interest-free government loans are measured initially at their fair value and interest is imputed on the loan in subsequent periods. The benefit
of the below-market interest rate is measured as the difference between the fair value of the loan on initial recognition and the amount received. This benefit
is accounted for according to the type of grant.

(h) Lease payments

(i) Operating lease payments

Payments made under operating leases are recognized in profit or loss on an accrual basis over the term of the lease. Initial direct costs for operating leases
are immediately expensed.

(ii) Finance lease payments

Minimum lease payments made under finance leases are apportioned between finance costs and a reduction of the outstanding liability. The finance cost is
allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

(i) Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is
probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount
is recognized as finance cost.

(i) Warranties

The Company warrants that the AFIRS products shall be free of defects during the term of each agreement and any renewals. Also, FLYHT warrants that it will
deliver all data services required by the customer accurately and on-time. A provision for warranties is recognized when the underlying products or services
are sold. The provision is based on historical warranty data.

(j) Impairment

(i) Financial assets (including receivables)

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is
impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss
event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms
that the Company would not consider otherwise, or indications that a debtor will enter bankruptcy.

The Company assesses impairment of each customer’s receivable balance by analyzing historical trends of the probability of default, timing of recoveries and
the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are
likely to be greater or less than suggested by historical trends.

An impairment loss regarding a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value
of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance
account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event
causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

FLYHT AEROSPACE SOLUTIONS LTD.

(j) Impairment (Continued)

(ii) Non-financial assets

The carrying amounts of the Company’s non-financial assets, other than inventories, are reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For intangible assets that have indefinite useful lives,
the recoverable amount is estimated at year end. The Company’s non-financial assets that are subject to impairment include: property and equipment and
intangible assets.

The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. 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. Fair value less costs to sell is assessed on an asset by asset basis at the point in time when a sale may be probable.

For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”, or “CGU”). The
Company’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable
amount is determined for the CGU to which the corporate asset belongs.

An impairment loss is recognized in profit or loss if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses
are allocated to reduce the carrying amounts of the assets in the CGU on a pro rata basis.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, had no
impairment loss been recognized.

(k) Revenue

(i) AFIRS sales

AFIRS fees from service agreements are deferred as revenue and corresponding expenses are recorded as an asset (installations in progress). Once the system
(including the AFIRS unit and installation kit) is fully functional and accepted by the customer, the full deferred amount is recognized in revenue along with
the installations in progress as cost of sales. Revenue from the sale of Dragons is recognized when the unit is shipped, title is transferred, and collection is
reasonably assured.

(ii) Voice and Data services

Revenue from UpTime usage fees is recognized at the end of each month and is based on actual usage during that month.

(iii) Parts sales

Revenue from the sale of goods is measured at the fair value of the consideration received or receivable. Revenue is recognized when persuasive evidence
exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of
the consideration is probable, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.

Revenue from the sale of Underfloor Stowage Units is recognized when the unit is shipped, title is transferred, and collection is reasonably assured.

(iv) Services

Technical services are provided based on orders and contracts with customers that include fixed or determinable prices that are based on daily, hourly, or
contracted rates. Revenue is recognized in proportion to the stage of completion of the transaction at the reporting date.

(v) Other income

License fees and royalties paid for the use of FLYHT’s assets (i.e., trademarks, patents, and software) are recognized on an accrual basis.

ANNUAL REPORT 2014

(l) Employee benefits

(i) Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

The Company follows accrual accounting for wages, salaries, commissions and variable compensation payments. The commission policy outlines how
commissions are calculated and when payment is made to employees.

(ii) Share-based payment transactions

The grant date fair value of share-based payment awards granted to employees is recognized as an expense, with a corresponding increase in equity, over the
period that the employees unconditionally become entitled to the awards.

Share-based payment transactions are equity-settled. Share options granted to directors and employees are measured using the fair value of the equity
instruments granted at the grant date, which is determined using the Black-Scholes option pricing model.

If options are promised to an employee before the grant date, the Company recognizes the expense at the service commencement date based on fair value.
Once the grant date is established, the earlier estimate is revised so that the expense is recognized based on the actual grant date fair value.

FLYHT estimates the expected forfeiture rate at the option grant date and updates the estimate over time as new information becomes available. Forfeitures
may occur if employees terminate their employment before the options vest.

(m) Share-based payment transactions to non-employees

(i) Stock options granted to consultants

The Company grants stock options to consultants. These share-based payment transactions are equity-settled. Transactions with non-employees are
measured based on the fair value of the goods or services received, at the receipt date. Fair value is measured at the date the Company obtains the goods or
the counterparty renders service.

FLYHT estimates the expected forfeiture rate at the option grant date and updates the estimate over time as new information becomes available. Forfeitures
may occur if consultants do not fulfill their obligations before the options vest.

(ii) Agent warrants

When the Company issues common shares, warrants, and debentures through brokered private placements, agent warrants are issued to the agents as
consideration for their services.

Warrants are classified as equity. Incremental costs directly attributable to the issue of warrants are recognized as a deduction from equity, net of any tax
effects.

The fair value of warrants is estimated using the Black-Scholes option pricing model.

(n) Finance income and finance costs

Finance income comprises interest income which is recognized as it accrues in profit or loss, using the effective interest method. The Company earns income
on its cash and cash equivalents (bank deposits) and its restricted cash (Guaranteed Investment Certificates).

Finance costs comprise interest expense and accretion on borrowings, and unwinding of the discount on provisions and are recognized in profit or loss using
the effective interest method.

Foreign currency gains and losses are reported on a net basis, as either finance income or finance costs.

(o) Foreign currency

(ii) Foreign currency transactions

Foreign currency transactions are translated to Canadian dollars at the exchange rate in effect on the transaction date. Foreign currency denominated monetary
assets and liabilities at each reporting date are retranslated to the functional currency at the exchange rate in effect on that date. The foreign currency gain or
loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and
payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate in effect on the date of the
transaction.

Foreign currency differences arising on retranslation are recognized in profit or loss.

FLYHT AEROSPACE SOLUTIONS LTD.

(o) Foreign currency (Continued)

(iii) Foreign operations

The assets and liabilities of foreign operations are translated to Canadian dollars at exchange rates in effect at the reporting date. The income and expenses
of foreign operations are translated to Canadian dollars at exchange rates in effect on the transaction dates.

Foreign currency differences are recognized in other comprehensive income in the cumulative translation account.

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned
nor likely to occur in the foreseeable future and which, in substance, is considered to form part of the net investment in the foreign operation, are recognized
in other comprehensive income in the cumulative amount of foreign currency translation differences.

(p) Income tax

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a
business combination, or items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the
reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized in respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities
in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in
subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been
enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax
liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend
to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable
profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no
longer probable that the related tax benefit will be realized.

When a taxable temporary difference arises from the initial recognition of the equity component separately from the liability component of a compound
financial instrument, the resulting deferred tax liability is charged directly to the carrying amount of the equity component.

(q) Earnings per share

The Company presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable
to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined each
period by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, for the effects of
all dilutive potential common shares, which comprise debentures, convertible debentures, share options, and warrants.

4. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
The following new standards, interpretations, amendments and improvements to existing standards issued by the IASB or International Financial Reporting
Interpretations Committee (“IFRIC”) were adopted as of January 1, 2014 without any material impact to FLYHT’s financial statements: IFRS 7 / IAS 32
– Offsetting Financial Assets and Liabilities, IAS 1 – Presentation of Financial Statements, IAS 39 – Novation of Derivatives and Continuation of Hedge
Accounting, and IFRIC 21 - Levies.

The following new accounting pronouncements have been issued but are not effective and may have an impact on the Company. All of the following new or
revised standards permit early adoption with transitional arrangements depending upon the date of initial application:

IFRS 9 – Financial Instruments replaces the current multiple classification and measurement models for financial assets and liabilities with a single model
that has only two classification categories: amortized cost and fair value. (January 1, 2018).

IFRS 15 – Revenue from Contracts with Customers replaces IAS 11 Construction Contracts, IAS 18 Revenue, Customer Loyalty Programs, IFRIC 15 -
Agreements for the Construction of Real Estate, IFRIC 18 - Transfer of Assets from Customers, and SIC 31 - Revenue – Barter Transactions Involving
Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at
a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue
is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The
new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the
scope of other IFRSs (January 1, 2017).

The Company has not completed its evaluation of the effect of adopting these standards on its consolidated annual financial statements.

ANNUAL REPORT 2014

5. DETERMINATION OF FAIR VALUES

A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities.
Fair values have been determined for measurement and/or disclosure purposes based on the following methods.

(a) Share based payment transactions: measured using the Black-Scholes option pricing model;

(b) Loans and borrowings: for measurement purposes, initial fair value is calculated based on the present value of future principal and interest cash flows, discounted
at the market rate of interest at the inception of the loan. In respect of the liability component of convertible debenture, the market rate of interest is
determined by reference to similar liabilities that do not have a conversion feature. In respect of the convertible debentures and the debentures, as there
has been no material change in the Company’s market rate subsequent to the issuance dates, carrying value approximates fair value; and

(c) Trade and other receivables, trade payables and accrued liabilities: carrying value approximates fair value, due to the short-term nature of the instruments.

6. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash balances and bank deposits with an original maturity of three months or less.

7. TRADE AND OTHER RECEIVABLES

Trade receivables

Non-trade receivables and accrued receivables

Total

December 31, 2014

December 31, 2013

944,835

14,951

959,786

771,244

13,182

784,426

Non-trade receivables consist of earned interest income receivable, input tax credits, and government grants receivable. The Company’s exposure to credit
and currency risks is disclosed in note 26.

8. INVENTORY

AFIRS raw materials

AFIRS finished goods

Installations in progress

Balance

Less current portion

Non-current portion

December 31, 2014

December 31, 2013

951,269

752,333

1,015,268

2,718,870

(1,917,249)

801,621

806,872

406,475

631,145

1,844,492

(1,308,243)

536,249

In 2014, AFIRS materials and changes in AFIRS units and installations in progress recognized as cost of sales amounted to $1,521,962 (2013: $1,941,847).
Included in this amount was a write down of inventories amounting to $203,618 in 2014 (2013: recovery of $251,635) resulting from a complete review of slow
moving inventory parts. All inventories are pledged as security for the bank loan and debentures.

FLYHT AEROSPACE SOLUTIONS LTD.

9. PROPERTY AND EQUIPMENT

2014

Cost

Balance at January 1

Additions

Disposals

Balance at December 31

Accumulated Depreciation

Balance at January 1

Depreciation for the year

Disposals

Balance at December 31

Carrying Amounts

At January 1

At December 31

2013

Cost

Balance at January 1

Additions

Balance at December 31

Accumulated Depreciation

Balance at January 1

Depreciation for the year

Balance at December 31

Carrying Amounts

At January 1

At December 31

Computers
and Software
$

898,919

73,523

(480,642)

491,800

803,805

36,088

(454,775)

385,118

95,114

106,682

Computers
and Software
$

894,360

4,559

898,919

760,111

43,694

803,805

134,249

95,114

Equipment

230,297

36,722

(25,000)

242,019

172,021

18,984

(21,435)

169,570

58,276

72,449

Equipment

230,297

157,452

14,569

172,021

72,845

58,276

Leasehold
improvements
$

166,972

10,000

(132,851)

44,121

128,667

10,250

(132,851)

6,066

38,305

38,055

Leasehold
improvements
$

132,851

34,121

166,972

99,220

29,447

128,667

33,631

38,305

Total

1,296,188

120,245

(638,493)

777,940

1,104,493

65,322

(609,061)

560,754

191,695

217,186

Total

11,257,508

38,680

1,296,188

1,016,783

87,710

1,104,493

240,725

191,695

The Company leases equipment under several finance lease agreements. Certain leases provide FLYHT with the option to purchase the equipment at the end
of the lease term. At December 31, 2014, the net carrying amount of leased property and equipment was $89,612 (2013: $41,619).

As of December 31, 2014, all property and equipment are pledged as security for the bank loan and debentures (note 13).

FLYHT entered into two finance lease agreements in 2014, the first covering equipment required for a security system in the new premises effective March
1, 2014, and the second covering computer hardware. Both agreements have a lease term of 36 months and the option to purchase the equipment at the
end of the lease term.

ANNUAL REPORT 2014

10. INTANGIBLE ASSETS

2014

Cost

Balance at January 1

Balance at December 31

Amortization

Balance at January 1

Balance at December 31

Carrying amounts

At January 1

At December 31

2013

Cost

Balance at January 1

Balance at December 31

Amortization

Balance at January 1

Amortization for the year

Balance at December 31

Carrying amounts

At January 1

At December 31

License

Customer contracts

34,992

License
$

34,992

466,510

Customer contracts
$

466,510

438,879

27,631

466,510

27,631

Total

501,502

466,510

34,992

Total
$

501,502

438,879

27,631

466,510

62,623

34,992

The license with Bombardier allows FLYHT access to technical documents. It has an indefinite life, is not amortized, and is tested for impairment annually. The
Company presently has dealings with Bombardier and forsees no end to that relationship.

FLYHT provides the contracted customers with UpTime data services. The fair value of the contracts acquired was amortized over the contract period, ending
in March 2013.

Amortization of intangibles is included in the statement of comprehensive income as cost of sales. All intangible assets are pledged as security for the bank
loan and debentures.

FLYHT AEROSPACE SOLUTIONS LTD.

11. TRADE PAYABLES AND ACCRUED LIABILITIES

Trade payables

Non-refundable customer deposits

Compensation and statutory deductions

Accrued liabilities

Total

December 31, 2014

December 31, 2013

650,712

790,405

516,881

171,624

2,129,622

2,454,242

620,840

512,806

116,608

3,704,496

Compensation and statutory deductions include accrued vacation pay, variable compensation, and statutory payroll deductions.

The Company settled an ongoing dispute with Sierra Nevada Corporation (“SNC”) on June 16, 2014 whereby both parties mutually released all claims against
each other. FLYHT and SNC entered into a License and Manufacturing Agreement (‘L&M Agreement”) as well as a Value Added Reseller Agreement (“VAR
Agreement”) and for the execution of those agreements SNC withdrew invoices totaling a Canadian equivalent of $1,950,957. The L&M Agreement provides
for SNC to manufacture and/or sell to military end users and unmanned aerial vehicles. FLYHT will receive a fee for each unit manufactured and sold to an
end user and a percentage of UpTime Service fees paid to SNC by the end user. These fees will commence once SNC realizes revenue of $2.5 million USD.
As well, a VAR Agreement was entered into which allows SNC to market and sell FLYHT’s AFIRS units and UpTime Services. Under the terms of the VAR
Agreement FLYHT will pay SNC an agreed commission. Based on the terms of the agreements FLYHT derecognized the accounts payable liability with an
off-setting recovery of research and development expenses of the same amount.

12. UNEARNED REVENUE

Unearned revenue classified as current consists of sales type agreements revenue that will be recognized when the AFIRS system is fully functional and
expected to be recognized as income in the next year.

The license and manufacturing agreement with SNC gave SNC the right to manufacture the Company’s AFIRS product and market the AFIRS UpTime
technology and products to the global military market. The license fee was deferred as unearned revenue and revenue was recognized on a straight-line basis
over the five year term of the agreement and was fully recognized as of December 31, 2013.

All amounts recorded in unearned revenue are non-refundable.

December 31, 2014

December 31, 2013

Balance January 1

AFIRS sales: shipped, not accepted

Voice and Data services: prepaid

AFIRS sales: revenue recognized

Voice and Data services: revenue recognized

License fees: revenue recognized

Balance December 31

Less current portion

Non-current portion

1,103,834

2,727,911

92,084

(2,146,871)

(101,212)

1,675,746

1,484,345

191,401

2,717,245

1,450,520

414,228

(2,694,292)

(526,347)

(257,520)

1,103,834

ANNUAL REPORT 2014

13. LOANS AND BORROWINGS

Bank loan

The Company currently has no bank debt and has available to it an operating demand loan up to a maximum of $250,000 (2013: $250,000). The operating
loan bears interest at Canadian chartered bank prime plus 1.5%. The operating demand loan is secured by an assignment of cash collateral in the amount
of $250,000 and a general security agreement including a first ranking security interest in all personal property. The amount of the cash collateral has been
disclosed as restricted cash. As at December 31, 2014 and 2013, the facility had not been drawn.

Government loans

The Technology Partnerships Canada (“TPC”) loan is non-interest bearing and unsecured. The loan is repayable annually, based on 15% of the initial contribution
when the Company has achieved more than 10% growth in gross revenues above the previous year’s gross revenue and the gross revenue for the year is
greater than the base amount. The base amount is defined as the Company’s gross revenue in fiscal 2004, which was at $556,127.

Convertible debentures

The debenture issued December 23, 2010 has a face value of $3,101,000 at December 31, 2014 (December 31, 2013: $3,159,000) and was set to mature on
December 23, 2014. On December 22, 2014 approval was received to extend the maturity date of the debenture from four to six years. The debenture continues
to bear interest at a rate of 8% per annum, accrued and paid annually in arrears commencing December 31, 2011. The debentures are convertible into common
shares at a conversion rate of $0.40 per share at any time up to December 23, 2015. The debentures are secured against all personal property of the Company,
with the exception of the Company’s intellectual property, and are subordinated in right of payment to all existing and future bank and/or governmental
indebtedness of the Company. The fair value of the conversion feature was determined at the time of issue as the difference between the principal value of
the debentures and the discounted cash flows assuming an 18% rate. The conversion feature is classified as equity and amounts to $220,700 as at December
31, 2014 (December 31, 2013: $231,318). If the debentures are converted to shares, a portion of the value of the conversion feature recognized in shareholders’
equity will be classified to share capital along with the conversion price paid.

Debentures

In two tranches on April 18 and May 28, 2013, the Company issued an aggregate $2,110,000 of debentures in a debt offering. The debentures mature on
June 30, 2016 and bear interest at a rate of 12% per annum on the contributed amounts, which shall be accrued and paid annually in arrears commencing
December 1, 2013. Purchasers of debentures received a capital discount premium of 10% on the financing, meaning that for every $1.00 debenture acquired,
FLYHT shall owe, on the maturity date, principal equal to $1.10 to the debenture holder. The purchasers of the debentures were also issued one common
share of the Corporation for every $1.00 principal amount of debentures acquired pursuant to the offering. A total of 2,110,000 common shares were issued
under these tranches. All of the securities issued thereunder were subject to a 4-month hold period. The debentures are not listed on any stock exchange
and are not convertible into common shares. The debentures are secured against all personal property of FLYHT, including FLYHT’s intellectual property and
are subordinated in right of payment to all existing and future secured bank and/or governmental indebtedness of FLYHT and any existing security already
registered against FLYHT’s assets. The fair value of the debenture was determined at the time of issue as the difference between the principal value of the
debentures and the discounted cash flows assuming an 18% rate.

December 31, 2014
$
-
899,601
2,128,842

December 31, 2013
$
12,364
818,828
2,006,397

3,007,040

6,035,483

(572,782)

5,462,701

2,899,952

5,737,541

(3,745,513)

1,992,028

TPC
SADI
Debenture payable

Convertible debenture payable

Balance December 31

Less current portion

Non-current portion

FLYHT AEROSPACE SOLUTIONS LTD.

14. OPERATING LEASES

2015

2016

2017

2018

2019

2020

Premises $

410,750

433,419

437,952

2021

72,992

Total

2,641,767

Operating lease payments made in 2014 totaled $441,101 (2013: $488,060).

15. PROVISIONS

Product warranty - non-current provision

Balance January 1

Provision made during the period

Provision used during the period

Balance December 31

2014
$

148,428

157,942

(71,351)

235,019

2013
$

46,452

309,456

(207,480)

148,428

A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data.

16. CAPITAL AND OTHER COMPONENTS OF EQUITY

Share capital

Authorized:

Unlimited numbers of common shares, and classes A, B and C preferred shares, issuable in series, having no par value.

The preferred shares may be issued in one or more series. The directors are authorized to fix the number of shares in each series and to determine the
designation, rights, privileges, restrictions and conditions attached to the shares in each series.

Common shares:

Balance January 1, 2013

Exercise of employee options

Share issue costs

Share issue costs – agent warrants

Bifurcation of warrants

Exercise of employee options

Contributed surplus from exercise of employee options

Balance December 31, 2013

Exercise of employee options

Exercise of warrants

Debenture conversions

Balance December 31, 2014

Number

140,386,166

2,110,000

314,000

16,007,102

158,817,268

2,774,500

10,443,367

145,000

172,180,135

Value
$

39,877,966

157,280

(3,121)

92,900

55,107

6,051,986

2,085,885

48,318,003

1,008,573

4,112,393

58,000

53,496,969

ANNUAL REPORT 2014

16. CAPITAL AND OTHER COMPONENTS OF EQUITY (CONTINUED)

In 2014 warrant and option exercises together with convertible debenture conversions resulted in the Company issuing a total of 13,362,867 shares for total
proceeds of $3,952,015, including:

a) 151,987 warrants were exercised at $0.20 per share for proceeds of $30,398

b) 8,885,600 warrants were exercised at $0.30 per share for proceeds of $2,665,680

c) 1,405,780 warrants were exercised at $0.40 per share for proceeds of $562,312

d) 2,774,500 options were exercised at $0.25 per share for proceeds of $693,625

e) 145,000 convertible debentures converted at $0.40 per share

Stock option plan

The Company grants stock options to its directors, officers, employees and consultants.

In the first quarter of 2014 the Company granted 400,000 stock options to one Investor Relations (IR) consultant under the stock option plan. The stock options
expire December 31, 2016, have an exercise price of $0.45 per share, with 100,000 options vested on March 31, and a further 100,000 vesting on each of June
30, September 30, and December 31, 2014. The fair value of the options granted was determined based on the estimated fair value of services to be received.

In the second quarter of 2014 the Company granted 2,480,750 stock options to employees, officers and directors under the stock option plan. The stock options
vest immediately, expire December 31, 2017, and have an exercise price of $0.40 per share. The options were granted at an exercise price not less than fair
market value of the stock on the date of issuance.

In the third quarter of 2014 the Company granted 300,000 stock options to employees, officers and directors under the stock option plan. The stock options
vest immediately; expire December 31, 2017, with 150,000 stock options having an exercise price of $0.40 per share, and 150,000 having an exercise price of
0.53 per share. The options were granted at an exercise price not less than fair market value of the stock on the date of issuance.

In the fourth quarter of 2014 the Company granted 50,000 stock options to an employee under the stock option plan. The stock options vest immediately;
expire December 31, 2017, with an exercise price of 0.42 per share. The options were granted at an exercise price not less than fair market value of the stock
on the date of issuance.

The Company has a policy of reserving up to 10% of the outstanding common shares for issuance to eligible participants. As at December 31, 2014, there were
17,218,014 (2013: 15,881,726) common shares reserved for this purpose.

All outstanding options issued to date vested immediately at the grant date with the exception of 1,200,000 options, comprised of 400,000 options to each of
three IR consultants. Vesting provisions provide that 25% of the total stock options issued under these three agreements vest to each of the IR consultants per
quarter over the first one-year period. No options remained unvested as at December 31, 2014 (2013: 800,000).

A summary of the Company’s outstanding and exercisable stock options as at December 31, 2014 and 2013 and changes during these years is presented below.

Outstanding, January 1
Options granted
Options exercised
Options expired
Outstanding, December 31
Exercisable, December 31

2014

Number

7,472,500
3,230,750
(2,774,500)
(126,500)
7,802,250
7,802,250

Weighted average
exercise price
$
0.27
0.41
0.25
0.30
0.34
0.34

2013

Number of options

6,270,500
3,599,000
(314,000)
(2,083,000)
7,472,500
6,672,500

Weighted average
exercise price
$
0.26
0.29
0.30
0.28
0.27
0.25

FLYHT AEROSPACE SOLUTIONS LTD.

16. CAPITAL AND OTHER COMPONENTS OF EQUITY (CONTINUED)

Weighted average life remaining for the options outstanding and exercisable is 2.1 years. The exercise prices for options outstanding at December 31, 2014
were as follows:

Exercise price:

$0.25
$0.25
$0.40
$0.42
$0.45
$0.53
Total

All options

Exercisable options

Number

1,812,500
2,003,000
2,586,750
50,000
1,200,000
150,000
7,802,250

Weighted average remaining
contractual life (years)
1.0
2.0
3.0
3.0
2.0
3.0
2.1

Number

1,812,500
2,003,000
2,586,750
50,000
1,200,000
150,000
7,802,250

Weighted average remaining
contractual life (years)
1.0
2.0
3.0
3.0
2.0
3.0
2.1

The weighted average fair value of the options granted during the year that were valued using the Black-Scholes option pricing model was $0.20 (2013: $0.12).
The fair value of the options granted and valued using the Black-Scholes option pricing model were valued with the following weighted average assumptions:

Risk-free interest rate
Expected life (years)
Volatility in the price of the Company’s common shares
Dividend yield rate

2014
1.48%
3.69
74%
0.00%

Warrants

Outstanding January 1, 2013

Warrants exercised

Warrants expired

Outstanding December 31, 2013

Warrants exercised

Warrants expired

Outstanding December 31, 2014

Number

Weighted average exercise price

32,133,969

(16,007,102)

(1,415,000)

14,711,867

(10,443,367)

(319,750)

3,948,750

0.40

0.38

0.40

0.23

0.31

0.30

0.75

2013
1.24%
3.65
99%
0.00%

Value

3,340,222

(2,085,885)

(196,685)

1,057,652

(854,003)

(39,878)

163,771

ANNUAL REPORT 2014

17. EARNINGS PER SHARE

Basic earnings per share

The calculation of basic and diluted earnings per share for the year ended December 31, 2014 was based on a weighted average number of common shares
outstanding of 166,441,119 (2013: 142,691,525). The calculation of diluted earnings per share did not include stock options of 7,802,250 (2013: 7,872,500),
warrants of 3,948,750 (2013: 14,711,867) and convertible debentures of 7,390,000 (2013: 7,897,500) because they would be anti-dilutive.

18. REVENUE

Voice and data services

AFIRS sales

Parts sales

Services

Total

2014

3,657,300

2,054,251

718,567

451,910

6,882,028

2013

3,624,719

2,707,839

655,561

1,012,245

8,000,364

Voice and Data services include UpTime monthly voice and data usage fees. AFIRS sales includes revenue from AFIRS and Dragon hardware sales along with
the parts required to install the unit. Parts sales includes spare AFIRS units, spare installation kit parts, L-3 AR revenue and Underfloor Stowage Units. Services
include technical, repair and installation support services.

19. OTHER INCOME

Other income consists of the recognition of the SNC license fee that was deferred as unearned revenue when received and recognized over the initial five year
term of the agreement. The amount was fully recognized by December 31, 2013.

20. OPERATING SEGMENTS

The Company has one operating segment.

Geographical Information

The following revenue is based on the geographical location of customers.

North America

South / Central America

Africa / Middle East

Europe

Australasia

Asia

Total

2014
$

3,321,408

304,449

1,194,644

317,112

658,366

1,086,049

6,882,028

2013
$

3,853,788

460,184

1,391,446

549,718

697,249

1,047,979

8,000,364

All non-current assets (property and equipment and intangible assets) reside in Canada.

Major customers

Revenues from the three largest customers represent approximately 30.9% of the Company’s total revenues for the year ended December 31, 2014 (2013:
31.1%).

FLYHT AEROSPACE SOLUTIONS LTD.

21. DISTRIBUTION EXPENSES

Salaries and benefits

Stock based compensation

Contract labour

Office

Travel

Equipment & maintenance

Depreciation

Marketing

Bad debts & other

Total

22. ADMINISTRATION EXPENSES

Salaries and benefits
Stock based compensation
Contract labour
Office
Legal fees
Audit and accounting
Investor relations
Brokerage, stock exchange, and transfer agent fees
Travel
Equipment and maintenance
Depreciation
Other
Total

2014
$

1,652,340

84,971

354,320

275,427

449,215

22,180

26,910

55,610

472,018

3,392,991

2014
$
1,468,711
417,278
245,678
276,983
151,566
141,438
372,423
74,066
215,660
98,438
15,217
71,060
3,548,518

2013
$

1,506,626

85,071

275,059

366,439

403,319

25,413

46,129

41,441

206,949

2,956,446

2013
$
1,498,854
260,091
141,271
305,104
36,405
122,625
243,975
27,377
96,585
55,462
23,920
47,453
2,859,122

ANNUAL REPORT 2014

23. RESEARCH AND DEVELOPMENT EXPENSES

To date, all development costs have been expensed as incurred.

Salaries and benefits
Stock based compensation
Contract labour
Office
Travel
Equipment and maintenance
Components
Government grants
SRED tax credit
Depreciation
Other
SNC litigation settlement (note 11)

Total

24. FINANCE INCOME AND FINANCE COSTS

Interest income on bank deposits

Net foreign exchange gain

Finance income

Bank service charges

Interest expense

Government grant interest expense

Debenture interest expense and accretion

Debenture issuance cost amortization

Net foreign exchange loss

Finance costs

2014
$
1,874,482
86,341
538,874
288,686
37,882
56,555
52,308
-
(241,677)
23,195
12,060
(1,950,957)

777,749

2014
$

2,000

154,265

156,265

21,995

3,885

149,001

784,404

88,530

2013
$
1,536,904
13,542
533,107
188,579
48,734
33,154
264,587
(130,801)
(326,195)
17,661
955
-

2,180,227

2013
$

2,221

21,388

10,187

123,460

657,620

84,136

165,432

1,047,815

1,062,223

FLYHT AEROSPACE SOLUTIONS LTD.

25. INCOME TAX EXPENSE

Current Tax Expense

Current income tax expense

Deferred income tax expense

Deferred Tax Expense

Unrecognized deferred tax assets

2014
$

2013
$

465

Deferred tax assets have not been recognized in respect to the following items:

Capital assets

Intangibles

Inventory

Non-capital loss carry-forwards

Share issue costs

Scientific research and experimental development expenditures

2014

180,622

107,370

2,342

10,643,137

52,432

6,735,345

17,721,248

2013

156,933

113,870

405

9,599,862

90,225

6,203,715

16,165,010

The Company has non-capital losses for income tax purposes of approximately $41,749,511 which are available to be applied against future year’s taxable
income. The benefit of these non-capital losses has not been recognized in the consolidated financial statements because it is not probable that future taxable
profit will be available against which FLYHT can use the benefits. These losses will expire as follows:

Year

2014
2015
2026
2027
2028
2029
2030
2031
2032
2033
2034
Total

Amount
$
2,570,288
2,461,959
3,390,309
5,596,948
6,997,140
2,791,748
6,596,636
4,351,802
2,313,255
1,464,723
3,214,703
41,749,511

ANNUAL REPORT 2014

25. INCOME TAX EXPENSE (CONTINUED)

Reconciliation of effective tax rate

Loss for the period

Total income tax expense

Loss excluding income tax

Tax Rate

Expected income tax recovery

True up from prior year

Non-deductible expenses

Stock based compensation

Change in unrecognized temporary differences

26. FINANCIAL RISK MANAGEMENT

2014
$

(4,278,885)

(4,278,831)

25.0%

(1,069,708)

(636,299)

200,624

147,147

1,358,290

2013
$

(4,063,164)

465

(4,062,699)

25.0%

(1,015,675)

486,748

171,827

89,676

267,889

465

The Company’s operating activities expose it to a variety of financial risks, including credit, liquidity and market risks associated with the Company’s financial
assets and liabilities. FLYHT has established procedures and policies to minimize its exposure to these risks, and continually monitors its exposure to all
significant risks to assess the impact on its operating activities. The following details the Company’s exposure to credit, liquidity, currency, and other market
risks.

Credit risk

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Management considers the demographics of
the Company’s customer base, including the default risk of the industry and country in which customers operate. Approximately 13.1% (2013: 11.7%) of the
Company’s 2014 revenue is attributable to transactions with a single customer; however, geographically there is no concentration of credit risk.

Each new customer is analyzed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered.
Customers that fail to meet the Company’s benchmark creditworthiness may transact with FLYHT only on a prepayment basis. The AFIRS solution is subject
to a retention of title clause, so that in the event of non-payment the Company will have a secured claim. To further minimize credit exposure, the sale of most
AFIRS solutions requires payment in advance of any product shipment. At each reporting date, the Company establishes an allowance for impairment that
represents its estimate of incurred losses.

The aging of receivables at the reporting date was:

December 31, 2014

Accounts receivable

Impairment

Net receivable

December 31, 2013

Accounts receivable

Impairment

Net receivable

0-30 days
$

646,795

(37,747)

609,048

0-30 days
$

404,658

(4,705)

399,953

31-60 days
$

326,522

(37,728)

288,794

31-60 days
$

129,737

(7,058)

122,679

61-90 days
$

107,106

(37,731)

69,375

61-90 days
$

175,233

(30,216)

145,017

91+ days
$

271,218

(278,649)

(7,431)

91+ days
$

272,805

(156,028)

116,777

Total
$

1,351,641

(391,855)

959,786

Total
$

982,433

(198,007)

784,426

The Company believes that the unimpaired amounts that are past due by more than 30 days are still collectible, based on historic payment behavior.

FLYHT AEROSPACE SOLUTIONS LTD.

26. FINANCIAL RISK MANAGEMENT (CONTINUED)

The movement in the allowance for impairment in respect of trade and other receivables for the years ended December 31, 2014 and 2013 was:

Balance, January 1

Provision

Amounts written off

Impairments recovered

Balance, December 31

Liquidity risk

2014
$

198,007

409,478

(203,651)

(11,979)

391,855

2013
$

12,994

198,007

(12,645)

(349)

198,007

The Company’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, without incurring
unacceptable losses or risking damage to the Company’s reputation. The Company manages its liquidity risks by having cash available, by maintaining a
conservative capital structure, by prudently managing its credit risks, and by maintaining its relationship with the capital markets to meet any near-term
liquidity requirements.

The following table details the contractual maturities of financial liabilities, including estimated interest payments.

December 31, 2014

Accounts payable

Compensation and statutory deductions

Finance lease liabilities

Accrued liabilities

Loans and borrowings

Total

December 31, 2013

Accounts payable

Accounts payable – SNC

Compensation and statutory deductions

Finance lease liabilities

Accrued liabilities

Loans and borrowings

Total

< 2 months
$

2-12 months
$

1-2 years
$

2-5 years
$

> 5 years
$

638,598

406,298

4,970

43,641

1,093,507

12,114

110,584

24,849

115,030

585,146

847,723

29,818

5,819,600

5,849,418

15,794

12,953

360,335

389,082

1,370,267

< 2 months
$

2-12 months
$

1-2 years
$

2-5 years
$

> 5 years
$

581,557

1,921,384

296,223

4,059

40,678

2,843,901

18,726

216,583

9,970

75,930

3,751,695

4,072,904

344,026

2,781,399

1,507,480

Total
$

650,712

516,882

75,431

171,624

8,135,348

9,549,997

Total
$

600,283

1,921,384

512,806

14,029

116,608

8,384,600

11,549,710

ANNUAL REPORT 2014

Currency risk

A significant portion of the Company’s revenues and a portion of its expenses are denominated in U.S. dollars. Management estimates that a 1% weakening
of the Canadian dollar relative to the U.S. dollar would increase net earnings by approximately $65,743 (2013: $76,314) and a strengthening of the Canadian
dollar would decrease net earnings by approximately $65,743 (2013: $76,314).

The Company mitigates its currency exposures by the international nature of the business where a portion of its cost of goods sold are in currencies that
naturally hedge a portion of U.S. dollar revenue. The Company has not engaged in activities to manage its cash flow foreign currency exposure through the
use of financial instruments.

The Company has exposure to foreign exchange risk for working capital items denominated in U.S. dollars. At December 31, 2014, working capital denominated
in U.S. dollars was approximately positive $3,109,586 (2013: negative $1,180,745). As a result a 1% weakening of the Canadian dollar would increase net
earnings by approximately $31,096 (2013: $11,807) and a strengthening of the Canadian dollar would decrease net earnings by approximately $31,096 (2013:
$11,807).

The Company mitigates its working capital exposure by managing its U.S. dollar denominated working capital items to limit the requirement to convert either
to or from U.S. dollars to fulfill working capital payment requirements.

Although there are limited expenses under contracts denominated in EUR and GBP, fluctuations in these currencies would result in insignificant foreign
exchange variances. In respect of other monetary assets and liabilities denominated in foreign currencies, the Company ensures that its net exposure is kept
to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.

Interest rate risk

Borrowings issued at variable rates result in exposure to interest rate risk, which would affect future cash flows if interest rates were to rise. Fluctuations in
the prime interest rate could result in exposure for the Company with regards to the bank credit facility, which bears interest at Canadian chartered bank prime
plus 1.5%. The Company’s exposure to interest rate risk as at December 31, 2014 and 2013 was minimal as the credit facility had not been drawn.

Market risk

Market risk is the risk that changes in market conditions, such as foreign exchange rates, interest rates and equity prices will affect the Company’s income or
the value of its financial instruments. The Company’s objective in managing market risk is to manage and control exposure, while optimizing return.

Fair values versus carrying amounts

The fair values of financial assets and liabilities approximate carrying values.

Capital management

FLYHT’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern. In order to maintain or adjust the capital
structure, the Company may issue new debt, sell assets to reduce debt, or issue new shares. There were no changes in the Company’s approach to capital
management during the year.

27. RELATED PARTIES

Throughout 2014, the Company engaged in transactions with a company owned by a former director to supply consulting services in promoting the Company’s
products as a preferred solution for enhanced aircraft tracking and triggered data transmission.

Included in contract labour:

Included in accounts payable and accrued liabilities:

For the three months ended
December 31

For the year ended
December 31

2014
$

Consulting fees

5,621

Total

5,621

2013
$

2014
$

74,418

2013
$

December 31

2014
$

2013
$

All of the transactions with the related parties were amounts that were agreed upon by the parties and approximated fair value. All other transactions with
related parties were normal business transactions related to their positions within the Company. These transactions included expense reimbursements for
business travel and other expenses paid by the related party and were measured at exchange amounts that the related party paid to a third party and were
substantiated with a third party receipt.

FLYHT AEROSPACE SOLUTIONS LTD.

27. RELATED PARTIES (CONTINUED)

Transactions with key management personnel

Key management personnel includes all persons with direct or indirect authority and responsibility for planning, directing and controlling the activities of the
Company, and includes directors and the FLYHT’s executive team.

In addition to salary and variable compensation, the Company also provides non-cash benefits to key management personnel. Certain executive officers are
entitled to a mutual term of notice of six months.

Compensation for this group comprised:

Salary
Director fees
Variable compensation
Retiring allowance
Share-based payments
Short-term employee benefits

Total

2014
$
1,138,733
125,928
221,471
275,000
208,418
131,425

2,100,975

2013
$
736,500
109,359
192,264
-
94,550
57,254

1,189,927

Directors of the Company control 4.1% (2013: 4.1%) of the voting shares of the Company.

Subsidiaries

FLYHT Inc.
AeroMechanical Services USA Inc.
FLYHT Corp.
FLYHT India Corp.
TFM Inc.

Country of Incorporation

Ownership interest

United States
United States
Canada
Canada
Canada

100%
100%
100%
100%
100%

ANNUAL REPORT 2014

Corporate
Information

DIRECTORS

Doug Marlin

Bill Tempany
Mike Brown
Paul Takalo
Jacques Kavafian
Jack Olcott
Barry Eccleston
John Belcher

OFFICERS

Bill Tempany

Matt Bradley

Nola Heale

Chairman, FLYHT Aerospace Solutions Ltd.
& President, Marlin Ventures Ltd.
Chief Executive Officer, FLYHT Aerospace Solutions Ltd.
Partner, Geselbracht Brown
Director
Director
President, General Aviation Company
President, Airbus Americas, Inc.
Former Chairman and Chief Executive Officer, ARINC Inc.

Chief Executive Officer

President

Chief Financial Officer

Derek Graham

Chief Technical Officer

Jeff Brunner

VP Certification Engineering and China Operations

AUDITOR

KPMG LLP

LEGAL COUNSEL

Calgary, Alberta

Chris Croteau

Tingle Merrett LLP, Calgary, Alberta

HEAD OFFICE

300E, 1144 - 29 Avenue NE
Calgary, Alberta T2E 7P1

REGISTRAR AND
TRANSFER AGENT

Valiant Trust Company
Telephone: 1-866-313-1872
Email: inquiries@valianttrust.com
www.valianttrust.com

SHARE LISTING

Shares are traded on the TSX Venture
Exchange and the OTCQX Marketplace

Ticker Symbols: TSX: FLY
and OTCQX: FLYLF

INVESTOR RELATIONS

Email: investors@flyht.com
Telephone: 1-403-250-9956
Toll free: 1-866-250-9956
www.flyht.com

The Howard Group Inc.
Dave Burwell
Email: dave@howardgroupinc.com
Telephone: 1-403-410-7907
www.howardgroupinc.com

Kin Communications Inc.
Fred Leigh
Email: FLY@kincommunications.com
Telephone: (866) or (604) 684-6730

Bristol Capital Ltd.
Glen Akselrod
Email: glen@bristolir.com
Telephone: 1-905-326-1888
www.bristolir.com

FLYHT AEROSPACE SOLUTIONS LTD.

FLYHT
Aerospace Solutions Ltd.

300 E, 1144 – 29 Ave NE
Calgary, AB, T2E 7P1
Canada

Phone: 1.866.250.9956
Fax: 1.403.291.9717