FLYHT Aerospace Solutions
Annual Report 2015

Plain-text annual report

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Table of Contents 23 25 25 25 26 29 29 LETTER TO SHAREHOLDERS 30 MANAGEMENT DISCUSSION & ANALYSIS NON-GAAP FINANCIAL MEASURES FORWARD-LOOKING STATEMENTS OVERVIEW TRENDS AND ECONOMIC FACTORS CONTRACTS AND ACHIEVEMENTS OF FISCAL 2015 42 43 47 71 RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2015 AND 2014 30 SELECTED RESULTS 31 FINANCIAL POSITION 34 COMPREHENSIVE INCOME 39 OTHER INDEPENDENT AUDITORS’ REPORT CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CORPORATE INFORMATION “THE 2015 FINANCIAL YEAR WAS A PERIOD FULL OF ACCOMPLISHMENT FOR FLYHT” Commonly Used Financial Terms & Aviation Acronyms 01 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 ACARS: Aircraft Communications Addressing ICAO: and Reporting System International Civil Aviation Organization ADCC: Aircraft Data Communication ICE: Iridium Compatible Equipment Corporation AFIRSTM: Automated Flight Information Reporting System ANAC: National Civil Aviation Agency of Brazil BEA: Bureau d’Enquetes et d’Analyses (French authority for safety investigations in civil aviation) IFRS: ITU: International Financial Reporting Standards International Telecommunications Union MD&A: Management Discussion and Analysis NCAA: Nigerian Civil Aviation Authority CAAC: Civil Aviation Administration of China NTSB: National Transportation Safety Board COMAC: Commercial Aircraft Corporation of China OEM: Original Equipment Manufacturer QTD: Quarter-to-date DGAC: Direccion General de Aeronautica R&D: Research and Development Civil (Mexico’s certification organization)  EASA: European Aviation Safety Agency ECAA: Egyptian Civil Aviation Authority FAA: Federal Aviation Administration FIRST: Fuel Initiative Reporting System Tracker GAMA: General Aviation Manufacturers Association GAAP: Generally Accepted Accounting Principles IATA: International Air Transport Association SADI: Strategic Aerospace and Defence Initiative SFP: Statement of Financial Position STC: Supplemental Type Certificate TCCA: Transport Canada Civil Aviation YTD: Year-to-date 02 Investment Highlights 03 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Multiple revenue streams: initial hardware sale and installation and recurring revenue Robust recurring revenue gross margins of 75-85% Five-year customer contracts renew at expiry Greater than 2.1 million flight hours using AFIRS; and have shipped and/or installed over 800 units worldwide Certified on 95% of all aircraft used for commercial air transport; significant barrier to entry OEM agreements in place with two global OEMs Only solution that can provide real-time aircraft data monitoring and black box streaming 04 2015 FLYHT Plan Review & Achievements Increase sales force and focus on major markets FLYHT recruited David Perez as the VP, Sales and Marketing and appointed additional agents. Capture a major carrier Succeeded in signing a contract for 146 aircraft with Canadian-based leasing and airline company Avmax Aviation Services Inc. (“Avmax”). In China: continued vigilance in order to meet mandate for SatCom in 2017; add an AFIRS repair depot Saw an escalating increase in AFIRS orders from China in anticipation of the 2017 deadline. While we did not open an AFIRS repair depot in 2015, we plan to partner with a company to serve as our service centre commencing in 2016. The Company will have equipment and spare parts to test or repair AFIRS units and provide customers with the re-certification required to install on their aircraft. Respond to commercial OEM requests for alerting and streaming technology FLYHT responded to several RFPs from OEMs although at the time of the printing of this report we have not been advised of the award of these proposals. Continue to participate with industry groups to make changes in regulations for aircraft alerting and streaming FLYHT participated in the ICAO meetings regarding regulations on aircraft tracking at the beginning of 2015. On March 8, 2016 ICAO released information announcing that between now and 2021 there will be new tracking requirements primarily related to: • The requirement for aircraft to carry autonomous distress tracking devices which can autonomously transmit location information at least once every minute in distress circumstances. 05 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 • The requirement for aircraft to be equipped with a means to have flight recorder data recovered and made available in a timely manner. • Extending the duration of cockpit voice recordings to 25 hours so that they cover all phases of flight for all types of operations. FLYHT’s technology already complies with the first point for one-minute tracking (transmits as frequently as every 20 seconds) and can send the black box data to the airline in real time so that the FDR data is available in a timely manner, hence complies with item two for our customers. The third point refers to flight voice recorders, which are not part of our functionality. Development: expand application to mobility platforms, lay groundwork for high bandwidth solutions, introduce data on demand In Q2 2015 FLYHT suspended its work on mobility platforms and shifted the focus to develop an improved user interface to the UpTimeTM platform, updated its Aircraft Situational Display and continued to build value-added applications that improve airlines’ real-time aircraft intelligence. These applications and the UpTime expansion are scheduled for completion in 2016. 2016 FLYHT Plan: Increase revenues +30% over 2015 Complete development and roll out of a cloud-based UpTime user interface Establish a 24x7 service call center Close a new OEM opportunity Deploy our “Adopt Excellence” strategy: focused efforts to achieve profitability and to increase shareholder value In China: continued vigilance to meet mandate for SatCom in 2017; complete an AFIRS repair depot 06 Revenue Sources $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Flight Hours and Flights Services Parts sales AFIRS sales Voice & data services Hours 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2010 2011 2012 2013 2014 2015 Flight Hours Flights 07 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Revenue Based on Location NORTH AMERICA 55.1% $5,754,913 CENTRAL & SOUTH AMERICA 2.5% $266,203 EUROPE 5.2% $542,037 AFRICA & MIDDLE EAST 13.7% $1,432,230 TOTAL 2015 REVENUE: $10,457,125 ASIA 16.9% $1,766,750 AUSTRALASIA 6.6% $694,992 08 2015 Sales & Marketing Update FLYHT had several achievements on the Sales and Marketing front throughout 2015. The department went through a transition in July with the hiring of David Perez, VP Sales and Marketing. FLYHT also signed its largest contract to date with Avmax for 146 aircraft. Further achievements were completed in 2015 and established the launch point for 2016. Organization & Process IN 2015 FLYHT REFRESHED, TRANSITIONED AND REBUILT ITS SALES TEAM. Part of the refresh occurred in June when the Company contracted an outside sales agency to assist with sales and marketing campaigns. This sales agency provided FLYHT with the ability to reach several airlines through their impressive email campaigns. Additionally, FLYHT re-organized their sales organization after David joined the team by hiring experienced industry sales resources to fortify the group and also moved the Product Management Marketing discipline under Sales and Marketing. Due to the interaction that Sales has with the market it made sense to feed the intelligence directly from Sales to the Product Development team. Through other changes, FLYHT has created a sales process that provides senior management with improved visibility to allow for input from all departments on each deal. The Company uses financial models to provide clear financial metrics that can be viewed by all parties on the profitability of each contract. Further to the successful internal adjustments, FLYHT continued to attend a total of eight industry events in 2015. These global tradeshows spanned many regions including three in Asia, one in each of Africa and Europe and the remainder in the United States. FLYHT focuses on tradeshows that reach our target market including mid-tier airlines operating regional aircraft with limited communication capabilities, flight tracking or MRO-themed conferences and those events with a large OEM presence. 09 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Tradeshows • China Aviation New Technology Forum – China (April, 2015) • AFRAA Convention – Kenya (April, 2015) • Civil Avionics International Forum – China (April, 2015) • EFB Conference – Germany (June, 2015) • Global Connected Aircraft – Washington (June, 2015) • Aviation Flight Operations & MRO IT Show – Thailand (October, 2015) • AirInsight Cyber Conference – Washington (October, 2015) • NBAA Convention – Las Vegas (November, 2015) Sales Key takeaways from each show include relationships with airlines to pursue sales or partnership opportunities and increased industry awareness on FLYHT’s fit within the industry and on wider trends. In continuation of the marketing improvements that commenced in 2015, in 2016 FLYHT will examine and revamp its sales tools including the website, branding and messaging. The FLYHT website was launched in 2011 and needs a refresh of materials and facelift to appeal to target customers. FLYHT HAD A STRONG SALES YEAR IN 2015. Our sales team signed six new contracts, including the Avmax agreement in September that contributed a new base of close to 170 aircraft to our contracts. This is a significant increase over our AFIRS count coming into the year. FLYHT increased the effort to sell data and services in 2015, and upsold many current clients to include valued-added features that also expanded revenue. China continues to be a primary focus area for FLYHT, with expansion goals targeting the tier one airline market. Tier one airlines include the top 25 airlines in the world based on revene. While we didn’t make any inroads with the tier one airlines in 2015 we did sign FLYHT’s largest customer to date in Avmax with 146 aircraft and this is a positive step to demonstrating our capabilities and technology to the larger carriers. 10 Addressing Industry Problems In order to expand our customer base, FLYHT remains focused on the problems that are facing the industry and how we can market our technology to help airlines address those problems. A COUPLE OF AREAS WE IDENTIFIED IN 2015 ARE BEING ADDRESSED. • The market is demanding an integrated suite of solutions that can be delivered through a single web portal. Today’s UpTime portal requires an update to include new functionality. The industry is also demanding a solution that provides alerts and notifications when problems occur. They want to “manage by exception” to be able to focus on the problem areas and not get distracted by normal operations. Actionable intelligence is the method AFIRS uses to acquire the data from the aircraft, interpret the data and then alert on the data if thresholds are exceeded. This integration of the products and alerting is the primary focus of our UpTime development that includes an overhaul and update. This project is a top priority for FLYHT in 2016. • FLYHT is proactively providing customers with a more intuitive and appealing interaction to the AFIRS system. With all the data AFIRS provides and processes there is a need to distribute the information in a way that can be customized depending on airlines’ needs. The new user interface that is planned for full launch later in 2016, already being tested with a few customers, is a fresh and intuitive program for airlines to navigate. The newly improved user interface is one of the features of AFIRS that enticed Avmax to invest in our technology. 11 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 • FLYHT now provides a Future Air Navigation System (“FANS”) certified solution through the AFIRS 228S. Throughout the past few years FLYHT worked on obtaining the Canadian Technical Standard Order (“CAN TSO”) Design Approval, CAN-TSO-C159b, and announced successful receipt in January 2016. The TSO receipt represents additional certification that FLYHT has achieved to increase its attractiveness to potential customers and expand its potential market. FANS allows for and supports improved data and surveillance of aircraft flying in remote regions and over the oceans. At the time of receipt AFIRS is the only product in the world to receive a TSO based on compliance to DO-262B for combined Iridium voice and datalink. As listed above, the Sales team has observed the need for AFIRS technology to solve several problems and these apply to a variety of target airlines. AFIRS provides a lifeline to close the communications gap for airlines operating in remote areas with little to no VHF coverage. With AFIRS, airlines know where their aircraft are at all times and can communicate and send text messages to them through the FLYHTASDTM system enabled by the Iridium satellite network’s global coverage. Not only does the system notify airlines where their assets are, FLYHTHealthTM detects, reports, and diagnoses to allow the airline to fix an issue immediately. This enhancement of the decision making process leads to fewer delays or flight cancellations, a reduction in unscheduled maintenance and improved on-time performance which all impact airline’s cost cutting programs. 12 On the horizon To progress and grow, the Sales and Marketing team are aggressively promoting AFIRS’ capabilities to the global aviation market. Specific regions of focus include the airlines in China and Asia that are improving their aviation communications technology to respond to increased growth. We will also reach mid-tier airlines operating regional aircraft and those without ACARS that require an Iridium capability. Our efforts are strongly targeted to position FLYHT in the marketplace to solve problems and receive further recognition as an industry leader for connectivity and real-time aircraft intelligence. 13 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 14 2015 Major Announcements CONTRACTS // IN 2015 FLYHT SIGNED A TOTAL SIX CONTRACTS WITH NEW CUSTOMERS WORLDWIDE. OF THE AIRCRAFT CONTRACTED, TWO WERE FOR THE AFIRS 220 AND 167 WERE FOR AFIRS 228. February 10 // FLYHT attended ICAO meetings in Montreal and participated with the working group looking into aircraft data collection, storage and uses. April 10 // FLYHT signed two new customers with AFIRS previously installed on their aircraft who decided to turn on and utilize the technology’s benefits. May 8 // FLYHT signed a contract with an African Airline for AFIRS on a fleet of four A320 aircraft. May 12 // FLYHT reported the first quarter results as the highest quarter on record. “Revenue for the quarter was the highest on record at $2.57 million, along with a very small loss,” remarked FLYHT CEO Bill Tempany. “We are very pleased the contracts signed and relationships developed in the past few years are now starting to deliver returns.” June 3 // FLYHT announced the election by the shareholders of retired Major General Mark V. Rosenker as a director of the Company. General Rosenker has many years of experience in the aviation industry including a past tenure as chairman of the National Transportation Safety Board (“NTSB”). He is currently a consultant to CBS News and appears on their network to discuss transportation safety issues. “I’m honored and energized to have been appointed to the board of directors of FLYHT Aerospace Solutions. I have long believed that innovation, training, technology and information are keys to enhanced safety and accident prevention,” said Mr. Rosenker. “What FLYHT brings today to the global industry is a combination of proven products and services that are cutting edge and raise the bar of safety for all that implement them.” 15 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 16 17 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 June 9 // FLYHT announced the receipt of the 2015 Excellence in Avionics Safety Systems Award from Avionics Magazine. The award was presented to FLYHT’s Director of Operations, Graham Ingham, at the 2015 Global Connected Aircraft Summit in Chantilly Virginia. FLYHT’s Automated Flight Information Reporting System (“AFIRSTM”) and FLYHTStreamTM application were recognized as a critical and new safety system that enable the fastest response time, and most effectively help in an emergency, to guarantee safety, or to locate a lost aircraft in the event of a crash. “We are honoured to receive this award for our advancement of safety in the industry,” remarked Matt Bradley, President of FLYHT. “The real-time capability of FLYHTStream lets our customers know where their aircraft are at all times, and more importantly, what is happening when something goes wrong. It’s a new level of connectivity and it contributes to the safety of their operation while also providing valuable real-time data that saves them money.” July 15 // FLYHT reported its customer of seven years, a Middle Eastern Military Organization has extended its contract for AFIRS voice and data services on 23 C-130 Hercules Aircraft with the AFIRS 228 installed. “The contract extension is indicative of our strong relationship and the importance of operational control and global air traffic control compliance for the customer,” stated Matt Bradley, President of FLYHT. “The C-130 is an exceptional platform for AFIRS, and this expanding fleet is a great showcase for what 21st century connectivity can do for real-time decision making.” 18 July 20 // FLYHT announced that Mr. David Perez joined FLYHT as Vice President, Sales and Marketing effective July 20, 2015. Mr. Perez has over 25-years of accomplishments in the aviation industry. Most recently he had served as Director of Travel and Transportation at Hewlett-Packard (“HP”), where he leveraged his industry expertise to secure many strategic aviation agreements. “I’m excited by the valuable opportunities FLYHT brings to the aviation industry, as well as the potential of creating additional profitable revenue streams that will enhance the Company’s shareholder value,” commented Mr. Perez. “FLYHT is uniquely positioned to provide global flight tracking and data analysis to the aviation market.” August 11 // FLYHT was selected by Alberta Venture Magazine in a list of the province’s 20 most innovative companies. Alberta Venture’s annual innovators list is comprised of companies from a variety of sectors who are solving problems by thinking outside of the box in what they describe as “a compulsion to be better and an inability to be satisfied with the way things are”. September 28 // FLYHT and Avmax announced an agreement for the AFIRSTM 228 for the two airlines Avmax owns, as well as its current and future leased fleet, for a total fleet size of 146 aircraft over a seven- year term. “Avmax did an extensive review of products in the market and AFIRS was selected because it met all of our business needs. FLYHT’s solution was superior to the other products we evaluated in the market,” remarked Al Young, VP of Avmax Canada and R1 Airlines. “We will be able to provide world-class solutions, not only to our own fleet, but also to those aircraft that are leased to other airlines and give us higher visibility and data on our assets. We anticipate high cost savings on engine repairs as well as the other advantages of the product for operations, communications and maintenance support.” October 14 // FLYHT received a re-issued Supplemental Type Certificate (“STC”) for its Automated Flight Information Reporting System (“AFIRSTM”) 228 on the Airbus A320 series aircraft from the Federal Aviation Administration (“FAA”). The STC has been re-issued to add the AFIRS 228 to this existing STC. 19 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 20 21 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 October 19 // FLYHT announced changes to its executive management team. Mr. Thomas R. Schmutz, MEng, MBA, was appointed the new chief executive officer of the Corporation. Mr. Bill Tempany retired from his role as CEO, but remained on the board of directors and was appointed the chairman of the board. In addition, Mr. Matt Bradley resigned from his position as president of the Corporation to pursue new career opportunities. “I am extremely excited about the opportunity to lead FLYHT as we head into the connected aircraft future,” said Thomas R. Schmutz. “The AFIRS™ UpTime technology is cutting edge and the value proposition for airline operators and OEM manufacturers is being demonstrated daily.” “My retirement is the culmination of work to structure FLYHT for success including changes to the board, a solid team to deliver solutions, opportunities to make FLYHT a global force in aviation and a new CEO to lead the charge,” stated Bill Tempany. “It was a pleasure to lead the FLYHT team with the board’s support to put our company in a position to change a global industry.” November 3 // FLYHT announced its third quarter results were the second highest on record with revenue of $2.52M. Also updated that the July 29 private placement was withdrawn because market conditions were not conducive to a U.S.A. based offering. December 8 // FLYHT applied to the TSX Venture Exchange to extend the expiry date of the conversion feature of the Company’s debentures by one year and amend the conversion price to $0.25 per share. The Company also applied to amend the exercise price of the share purchase warrants to $0.20 from $0.75 and received TSX approval on December 15, 2015. December 17 // FLYHT received a Supplemental Type Certificate (“STC”) for AFIRS on the Boeing 737 Classic and 737 Next Generation series aircraft from the National Civil Aviation Agency (“ANAC”) of Brazil. December 21 // FLYHT announced the granting of a non-exclusive license to use certain of its intellectual property (the “IP”). The license was granted to a technology company (the “Licensee”) for an aggregate license fee of $2.5 million USD, payable in the first quarter of 2016. 22 To Our Shareholders The 2015 financial year was a period full of accomplishment for FLYHT; we set “best revenue” records for our financial performance, we made excellent progress on our stated goals for the year, we further enhanced our board of directors and sales team and we won awards in the industry and community. Furthermore, we smoothly transferred executive control of the Company, reorganized internally and adopted several new approaches, standards and goals for the year 2016 and beyond. There is significant optimism within the Company resulting from our improving financial performance and strong feedback from OEM and solution partners that the unique offerings of FLYHT are now timely and are recognized to solve important problems within our industry. The 2015 year ended with a record revenue fourth quarter (Q4) of $3.8 million, or 46.7% higher than the previous record quarter, which was the first quarter (Q1) of the same year. Q1 was itself only $51k ahead of the third quarter (Q3) of 2015! So, the three highest revenue quarters in our history were all achieved in 2015. The resulting $10.5M annual revenue for 2015 was also a revenue record, a 51.9% improvement on 2014 and 30.7% ahead of the previous best year in 2013. The additional revenue fell to the bottom line but an operating loss of $3.2 million was still reported for 2015. This was $0.4 million less loss than 2014 but, if we remove the impact of the one-time add back in 2014 of the $1.95 million SNC legal claim provision and the impact of the costs of retirement and changes in key management positions in both 2014 and 2015, the normalized comprehensive loss has decreased 49% or $2.5 million. Noteworthy financial progress has been made, but we need to do more in order to internally fund our operations and produce returns for our loyal shareholders. 23 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 The Company utilized net $2.9 million cash during the year because of the losses, but it is also pleasing to report that the cash balance reported at December 31, 2015 is $5,000 more than that at September 30, 2015. FLYHT progressively self-funded more of its operations, or consumed less cash, each quarter, from $1.7 million utilized in Q1, to $0.6 million utilized in Q2 and Q3 to neutral in Q4. Working capital items were well controlled so did not contribute to a cash burn. The redeemable and convertible debentures mature within the coming twelve months and therefore they are now classified as current liabilities on the statement of financial position. Management is addressing this debt and the Company continues to strive to self-fund operations in 2016. Our goals for 2015 included expanding the sales team and capturing a major carrier. We did expand our team and have put into place standardized sales processes and materials. We captured our largest customer to date, Avmax Aviation Services Inc. (“Avmax”), who operates or leases 146 Bombardier aircraft. We also continued expansion in China, winning positions at five airlines, including direct sales and sales through partners, and began the process of establishing a depot maintenance facility. This latter goal was not completed in 2015 but will be accomplished by mid- 2016. We responded to a significant OEM opportunity for alerting and streaming aircraft data and we remain hopeful that our outstanding technology will be selected. FLYHT also collected awards in 2015. FLYHT was awarded the 2015 Excellence in Avionics Safety Systems Innovation Award by Avionics Magazine for the AFIRSTM and FLYHTStreamTM products. Closer to home, the Alberta Venture Magazine included FLYHT in a list of 20 most innovative companies. These awards demonstrate recognition of the unique solutions that FLYHT has brought to the industry and are a source of pride for our team, along with the 2015 achievement of over two million AFIRS flight hours on our customers’ aircraft, accumulated on more than one million flights. As we advance in 2016, we are making significant investment in the redevelopment and roll out of an updated, cloud based implementation of the UptimeTM ground based user software. We have collected important lessons learned in the legacy, server based applications that we currently provide as a seminal service provider in the connected aircraft space. This UpTime suite of products includes FLYHTVoiceTM, FLYHTLogTM, FLYHTASDTM, FLYHTMailTM, FLYHTHealthTM, FLYHTFuelTM and, of course, FLYHTStreamTM along with some other product components. UpTime features will include an integrated user interface to this suite using the latest cloud-based application implementation in order to enhance service availability and intuitive usability, while providing some dramatic enhancements. We have created new goals for 2016 including the launch of a 24x7 call center to enhance customer service. Internally, we’ve implemented the “Adopt Excellence” program which establishes our goals and objectives to improve internal efficiencies which in turn will further enhance financial performance of the Company. Furthermore, we have set very aggressive sales goals and budgets to control expenditures to continue our efforts toward profitability and growth. FLYHT continues to monitor industry discussions on aircraft tracking and other safety related industry initiatives, but the delays and industry stonewalling in these efforts indicate that there will not be any type of regulatory action in the next year or more. Most recently, the International Civil Aviation Organization (ICAO) adopted new provisions to include a requirement for aircraft to carry an autonomous tracking device which can transmit location information at least once every minute in distress circumstances by the year 2021. This new provision is separate from ICAO’s proposal to require a standard of reporting aircraft position at least every 15 minutes when in oceanic or remote airspace. This later requirement, originally targeted for 2016 as a result of the MH370 disaster, has been pushed back to 2018. FLYHT stands ready with our solution set to address these or any other similar regulatory response, but we are focused on demonstrating how our existing, fielded, proven solutions save customers money while dramatically enhancing the safety and situational awareness of their fleet today. We remain very positive about our significant ability to improve the operational efficiencies of airlines and are as engaged as ever at FLYHT. Our monthly CEO investor letters are designed to help provide as much background information as we can to help you understand how we run the business. Thank you for your support of our Company and we look forward to a very exciting and opportunity filled 2016! Thomas R. Schmutz Chief Executive Officer 24 Management Discussion & Analysis This management discussion and analysis (“MD&A”) is as of April 5, 2016 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, 2015 and 2014 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, 2015 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 occasionally uses certain non-GAAP financial measures, such as working capital, modified working capital, 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. 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.A., 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.A., 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.A. 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. 25 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 FLYHT Overview FLYHTStreamTM FLYHT is a leading provider of real-time aircraft intelligence and cockpit communications for the aerospace industry. More than 50 customers, including airlines, leasing companies and original equipment manufacturers, have installed our systems in order to increase safety, improve operational efficiencies and enhance profitability. 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 proprietary technology, the Automated Flight Information Reporting System (AFIRSTM), operates on multiple aircraft types and provides functions such as safety services voice and text messaging, data collection and transmission, and on-demand streaming of flight data recorder (black box), engine and airframe data. AFIRS has flown over 2.1 million aggregate flight hours and 1.4 million flights on customers’ aircraft. FLYHT holds supplemental type certificates (STC) which allow for the installation of AFIRS on 95% of transport category aircraft. FLYHT’s products and services are marketed globally by a team of employees and agents based in Canada, the United States, China, and the United Kingdom. AFIRSTM and UpTimeTM AFIRS is a device installed on aircraft that monitors hundreds of essential functions from the aircraft and the black box. AFIRS sends this information through the Iridium satellite network to FLYHT’s UpTimeTM ground-based server, which routes the data to customer-specified end points and provides an interface for real-time aircraft interaction. In addition to its data monitoring functions, AFIRS provides voice and text messaging capabilities that give pilots the ability to communicate with ground support. Value- added applications such as FLYHTStreamTM, FLYHTLogTM, FLYHTASDTM, FLYHTMailTM, FLYHTHealthTM and FLYHTFuelTM are unique to FLYHT. FLYHT’s global satellite coverage is enabled by the Iridium satellite network, providing service to our customers when they need it anywhere on the planet. FLYHT first marketed its technology with the AFIRS 220 in 2004. The unit received regulatory certification for installation in a large number of widely used commercial aircraft brands and models (see systems approvals section). The AFIRS 228, released in 2009, incorporates improvements over the AFIRS 220 in processing capacity, data transmission characteristics and programmability. The AFIRS 228 features cater to the evolving needs of airlines by providing a customized and flexible product. In early 2016, FLYHT announced the Canadian Technical Standard Order (“CAN-TSO”) Design Approval, CAN-TSO-C159b for the AFIRS 228S. The certification, granted by Transport Canada, represents an additional level of airworthiness standards met by AFIRS to provide safety services messages and data. 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 activated 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. Animation software converts the raw FDR data 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 program that focuses attention on areas of greatest savings potential to provide 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. 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. FLYHTASDTM FLYHTASD is an aircraft situational display that shows the aircraft position reports from AFIRS via the Iridium satellite network. 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. 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 FLYHTStream, black box data streaming, on their airborne aircraft at any time. 26 FLYHTHealthTM System Approvals Consists of automated engine and airframe trend monitoring and real-time exceedances and diagnostics. Automated trend reports with configurable reporting intervals notify the airline when a maintenance event has occurred. Leveraging the global coverage of the Iridium satellite network, FLYHTHealth allows the airline to request data directly from the engine once a problem has been detected. The airline can then use FLYHT’s real-time systems diagnostics capabilities to interrogate systems information and identify the source of the problem and prepare the arrival station for repair, long before the aircraft lands at its destination. By automating and enhancing the real-time and long-term monitoring of airplane data, FLYHTHealth enables proactive management of maintenance and reduces downtime and the financial impact of unscheduled maintenance. FLYHTLogTM Allows operators to monitor the status of their aircraft and have detailed Out, Off, On and In (“OOOI”) time information. It allows airlines to automatically route aircraft system and operational data to various partner systems. Additionally, FLYHTLog increases situational awareness and accurate flight times, saving money on flight crew pay and maintenance operations. FLYHTMailTM Two-way text messaging to the flight deck is established through the multi- control display unit (“MCDU”) or an iPad application. Text messaging is highly useful to manage diversions due to weather, mechanical occurrences or other unforeseen situations. FLYHTVoiceTM The onboard satellite phone, using the Iridium satellite constellation with global coverage, is a rapid and reliable private communication channel for the flight deck. When operating remote or oceanic flights, it allows dispatch to pass on updated information to the crew with no delay. The voice capability is particularly valuable during emergency situations or irregular operations. 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. The DragonTM As part of an evaluation of its products and services and in order to focus attention where it is needed most, FLYHT is discontinuing the sale of the DragonTM. This decision will not impact FLYHT’s current Dragon customers. 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, DGAC 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, DGAC 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, over the next several years, will file the necessary documents to obtain approval for the AFIRS 228 in parallel to the majority of current 220 STCs, depending on market requirements. 27 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 TCCA FAA EASA CAAC ANAC 220 A A A A A A A A A A A A A A A 228 A 220 A 228 A 220 A 228 A 220 A 228 A 220 228 Airbus A319, A320, A321 A A A A A A A A A I* P A A A I I I A A I I A A I I A A A A A A A A A I* I* I I A A A A A A A A A A A A A A I A I I I I I A Airbus A330 ATR42-300, -500 ATR72-100, -200 ATR-42-500 A A I ATR42-500 "600 Version" *STC Twenty One ATR72-212A "600 Version" *STC Twenty One Boeing B737 -200 A Boeing B737 -300, -400, -500 Boeing B737 -600 A Boeing B737 -700, -800 Boeing B737 -900 Boeing 747-200 Boeing 757 -200 Boeing 767 -200, -300 Boeing B777 Bombardier DHC 8 -100, -200, -300 *Avmax Bombardier DHC 8 -400 Bombardier CRJ 100, 200, 440 Bombardier CRJ -700, 900 McDonnell Douglas DC-10 (KC-10 military) McDonnell Douglas MD-82 McDonnell Douglas MD-83 Fokker 100 A A A A A Hawker Beechcraft -750, 800XP, 850XP, 900XP I A Viking Air DHC -7 (LSTC) Embraer EMB 190 Embraer Legacy 600 and EMB – 135/145 FLYHT has also received an approved AFIRS 228 STC for the Bombardier CRJ- 700, 900 from the DGDC in Mexico. 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. * = Occasionally FLYHT may partner with a third party to gain STC approval. Balance January 1 Interest accretion Repayment Balance December 31 Less current portion Non-current portion FLYHT announced additional certification in January 2016, with the receipt of the Canadian Technical Standard Order (“CAN-TSO”) Design Approval, CAN-TSO-C159b for the AFIRS 228S. The certification, granted by Transport Canada, represents an additional level of airworthiness standards met by AFIRS. A Technical Standard Order is a minimum performance standard issued by an airworthiness authority for specified materials, parts, processes, and appliances used on civil aircraft. Issuance of the CAN-TSO by TCCA through international agreements, represents recognition of the AFIRS 228S in the world’s major airworthiness jurisdictions, thus simplifying the STC and installation process. Balance January 1 Repayment Balance December 31 2015 $ 2014 $ 818,828 149,001 (68,229) 899,600 78,462 821,138 899,600 163,369 This TSO certification confirms that AFIRS 228S meets all product (78,462) requirements, including DO-262B Minimum Operational Performance 984,507 Standards for Avionics Supporting Next Generation Satellite Systems 90,234 (NGSS), for an Iridium SATCOM supporting Future Air Navigation System 894,273 (“FANS”) -1/A capability. FANS allows for and supports improved data and surveillance of aircraft flying in remote regions and over the oceans. Additionally, the certification enables voice and data services for Air Traffic Control (“ATC”), Aeronautical Operational Control (“AOC”) and Air-to-Air Communication (“AAC”) using Iridium’s global satellite network. The system also provides ACARS over Iridium messaging capability. 2014 $ 1,967,507 (68,229) 1,899,278 (78,462) 2015 $ 1,899,278 1,820,816 28 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. Passenger traffic (measured in Revenue Passenger Kilometers or “RPK”) saw a 6.5% increase in 2015 compared to the previous year and was the strongest result in five years1. All regions saw demand growth in 2015 and load factors that measure the capacity of flights were at a record annual high of 80.3%, an increase of 0.6% over 2014. Demand in international markets at 6.5% was slightly higher than domestic travel at 6.3%. Global freight traffic (measured in Freight Tonne Kilometers or “FTK”) increased by 2.2% in 2015, which was lower than the 4.5% growth in 20142. 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 freight shipping, suggesting growth in the industry. Large commercial aircraft manufacturers marked record numbers for deliveries and new orders in 2015. Airbus achieved a new record for aircraft deliveries of 635 aircraft for 85 customers, an increase from 629 aircraft in 2014. 2015 deliveries continued the upward trend for the 13th consecutive year3. Boeing also reached new heights, delivering 762 aircraft in 2015, 39 more than the previous year.4 Embraer set a five-year record and delivered a total of 101 commercial and 120 executive jets (82 light and 38 large), in 20155. Bombardier delivered less aircraft than in 2014, a total of 275 business and commercial jets compared to 290 aircraft in the previous year. The company also announced that it would undergo some transformation in its programs and a restructuring in 2016 resulting in a loss of jobs6. Results for the general aviation industry were not as strong in the year due to the fluctuating world economy. The General Aviation Manufacturers Association (“GAMA”) reported that numbers in worldwide general aviation airplane shipments fell in 2015 5% from 2,454 in 2014 to 2,331 shipments in 20157. FLYHT continues to be an industry leader in providing airlines with increased operational control and aircraft situational awareness. The Company’s efforts in the year have been on the early stage redevelopment and implementation of a cloud-based UpTime user software. This development will occur in 2016 and marks an improvement on our current technology; taking into consideration customer feedback and optimization. The FLYHTHealth program is significant in its ability to detect and notify the airline of any problems while the aircraft is in flight and prepare for repair before the aircraft lands, thereby reducing the financial impact of unscheduled maintenance. 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 with 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 2015 had a positive impact on the Company’s revenue and income compared to 2014. 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 2015 Contracts FLYHT Aerospace Solutions Ltd. signed a total of six contracts on 169 aircraft with customers worldwide. Two were for the AFIRS 220 and 167 for the AFIRS 228, as described below; In April, FLYHT signed contracts with new customers that had AFIRS 220 units previously installed on their aircraft. One was with an African operator on a Bombardier DHC-8; the other is with a Caribbean carrier on a Boeing 767-300. In May, FLYHT signed a contract with an African Airline for the AFIRS 228 on a fleet of four A320 aircraft. In September, FLYHT signed a contract with Avmax Aviation Services Inc. to install the AFIRS 228 on the two airlines Avmax owns, as well as its current and future leased fleet, for a total fleet size of 146 aircraft over a seven year term. Throughout the year FLYHT signed contracts with five airlines in China, including direct sales and sales through partners, for a total of 18 aircraft. 1 http://www.iata.org/pressroom/pr/Pages/2016-02-04-01.aspx 2 http://www.iata.org/pressroom/pr/Pages/2016-02-03-01.aspx 3 http://www.airbus.com/newsevents/news-events-single/detail/airbus- exceeds-targets-in-2015-delivers-the-most-aircraft-ever/ 4 http://boeing.mediaroom.com/2016-01-07-Boeing-Achieves-Record- Commercial-Airplanes-Deliveries-in-2015 5 http://www.embraer.com/Documents/noticias/003-Embraer%20Deliveries%20 4Q15-Ins-VPF-I-16.pdf 6 http://www.bombardier.com/en/media/newsList/details.binc-20160217- bombardier-announces-financial-results-for-the-fou.bombardiercom.html 7 http://www.gama.aero/media-center/press-releases/content/gama-unveils- 2015-year-end-shipment-and-billing-numbers-%E2%80%9Cstate-i and http://www.gama.aero/media-center/industry-facts-and-statistics/ shipments-billings 29 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Achievements • In the first quarter FLYHT reported the highest revenue yet achieved in a quarter, $2,569,908, and a loss for the period close to break even. • In June, FLYHT announced the election of retired Major General Mark V. Rosenker to the Board of Directors. • In June, FLYHT was recognized with the 2015 Excellence in Avionics Safety Systems Innovation Award by Avionics Magazine. • In July, FLYHT welcomed Mr. David Perez as Vice President, Sales and Marketing. Mr. Perez has over 25 years of experience in the aviation industry. • In August, FLYHT was selected by the Alberta Venture Magazine in a list of 20 most innovative companies. • In the third quarter FLYHT reported the second highest revenue achieved in a quarter, $2,519,347; second only to the first quarter of 2015 by $50,561. • In October, subsequent to the end of the third quarter, FLYHT announced appointment of Mr. Thomas R. Schmutz as new CEO of the Company. In a career of more than 30 years, he gained extensive experience in senior leadership roles in the aerospace and telecommunications industries. • In December, FLYHT announced the granting of a non-exclusive license to use certain of its intellectual property (the “IP”) to a technology company for an aggregate license fee of $2.5 million USD, payable in the first quarter of 2016. • In the fourth quarter FLYHT reported a new quarterly revenue record, $3,769,267, being the third record revenue quarter in the 2015 financial year. The results show a 51.9% improvement on 2014 revenue and 30.7% ahead of the previous highest revenue year in 2013. Results of Operations – Years Ended December 31, 2015 and 2014 Results of Operations – Years Ended December 31, 2015 and 2014 Selected Results Selected Results 2015 Assets Non-current financial liabilities Revenue Cost of sales Distribution expenses Administration expenses Research, development and certification engineering expenses Loss (income) from operating activities Loss Loss (income) before R&D Loss per share (basic & fully diluted) 2014 Assets Non-current financial liabilities Revenue Cost of sales Distribution expenses Administration expenses Research, development and certification engineering expenses Loss (income) from operating activities Loss Loss before R&D Loss per share (basic & fully diluted) Financial Position Liquidity and Capital Resource Q4 $ 5,478,867 390,110 3,769,267 1,340,513 1,084,443 1,573,796 Q3 $ 6,140,675 3,267,030 2,519,347 672,341 1,142,086 607,755 Q2 $ 6,344,752 3,053,577 1,598,603 562,535 987,330 943,931 Q1 $ 7,752,509 5,407,303 2,569,908 637,901 763,774 551,471 Total $ 5,478,867 390,110 10,457,125 3,213,290 3,977,633 3,676,953 689,195 638,104 737,968 737,285 2,802,552 918,680 540,939 1,633,161 120,523 3,213,303 1,203,998 514,803 0.01 Q4 $ 8,275,546 5,506,179 2,218,681 849,221 990,650 780,039 683,224 45,120 0.00 Q3 $ 8,968,372 2,728,769 1,808,794 655,927 806,051 985,756 1,943,924 1,205,956 0.01 Q2 $ 10,281,225 2,433,044 1,505,767 604,860 816,240 1,119,379 60,414 (676,871) 0.00 Q1 $ 9,734,630 2,262,812 1,348,786 440,043 780,050 663,344 3,891,560 1,089,008 0.02 Total $ 8,275,546 5,506,179 6,882,028 2,550,051 3,392,991 3,548,518 772,725 848,119 (1,277,790) 434,695 777,749 1,173,954 1,487,059 (243,078) 969,346 3,387,281 1,305,712 532,986 0.01 1,653,147 805,028 0.01 46,925 1,324,716 0.00 1,273,101 838,406 0.01 4,278,885 3,501,136 0.03 30 The Company’s cash at December 31, 2015 decreased to $1,301,955 from $3,910,962 at December 31, 2014 due mainly to cash used in operating activities in the first half of the year. FLYHT utilized net $2,894,478 million cash during the year (excluding the unrealized foreign exchange differences) to fund the losses. The Company progressively self-funded more of its operations, or consumed less cash, each quarter, from $1,666,232 utilized in Q1, to $622,400 utilized in Q2, $621,716 utilized in Q3 and $15,870 cash generated in Q4, as reported on the statements of cash flow. Working capital items were well controlled so did not contribute to a cash burn. 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. The convertible and the redeemable debentures mature during 2016 and have been classified as current liabilities a t December 31, 2015. The Company thus had negative working capital of $5,413,927 compared to positive $3,009,025 as of December 31, 2014, a decrease of $8,422,952 comprising $2,609,007 cash decrease, $5,267,636 increase in current portion of loans and borrowings reclassified from non-current liabilities and a net decrease in other working capital of $546,309. 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, 2015 would be negative $3,306,055 compared to positive $5,283,775 at December 31, 2014. The Company funded 2015 operations primarily through cash received from sales and available cash on hand. Management is addressing the debenture debt and the Company will continue to strive to self-fund operations in the coming year. The Company 9- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Financial Position Liquidity and Capital Resource The Company’s cash at December 31, 2015 decreased to $1,301,955 from $3,910,962 at December 31, 2014 due mainly to cash used in operating activities in the first half of the year. FLYHT utilized net $2,894,478 million cash during the year (excluding the unrealized foreign exchange differences) to fund the losses. The Company progressively self-funded more of its operations, or consumed less cash, each quarter, from $1,666,232 utilized in Q1, to $622,400 utilized in Q2, $621,716 utilized in Q3 and $15,870 cash generated in Q4, as reported on the statements of cash flow. Working capital items were well controlled so did not contribute to a cash burn. 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. The convertible and the redeemable debentures mature during 2016 and have been classified as current liabilities at December 31, 2015. The Company thus had negative working capital of $5,413,927 compared to positive $3,009,025 as of December 31, 2014, a decrease of $8,422,952 comprising $2,609,007 cash decrease, $5,267,636 increase in current portion of loans and borrowings reclassified from non-current liabilities and a net decrease in other working capital of $546,309. 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, 2015 would be negative $3,306,055 compared to positive $5,283,775 at December 31, 2014. The Company funded 2015 operations primarily through cash received from sales and available cash on hand. Management is addressing the debenture debt and the believes that where funding is required to meet cash flow requirements in 2016, it will be raised through sale of (or licensed rights Company will continue to strive to self-fund operations in the coming year. The Company believes that where funding is required to meet cash flow requirements in 2016, to use) assets, or issue of debt or equity instruments. it will be raised through sale of (or licensed rights to use) assets, or issue of 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 2015 $ 1,301,955 250,000 898,166 137,861 1,716,313 (2,757,707) (1,087,197) (5,840,418) (27,922) (4,978) (5,413,927) 1,087,197 1,020,675 (3,306,055) 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 Variance $ (2,609,007) - (61,620) (45,889) (200,936) (628,085) 397,148 (5,267,636) (1,949) (4,978) (8,422,952) (397,148) 230,270 (8,589,830) In 2015 warrant and option exercises together with convertible debenture conversions resulted in the Company issuing a total of In 2015 warrant and option exercises together with convertible debenture conversions resulted in the Company issuing a total of 1,297,500 shares for total proceeds of 1,297,500 shares for total proceeds of $236,000, including: $236,000, including: a) 542,500 warrants were exercised at $0.20 per share for proceeds of $108,500 a) 542,500 warrants were exercised at $0.20 per share for proceeds of $108,500 b) 100,000 options were exercised at $0.25 per share for proceeds of $25,000 c) 500,000 options were exercised at $0.205 per share for proceeds of $102,500 b) 100,000 options were exercised at $0.25 per share for proceeds of $25,000 d) 155,000 convertible debentures converted at $0.40 per share c) 500,000 options were exercised at $0.205 per share for proceeds of $102,500 As at April 5, 2016, FLYHT’s issued and outstanding share capital was 173,477,635. d) 155,000 convertible debentures converted at $0.40 per share 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. 2015 revenue was a 51.9% increase over 2014 which contributed to a reduced operating loss of $3,213,303; being $130,337 less loss than 2014 To continue as a going concern, the Company will need to attain profitability and/or obtain additional financing to fund ongo ing operations. If:  general economic conditions in the industry or the financial condition of a major customer deteriorates, or   sufficient funds are not available to extinguish the debentures coming due in June 2016, or sufficient funds are not available, or debenture holders do not convert their debenture units to equity, when the debentures mature in December 2016; 31 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 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 an d 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 its risk. to interest rate changes. The Company is exposed to fluctuations in the exchange rates between the Canadian dollar and other currencies with respect to assets, sales, expenses and purchases. The Company monitors fluctuations and may take action if deemed necessary to mitigate 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 There is a credit risk associated with accounts receivable where the customer fails to pay invoices. The Company extends cred it to credit-worthy or well-established customers. In the case of AFIRS sales the invoiced amount is frequently 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 services are provided. In the case of monthly recurring revenue the Company has the ability to disable the AFIRS unit transmissions where the customer has not fulfilled its financial obligations. 10- As at April 5, 2016, FLYHT’s issued and outstanding share capital was 173,477,635. 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. 2015 revenue was a 51.9% increase over 2014 which contributed to a reduced operating loss of $3,213,303; being $130,337 less loss than 2014. 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, or • sufficient funds are not available to extinguish the debentures coming due in June 2016, or • sufficient funds are not available, or debenture holders do not convert their debenture units to equity, when the debentures mature in December 2016; 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, expenses 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 AFIRS sales the invoiced amount is frequently 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 services are provided. In the case of monthly recurring revenue the Company has the ability to disable the AFIRS unit transmissions where the customer has not fulfilled its financial obligations. Contractual Obligations Contractual Obligations 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. December 31, 2015 Accounts payable Compensation and statutory deductions < 2 months $ 1,034,319 2-12 months $ 2,692 1-2 years $ - 2-5 years $ - > 5 years $ - Total $ 1,037,011 84,525 270,134 108,000 108,000 - 570,659 Finance lease liabilities 4,970 24,849 15,794 Accrued liabilities 39,215 61,650 Loans and borrowings - 5,840,418 Total 1,163,029 6,199,743 9,715 103,768 237,277 - 18,782 - - 45,613 129,362 414,386 1,212,427 7,570,999 541,168 1,212,427 9,353,644 Under SADI, the Company has, at December 31, 2015, an outstanding repayable balance of $1,820,816, compared to $1,899,278 at December 31, 2014. The amount Under SADI, the Company has, at December 31, 2015, an outstanding repayable balance of $1,820,816, compared to $1,899,278 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 at December 31, 2014. The amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment payment increases yearly by 15% until April 30, 2028 when the final payment will be 24.5% of the total contribution received. The repayment in 2015 was $78,462 on April 30, 2014 was 3.5% of the total contribution received and the payment increases yearly by 15% until April 30, 2028 wh en (2014: $68,229). the final payment will be 24.5% of the total contribution received. The repayment in 2015 was $78,462 (2014: $68,229). A summary of the SADI loan carrying value as at December 31, 2015 and 2014 and changes during these years is presented below. Balance January 1 Interest accretion Repayment Balance December 31 Less current portion Non-current portion 2015 $ 899,600 163,369 (78,462) 984,507 90,234 894,273 2014 $ 818,828 149,001 (68,229) 899,600 78,462 821,138 A summary of the SADI outstanding payable balance as at December 31, 2015 and 2014 and changes during these years is presented below. 32 Balance January 1 Repayment Balance December 31 2015 $ 1,899,278 (78,462) 1,820,816 2014 $ 1,967,507 (68,229) 1,899,278 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 was received to extend the maturity date of the debentures then remaining outstanding from four to six years, now maturing on December 23, 2016. The debenture continues to bear interest at a rate of 8% per annum, accrued and paid annually in arrears. The debentures were convertible into common shares at a conversion rate of $0.40 per share at any time up to December 23, 2015; on December 15, 2015 the conversion rate was amended to be $0.25 per share at any time up to December 23, 2016 and the warrant exercise price was amended to $0.20. The debentures carry a face value after conversions of $3,039,000 at April 5, 2016. FLYHT did not enter into any new loan or lease agreements in 2015. Minimum lease payments are as follows. Year 2016 2017 Total Total $ 29,818 15,795 45,613 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 Solution. 11- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 TCCA FAA EASA CAAC ANAC 220 228 220 228 220 FAA EASA CAAC TCCA A 220 228 220 228 220 228 A 228 A 220 A 220 A 228 A 228 A 220 228 ANAC 220 228 Airbus A319, A320, A321 Airbus A330 Airbus A319, A320, A321 A A A I A I A A A A ATR42-300, -500 Airbus A330 ATR72-100, -200 ATR42-300, -500 ATR-42-500 ATR72-100, -200 ATR-42-500 ATR42-500 "600 Version" *STC Twenty One ATR72-212A "600 Version" *STC Twenty One ATR42-500 "600 Version" *STC Twenty One Boeing B737 -200 ATR72-212A "600 Version" *STC Twenty One Boeing B737 -300, -400, -500 Boeing B737 -200 Boeing B737 -600 Boeing B737 -300, -400, -500 Boeing B737 -700, -800 Boeing B737 -600 Boeing B737 -900 Boeing B737 -700, -800 Boeing 747-200 Boeing B737 -900 Boeing 757 -200 Boeing 747-200 Boeing 767 -200, -300 Boeing B777 Boeing 767 -200, -300 A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A I* A P I* A A A A A A A A A A A A A A A A A A A A A A A A A A A A I I I I I I A A A I A I A I A A A I I I I A Contractual Obligations A A A A I I* I* I* I* I I I I A A A A A A A A A A A A I I A I A I I I I I I I I I The following table details the contractual maturities of financial liabilities, including estimated interest payments. Boeing 757 -200 December 31, 2015 < 2 months 2-12 months $ $ Accounts payable 1,034,319 2,692 Finance lease liabilities 4,970 Compensation and A P statutory deductions Accrued liabilities Loans and borrowings A A Total 84,525 270,134 A 39,215 24,849 A 61,650 - 5,840,418 1,163,029 6,199,743 A A Bombardier DHC 8 -100, -200, -300 > 5 years 1-2 years Boeing B777 *Avmax 2-5 years Bombardier DHC 8 -400 Bombardier DHC 8 -100, -200, -300 $ - $ - *Avmax Bombardier CRJ 100, 200, 440 108,000 Bombardier DHC 8 -400 Bombardier CRJ -700, 900 108,000 Bombardier CRJ 100, 200, 440 15,794 McDonnell Douglas DC-10 (KC-10 military) - - Bombardier CRJ -700, 900 McDonnell Douglas MD-82 18,782 9,715 McDonnell Douglas DC-10 (KC-10 military) $ - - - Total $ 1,037,011 570,659 45,613 129,362 103,768 McDonnell Douglas MD-83 414,386 McDonnell Douglas MD-82 237,277 Fokker 100 541,168 McDonnell Douglas MD-83 1,212,427 7,570,999 1,212,427 9,353,644 Hawker Beechcraft -750, 800XP, 850XP, 900XP A A A A A I Under SADI, the Company has, at December 31, 2015, an outstanding repayable balance of $1,820,816, compared to $1,899,278 at December 31, 2014. 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. The repayment in 2015 was $78,462 (2014: $68,229). A A summary of the SADI loan carrying value as at December 31, 2015 and 2014 and changes during these years is presented below. summary of the SADI loan carrying value as at December 31, 2015 and 2014 and changes during these years is presented below. Fokker 100 Viking Air DHC -7 (LSTC) Hawker Beechcraft -750, 800XP, 850XP, 900XP Embraer EMB 190 Viking Air DHC -7 (LSTC) Embraer Legacy 600 and EMB – 135/145 Embraer EMB 190 A A A A A I Embraer Legacy 600 and EMB – 135/145 A Balance January 1 Balance January 1 Interest accretion Interest accretion Repayment Repayment Balance January 1 Balance December 31 Balance December 31 Interest accretion Less current portion Less current portion Repayment Non-current portion Non-current portion Balance December 31 Less current portion Non-current portion Balance January 1 Repayment Balance December 31 Balance January 1 Balance January 1 Repayment Repayment Balance December 31 Balance December 31 2015 2015 $ $ 899,600 899,600 2015 163,369 163,369 $ (78,462) (78,462) 899,600 984,507 163,369 984,507 90,234 90,234 (78,462) 894,273 894,273 984,507 90,234 894,273 2015 $ 1,899,278 2015 2015 (78,462) $ $ 1,899,278 1,820,816 1,899,278 (78,462) (78,462) 2014 2014 $ $ 818,828 818,828 2014 149,001 149,001 $ (68,229) (68,229) 818,828 899,600 149,001 899,600 78,462 78,462 (68,229) 821,138 821,138 899,600 78,462 821,138 2014 $ 1,967,507 2014 2014 (68,229) $ $ 1,967,507 1,899,278 1,967,507 (68,229) (68,229) 1,820,816 1,820,816 1,899,278 1,899,278 A summary of the SADI outstanding payable balance as at December 31, 2015 and 2014 and changes during these years is A summary of the SADI outstanding payable balance as at December 31, 2015 and 2014 and changes during these years is presented below. presented below. 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 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 was On December 22, 2014 approval was received to extend the maturity date of the debentures then remaining outstanding from four received to extend the maturity date of the debentures then remaining outstanding from four to six years, now maturing on December 23, 2016. The debenture continues to six years, now maturing on December 23, 2016. The debenture continues to bear interest at a rate of 8% per annum, accrued to bear interest at a rate of 8% per annum, accrued and paid annually in arrears. The debentures were convertible into common shares at a conversion rate of $0.40 per and paid annually in arrears. The debentures were convertible into common shares at a conversion rate of $0.40 per share at any share at any time up to December 23, 2015; on December 15, 2015 the conversion rate was amended to be $0.25 per share at any time up to December 23, 2016 and the time up to December 23, 2015; on December 15, 2015 the conversion rate was amended to be $0.25 per share at any time up to warrant exercise price was amended to $0.20. The debentures carry a face value after conversions of $3,039,000 at April 5, 2016. December 23, 2016 and the warrant exercise price was amended to $0.20. The debentures carry a face value after conversions of $3,039,000 at April 5, 2016. FLYHT did not enter into any new loan or lease agreements in 2015. Minimum lease payments are as follows. FLYHT did not enter into any new loan or lease agreements in 2015. Minimum lease payments are as follows. Year 2016 2017 Total Total $ 29,818 15,795 45,613 Customer Deposits 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, FLYHT’s revenue recognition for AFIRS sales and Parts sales occurs in a series of steps. The process begins with the receipt of installation and finally customer usage of the AFIRS Solution. customer deposits, followed by shipment, installation and finally customer usage of the AFIRS Solution. Customers are frequently required to pay for AFIRS units and installation kits prior to the planned shipment date. This prepayment Customers are frequently required to pay for AFIRS units and installation kits prior to the planned shipment date. This prepayment is recorded as a customer deposit, is recorded as a customer deposit, which is recognized as an accrued liability upon receipt. When the AFIRS unit and installation which is recognized as an accrued liability upon receipt. When the AFIRS unit and installation kit are shipped, the customer deposit is reclassified to unearned revenue, kit are shipped, the customer deposit is reclassified to unearned revenue, where it will remain until the AFIRS Solution has been FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 11- where it will remain until the AFIRS Solution has been installed and is fully functional, at which point the unearned revenue is recognized as AFIRS sales revenue. installed and is fully functional, at which point the unearned revenue is recognized as AFIRS sales revenue. When customers order spare parts or Underfloor Stowage Units and a prepayment is required, it is also recorded as a customer deposit. The Parts sales revenue is When customers order spare parts or Underfloor Stowage Units and a prepayment is required, it is also recorded as a customer deposit. The Parts sales revenue is recognized when the ordered part or unit is shipped. recognized when the ordered part or unit is shipped. 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 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 deposits are nonrefundable, and are included on the Statement of Financial Position (“SFP”) in trade payables and accrued liabilities. (“SFP”) in trade payables and accrued liabilities. The chart below outlines the movement in the Company’s customer deposits throughout the periods ended December 31, 2015 and 2014. Payment was received for 11 The chart below outlines the movement in the Company’s customer deposits throughout the periods ended December 31, 2015 installation kits in the fourth quarter of 2015 compared to 9 received in the fourth quarter of 2014, bringing 2015 year-to-date (“YTD”) total payments for installation kits and 2014. Payment was received for 11 installation kits in the fourth quarter of 2015 compared to 9 received in the fourth quarter of to 36, compared to a total of 57 in 2014. 2014, bringing 2015 year-to-date (“YTD”) total payments for installation kits to 36, compared to a total of 57 in 2014. Opening balance Payments received Moved to unearned revenue Q4 2015 $ 524,325 1,229,085 (732,735) Q4 2014 $ 1,070,854 744,042 (1,024,491) Variance $ (546,529) 485,043 291,756 YTD 2015 $ 790,405 2,828,055 (2,597,785) YTD 2014 $ 551,227 2,967,089 (2,727,911) Variance $ 239,178 (139,034) 130,126 Balance, December 31 1,020,675 790,405 230,270 1,020,675 790,405 230,270 Unearned Revenue 33 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 The chart below outlines the movement in the Company’s unearned revenue throughout the periods ended December 31, 2015 and 2014. Revenue was recognized for 28 installation kits in 2015’s fourth quarter compared to 12 in the fourth quarter of 2014. YTD, revenue has been recognized for 58 installation kits in 2015, as compared to 44 in 2014. In 2015, 65.9% of the unearned revenue balance at December 31, 2014 was recognized as earned revenue (2014: 57.1%). Voice and data services prepaid 19,033 15,960 3,073 19,033 92,084 (73,051) Q4 2015 Q4 2014 Variance YTD 2015 YTD 2014 Variance $ $ $ $ $ $ 1,922,504 1,272,206 650,298 1,675,746 1,103,834 571,912 732,735 1,024,491 (291,756) 2,597,785 2,727,911 (130,126) (1,524,940) (614,411) (910,529) (3,131,261) (2,146,871) (984,390) (3,991) (22,500) 18,509 (15,962) (101,212) 85,250 1,145,341 1,675,746 (530,405) 1,145,341 1,675,746 (530,405) Opening balance AFIRS sales shipped, not accepted AFIRS sales revenue recognized Voice and data services revenue recognized Balance, December 31 Comprehensive Income Revenue In 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 provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales and related 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 accepted the system, the deferred amount is recognized as AFIRS sales revenue and the work in progress as cost of sales. Parts sales include the sale of spare AFIRS units, spare installation parts, modems with related manufacturing license fee, and Underfloor Stowage Units. Services revenue includes technical services, repairs and expertise the Company offers including the installation of operations control centres. Revenue sources Q4 2015 Q4 2014 Variance YTD 2015 YTD 2014 Variance $ $ $ $ $ $ Voice and data services 1,067,894 915,602 152,292 3,986,813 3,657,300 329,513 AFIRS sales 1,574,559 619,776 954,783 3,372,421 2,054,251 1,318,170 12- Customers are frequently required to pay for AFIRS units and installation kits prior to the planned shipment date. This prepayment Customers are frequently required to pay for AFIRS units and 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. When the AFIRS unit and installation is recorded as a customer deposit, which is recognized as an accrued liability upon receipt. When the AFIRS unit and installation kit are shipped, the customer deposit is reclassified to unearned revenue, where it will remain until the AFIRS Solution has been kit are shipped, the customer deposit is reclassified to unearned revenue, where it will remain until the AFIRS Solution has been installed and is fully functional, at which point the unearned revenue is recognized as AFIRS sales revenue. installed and is fully functional, at which point the unearned revenue is recognized as AFIRS sales revenue. When customers order spare parts or Underfloor Stowage Units and a prepayment is required, it is also recorded as a customer When customers order spare parts or Underfloor Stowage Units and a prepayment is required, it is also recorded as a customer deposit. The Parts sales revenue is recognized when the ordered part or unit is shipped. deposit. The Parts sales revenue is recognized when the ordered part or unit is shipped. Customer deposits are amounts received for AFIRS sales and parts that have not yet been shipped to the customer, and services 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 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. (“SFP”) in trade payables and accrued liabilities. The chart below outlines the movement in the Company’s customer deposits throughout the periods ended December 31, 2015 The chart below outlines the movement in the Company’s customer deposits throughout the periods ended December 31, 2015 and 2014. Payment was received for 11 installation kits in the fourth quarter of 2015 compared to 9 received in the fourth quarter of and 2014. Payment was received for 11 installation kits in the fourth quarter of 2015 compared to 9 received in the fourth quarter of 2014, bringing 2015 year-to-date (“YTD”) total payments for installation kits to 36, compared to a total of 57 in 2014. 2014, bringing 2015 year-to-date (“YTD”) total payments for installation kits to 36, compared to a total of 57 in 2014. Opening balance Opening balance Payments received Payments received Moved to unearned revenue Moved to unearned revenue Balance, December 31 Balance, December 31 Q4 2015 Q4 2015 $ $ 524,325 524,325 1,229,085 1,229,085 (732,735) (732,735) 1,020,675 1,020,675 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 YTD 2015 YTD 2015 YTD 2014 YTD 2014 Variance Variance $ $ (546,529) (546,529) 485,043 485,043 291,756 291,756 230,270 230,270 $ $ 790,405 790,405 2,828,055 2,828,055 (2,597,785) (2,597,785) 1,020,675 1,020,675 $ $ 551,227 551,227 2,967,089 2,967,089 (2,727,911) (2,727,911) 790,405 790,405 $ $ 239,178 239,178 (139,034) (139,034) 130,126 130,126 230,270 230,270 Unearned Revenue Unearned Revenue Unearned Revenue The chart below outlines the movement in the Company’s unearned revenue throughout the periods ended December 31, 2015 The chart below outlines the movement in the Company’s unearned revenue throughout the periods ended December 31, 2015 and 2014. Revenue was recognized for 28 installation kits in 2015’s fourth quarter compared to 12 in the fourth quarter of 2014. The chart below outlines the movement in the Company’s unearned revenue throughout the periods ended December 31, 2015 and 2014. Revenue was recognized for 28 and 2014. Revenue was recognized for 28 installation kits in 2015’s fourth quarter compared to 12 in the fourth quarter of 2014. YTD, revenue has been recognized for 58 installation kits in 2015, as compared to 44 in 2014. In 2015, 65.9% of the unearned installation kits in 2015’s fourth quarter compared to 12 in the fourth quarter of 2014. YTD, revenue has been recognized for 58 installation kits in 2015, as compared to YTD, revenue has been recognized for 58 installation kits in 2015, as compared to 44 in 2014. In 2015, 65.9% of the unearned revenue balance at December 31, 2014 was recognized as earned revenue (2014: 57.1%). revenue balance at December 31, 2014 was recognized as earned revenue (2014: 57.1%). 44 in 2014. In 2015, 65.9% of the unearned revenue balance at December 31, 2014 was recognized as earned revenue (2014: 57.1%). Q4 2015 Q4 2015 $ $ 1,922,504 1,922,504 732,735 732,735 19,033 19,033 (1,524,940) (1,524,940) Q4 2014 Q4 2014 $ $ 1,272,206 1,272,206 1,024,491 1,024,491 15,960 15,960 (614,411) (614,411) Variance Variance $ $ 650,298 650,298 (291,756) (291,756) 3,073 3,073 (910,529) (910,529) YTD 2015 YTD 2015 $ $ 1,675,746 1,675,746 2,597,785 2,597,785 19,033 19,033 (3,131,261) (3,131,261) 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) (3,991) (3,991) (22,500) (22,500) 18,509 18,509 (15,962) (15,962) (101,212) (101,212) 1,145,341 1,145,341 1,675,746 1,675,746 (530,405) (530,405) 1,145,341 1,145,341 1,675,746 1,675,746 Variance Variance $ $ 571,912 571,912 (130,126) (130,126) (73,051) (73,051) (984,390) (984,390) 85,250 85,250 (530,405) (530,405) Opening balance Opening balance AFIRS sales shipped, not AFIRS sales shipped, not accepted accepted Voice and data services prepaid Voice and data services prepaid AFIRS sales revenue AFIRS sales revenue recognized recognized Voice and data services Voice and data services revenue recognized revenue recognized Balance, December 31 Balance, December 31 Comprehensive Income Comprehensive Income Comprehensive Income Revenue Revenue Revenue In 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 In the categories listed in the revenue sources chart, Voice and data services is the recurring revenue from customers’ usage of In the categories listed in the revenue sources chart, Voice and data services is the recurring revenue from customers’ usage of 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 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 the income from AFIRS hardware sales and related parts required to install the. Upon shipment, these amounts are deferred as unearned revenue and corresponding provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales and related provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales and related parts required to install the unit along with Dragon hardware sales. Upon shipment, these amounts are deferred as unearned expenses are recorded as work in progress. When the system is fully functional and the customer has accepted the system, the deferred amount is recognized as 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 AFIRS sales revenue and the work in progress as cost of sales. Parts sales include the sale of spare AFIRS units, spare installation parts, modems with related accepted the system, the deferred amount is recognized as AFIRS sales revenue and the work in progress as cost of sales. Parts accepted the system, the deferred amount is recognized as AFIRS sales revenue and the work in progress as cost of sales. Parts manufacturing license fee, and Underfloor Stowage Units. Services revenue includes technical services, repairs and expertise the Company offers including the sales include the sale of spare AFIRS units, spare installation parts, modems with related manufacturing license fee, and sales include the sale of spare AFIRS units, spare installation parts, modems with related manufacturing license fee, and installation of operations control centres. Underfloor Stowage Units. Services revenue includes technical services, repairs and expertise the Company offers including the Underfloor Stowage Units. Services revenue includes technical services, repairs and expertise the Company offers including the installation of operations control centres. installation of operations control centres. Revenue sources Revenue sources Revenue sources Voice and data services Voice and data services AFIRS sales AFIRS sales Parts sales Services Total Q4 2015 Q4 2015 $ $ 1,067,894 1,067,894 1,574,559 1,574,559 1,123,803 Q4 2014 Q4 2014 $ $ 915,602 915,602 619,776 619,776 455,297 Variance Variance $ $ 152,292 152,292 954,783 954,783 668,506 YTD 2015 YTD 2015 $ $ 3,986,813 3,986,813 3,372,421 3,372,421 2,932,100 YTD 2014 YTD 2014 $ $ 3,657,300 3,657,300 2,054,251 2,054,251 718,567 3,011 228,006 (224,995) 165,791 451,910 Variance Variance $ $ 329,513 329,513 1,318,170 1,318,170 2,213,533 12- 12- (286,119) 3,769,267 2,218,681 1,550,586 10,457,125 6,882,028 3,575,097 Overall, total revenue increased 51.9% from $6,882,028 in 2014 to $10,457,125 in 2015. Voice and data services increased by Overall, total revenue increased 51.9% from $6,882,028 in 2014 to $10,457,125 in 2015. Voice and data services increased by 9.0%, Parts sales increased by 308.0%, 9.0%, Parts sales increased by 308.0%, AFIRS sales increased by 64.2%, while Services revenue decreased by 63.3%. Revenue AFIRS sales increased by 64.2%, while Services revenue decreased by 63.3%. Revenue in the first, third and fourth quarters were the three highest quarters in FLYHT in the first, third and fourth quarters were the three highest quarters in FLYHT history. history. Voice and data services increased compared to last year, due to a higher number of aircraft producing recurring revenue together Voice and data services increased compared to last year, due to a higher number of aircraft producing recurring revenue together with the higher value of the USD. with the higher value of the USD. Recurring revenue accounted for 28.3% of revenue in Q4 2015 (Q4 2014: 41.3%), and 38.1% YTD 2015 (YTD 2014: 53.1%). Recurring revenue from FLYHT’s existing client base is expected to continue to expand throughout Recurring revenue accounted for 28.3% of revenue in Q4 2015 (Q4 2014: 41.3%), and 38.1% YTD 2015 (YTD 2014: 53.1%). Recurring revenue from FLYHT’s existing client 2016 and future years. base is expected to continue to expand throughout 2016 and future years. AFIRS sales increased in 2015 as compared to 2014 due to an increased number of installation kits meeting the requirements for AFIRS sales increased in 2015 as compared to 2014 due to an increased number of installation kits meeting the requirements for revenue recognition. YTD, revenue has revenue recognition. YTD, revenue has been recognized on 58 installation kits, compared to 44 in 2014. Revenue was recognized been recognized on 58 installation kits, compared to 44 in 2014. Revenue was recognized on 28 installation kits in Q4 2015 compared to 12 in Q4 2014. on 28 installation kits in Q4 2015 compared to 12 in Q4 2014. Parts sales increased both in the quarter and YTD in 2015 from 2014 as the result of large orders of modems with related license Parts sales increased both in the quarter and YTD in 2015 from 2014 as the result of large orders of modems with related license fees throughout 2015. fees throughout 2015. Services revenue decreased in the quarter and YTD in 2015 compared to 2014 due to a lower number of technical services provided to customers throughout 2015. In Services revenue decreased in the quarter and YTD in 2015 compared to 2014 due to a lower number of technical services provided to customers throughout 2015. In 2014 higher revenue was earned on engineering documentation required for our 2014 higher revenue was earned on engineering documentation required for our Chinese customers, which was not required in 2015. Chinese customers, which was not required in 2015. Revenue sources for the last eight quarters were: Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Voice and data services AFIRS sales Parts sales Services 1,067,894 1,100,238 613,229 1,574,559 682,476 1,123,803 123,404 3,011 855,121 434,102 285,459 23,921 963,560 750,531 840,362 15,455 915,602 619,776 455,297 228,006 927,117 609,085 148,198 124,394 893,464 447,632 111,720 52,951 921,116 34 377,758 3,353 46,559 Total 3,769,267 2,519,347 1,598,603 2,569,908 2,218,681 1,808,794 1,505,767 1,348,786 Geographical sources of revenue The following revenue split is based on the geographical location of customers. North America South/Central America Africa/Middle East Europe Australasia Asia Total North America South/Central America Africa/Middle East Europe Australasia Asia Total YTD 2015 YTD 2014 Q4 2015 $ 1,979,070 38,640 586,570 251,382 215,805 697,800 3,769,267 Q4 2015 % 52.5 1.0 15.6 6.7 5.7 18.5 100.0 Q4 2014 $ 1,215,724 67,265 369,309 54,078 143,922 368,383 2,218,681 Q4 2014 % 54.9 3.0 16.6 2.4 6.5 16.6 100.0 $ 5,754,913 266,203 1,432,230 542,037 694,992 1,766,750 10,457,125 YTD 2015 % 55.1 2.5 13.7 5.2 6.6 16.9 100.0 $ 3,321,408 304,449 1,194,644 317,112 658,366 1,086,049 6,882,028 YTD 2014 % 48.2 4.4 17.4 4.6 9.6 15.8 100.0 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 personnel while performing on-site installation support. Installations on aircraft are performed by third parties at the customer’s 13- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Parts sales Services Total 1,123,803 455,297 668,506 2,932,100 718,567 2,213,533 3,011 228,006 (224,995) 165,791 451,910 (286,119) 3,769,267 2,218,681 1,550,586 10,457,125 6,882,028 3,575,097 Overall, total revenue increased 51.9% from $6,882,028 in 2014 to $10,457,125 in 2015. Voice and data services increased by 9.0%, Parts sales increased by 308.0%, AFIRS sales increased by 64.2%, while Services revenue decreased by 63.3%. Revenue in the first, third and fourth quarters were the three highest quarters in FLYHT history. Voice and data services increased compared to last year, due to a higher number of aircraft producing recurring revenue together with the higher value of the USD. Recurring revenue accounted for 28.3% of revenue in Q4 2015 (Q4 2014: 41.3%), and 38.1% YTD 2015 (YTD 2014: 53.1%). Recurring revenue from FLYHT’s existing client base is expected to continue to expand throughout 2016 and future years. AFIRS sales increased in 2015 as compared to 2014 due to an increased number of installation kits meeting the requirements for revenue recognition. YTD, revenue has been recognized on 58 installation kits, compared to 44 in 2014. Revenue was recognized on 28 installation kits in Q4 2015 compared to 12 in Q4 2014. Parts sales increased both in the quarter and YTD in 2015 from 2014 as the result of large orders of modems with related license fees throughout 2015. Services revenue decreased in the quarter and YTD in 2015 compared to 2014 due to a lower number of technical services provided to customers throughout 2015. In 2014 higher revenue was earned on engineering documentation required for our Chinese customers, which was not required in 2015. Revenue sources for the last eight quarters were: Revenue sources for the last eight quarters were: Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q2 2015 Q2 2015 Q1 2015 Q1 2015 Q4 2014 Q4 2014 Q3 2014 Q3 2014 Q2 2014 Q2 2014 Q1 2014 Q1 2014 Voice and data services Voice and data services AFIRS sales AFIRS sales Parts sales Parts sales Services Services Total Total 1,067,894 1,100,238 613,229 1,574,559 682,476 1,123,803 123,404 3,011 1,067,894 1,100,238 963,560 613,229 1,574,559 750,531 1,123,803 682,476 840,362 123,404 3,011 15,455 3,769,267 2,519,347 1,598,603 2,569,908 893,464 447,632 111,720 52,951 3,769,267 2,519,347 1,598,603 2,569,908 2,218,681 1,808,794 1,505,767 921,116 377,758 3,353 46,559 2,218,681 1,808,794 1,505,767 1,348,786 927,117 609,085 148,198 124,394 915,602 619,776 455,297 228,006 855,121 434,102 285,459 23,921 963,560 750,531 840,362 15,455 893,464 447,632 111,720 52,951 927,117 609,085 148,198 124,394 915,602 619,776 455,297 228,006 855,121 434,102 285,459 23,921 921,116 377,758 3,353 46,559 1,348,786 Geographical sources of revenue Geographical sources of revenue Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 73.3 The following revenue split is based on the geographical location of customers. The following revenue split is based on the geographical location of customers. 26.7 Gross Margin % Cost of Sales % 64.4 35.6 75.2 24.8 61.7 38.3 64.8 35.2 63.7 36.3 59.8 40.2 67.4 32.6 Distribution Expenses (Recovery) Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. North America South/Central America Africa/Middle East Europe Australasia Major Category Asia Total Salaries and benefits Share based compensation Contract labour Office North America Travel South/Central America Equipment and maintenance Africa/Middle East Depreciation Europe Australasia Marketing Asia Other Total Total Q4 2015 $ 1,979,070 38,640 586,570 251,382 215,805 Q4 2014 697,800 $ 3,769,267 364,083 10,470 Q4 2015 97,574 % 66,654 52.5 84,291 1.0 5,764 15.6 6.7 1,733 5.7 12,306 18.5 347,775 100.0 990,650 Q4 2014 $ 1,215,724 67,265 369,309 54,078 143,922 368,383 2,218,681 Variance $ 234,842 (11,862) 107,020 45,505 59,919 (10,816) 7,652 9,308 (347,775) YTD 2015 $ 1,983,579 91,658 829,298 328,855 472,078 40,216 29,840 100,169 101,940 Q4 2014 % 54.9 3.0 16.6 2.4 6.5 16.6 100.0 93,793 3,977,633 YTD 2015 $ 5,754,913 266,203 1,432,230 542,037 694,992 YTD 2014 1,766,750 $ 10,457,125 1,652,340 84,971 YTD 2015 354,320 % 275,427 55.1 449,215 2.5 22,180 13.7 5.2 26,910 6.6 55,610 16.9 472,018 100.0 3,392,991 YTD 2014 $ 3,321,408 304,449 1,194,644 317,112 658,366 1,086,049 6,882,028 Variance $ 331,239 6,687 474,978 53,428 22,863 18,036 2,930 44,559 (370,078) YTD 2014 % 48.2 4.4 17.4 4.6 9.6 15.8 100.0 584,642 Q4 2015 $ 598,925 (1,392) 204,594 112,159 144,210 (5,052) 9,385 21,614 - 1,084,443 Gross Profit and Cost of Sales Gross Profit and Cost of Sales Q4 2015 Q4 2015 Q3 2015 Q4 2014 Q2 2014 Q3 2015 Q2 2015 Q1 2015 Q3 2014 Variance $ 64.4 35.6 Gross margin for the last eight quarters was: 927,117 609,085 148,198 124,394 893,464 447,632 111,720 52,951 Administration Expenses 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 FLYHT’s cost of sales includes the direct costs associated with specific revenue types, including the AFIRS unit, installation kits, as associated shipping expenses and travel expenses for the Company’s engineering personnel while performing on-site installation support. Installations on aircraft are training and installation support, as well as associated shipping expenses and travel expenses for the Company’s engineering Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of services or Q1 2014 performed by third parties at the customer’s expense. Cost of sales as a percentage of revenue in the fourth quarter of 2015 was 35.6% compared to 38.3% in 2014’s personnel while performing on-site installation support. Installations on aircraft are performed by third parties at the customer’s sales. 1,067,894 1,100,238 Voice and data services 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 to 30.7% in 2015. The decrease was 1,574,559 613,229 AFIRS sales due to a difference in the mix of revenue sources, as Voice and data services, Parts sales, and Services have higher margins than AFIRS sales. Gross margin will fluctuate 13- 682,476 1,123,803 Parts sales quarter over quarter depending on customer needs and revenue mix. Major Category Q4 2015 123,404 3,011 Services $ Total Salaries and benefits 1,058,602 Share based compensation 37,099 Contract labour 52,024 Office 61,836 Gross Margin % Legal fees 91,212 Cost of Sales % Audit and accounting 24,000 148,810 Investor relations Brokerage, stock exchange, and transfer agent fees Travel Equipment and maintenance Depreciation Major Category Other 855,121 434,102 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 285,459 Q4 2014 23,921 $ 352,434 2,022 Q2 2015 60,860 62,895 42,787 31,500 85,807 921,116 915,602 377,758 619,776 3,353 455,297 YTD 2015 YTD 2014 46,559 228,006 $ $ 2,218,681 1,808,794 1,505,767 1,348,786 1,972,362 1,468,711 417,278 276,008 245,678 153,594 257,614 276,983 61.7 160,360 151,566 38.3 141,438 85,840 372,423 399,619 963,560 750,531 840,362 Variance 15,455 $ 3,769,267 2,519,347 1,598,603 2,569,908 706,168 35,077 Q1 2015 (8,836) (1,059) 48,425 (7,500) 63,003 54,140 Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. 46,270 760 Q4 2014 30,458 $ 780,039 364,083 10,470 97,574 66,654 84,291 5,764 1,733 Total Salaries and benefits Share based compensation Contract labour Office Travel Equipment and maintenance Depreciation 6,683 (34,317) 1,544 Variance (8,926) $ 793,757 234,842 (11,862) 107,020 45,505 59,919 (10,816) 7,652 60,823 11,953 2,304 Q4 2015 21,532 $ 1,573,796 598,925 (1,392) 204,594 112,159 144,210 (5,052) 9,385 215,660 98,438 15,217 YTD 2014 71,060 $ 3,548,518 1,652,340 84,971 354,320 275,427 449,215 22,180 26,910 211,307 64,138 10,098 YTD 2015 26,469 $ 3,676,953 1,983,579 91,658 829,298 328,855 472,078 40,216 29,840 Variance $ 128,435 331,239 6,687 474,978 53,428 22,863 18,036 2,930 503,651 (141,270) (92,084) (19,369) 8,794 (55,598) 27,196 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Distribution Expenses (Recovery) (4,353) (34,300) (5,119) (44,591) 75.2 24.8 73.3 26.7 67.4 32.6 64.8 35.2 59.8 40.2 63.7 36.3 (14,522) (6,505) Q3 2014 Q1 2014 Q4 2014 Q2 2014 74,066 10,106 59,544 3,601 35 Marketing Other Total 21,614 12,306 9,308 100,169 55,610 44,559 - 347,775 (347,775) 101,940 472,018 (370,078) 1,084,443 990,650 93,793 3,977,633 3,392,991 584,642 Administration Expenses sales. Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of services or Major Category Q4 2015 Q4 2014 Variance YTD 2015 YTD 2014 Variance $ $ $ $ $ $ 1,058,602 352,434 706,168 1,972,362 1,468,711 503,651 Salaries and benefits Share based compensation Contract labour Office Legal fees Audit and accounting Investor relations Brokerage, stock exchange, and transfer agent fees Equipment and maintenance Depreciation Travel Other Total 37,099 52,024 61,836 91,212 24,000 148,810 3,601 60,823 11,953 2,304 21,532 2,022 60,860 62,895 42,787 31,500 85,807 10,106 54,140 46,270 760 30,458 35,077 (8,836) (1,059) 48,425 (7,500) 63,003 (6,505) 6,683 (34,317) 1,544 (8,926) 276,008 153,594 257,614 160,360 85,840 399,619 59,544 64,138 10,098 26,469 417,278 245,678 276,983 151,566 141,438 372,423 (141,270) (92,084) (19,369) 8,794 (55,598) 27,196 74,066 (14,522) 98,438 15,217 71,060 (34,300) (5,119) (44,591) 211,307 215,660 (4,353) 1,573,796 780,039 793,757 3,676,953 3,548,518 128,435 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Voice and data services 1,067,894 1,100,238 855,121 963,560 915,602 927,117 893,464 921,116 AFIRS sales Parts sales Services Total 1,574,559 613,229 434,102 750,531 619,776 609,085 447,632 377,758 1,123,803 682,476 285,459 840,362 455,297 148,198 111,720 3,353 3,011 123,404 23,921 15,455 228,006 124,394 52,951 46,559 3,769,267 2,519,347 1,598,603 2,569,908 2,218,681 1,808,794 1,505,767 1,348,786 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Gross Margin % Cost of Sales % 64.4 35.6 73.3 26.7 64.8 35.2 75.2 24.8 61.7 38.3 63.7 36.3 59.8 40.2 67.4 32.6 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 915,602 Distribution Expenses (Recovery) Distribution Expenses (Recovery) 619,776 Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. 455,297 228,006 893,464 447,632 111,720 Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. 52,951 963,560 750,531 840,362 15,455 3,769,267 2,519,347 1,598,603 2,569,908 Voice and data services AFIRS sales Parts sales Services Total Major Category 1,067,894 1,100,238 613,229 1,574,559 682,476 1,123,803 123,404 3,011 855,121 434,102 285,459 23,921 Q3 2014 927,117 609,085 148,198 124,394 921,116 377,758 3,353 46,559 2,218,681 1,808,794 1,505,767 1,348,786 YTD 2015 YTD 2014 $ $ 1,983,579 1,652,340 Q4 2014 91,658 84,971 61.7 829,298 354,320 38.3 275,427 328,855 449,215 472,078 22,180 40,216 26,910 29,840 55,610 100,169 472,018 101,940 Variance $ 331,239 6,687 474,978 53,428 22,863 18,036 2,930 44,559 (370,078) 67.4 32.6 59.8 40.2 63.7 36.3 Q1 2014 Q2 2014 Salaries and benefits Share based compensation Gross Margin % Contract labour Cost of Sales % Office Travel Equipment and maintenance Depreciation Marketing Other Q4 2015 Q3 2015 Q2 2015 64.4 35.6 73.3 26.7 64.8 35.2 Q4 2015 $ 598,925 (1,392) 204,594 112,159 144,210 (5,052) 9,385 21,614 - Q4 2014 $ 364,083 10,470 97,574 66,654 84,291 5,764 1,733 12,306 347,775 Q1 2015 75.2 24.8 Variance $ 234,842 (11,862) 107,020 45,505 59,919 (10,816) 7,652 9,308 (347,775) Distribution Expenses (Recovery) Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of services or sales. Contract labour increased compared with the same periods last year, consequent on an increase in resources focused on customer deliverables, increased sales representation throughout the later portion of 2014 into 2015, together with recruitment fees paid to seek additional sales staff. Marketing expense has increased YTD mainly due to the creation in Q1 2015 of a video communicating the FLYHTStream product together with a presence at an industry tradeshow in China in Q2 2015. Office expenses increased in 2015 from 2014 mainly as the result of an increased rent allocation combined with increased participation in an industry group. Travel expenses increased in 2015 versus 2014 largely as the result of increased travel associated with sales and customer satisfaction activities, particularly in the fourth quarter of 2015. Travel expenses vary significantly depending on the location of customer contracts and regions served. Total Major Category Other expenses decreases in both the quarter and YTD are due to a large bad debt reserve taken in Q4 2014 that was not repeated in 2015. Administration Expenses 990,650 Q4 2014 $ 364,083 10,470 97,574 66,654 84,291 5,764 1,733 Q4 2014 12,306 $ 347,775 352,434 990,650 2,022 60,860 62,895 42,787 31,500 85,807 3,977,633 YTD 2015 $ 1,983,579 91,658 829,298 328,855 472,078 40,216 29,840 YTD 2015 100,169 $ 101,940 1,972,362 3,977,633 276,008 153,594 257,614 160,360 85,840 399,619 1,084,443 Q4 2015 $ 598,925 (1,392) 204,594 112,159 144,210 (5,052) 9,385 Q4 2015 21,614 $ - 1,058,602 1,084,443 37,099 52,024 61,836 91,212 24,000 148,810 93,793 Variance $ 234,842 (11,862) 107,020 45,505 59,919 (10,816) 7,652 Variance 9,308 $ (347,775) 706,168 93,793 35,077 (8,836) (1,059) 48,425 (7,500) 63,003 3,392,991 YTD 2014 $ Salaries and benefits 1,652,340 Distribution expenses increased compared to 2014 due mainly to higher people costs offset by the decrease required in FLYHT’s bad debt reserve. Share based compensation 84,971 Administration Expenses Salaries and benefits increased in 2015 as compared to 2014 mainly due to an increase in sales and customer satisfaction staff. Contract labour 354,320 Office 275,427 Travel 449,215 Equipment and maintenance 22,180 Depreciation 26,910 Marketing Major Category YTD 2014 55,610 $ Other 472,018 Equipment expenses increased YTD due to the 2015 purchase of equipment used to demonstrate FLYHT’s services to prospective customers. Salaries and benefits 1,468,711 Total 3,392,991 Share based compensation 417,278 Contract labour 245,678 Office 276,983 Legal fees 151,566 Audit and accounting 141,438 372,423 Investor relations Brokerage, stock exchange, and transfer agent fees Travel Equipment and maintenance Major Category Depreciation Salaries and benefits Other Share based compensation Total Contract labour Office Legal fees Audit and accounting Investor relations Brokerage, stock exchange, and transfer agent fees Travel Equipment and maintenance Depreciation Other 60,823 11,953 Q4 2015 $ 2,304 1,058,602 21,532 37,099 1,573,796 52,024 61,836 91,212 24,000 148,810 54,140 46,270 Q4 2014 $ 760 352,434 30,458 2,022 780,039 60,860 62,895 42,787 31,500 85,807 215,660 98,438 YTD 2014 $ 15,217 1,468,711 71,060 417,278 3,548,518 245,678 276,983 151,566 141,438 372,423 211,307 64,138 YTD 2015 $ 10,098 1,972,362 26,469 276,008 3,676,953 153,594 257,614 160,360 85,840 399,619 6,683 (34,317) Variance $ 1,544 706,168 (8,926) 35,077 793,757 (8,836) (1,059) 48,425 (7,500) 63,003 6,683 (34,317) 1,544 (8,926) 215,660 98,438 15,217 71,060 211,307 64,138 10,098 26,469 54,140 46,270 760 30,458 60,823 11,953 2,304 21,532 (6,505) 10,106 74,066 10,106 59,544 3,601 584,642 Variance $ 331,239 6,687 474,978 53,428 22,863 18,036 2,930 Variance 44,559 $ (370,078) 503,651 584,642 (141,270) (92,084) (19,369) 8,794 (55,598) 27,196 Variance $ (4,353) (34,300) (5,119) 503,651 (44,591) (141,270) 128,435 (92,084) (19,369) 8,794 (55,598) 27,196 (14,522) (4,353) (34,300) (5,119) (44,591) Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of services or Administration Expenses sales. Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of services or sales. (14,522) (6,505) 74,066 59,544 3,601 Total 1,573,796 780,039 793,757 3,676,953 3,548,518 128,435 36 Administration expenses were higher in 2015 due mainly to people costs for staff retirement and change in key management positions, partially offset by cost savings in several other expense categories. Salaries and benefits were higher in 2015 compared with 2014, mainly as the result of separation payments for our retiring CEO together with variable compensation as a result of the change in key management positions in Q4 2015 which exceeded the cost of separation included in Q4 2014 for our retiring CFO. Share based compensation differences in the quarter and YTD were the result of timing and volume differences in share options awarded throughout 2014 and into 2015. Contract labour decreased compared to 2014 as a result of recruitment fees paid in 2014, along with expenses resulting from increased involvement throughout 2014 in industry groups following the disappearance of Malaysian Airlines flight MH370, which did not recur in 2015. Office expenses decreased throughout 2015 compared to 2014 mainly as the result of decreased rent with the move to the new office space in Q1 2014 and a change in rent allocation, together with decreased communication costs. Legal fees increased in the quarter due to employee related services, including international employment law, and treasury matters. Audit and accounting decreases are mainly due to service adjustments. Investor relations expense increased due to treasury matters and including costs of the OTCQX listing for the full year in 2015 (listing obtained in June 2014). Brokerage, stock exchange, and transfer agent fees decreases are the result of a larger number of warrant and option exercises throughout 2014 as compared to 2015. Equipment and maintenance decreases were the result of one-time purchases of equipment required for the new office premises in 2014. Other decreases were related to the office move in 2014. Research, Development and Certification Engineering Expenses (Recovery) Research, Development and Certification Engineering Expenses (Recovery) Major Category Salaries and benefits Share based compensation Contract labour Office Travel Equipment and maintenance Components SRED credit Depreciation Other SNC litigation settlement Total Q4 2015 $ 474,014 (1,635) 161,206 30,212 6,902 20,364 (9,541) - 3,310 4,363 - 689,195 Q4 2014 $ 427,690 - 172,201 87,376 11,226 39,409 35,708 (324) (561) - - 772,725 Variance $ 46,324 YTD 2014 YTD 2015 $ $ 1,874,482 1,964,388 86,341 (1,635) 75,011 538,874 595,821 288,686 197,618 37,882 52,143 56,555 65,038 52,308 27,877 (241,677) (216,708) 23,195 16,936 12,060 24,428 - (1,950,957) 777,749 2,802,552 (10,995) (57,164) (4,324) (19,045) (45,249) 324 3,871 4,363 - (83,530) Variance $ 89,906 (11,330) 56,947 (91,068) 14,261 8,483 (24,431) 24,969 (6,259) 12,368 1,950,957 2,024,803 Research and Development expense, before the favorable impact in 2014 of the recovery of a provision on settlement of the SNC Research and Development expense, before the favorable impact in 2014 of the recovery of a provision on settlement of the SNC litigation, was higher in 2015 due mainly litigation, was higher in 2015 due mainly to higher people costs, legal and patent fees, and components required for research and to higher people costs, legal and patent fees, and components required for research and development activities. development activities. Salaries and benefits expended in this category increased from 2014 to 2015, partially due to the time committed to increasing revenue sources for ground based server applications, and enhancements made to FLYHTStream in Q1 2015. People costs will fluctuate with customer and industry demands for new products and enhancements of existing products, as well as differences in allocations between Distribution cost centres and R&D. Contract labour has increased YTD mainly due to certification engineering on a time-sensitive STC in Q1 2015 together with increased software development needs in Q2 2015. Office expenses decreased as a result of decreased legal fees, as resources similar to those required in 2014 to finalize the settlement with Sierra Nevada Corporation (“SNC”) were not required in 2015. Legal fees required to establish and defend patents also decreased from 2014 to 2015. Travel expenses increased due to increased hardware testing and test flights. Cost of travel varies significantly depending on the location of customers and regions served. 37 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Equipment and maintenance expense decreases in Q4 2015 offset increases earlier in 2015 due to timing on additional software and associated licensing fees required for research and development activities. Components requirements were lower in 2015 than in 2014 as a lower number of expensed parts were required for use in development and testing activities. 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 2015 compared to 2014. Annual claims will fluctuate based on differences in R&D activities and associated costs. Other expenses increased due to differences in employee relocation costs between 2014 and 2015. 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. 16- Salaries and benefits expended in this category increased from 2014 to 2015, partially due to the time committed to increasing revenue sources for ground based server applications, and enhancements made to FLYHTStream in Q1 2015. People costs will fluctuate with customer and industry demands for new products and enhancements of existing products, as well as differences in allocations between Distribution cost centres and R&D. Contract labour has increased YTD mainly due to certification engineering on a time-sensitive STC in Q1 2015 together with increased software development needs in Q2 2015. Office expenses decreased as a result of decreased legal fees, as resources similar to those required in 2014 to finalize the settlement with Sierra Nevada Corporation (“SNC”) were not required in 2015. Legal fees required to establish and defend patents also decreased from 2014 to 2015. Travel expenses increased due to increased hardware testing and test flights. Cost of travel varies significantly depending on the location of customers and regions served. Equipment and maintenance expense decreases in Q4 2015 offset increases earlier in 2015 due to timing on additional software and associated licensing fees required for research and development activities. Components requirements were lower in 2015 than in 2014 as a lower number of expensed parts were required for use in development and testing activities. 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 2015 compared to 2014. Annual claims will fluctuate based on differences in R&D activities and associated costs. Other expenses increased due to differences in employee relocation costs between 2014 and 2015. 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. Net Finance Costs Net Finance Costs Major Category Interest (income) Q4 2015 $ - Q4 2014 $ - Variance $ - YTD 2015 $ (2,128) YTD 2014 $ (2,000) Variance $ (128) Net foreign exchange (gain) loss 25,721 (137,326) 163,047 (237,247) (154,265) (82,982) Bank service charges 6,352 5,353 999 22,699 21,995 704 Interest expense 821 1,088 (267) 3,917 3,885 32 Government grant accretion 42,628 38,928 3,700 163,368 149,001 14,367 Debenture interest and accretion 204,272 199,937 4,335 711,993 784,404 (72,411) Debenture cost amortization 2,691 23,777 (21,086) 10,677 88,530 (77,853) Net finance costs 282,485 131,757 150,728 673,279 891,550 (218,271) 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 Canadian dollar. A weakening of the Canadian dollar has given rise to increased foreign exchange gains on U.S. dollar denominated sale s 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 purchases, in combination with fluctuations in U.S. denominated assets and liabilities. and liabilities. Government grant accretion is the recognition of the effective interest component of the SADI grant. Government grant accretion is the recognition of the effective interest component of the SADI grant. Debenture interest and accretion decreases are due to the conversion of a portion of the debentures issued in December 2010. Debenture interest and accretion decreases are due to the conversion of a portion of the debentures issued in December 2010. Debenture cost amortization decreases occurred as the costs associated with issuing the convertible debenture in 2010 had Debenture cost amortization decreases occurred as the costs associated with issuing the convertible debenture in 2010 had been fully amortized when the debenture been fully amortized when the debenture was extended in December 2015. was extended in December 2015. Net Loss Major Category Net loss Net loss without R&D Q4 2015 $ 1,203,998 Q4 2014 $ 1,305,712 Variance $ (101,714) YTD 2015 $ 3,891,560 YTD 2014 $ 4,278,885 Variance $ (387,325) 514,803 532,986 (18,183) 1,089,008 3,501,136 (2,412,128) The loss for 2015 was $387,325 less than the loss in 2014. If the favorable impact of the onetime recovery of the $1,950,957 provision on settlement of the SNC litigation is excluded from 2014 results, the improvement in 2015 would be $2,338,282 or 37.5%. Foreign Exchange 38 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 2015, 98.4% of the Company’s gross sales were made in U.S. dollars, compared to 95.5% in 2014. 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. Recent Accounting Pronouncements Other 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 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 Programmes, 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. 17- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Net Finance Costs Major Category Interest (income) Q4 2015 Q4 2014 Variance YTD 2015 YTD 2014 Variance $ $ $ $ $ $ - - - (2,128) (2,000) (128) Net foreign exchange (gain) loss 25,721 (137,326) 163,047 (237,247) (154,265) (82,982) Bank service charges 6,352 5,353 999 22,699 21,995 704 Interest expense 821 1,088 (267) 3,917 3,885 32 Government grant accretion 42,628 38,928 3,700 163,368 149,001 14,367 Debenture interest and accretion 204,272 199,937 4,335 711,993 784,404 (72,411) Debenture cost amortization 2,691 23,777 (21,086) 10,677 88,530 (77,853) Net finance costs 282,485 131,757 150,728 673,279 891,550 (218,271) 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. Debenture interest and accretion decreases are due to the conversion of a portion of the debentures issued in December 2010. Debenture cost amortization decreases occurred as the costs associated with issuing the convertible debenture in 2010 had been fully amortized when the debenture was extended in December 2015. Net Loss Net Loss Major Category Net loss Q4 2015 $ 1,203,998 Q4 2014 $ 1,305,712 Variance $ (101,714) YTD 2015 $ 3,891,560 YTD 2014 $ 4,278,885 Variance $ (387,325) Net loss without R&D 514,803 532,986 (18,183) 1,089,008 3,501,136 (2,412,128) The loss for 2015 was $387,325 less than the loss in 2014. If the favorable impact of the onetime recovery of the $1,950,957 The loss for 2015 was $387,325 less than the loss in 2014. If the favorable impact of the onetime recovery of the $1,950,957 provision on settlement of the SNC litigation provision on settlement of the SNC litigation is excluded from 2014 results, the improvement in 2015 would be $2,338,282 or is excluded from 2014 results, the improvement in 2015 would be $2,338,282 or 37.5%. 37.5%. Foreign Exchange Foreign Exchange 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 All international and a majority of domestic sales of the Company’s products and services are denominated in U.S. dollars. foreign exchange fluctuations. In 2015, 98.4% of the Company’s gross sales were made in U.S. dollars, compared to 95.5% in 2014. The Company expects this to continue Accordingly, the Company is susceptible to foreign exchange fluctuations. In 2015, 98.4% of the Company’s gross sales were 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 made in U.S. dollars, compared to 95.5% in 2014. The Company expects this to continue as the aviation industry conducts the Company also contracts in U.S. dollars for certain services and products related to cost of sales, which creates a natural hedge. 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 Other Recent Accounting Pronouncements 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 Recent Accounting Pronouncements 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 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 Programmes, IFRIC IFRS 9 – Financial Instruments replaces the current multiple classification and measurement models for financial assets and 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving liabilities with a single model that has only two classification categories: amortized cost and fair value (January 1, 2018). 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. IFRS 15 – Revenue from Contracts with Customers replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, 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 that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model (January 1, 2017). 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 IFRS 16 – Leases replaces IAS 17, leases. Under the new standard, more leases may come on-balance sheet for lessees, with the exception of leases with a term FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 not greater than 12 months and leases considered to be of small value (January 1, 2019). 17- The Company has not completed its evaluation of the effect of adopting these standards on its consolidated annual financial statements. 39 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 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 90 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 certain payroll costs and 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. 40 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, 2014 and 2015. Through 2014 and 2015 FLYHT was working to increase certification of the 228 from an ‘E’ to a ‘D’ level certification at the request of customers; the certification was received during Q4 2015 and is expected to 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. Late in 2015 the Dragon was identified as falling outside of FLYHT’s core competency and the Company may look to divest the product line during 2016. The Company’s success will ultimately depend on the success of its products, and future enhancements made to same. Need to consider inserting FLYHTStream/fuel/etc type items 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 a) 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. No similar services were contracted during 2015. b) In the third and fourth quarters of 2015, the Company entered into an agreement with a company with ownership related to an officer of FLYHT. The company supplied consulting services in recruitment and supplied a contract resource to develop tools used to enhance the Company’s ground based software. Included in contract labour for the periods ended December 31: For the three months 2014 $ - 5,621 2015 $ 30,114 30,114 - 5,621 2015 $ - 41,114 41,114 For the year 2014 $ 74,418 - 74,418 (a) (b) Total Included in accounts payable and accrued liabilities as at December 31: (a) (b) Total 2015 $ - 30,114 30,114 2014 $ - - - 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. Contingency Subsequent to year end FLYHT received a claim from a partner totaling $0.8 million USD for past and potential future warranty claims relating to reliability of some active AFIRS units. The claim asserts a design defect has led to the reliability issues. The resolution of the claim is pending review. The result of the claim is currently unknown and will be resolved with the partner. Subsequent event On December 21, 2015 the Company granted a non-exclusive license to use certain of its intellectual property to a technology company for an aggregate license fee of $2.5 million USD, payable in the first quarter of 2016. Payment for this license has been delayed until the second quarter of 2016. 41 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 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, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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 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, 2015 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 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 Professional Accountants April 5, 2016 Calgary, Canada 42 Consolidated Statement of Financial Position December 31, 2015 $ December 31, 2014 $ 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 1,301,955 250,000 898,166 137,861 1,716,313 4,304,295 202,775 34,992 936,805 1,174,572 5,478,867 2,757,707 1,087,197 5,840,418 27,922 4,978 9,718,222 58,144 374,555 15,555 263,596 711,850 10,430,072 53,895,046 222,531 - 8,439,136 (67,507,918) (4,951,205) 5,478,867 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 See accompanying notes to consolidated financial statements. Going concern (note 2d). Contingencies (note 28) On behalf of the board Director – Bill Tempany Director – Paul Takalo 43 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Consolidated Statement of Comprehensive Income (Loss) For the year ended December 31 Revenue (note 18) Cost of sales Gross profit Distribution expenses (note 21) Administration expenses (note 22) Research, development and certification engineering expenses (note 23) Results 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. 2015 $ 10,457,125 3,213,290 7,243,835 3,977,633 3,676,953 2,802,552 (3,213,303) (239,375) 912,654 (673,279) (3,886,582) 4,978 (3,891,560) (3,891,560) (0.02) 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) 54 (4,278,885) (4,278,885) (0.03) 44 Consolidated Statement of Changes in Equity (Deficiency) For the years ended December 31, 2015 and 2014 Share Capital $ Convertible Debenture $ Warrants $ Contributed Surplus $ Deficit $ Total Equity (Deficit) $ Balance at December 31, 2014 Loss for the period 53,496,969 - 220,700 - 163,771 - 7,865,143 - (63,616,358) (3,891,560) (1,869,775) (3,891,560) Total comprehensive loss for the period Contributions by and distributions to owners Issue of common shares Issue of warrants Share-based payment transactions Share options exercised Warrants exercised Warrants expired Total contributions by and distributions to owners - - - - (3,891,560) (3,891,560) 62,000 - - 183,920 152,157 - 1,831 - - - - - - 154,001 - - (43,657) (274,115) (86,378) - 442,676 (56,420) - 274,115 398,077 1,831 (163,771) 573,993 - - - - - - - (22,547) 154,001 442,676 127,500 108,500 - 810,130 Balance at December 31, 2015 53,895,046 222,531 - 8,439,136 (67,507,918) (4,951,205) 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 period 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) (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) See accompanying notes to consolidated financial statements. 45 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Consolidated Statement of Cash Flows For the year ended December 31 Cash flows used in operating activities Loss for the period Depreciation – property plant and equipment Convertible debenture accretion Payment of debenture interest Amortization of debenture issue costs Government grant accretion 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 used in investing activities Acquisitions of property and equipment Interest income Interest received Net cash used in investing activities Cash flows from financing activities Proceeds from issue and exercise of share options and warrants Repayment of borrowings Payment of finance lease liabilities Net cash from financing activities Net (decrease) 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. 2015 $ (3,891,560) 56,873 711,993 (496,633) 10,677 163,368 442,676 65,752 17,969 45,889 605,257 28,577 (530,405) (218,991) 3,917 (3,917) 4,978 - (2,983,580) (42,462) (2,128) 2,128 (42,462) 236,000 (78,462) (25,974) 131,564 (2,894,478) 3,910,962 285,471 1,301,955 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 46 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, 2015 and 2014 consist of the Company and its subsidiaries. FLYHT is a designer and developer of products and software for, 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, and the United Kingdom. 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 5, 2016. (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”). (c) Functional and presentation currency 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, 2015, the Company had negative working capital of $5,413,927, a deficit of $67,507,918, a net loss of $3,891,560 and negative cash flow used in operating activities of $2,983,580 for the year. The Company has incurred significant operating losses and negative cash flows from operations over the past years. 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, or • sufficient funds are not available to extinguish the debentures coming due in June 2016, or • sufficient funds are not available, or debenture holders do not convert their debenture units to equity, when the debentures mature in December 2016; 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. 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. 47 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 2. Basis of preparation (Continued) (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. 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, 2015, 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. 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 Voice and data services is recognized at the end of each month and is based on actual usage during that month. 5. 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. 6. 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 including 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. 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. 48 3. Significant accounting policies (Continued) (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. 49 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 3. Significant accounting policies (Continued) (c) Inventories 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. 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 to determine the carrying cost of purchased AFIRS units. The carrying cost of AFIRS units assembled by the Company includes AFIRS raw material component costs plus a standard labour allocation. 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. 50 3. Significant accounting policies (Continued) (e) Research and development (“R&D”) (i) Recognition and measurement 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 all software systems and products (including UpTime, FLYHTASD, FLYHTMail, FLYHTStream and FLYHTFuel). Other R&D costs include testing, patent application 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. (ii) 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. (iii) 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. (f) 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. (g) 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. (h) 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. 51 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 3. Significant accounting policies (Continued) (i) 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. (j) 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. 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. (k) 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. (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. 52 3. Significant accounting policies (Continued) (ii) Non-financial assets (Continued) 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. (l) 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 Voice and data services 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. (m) 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 the employee’s relationship with the Company is terminated prior to expiry. 53 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 3. Significant accounting policies (Continued) (n) 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, or if the consultant’s relationship with the Company is terminated prior to expiry. (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. (o) 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. (p) Foreign currency (i) 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. (ii) 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. 54 3. Significant accounting policies (Continued) (q) 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. (r) 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 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 Programmes, 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). IFRS 16 – Leases replaces IAS 17, Leases. Under the new standard, more leases may come on-balance sheet for lessees, with the exception of leases with a term not greater than 12 months and leases considered to be of small value (January 1, 2019). The Company has not completed its evaluation of the effect of adopting these standards on its consolidated annual financial statements. 55 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 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, 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, 2015 December 31, 2014 $ 874,112 24,054 898,166 $ 944,835 14,951 959,786 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, 2015 December 31, 2014 $ 946,082 1,047,415 659,621 2,653,118 (1,716,313) 936,805 $ 951,269 752,333 1,015,268 2,718,870 (1,917,249) 801,621 In 2015, AFIRS raw materials and changes in AFIRS finished goods units and installations in progress recognized as cost of sales amounted to $2,289,676 (2014: $1,521,962). Included in this amount was a write down of inventories amounting to $66,196 in 2015 (2014: $203,618) resulting from a review of slow moving inventory parts. All inventories are pledged as security for the bank loan and debentures. 56 9. Property and equipment 2015 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 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 Computers and Software $ 491,800 19,111 510,911 385,118 35,261 420,379 106,682 90,532 Computers and Software $ 898,919 73,523 (480,642) 491,800 803,805 36,088 (454,775) 385,118 95,114 106,682 Equipment $ 242,019 23,351 265,370 169,570 15,309 184,879 72,449 80,491 Equipment $ 230,297 36,722 (25,000) 242,019 172,021 18,984 (21,435) 169,570 58,276 72,449 Leasehold improvements $ 44,121 - 44,121 6,066 6,303 12,369 38,055 31,752 Leasehold improvements $ 166,972 10,000 (132,851) 44,121 128,667 10,250 (132,851) 6,066 38,305 38,055 Total $ 777,940 42,462 820,402 560,754 56,873 617,627 217,186 202,775 Total $ 1,296,188 120,245 (638,493) 777,940 1,104,493 65,322 (609,061) 560,754 191,695 217,186 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, 2015, the net carrying amount of leased property and equipment was $52,704 (2014: $89,612). As of December 31, 2015, all property and equipment is pledged as security for the bank loan and debentures (note 13). FLYHT did not enter into any new lease agreements in 2015. 57 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 10. Intangible assets The intangible asset balance of $34,992 at December 31, 2015 (December 31, 2014: $34,992) is the value of the license with Bombardier that 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. All intangible assets are pledged as security for the bank loan and debentures. 11. Trade payables and accrued liabilities Trade payables Non-refundable customer deposits Compensation and statutory deductions Accrued liabilities Total December 31, 2015 December 31, 2014 $ 1,037,011 1,020,675 570,659 129,362 2,757,707 $ 650,712 790,405 516,881 171,624 2,129,622 Compensation and statutory deductions include accrued vacation pay, variable compensation, and statutory payroll deductions. 12. Unearned revenue Unearned revenue classified as current consists of sales type agreements revenue that will be recognized when the AFIRS Solution is fully functional and expected to be recognized as income in the next year. All amounts recorded in unearned revenue are non-refundable. December 31, 2015 December 31, 2014 Balance January 1 AFIRS sales: shipped AFIRS sales: revenue recognized Voice and data services: prepaid Voice and data services: revenue recognized Balance December 31 Less current portion Non-current portion $ 1,675,746 2,597,785 (3,131,261) 19,033 (15,962) 1,145,341 1,087,197 58,144 $ 1,103,834 2,727,911 (2,146,871) 92,084 (101,212) 1,675,746 1,484,345 191,401 58 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 (2014: $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, 2015 and 2014, the facility had not been drawn. Government loans The Technology Partnerships Canada (“TPC”) loan was non-interest bearing and unsecured. The loan was repayable annually, based on 15% of the initial contribution when the Company 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. The obligation under TPC was fulfilled in 2015. Under SADI, the Company has, at December 31, 2015, an outstanding repayable balance of $1,820,816, compared to $1,967,507 at December 31, 2014. 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 is 24.5% of the total contribution received. A summary of the SADI loan carrying value as at December 31, 2015 and 2014 and changes during these years is presented below. Balance January 1 Interest accretion Repayment Balance December 31 Less current portion Non-current portion 2015 $ 899,600 163,369 (78,462) 984,507 90,234 894,273 A summary of the SADI outstanding payable balance as at December 31, 2015 and 2014 and changes during these years is presented below. Balance January 1 Repayment Balance December 31 Convertible debentures 2015 $ 1,899,278 (78,462) 1,820,816 2014 $ 818,828 149,001 (68,229) 899,600 78,462 821,138 2014 $ 1,967,507 (68,229) 1,899,278 The debenture issued December 23, 2010 originally had a face value of $3,159,000 and was set to mature on December 23, 2014. 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 was classified as equity and had an original value of $231,318 based on an exercise price of $0.40. The associated debenture warrants had an exercise price of $0.75, were exercisable by December 23, 2014, and had an original carrying value of $163,771. On December 22, 2014 approval was received to extend the maturity date of the debenture from four to six years. The debentures were convertible into common shares at a conversion rate of $0.40 per share at any time up to December 23, 2015. The associated debenture warrants were also extended to December 23, 2015. On December 15, 2015 approval was received to lower the warrant exercise price to $0.20, extend the conversion feature to December 23, 2016, and lower the conversion price to $0.25. 59 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 13. Loans and borrowings (Continued) Convertible debentures (Continued) The debenture has a face value of $3,039,000 as at December 31, 2015 (December 31, 2014: $3,101,000). The conversion feature has a carrying value of $222,531 as at December 31, 2015 (December 31, 2014: $220,700). The debenture warrants have a carrying value of nil as at December 31, 2015 (December 31, 2014: $163,771), as they expired on 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. 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. The debenture continues to bear interest at a rate of 8% per annum, accrued and paid annually in arrears commencing December 31, 2011. Redeemable 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. TPC SADI Debenture payable Convertible debenture payable Balance December Less current portion Non-current portion 14. Operating leases Operating lease rentals are payable as follows: 2015 $ - 984,507 2,269,545 2,960,921 6,214,973 (5,840,418) 374,555 2014 $ - 899,601 2,128,842 3,007,040 6,035,483 (572,782) 5,462,701 Premises $ 410,750 433,419 437,952 437,952 437,952 2016 2017 2018 2019 2020 2021 72,992 Total 2,231,017 60 15. Provisions Product warranty - non-current provision Balance January 1 Provision made during the period Provision used during the period Balance December 31 2015 $ 235,019 72,735 (44,158) 263,596 2014 $ 148,428 157,942 (71,351) 235,019 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. Issued and outstanding: Common shares: Balance January 1, 2014 Exercise of employee options Exercise of warrants Debenture conversions Balance December 31, 2014 Exercise of employee options Exercise of warrants Debenture conversions Balance December 31, 2015 Number of Shares 158,817,268 2,774,500 10,443,367 145,000 172,180,135 600,000 542,500 155,000 173,477,635 Value $ 48,318,003 1,008,573 4,112,393 58,000 53,496,969 183,920 152,157 62,000 53,895,046 In 2015 warrant and option exercises together with convertible debenture conversions resulted in the Company issuing a total of 1,297,500 shares for total proceeds of $236,000, including: e) 542,500 warrants were exercised at $0.20 per share for proceeds of $108,500 f) 100,000 options were exercised at $0.25 per share for proceeds of $25,000 g) 500,000 options were exercised at $0.205 per share for proceeds of $102,500 h) 155,000 convertible debentures were converted at $0.40 per share 61 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 16. Capital and other components of equity (Continued) Stock option plan The Company grants stock options to its directors, officers, employees and consultants. In the second quarter of 2015 the Company granted 2,803,050 stock options to employees, officers and directors under the stock option plan. The stock options will expire December 31, 2018, and have an exercise price of $0.25 per share. In the third quarter of 2015 the Company granted a total of 475,000 stock options to one officer and two employees under the stock option plan. The stock options will expire December 31, 2018 and have an exercise price of $0.165 per share. In the fourth quarter of 2015 the Company granted a total of 500,000 options exercisable at a price of $0.205 per share to an officer of the Company under the stock option plan. 100,000 of the stock options expired on December 31, 2015 with 100,000 additional stock options expiring on December 31 of each subsequent year (the last 100,000 stock options expiring on December 31, 2019). The Company has a policy of reserving up to 10% of the outstanding common shares for issuance to eligible participants. As at December 31, 2015, there were 17,347,764 (2014: 17,218,014) common shares reserved for this purpose. All outstanding options vested immediately at the grant date and were granted at an exercise price not less than fair market value of the stock on the date of issuance. No options remained unvested as at December 31, 2015 and 2014. A summary of the Company’s outstanding and exercisable stock options as at December 31, 2015 and 2014 and changes during these years is presented below. 2015 Number of options 7,802,250 3,778,050 (600,000) (2,244,000) 8,736,300 8,736,300 Weighted average exercise price $ 0.34 0.23 0.23 0.27 0.32 0.32 2014 Number of options 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 Outstanding, January 1 Options granted Options exercised Options expired Outstanding, December 31 Exercisable, December 31 Weighted average life remaining for the options outstanding and exercisable is 2.0 years. The exercise prices for options outstanding at December 31, 2015 were as follows: Exercise price: $0.165 $0.250 $0.250 $0.400 $0.420 $0.450 $0.530 Total All options Exercisable options Number 475,000 1,807,500 2,716,050 2,337,750 50,000 1,200,000 150,000 8,736,300 Weighted average remaining contractual life (years) 3.0 1.0 3.0 2.0 2.0 1.0 2.0 2.0 Number 475,000 1,807,500 2,716,050 2,337,750 50,000 1,200,000 150,000 8,736,300 Weighted average remaining contractual life (years) 3.0 1.0 3.0 2.0 2.0 1.0 2.0 2.0 62 16. Capital and other components of equity (Continued) The weighted average fair value of the options granted during the year that were valued using the Black-Scholes option pricing model was $0.12 (2014: $0.20). 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 Warrants Outstanding January 1, 2014 Warrants exercised Warrants expired Outstanding December 31, 2014 Warrants extended Warrants exercised Warrants expired Outstanding December 31, 2015 17. Earnings per share Basic earnings per share Number 14,711,867 (10,443,367) (319,750) 3,948,750 - (542,500) (3,406,250) - 2015 0.75% 3.37 76% 0.00% Weighted average exercise price $ 0.23 0.31 0.30 0.75 - 0.20 0.20 - 2014 1.48% 3.69 74% 0.00% Value $ 1,057,652 (854,003) (39,878) 163,771 154,001 (43,657) (274,115) - The calculation of basic and diluted earnings per share for the year ended December 31, 2015 was based on a weighted average number of common shares outstanding of 172,423,488 (2014: 166,441,119). The calculation of diluted earnings per share did not include stock options of 8,736,300 (2014: 7,802,250), nil warrants (2014: 3,948,750) and convertible debentures of 7,597,500 (2014: 7,390,000) because they would be anti-dilutive. 18. Revenue Voice and data services AFIRS sales Parts sales Services Total 2015 $ 3,986,813 3,372,421 2,932,100 165,791 10,457,125 2014 $ 3,657,300 2,054,251 718,567 451,910 6,882,028 Voice and data services include fees for communications usage. 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. 63 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 19. 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 2015 $ 5,754,913 266,203 1,432,230 542,037 694,992 1,766,750 10,457,125 2014 $ 3,321,408 304,449 1,194,644 317,112 658,366 1,086,049 6,882,028 All non-current assets (property and equipment and intangible assets) reside in Canada. Major customers Revenues from the three largest customers represent approximately 42.9% of the Company’s total revenues for the year ended December 31, 2015 (2014: 30.9%). 21. Distribution expenses Salaries and benefits Stock based compensation Contract labour Office Travel Equipment & maintenance Depreciation Marketing Other Total 2015 $ 1,983,579 91,658 829,298 328,855 472,078 40,216 29,840 100,169 101,940 3,977,633 2014 $ 1,652,340 84,971 354,320 275,427 449,215 22,180 26,910 55,610 472,018 3,392,991 64 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 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 SRED tax credit Depreciation Other SNC litigation settlement Total 2015 $ 1,972,362 276,008 153,594 257,614 160,360 85,840 399,619 59,544 211,307 64,138 10,098 26,469 3,676,953 2015 $ 1,964,388 75,011 595,821 197,618 52,143 65,038 27,877 (216,708) 16,936 24,428 - 2,802,552 2014 $ ,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 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 65 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 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 Finance costs 25. Income tax expense Current Tax Expense Current income tax expense Deferred income tax expense Deferred Tax Expense Unrecognized deferred tax assets 2015 $ 4,978 - 4,978 2014 $ 54 - 54 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 2015 $ 2,128 237,247 239,375 22,699 3,917 163,368 711,993 10,677 912,654 2015 145,562 77,332 2,162 12,071,922 20,598 7,535,586 19,853,162 2014 $ 2,000 154,265 156,265 21,995 3,885 149,001 784,404 88,530 1,047,815 2014 180,622 107,370 2,342 10,643,137 52,432 6,735,345 17,721,248 The Company has non-capital losses for income tax purposes of approximately $40,996,307 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: 66 Amount $ 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 1,890,509 3,141,308 40,996,307 25. Income tax expense (Continued) Year 2015 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Total 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 Change in rate and other Non-deductible expenses Stock based compensation Change in unrecognized temporary differences 26. Financial risk management 2015 $ (3,896,538) 4,978 (3,891,560) 26.0% (1,011,806) - (1,241,807) 11,582 115,096 2,131,913 4,978 2014 $ (4,278,885) 54 (4,278,831) 25.0% (1,069,708) (636,299) - 200,624 147,147 1,358,290 54 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 28.5% (2014: 13.1%) of the Company’s 2015 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. 67 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 26. Financial risk management (Continued) The aging of receivables at the reporting date was: December 31, 2015 Accounts receivable Impairment Net receivable December 31, 2014 Accounts receivable Impairment Net receivable 0-30 days $ 865,067 - 865,067 0-30 days $ 646,795 (37,747) 609,048 31-60 days $ 39,128 - 39,128 31-60 days $ 326,522 (37,728) 288,794 61-90 days $ (5,953) - (5,953) 61-90 days $ 107,106 (37,731) 69,375 91+ days $ 537,393 (537,469) (76) 91+ days $ 271,218 (278,649) (7,431) Total $ 1,435,635 (537,469) 898,166 Total $ 1,351,641 (391,855) 959,786 The Company believes that the unimpaired amounts that are past due by more than 30 days are still collectible, based on historic payment behavior. The movement in the allowance for impairment in respect of trade and other receivables for the years ended December 31, 2015 and 2014 was: Balance, January 1 Provision Amounts written off Impairments recovered Balance, December 31 Liquidity risk 2015 $ 391,855 165,164 (19,550) - 537,469 2014 $ 198,007 409,478 (203,651) (11,979) 391,855 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, 2015 Accounts payable Compensation and statutory deductions Finance lease liabilities Accrued liabilities Loans and borrowings Total < 2 months $ 1,034,319 84,525 4,970 39,215 - 1,163,029 2-12 months $ 1-2 years $ 2,692 270,134 24,849 61,650 5,840,418 6,199,743 - 108,000 15,794 9,715 103,768 237,277 2-5 years $ - 108,000 - 18,782 414,386 541,168 > 5 years $ - - - - 1,212,427 1,212,427 Total $ 1,037,011 570,659 45,613 129,362 7,570,999 9,353,644 68 26. Financial risk management (Continued) December 31, 2014 Accounts payable Compensation and statutory deductions Finance lease liabilities Accrued liabilities Loans and borrowings Total Currency risk < 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 1,370,267 Total $ 650,712 516,882 75,431 171,624 8,135,348 9,549,997 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 $102,932 (2014: $65,743) and a strengthening of the Canadian dollar would decrease net earnings by approximately $102,932 (2014: $65,743). 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, 2015, working capital denominated in U.S. dollars was approximately positive $90,053 (2014: positive $3,109,586). As a result a 1% weakening of the Canadian dollar would increase net earnings by approximately $901 (2014: $31,096) and a strengthening of the Canadian dollar would decrease net earnings by approximately $901 (2014: $31,096). 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, 2015 and 2014 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 (a) 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. No similar services were contracted during 2015. (b) In the third and fourth quarters of 2015, the Company entered into an agreement with a company with ownership that is related to an officer of FLYHT. The company supplied consulting services in recruitment and supplied a contract resource to develop tools used to enhance the Company’s ground based software. 69 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 Included in contract labour: Included in accounts payable and accrued liabilities: For the three months ended December 31 For the year ended December 31 2015 $ - 30,114 30,114 2014 $ 5,621 - 5,621 2015 $ - 41,114 41,114 2014 $ 74,418 - 74,418 (a) (b) Total December 31 2015 $ - 30,114 30,114 2014 $ - - - 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. 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 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 Directors of the Company control 2.6% (2014: 4.1%) of the voting shares of the Company. 2015 $ 1,299,019 167,494 368,870 324,000 305,855 123,858 2,589,096 2014 $ 1,138,733 125,928 221,471 275,000 208,418 131,425 2,100,975 Subsidiaries FLYHT Inc. AeroMechanical Services USA Inc. FLYHT Corp. FLYHT India Corp. TFM Inc. 28. Contingency Country of Incorporation Ownership interest United States United States Canada Canada Canada 100% 100% 100% 100% 100% Subsequent to year end FLYHT received a claim from a partner totaling $0.8 million USD for past and potential future warranty claims relating to reliability of some active AFIRS units. The claim asserts a design defect has led to the reliability issues. The resolution of the claim is pending review. The result of the claim is currently unknown and will be resolved with the partner. 29. Subsequent event On December 21, 2015 the Company granted a non-exclusive license to use certain of its intellectual property to a technology company for an aggregate license fee of $2.5 million USD, payable in the first quarter of 2016. Payment for this license has been delayed until the second quarter of 2016. 70 Corporate Information REGISTRAR AND TRANSFER AGENT Computershare Trust Company of Canada Telephone: 1-403-267-6800 Online: Investor Centre – contact us section www.computershare.com SHARE LISTING Shares are traded on the TSX Venture Exchange and the OTCQX Marketplace Ticker Symbols: TSX: FLY and OTCQX: FLYLF DIRECTORS Bill Tempany Doug Marlin Mike Brown Paul Takalo Jacques Kavafian Jack Olcott Barry Eccleston John Belcher Mark Rosenker OFFICERS Chairman, FLYHT Aerospace Solutions Ltd. President, Marlin Ventures Ltd. Partner, Geselbracht Brown Director Director President, General Aviation Company President, Airbus Americas, Inc. Former Chairman and Chief Executive Officer, ARINC Inc. United States Air Force (retired) Thomas R. Schmutz Nola M. Heale Derek Graham Jeff Brunner Chief Executive Officer Chief Financial Officer Chief Technical Officer Vice President, China Operations INVESTOR RELATIONS AUDITOR 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 KPMG LLP Calgary, Alberta LEGAL COUNSEL Chris Croteau Tingle Merrett LLP, Calgary, Alberta HEAD OFFICE 300E, 1144 - 29 Avenue NE Calgary, Alberta T2E 7P1 71 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2015 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 www.flyht.com 

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