FLYHT Aerospace Solutions
Annual Report 2016

Plain-text annual report

2016 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT TABLE OF CONTENTS 21 Letter to Shareholders 23 Management Discussion & Analysis 23 Non-GAAP Financial Measures 23 Forward-Looking Statements 24 Overview 27 Trends and Economic Factors 28 Contracts and Achievements of Fiscal 2016 30 Results of Operations Years Ended December 31, 2016 & 2015 30 Selected Results 31 Financial Position 34 Comprehensive Income 38 Other 41 Independent Auditors’ Report 42 Consolidated Financial Statements 46 Notes to the Consolidated Financial Statements 71 Corporate Information “FLYHT LOGGED RECORD REVENUES IN 2016. WE INCREASED OUR REVENUES BY 37% OVER 2015.” 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F $ COMMONLY USED FINANCIAL TERMS & AVIATION ACRONYMS ACARS: Aircraft Communications Addressing EASA: European Aviation Safety Agency and Reporting System ADCC: Aircraft Data Communication Corporation AFIRSTM: Automated Flight Information Reporting System ANAC: National Civil Aviation Agency of Brazil CAAC: Civil Aviation Administration of China COMAC: Commercial Aircraft Corporation of China DGAC: Direccion General de Aeronautica Civil (Mexico’s certification organization)  EBITDA: Earnings before interest, income tax, depreciation and amortization ECAA: Egyptian Civil Aviation Authority FAA: Federal Aviation Administration GAAP: Generally Accepted Accounting Principles GAMA: General Aviation Manufacturers Association GAMECO: Guangzhou Aircraft Maintenance Engineering Company Limited 01 IATA: International Air Transport Association ICAO: International Civil Aviation Organization ICE: Iridium Compatible Equipment IFRS: ITU: International Financial Reporting Standards International Telecommunications Union MD&A: Management Discussion and Analysis NTSB: National Transportation Safety Board OEM: Original Equipment Manufacturer QTD: Quarter-to-date R&D: Research and Development SADI: Strategic Aerospace and Defence Initiative SFP: Statement of Financial Position STC: Supplemental Type Certificate TCCA: Transport Canada Civil Aviation WINN: Western Innovation Initiative NCAA: Nigerian Civil Aviation Authority YTD: Year-to-date 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 02 INVESTMENT HIGHLIGHTS • Commercialized, unique, real-time aircraft • Escalating order shipments to China intelligence and cockpit communications in response to regulatory changes satellite technology for the aerospace industry • Significant opportunity to upsell recurring • Enhances profitability, saves time and drives revenue services on installed units operational efficiencies • Well positioned to support the aviation industry • Facilitates on-demand streaming as it advances to meet regulations, including of flight data recorder mandates on Autonomous Distress Tracking and • Supplemental Type Certificates covering 95% of transport category aircraft, representing • Significant international market opportunities a high barrier to entry for growth Timely Recovery of Flight Data • Multiple revenue streams – hardware sales, • AFIRS™ has registered over 2.5 million recurring revenue and OEM agreements flight hours • Robust recurring revenue model - 70-85% • Shipped and/or installed over 1,600 AFIRS gross margin units worldwide 03 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 04 2016 FLYHT PLAN REVIEW & ACHIEVEMENTS Increase revenue +30% over 2015 Close a new OEM opportunity FLYHT achieved record revenue of $14.3 million in 2016, an increase of 37% over 2015. If the $3.3 million from the one-time sale of the intellectual property license is included, the annual income was $17.6 million. In addition to increased revenue, FLYHT achieved profitability in the second, third and fourth quarters of 2016 and for the year; financial milestones for the Company. Complete development and roll-out of cloud- based UpTime user interface FLYHT launched UpTimeTM Cloud to airline customers in 2016. The first users were Chinese and Canadian airline customers. UpTime Cloud is a significant enhancement to the interface and functionality of the legacy platform. Establish a 24x7 service call center FLYHT now offers 24x7 customer support. Around the clock support is key to provide increased service to the Company’s global customer base. This support lays the foundation to expand international business opportunities. The Company dedicated significant resources to the OEM effort and will continue to target this goal in the 2017 plan as it remains a high priority. Deploy our “Adopt Excellence” strategy: focused efforts to achieve profitability and to increase shareholder value The FLYHT team embraced “Adopt Excellence” to empower employees, control costs and improve processes within the Company. The Company has made great progress during 2016 and will continue this high-level strategy, updated for 2017. In China: continued vigilance to meet satellite communications mandate in 2017; complete an AFIRS repair depot FLYHT captured eight new operators for Satcom in China in 2016 and signed a launch customer for recurring data service products. In November, FLYHT announced a contract with Guangzhou Aircraft Maintenance Engineering Company Limited (GAMECO) to provide repair services to FLYHT’s customers in China. GAMECO specializes in aircraft and airborne component maintenance, repair and overhaul (MRO). 05 2017 FLYHT PLAN: • Grow overall and monthly recurring revenue by at least 25% • Continue success in China – secure a major services deal • Win new contracts in South East Asia, Europe and the Middle East • Secure business with a new OEM position • Remain EBITDA Positive • Grow public value through strategic business initiatives 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 06 REVENUE SOURCES $7,000,000 $5,250,000 $3,500,000 $1,750,000 $0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 FLIGHT HOURS & FLIGHTS Services Parts sales AFIRS sales Voice & data services Other Revenue (IP Sale) Hours 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 07 2011 2012 2013 2014 2015 2016 Flight Hours Flights ASIA 16.2% $2,322,051 AUSTRALASIA 5.0% $719,763 EUROPE 2.4% $349,684 AFRICA & MIDDLE EAST 8.9% $1,273,655 NORTH AMERICA 62.9% $9,007,719 CENTRAL & SOUTH AMERICA 4.6% $658,319 TOTAL 2016 REVENUE: $14,331,191 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 08 FLYHT SUCCESS STORIES WITH OVER 70 CUSTOMERS AROUND THE WORLD, FLYHT RECOGNIZES THAT NO TWO AIRLINES ARE THE SAME AND CREATES CUSTOMIZED SOLUTIONS TO HELP IMPROVE AND ENHANCE AIRLINE OPERATIONS. THE CASE STUDIES FROM AIRLINE CUSTOMERS, FEATURED BELOW, DEMONSTRATE HOW THE COMPANY HAS HELPED CUSTOMERS ACHIEVE RESULTS. HIGH ENGINE VIBRATION AFIRS provided monetary and safety benefits to an operator who uses the technology to monitor its aircraft engines. AFIRS alerted the airline of a high engine vibration and the customer took the aircraft out of service to diagnose and address the issue before it became a serious problem. The replacement cost for the engine would have been $5.2 million; instead the repair cost based on AFIRS-driven data was $780,000. UNSTABLE APPROACH An operator of CRJ900 aircraft requested that FLYHT implement a real-time program specifically designed to improve the safety of its operation. FLYHT created customized reports using AFIRS and UpTime that not only monitored aircraft operation for unstable approaches, but delivered the reports in real time to the flight safety department for analysis and trending. CHINA MANDATE Regulations in China mandate a SATCOM voice communications connection between aircraft and the airline operations centre. FLYHT is the first company to receive an Iridium SATCOM licence and AFIRS is the ideal solution with which to comply with the mandate. Our customers also derive value-added benefits such as global flight tracking, aircraft health monitoring and triggered flight data streaming. 09 “FLYHT HAD A GREAT YEAR AND MADE SIGNIFICANT PROGRESS IN 2016. WE PRODUCED SEVERAL BESTS AND FIRSTS”! ENHANCED FLIGHT TRACKING Limited ground infrastructure makes it difficult for one of FLYHT’s customers to efficiently facilitate the transfer of passengers to and from the airport. FLYHT created a geo-fence capability in its software to alert the airline when the aircraft entered or exited specific boundaries. This kept all parties advised, in real time, on the progress of each flight, improved customer satisfaction and reduced costs for the airline associated with poor communication and logistical support issues. AIRCRAFT MONITORING SYSTEMS One of FLYHT’s long-time customers realized the value of AFIRS data when they were faced with legal action from a passenger claiming to be injured from a hard landing. AFIRS monitors onboard sensors and a review of the reports verified that in fact no thresholds had been exceeded on the flight. FLYHT saved the airline litigation costs while also improving its ability to monitor for maintenance and increase operational efficiency. ENGINE PERFORMANCE One of FLYHT’s customers entered a lease agreement that required them to demonstrate 10% of all takeoffs would be conducted at reduced-thrust to decrease excessive wear on the engines. Failure to do so would result in financial penalties. AFIRS data provided the customer with reports to demonstrate they were meeting their lease obligations. 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 10 UPTIME CLOUD THE VALUE PROPOSITION OF FLYHT’S TECHNOLOGY IS THE REAL-TIME INFORMATION IT PROVIDES TO ITS CUSTOMERS AND HOW THEY CAN CUSTOMIZE ALERTS AND NOTIFICATIONS TO STREAMLINE THEIR OPERATIONS. The goal of the new cloud-based solution is to allow airlines to “manage by exception”, focusing on the operational problems that cause delays, cancellations and overall flight disruptions. FLYHT invested in the launch of UpTime Cloud in 2016 to enhance these capabilities in the next generation program. UpTime Cloud is a web-based portal where customers access aircraft information and data. UpTime Cloud improves customers’ interaction with key programs while providing enhancements to security and infrastructure. The program allows airlines to send and receive text messages, while allowing them to configure alerts and notifications. Airlines conduct remote systems diagnostics by accessing aircraft data in real time and defining the content and amount of specific data they receive. UpTime Cloud expands FLYHT’s technology offering to our customers by delivering a configurable flight tracking solution combined with business intelligence applications and data analytics. One example of the extended benefits provided by UpTime Cloud is FLYHTHealthTM, developed for airlines’ maintenance staff to query the aircraft engine, while in flight, to take corrective maintenance action to reduce or eliminate all maintenance-related delays and flight cancellations. FLYHTHealth integrates remote detection, reporting, and analysis of airplane data to determine the status of an aircraft’s current and future serviceability. By automating and enhancing the real-time and long-term monitoring of airplane data, FLYHTHealth enables proactive management of maintenance crews and budget. FLYHTHealth provides economic benefit to the airline operator by applying intelligent analysis of aircraft data currently generated by existing aircraft systems. Through the UpTime Cloud portal, email or text message, FLYHTHealth notifies an airline when an issue is detected. The airline can then access the data, identify the problem and prepare for repair before the aircraft lands. This speeds up the process of repair and reduces the impact of unscheduled maintenance while saving the airline money. 11 FLYHTASDTM: Airlines can monitor their aircraft on the map and send text messages through the ASD FLYHTLog: Collection of flight and block times provides accurate information to maximize maintenance intervals and the utilization of life-limited parts. 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 12 2016 MAJOR ANNOUNCEMENTS JANUARY 11 FLYHT received the CAN-TSO-C159b for the AFIRS 228S from Transport Canada which represents approval for an additional level of airworthiness standards. The AFIRS 228S Iridium SATCOM system is currently approved, with STCs on numerous aircraft types, in all major jurisdictions and provides aircraft crew with 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 Aircraft Communications Addressing and Reporting System (ACARS) over Iridium messaging capability. JANUARY 19 FLYHT achieved a record milestone of two million flight hours that AFIRS has flown on direct sale customers’ aircraft. FEBRUARY 11 FLYHT announced a strategic partnership with Flight Data Services Ltd. (FDS), a global leader in flight data monitoring (FDM), to offer a complete flight data acquisition and analysis solution to the aviation industry. “FLYHT’s AFIRS data acquisition system ideally complements our POLARIS data analysis platform, and through this collaboration our two companies can offer a streamlined service right at the forefront of technical innovation,” said Dave Jesse, CEO, FDS. MARCH 29 FLYHT announced the signing of six new airlines over the previous six months (four new contracts in 2016 including two in China) with an aggregate revenue for all six contracts of approximately $615,000 USD. “We are making progress worldwide with airlines and China continues to be a growing market for FLYHT,” remarked VP Sales and Marketing David Perez. “To improve customer relations and sales opportunities in China, FLYHT has hired a new account manager stationed in Shanghai. The new position provides local support for airlines in the region which allows the VP, China Sales to focus full-time on sales efforts.” 13 “WE ARE MAKING PROGRESS WORLDWIDE WITH AIRLINES AND CHINA CONTINUES TO BE A GROWING MARKET FOR FLYHT.” 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 14 APRIL 25 FLYHT announced the receipt of the first of two milestone payments of the aggregate USD $2.5 million license fee due from a technology company. FLYHT also received an order from an OEM partner for USD $1.2 million parts with related license fees and signed its third Chinese airline customer of the year to contract with an aggregate revenue of approximately USD $1 million. MAY 12 FLYHT announced it closed a private placement offering. 33,910,081 units were issued at a price of $0.15 per unit, for aggregate consideration of $5,086,512. MAY 18 FLYHT received STCs for the AFIRS 228 on multiple aircraft types including the ATR 42-500 “600 version” and ATR 72-212A “600 version” from the EASA, the Boeing B757-200 aircraft from the FAA and the TCCA STC for the Bombardier DHC 8 – 100, 200, 300 series aircraft. JUNE 1 FLYHT announced the appointment of Matieu Plamondon, Vice President Operations and Customer Fulfillment and David Perez, Vice President Sales and Marketing as officers of the Company. In the second quarter, FLYHT also received the CAAC STC for the Boeing 767 200 and 300 series. JUNE 1 FLYHT’s outstanding debentures matured and were repaid in full for $2.5 million. JULY 6 FLYHT signed five new contracts for voice and data services in the second quarter of 2016 with a value of USD $2.3 million over the term of the agreements. 15 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 16 AUGUST 15 FLYHT launched real-time data services in the People’s Republic of China. “FLYHT is pleased to provide data services for customers in China to enable cost savings and improved operational efficiencies,” remarked Michael Fang, FLYHT’s Vice President of China Sales. “By receiving real- time data, airlines can track their aircraft and AFIRS will alert the airline to any issues which allows them to be proactive with their maintenance and operations. We believe that signing this airline may open FLYHT up to new possibilities in China as other airlines see the value that real-time data can provide.” OCTOBER 3 FLYHT entered an agreement with an Information Technology Company that implements data solutions for Chinese commercial aviation operators in the People’s Republic of China for the sale of AFIRS 228S. The initial contract for hardware is valued at approximately $4.26 million USD. OCTOBER 5 FLYHT announced updates to customer and parts sales activity in the third quarter of 2016 including parts with related license fees orders from an existing OEM partner for USD $1.0 million. Additionally, FLYHT signed one new hardware agreement for AFIRS 228 in China and one new operator in Africa for voice and data services. FLYHT received new STCs for the AFIRS 228 from the FAA including the ATR 42-300 and the ATR 72-100/200 aircraft. NOVEMBER 9 FLYHT was awarded a $2.35 million repayable government contribution from the Western Innovation Initiative (WINN) by the Western Economic Diversification Canada. “It’s really exciting to have been selected for WINN funding which greatly contributes to the work we do in the aerospace sector in Alberta,” remarked FLYHT’s program manager, Flint Walters. “With these funds, we plan to upgrade the Automated Flight Information Reporting System (AFIRS) and commercialize the Company’s cloud-based UpTime software which includes functionality to better support new and current customers.” 17 “FLYHT POSTED A PROFIT FOR THE SECOND, THIRD AND FOURTH QUARTERS OF 2016 AND AN OVERALL EBITDA GAIN FOR 2016 OF OVER $2.5 MILLION.” 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 18 NOVEMBER 14 FLYHT announced an update to the October 3, 2016 announcement. The contract was increased to approximately USD $6.94 million. NOVEMBER 28 FLYHT announced a contract with Guangzhou Aircraft Maintenance Engineering Company Limited (GAMECO) to provide repair services to FLYHT’s customers in the People’s Republic of China. GAMECO specializes in aircraft and airborne component maintenance, repair and overhaul. DECEMBER 1 FLYHT was granted CAAC Part-145 approval by the Civil Aviation Administration of China (CAAC). The approval took almost two years to achieve and allows FLYHT to repair AFIRS units and return them to customers in China with an AAC-038 release certificate. DECEMBER 2016 FLYHT’s outstanding redeemable debentures matured and were repaid in full for $3.1 million. FLYHT was awarded an STC from the CAAC in December that allows for further installation on the CRJ 100, 200, 440, 700 and 900 aircraft. FLYHT announced updates from the fourth quarter including receipt of orders from an existing OEM partner for approximately USD $1.8 million parts with related license fees. FLYHT signed two new airline customers in China for AFIRS 228 for a total value of approximately USD $709,000. Two existing customers added AFIRS 228 units with voice and data services for revenue value of approximately USD $811,000. 19 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 20 TO OUR SHAREHOLDERS FLYHT HAD A GREAT YEAR AND MADE SIGNIFICANT PROGRESS IN 2016. WE PRODUCED SEVERAL “BESTS” AND “FIRSTS”! • Delivered our best revenue year ever: for the first time, FLYHT strung together three consecutive money-making quarters for our first ever EBITDA positive year! • Achieved our best revenue quarter ever: Q4 2016. • Beat our AFIRSTM unit contract sales budget by 35% - aided by a very strong China sales market. • Grew Parts sales nearly 100% over 2015. • Rolled out a new cloud-based version of UpTimeTM Cloud and launched recurring data services in China: key to our continued growth. • Successfully executed our 2016 goals and set aggressive goals for 2017. The 2016 year ended with a record revenue quarter of $4.1 million, slightly higher than the previous record quarter (Q3 2016), and 10% higher than Q4 of 2015. This placed revenue for the year at $14.3 million, or 37% higher than 2015, previously our best revenue year. When the one-time Intellectual Property (IP) license sale income of $3.3 million is included, overall 2016 annual income was $17.6 million. More importantly, FLYHT posted a profit for the second, third and fourth quarters of 2016 and an overall EBITDA * gain for 2016 of over $2.5 million. Dominating the year’s revenue is $5.8 million of Parts sales, which includes our license fee receipts from our original equipment manufacturer (OEM) agreement for sales onto the Airbus A320 and A330 platforms. Revenue from this channel, along with the IP license sale and the private placement equity raise of $5.1 million in May, enabled FLYHT to re- pay $5.4 million in matured debentures in 2016 with no impact to business. Revenue in 2016 from our AFIRS sales grew by 17% over 2015, reaching nearly $4 million. Our Voice and Data Services component grew more slowly, at 10% over 2015. We added significantly more recurring data business than is reflected in this 10% growth number, but we encountered headwinds in our established base, in several cases due to impacts to our customers from weakness in the oil and gas market. We have set an aggressive goal for growth in 2017 in this area of revenue. Each year we create our “FLYHT Plan”, FLYHT’s annual goals. In 2016, we achieved most of our goals. • FLYHT logged record revenues in 2016. We increased our revenues by 37% over 2015, beating the 30% target that we had set for the year. • We deployed our “Adopt Excellence” high level strategy, which is our roadmap to profitability and stakeholder value. We use this plan to communicate priorities and vision within the Company. o We strengthened the balance sheet, which we accomplished by re-paying $5.4 million in matured debentures in the year and by securing a repayable government contribution for $2.35 million. Our resulting debt is low. o Other particularly successful elements of “Adopt Excellence” in 2016 are the expansion of recurring data services into China and the controlling of costs and improvement of efficiencies within the Company. While we did reorganize and change some of the players within FLYHT, we essentially remained headcount neutral through 2016, despite our significant revenue growth in the year. * EBITDA: defined as earnings before interest, income tax, depreciation and amortization. 21 • FLYHT had a China FLYHT Plan goal in 2016 to remain vigilant to help customers there meet the 2017 satellite communication mandate and to complete an AFIRS repair depot. o FLYHT had a productive year in China in 2016, closing eight new contracts. o FLYHT launched our recurring revenue services with one airline customer. Additional customers have been turned on for trial purposes in anticipation of securing future data service contracts. o We established an agreement with GAMECO, a major maintenance, repair and overhaul center and have made significant progress preparing the facility that will handle all FLYHT’s in-country warranty work as well as post- warranty repair. o China remains our largest growth area and our contractual backlog there can represent significant future revenues for FLYHT as our partners execute their business plans and outfit their fleets. FLYHT is still pursuing opportunities in the country for both AFIRS hardware sales and the corresponding recurring data services. • FLYHT met its goal by developing and deploying a cloud-based server called UpTime Cloud. We have deployed it for several accounts and will ultimately migrate all users from the legacy system to this new and exciting platform. We are engaged in launching all new services in China on this platform, which offers significant enhancements in the user interface and functionality over the legacy platform. We will continue to add capability and aircraft types to this new service through this year and beyond. • FLYHT identified and hired the resources for a 24x7 service call center in 2016. The center is now functional and is providing level-one service, augmenting our Calgary-based team to provide 24-hour support to our clients, seven days per week. We have invested significant resources and made several improvements in the customer account management resources in the past year and the surveys that we conduct indicate our customer base acknowledges and appreciates the continuous improvements we target in this area. One goal not accomplished in 2016 was the acquisition of new OEM business. We continue to very actively pursue a new OEM position and this remains a goal in our 2017 FLYHT Plan. In addition to a new OEM, FLYHT set goals to acquire new business in southeast Asia, Europe and the Middle East to continue to diversify our customer base. Of course, we want to continue the success we have demonstrated in China and have a goal to secure a major recurring service deal there. We have also established goals to remain EBITDA positive in 2017 and to grow our overall revenues and our recurring monthly revenues by at least 25% over December 2016. Growing recurring revenues is now the centerpiece of “Achieve Excellence - 2017”. Finally, from a capital markets perspective, we will continue to focus on growing the public value of the Company through strategic business initiatives. We believe these are a challenging set of goals to guide us through 2017 and, when combined with our internal goals, we feel like 2017 will be pivotal in our quest to be a strong industry player. FLYHT expects 2017 to also bring new opportunities given our demonstrated, commercially available expertise in real-time access to flight recorder data. We are cooperating with several OEMs who see FLYHT as the standard bearer and industry expert in this area. New mandates from the International Civil Aviation Organization (ICAO) will require timely access requirements for new airframes and FLYHT’s unique system can provide a means of compliance. On behalf of FLYHT, I want to convey the very positive spirit that exists within the Company right now. We are excited with our prospects and are continuously looking for ways to improve everything that we do. I know from my various contacts with stockholders and stakeholders that there is a large amount of goodwill for FLYHT, despite the long runway that the Company has been navigating. I’d like to thank you for your patience, for your support and I look forward to being able to discuss several exciting opportunities as they manifest. Thomas R. Schmutz Chief Executive Officer 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 22 Management Discussion & Analysis This management discussion and analysis (“MD&A”) is as of April 4, 2017 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, 2016 and 2015 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, 2016 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, earnings before interest, income tax, depreciation and amortization (EBITDA), 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. EBITDA is defined as income for the period, before net finance costs, depreciation and amortization of assets. 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, United States (U.S.), and global economic environments, local and foreign government policies/ regulations and actions, and assumptions made based upon discussions to date with the Company’s customers and advisers, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include but are not limited to production rates, timing for product deliveries and installations, Canadian, U.S., and foreign government activities, volatility of the aviation market for FLYHT’s products and services, factors that result in significant and prolonged disruption of air travel worldwide, U.S. and other military activity, market prices, availability of satellite communication, 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. 23 FLYHT Overview FLYHTStreamTM FLYHT is a leading provider of real-time aircraft intelligence and cockpit communications for the aerospace industry. More than 70 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 2.5 million aggregate flight hours and 1.7 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 Australasia. 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 UpTime 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 those described below 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’s 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. 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 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 on their airborne aircraft at any time. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 24 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, operating costs 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. Updated crew assignments, crew repositioning and tail swaps can be sent to the aircraft directly and immediately. 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 supply updated information to the crew with no delay. The voice capability is particularly valuable during emergency situations or irregular operations. FLYHT has discontinued active sales of the DragonTM. This decision will not impact FLYHT’s current Dragon customers. 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. 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. FLYHT is TCCA Approved Manufacturer, Approved Maintenance Organization and an EASA and a CAAC Part 145 Repair Facility. FLYHT is part of a select group of Canadian companies who are approved by TCCA as a Design Approval Organization (DAO). The Company also holds multiple STCs to make appropriate modifications, such as installing FLYHT’s AFIRS technology, to an aircraft’s approved design. FLYHT has received STC approvals from TCCA, FAA, EASA, CAAC, ANAC and DGAC 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 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. As a component of its DAO status, the Company employs the services of a delegated engineer, allowing for the approval of changes and the systems and electrical design aspects of an airworthiness certification. If an issue is encountered during the STC process, the delegate has the authority to approve necessary changes and continue the process without the involvement of an external party. The process to receive an STC takes some time, but in all cases, it starts with an STC application through the TCCA, FAA or EASA. FLYHT typically starts the process with TCCA by opening an application with the regulator before an STC package is created. The data package is prepared, including engineering documents outlining how AFIRS equipment is substantiated and installed on the aircraft, and the package is submitted to TCCA for approval. Once approved, first-of-type ground and flight testing takes place to fulfill regulatory requirements. FLYHT requires access to the proposed types and models of aircraft, which is done in cooperation with an existing or potential customer. After all tests are complete, FLYHT submits an application for the activation and data package to TCCA confirming all regulatory requirements have been met and the AFIRS unit is fit for operation on that aircraft type as designed. From there, TCCA approves the submission and an STC is issued. To acquire an STC from a different national regulator, FLYHT submits an application through TCCA to a regulator such as the FAA or EASA with the STC data package previously approved by TCCA. The regulator then reviews the package and issues an STC for that country based on their validation of the TCCA STC. Timelines required for the TCCA approval process will vary depending on aircraft and workloads, but typically take about three to four months, with an additional three to eight months if an STC is required from another regulator like the FAA or EASA. 25 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 A I A A A I A A A A A A A A A A* A I* P 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 A I A I I A A I A A Airbus A330 A ATR42 -300 ATR42 -500 A ATR-72 -100, -200 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 P I A Viking Air DHC -7 (LSTC) I 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 DGAC. AFIRS 220 or 228 model FLYHT has also received an approved AFIRS 228 STC for the Bombardier CRJ- 700, 900 from the DGAC. 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. A = Approved, P = Pending (We have received a Provisions STC and are in the final stages before receiving a full STC), I = In Progress. FLYHT announced additional certification in January 2016, with the receipt of the CAN-TSO-C159b for the AFIRS 228S. 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. FLYHT announced additional certification in January 2016, with the receipt of the CAN-TSO-C159b for the AFIRS 228S. 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. Standards for Avionics Supporting Next Generation Satellite Systems (NGSS), for an Iridium SATCOM supporting Future Air Navigation System (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. This TSO certification confirms that AFIRS 228S meets all product requirements, including DO-262B Minimum Operational Performance Standards for Avionics Supporting Next Generation Satellite Systems (NGSS), for an Iridium SATCOM supporting Future Air Navigation System (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. This TSO certification confirms that AFIRS 228S meets all product including DO-262B Minimum Operational Performance requirements, FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 26 4- Trends and Economic Factors Future Industry Projections FLYHT examines the results of measurements made by leading aviation associations and corporations in order to gain insight on the status of the industry. The Aviation Industry in 2016 The International Air Transport Association’s (IATA) quarterly industry results, measured in Revenue Passenger Kilometres (RPK) and Freight Tonne Kilometres (FTK) are the passenger and freight contributions to airline revenue and are significant markers to determine the health of the industry. Passenger traffic (measured in RPK) saw a 6.3% increase in 2016 compared to the previous year. 2016 results were also ahead of the ten-year average growth rate of 5.5%1. All regions saw demand growth in passenger traffic, and load factors that measure the capacity utilization of flights were at a record annual high of 80.5%. 700 new routes were added world-wide and 3.7 billion passengers flew in the year. Demand in domestic markets at 5.7% was slightly lower than international travel at 6.7%. Global freight traffic (measured in FTK) increased by 3.8% in 2016, which almost doubled the industry’s 2.0% average growth in the past five years 2. All regions, outside of Latin America, experienced positive freight growth. The lead region was Europe at 7.6%, which accounted for almost half of the total global annual increase in freight demand, and the Middle East was in second place, with an increase of 6.9%, even though the region experienced its slowest pace of growth since 2009. Results from large commercial aircraft manufacturers were mixed in 2016, although their backlog and projections remain positive going forward. Airbus continued its growth with a new record for aircraft deliveries of 688 aircraft for 82 customers, an increase from 635 aircraft to 85 customers in 20153. At the end of 2016, Airbus’ overall backlog stood at 6,874 aircraft valued at US $1 trillion at list prices. On March 2, 2016, construction of the Airbus China A330 completion and delivery center started in Tianjin, where A330 aircraft will be finished and delivered to Chinese clients. It is the company’s first completion and delivery center for wide-body aircraft outside of Europe4. Boeing’s deliveries decreased from 762 aircraft in 2015 to 748 in 20165. Boeing introduced and shipped 82 B737 MAX, a re-engined version of their successful B737 which helps their customers save fuel through new engine technologies. Boeing published their backlog at the end of 2016 as 5,712 aircraft including 4,452 B737 aircraft and 700 B787 aircraft. This backlog represents orders of nearly US $500 billion6. Embraer continued to see improved results from 2015 and delivered a total of 108 commercial and 117 executive jets (73 light and 4 large), in 20167. The total aircraft delivered is the highest volume of deliveries in six years. The manufacturer has a backlog of 450 aircraft. Bombardier delivered less aircraft than the previous year, a total of 249 business and commercial jets compared to 275 aircraft in 2015. While business jet deliveries decreased 36%, commercial deliveries increased 10% over the previous year8. Bombardier’s backlog at the end of 2016 is $15.4 billion in business jets and 436 commercial aircraft. Results released for the general aviation industry were weak because of the continued downturn in the economy. The General Aviation Manufacturers Association (GAMA) reported that numbers in worldwide general aviation airplane shipments in 2016 were down 3.9% at 2,241 compared to 2,331 in 20159. According to IATA’s 2017 outlook10, the global aviation industry is in the middle of what is expected to be the most profitable three-year span of its history, and is expected to retain USD $7.54 for every passenger carried in 2017. IATA reports that the industry is expected to add 1,700 new aircraft in 2017, expanding the global commercial fleet by 3.6% to 28,700. In addition, flights in 2017 are expected to increase 4.9% over 2016. Margins remain tight for airlines on their route to profitability depending on the regions they operate in. African, Middle Eastern and Latin American carriers remain close to or below break-even (many airlines are at a loss). While airline profits in North America are significantly ahead of other regions. The world’s two largest airplane manufacturers, Boeing and Airbus, predict strong industry growth in new aircraft shipments in the next twenty years. Boeing predicts a need for 39,000 new aircraft worth US $5.9 trillion11 and Airbus’ states the demand for 33,000 aircraft worth US $5.2 trillion12. Asia is expected to become the world’s leading travel market and will constitute 48.7% of global passenger traffic by 203513, with China needing 1,500 new widebody aircraft and 5,100 single-aisle airplanes. With the growth in the industry, the aviation market is increasingly relying on satellites for safety and operations as well as cockpit communications. According to Euroconsult, a global consulting and research firm, the biggest use of satellites is for communications and is continuing to grow14. They forecast the launch of 1,450 satellites between 2016 and 2025, a market of $250 billion15. 1 http://www.iata.org/pressroom/pr/Pages/2017-02-02-01.aspx 2 http://www.iata.org/pressroom/pr/Pages/2017-02-01-01.aspx 3 http://www.airbus.com/newsevents/news-events-single/detail/airbus-achieves- targets-proving-ramp-up-readiness-in-2016/ 4 http://www.airbus.com/newsevents/news-events-single/detail/airbus-achieves- targets-proving-ramp-up-readiness-in-2016/ 5 http://boeing.mediaroom.com/2017-01-25-Boeing-Reports-Fourth-Quarter-Results- and-Provides-2017-Guidance 6 http://boeing.mediaroom.com/2017-01-25-Boeing-Reports-Fourth-Quarter-Results- and-Provides-2017-Guidance 7 http://www.embraer.com/Documents/noticias/001%20embraer%20deliveries%20 4q16-ins-vpf-i-17%20vale%20este.pdf 8 http://ir.bombardier.com/en/press-releases/press-releases/67577-bombardier- reports-fourth-quarter-and-full-year-2016-results 9 http://gama.aero/media-center/press-releases/content/gama-unveils-2016-year- end-aircraft-shipment-and-billings-number 10 http://www.iata.org/whatwedo/Documents/economics/IATA-Economic- Performance-of-the-Industry-end-year-2016-report.pdf 11 http://www.boeing.com/commercial/market/long-term-market/world-regions/#/cis 12 http://www.airbus.com/company/market/global-market-forecast-2016-2035/ 13 http://www.boeing.com/commercial/market/long-term-market/world-regions/#/cis 14 http://www.euroconsult-ec.com/research/satellite-value-chain-2016-extract.pdf 15 http://www.euroconsult-ec.com/13_September_2016 27 FLYHT’s Market FLYHT’s technology is available to a number of sectors within the global aerospace industry. AFIRS technology can be installed on commercial, business or military aircraft. FLYHT’s primary sales target has been commercial passenger and freight air transport customers, and the secondary targets are business jet aircraft (used for business and personal travel) and military air transport aircraft that require AFIRS functionality. FLYHT’s business relies primarily on retrofitting existing aircraft to provide recurring, real-time aircraft data services. It is FLYHT’s objective to win additional positions on new aircraft, with a goal to fit AFIRS equipment on the aircraft during production so that services can be turned on immediately after delivery to the customer. FLYHT remains an industry leader in providing increased operational control and aircraft situational awareness. The Company has focused on the development and implementation of a cloud-based UpTime software over the past year and a half. UpTime Cloud marks an improvement in the Company’s current technology with real-time systems diagnostics. The technology relies on the use of satellites for real-time communication with the aircraft. The FLYHTHealth program within UpTime Cloud is significant in its ability to detect and notify the airline of any problems while the aircraft is in flight and allow the operator to prepare for repair before the aircraft lands, thereby reducing the financial impact of unscheduled maintenance. FLYHT has participated in industry events and working groups to demonstrate AFIRS’ capabilities and the real-time data streaming enabled by FLYHTStream. 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 strengthening of the Canadian dollar relative to the U.S. dollar throughout 2016 had a negative impact on the Company’s revenue and income compared to 2015. As a result of these currency movements, the Company’s revenues, which are substantially all denominated in U.S. dollars, were lower 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 2016 Contracts In February, FLYHT announced a strategic partnership with Flight Data Services Ltd., a global leader in flight data monitoring, to offer a complete flight data acquisition and analysis solution to the aviation industry. In March, FLYHT announced that contracts had been signed in the six months then ended with six new airlines (four new contracts in 2016 including two in China) that will install AFIRS and/or sign up for UpTime services. The aggregate revenue on all six contracts is expected to be approximately USD $615,000. In April, FLYHT announced an order from an OEM partner for USD $1.2 million in parts with related license fees, for immediate delivery, and signed its third Chinese airline customer of the year to contract. The aggregate revenue from the Chinese customer will be approximately USD $1 million. FLYHT signed five new contracts for voice and data services in the second quarter of 2016 with a value of USD $2.3 million over the term of the agreements. FLYHT received parts orders from an existing OEM partner for approximately USD $1.0 million of parts with related license fees. FLYHT signed one new sales agreement for AFIRS 228 hardware equipment of approximately USD $227,000 in China. The Company signed an order for voice and data services for an operator in Africa which will total USD $156,000. FLYHT announced updates to customer and parts sales activity in the third quarter of 2016 including parts orders from an existing OEM partner for USD $1.0 million of parts with related license fees. FLYHT signed one new hardware agreement for AFIRS 228 in China and one new operator in Africa for voice and data services. In August, FLYHT announced the launch of real-time data services in China. The undisclosed airline was the first Chinese customer to select data services provided by AFIRS on its fleet of CRJ-900 aircraft. The aggregate data services revenue on this contract is initially valued at USD $1.05 million. Subsequent to the end of the third quarter, FLYHT entered into an agreement with an Information Technology Company that implements data solutions for Chinese commercial aviation operators for the sale of the AFIRS 228S with the initial hardware valued at approximately USD $4.26 million. In November, FLYHT announced an amendment to the contract to increase to an approximate value of USD $6.94 million. In November, FLYHT announced a contract with Guangzhou Aircraft Maintenance Engineering Company Limited (GAMECO) to provide repair services to FLYHT’s customers in China. GAMECO specializes in aircraft and airborne component MRO. At the end of the year, FLYHT announced updates from the fourth quarter including receipt of orders from an existing OEM partner for approximately USD $1.8 million parts with related license fees. FLYHT also signed two new airline customers in China for AFIRS 228 during the fourth quarter for a total value of approximately USD $709,000. During Q4, two existing customers added AFIRS 228 units with voice and data services for revenue value of approximately USD $811,000. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 28 Achievements • In January, FLYHT announced receipt of CAN-TSO-C159b, for AFIRS 228S. • In January, FLYHT announced the approval of the extension of the debenture conversion expiry date to December 2016 and amendment of • In the second quarter, FLYHT also received the CAAC STC for the Boeing 767 200 and 300 series. • In June 2016 FLYHT’s outstanding debentures matured and were repaid in the conversion price to $0.25. full for $2.5 million. • During the third quarter, FLYHT received new STCs for the AFIRS 228 from the FAA including the ATR 42-300 and the ATR 72-100/200 aircraft. • In November FLYHT was awarded a $2.35 million Western Innovation repayable contribution by Western Economic Initiative (WINN) Diversification Canada. • In December FLYHT was granted CAAC Part-145 approval by the CAAC. The approval took almost two years to achieve and allows FLYHT to repair AFIRS units and return them to customers in China with an AAC-038 release certificate. • In December FLYHT’s outstanding redeemable debentures matured and were repaid in full for $3.1 million. • FLYHT was awarded an STC from the CAAC in December that allows for further installation on the CRJ 100, 200, 440, 700 and 900 aircraft. • In February, FLYHT announced that as part of its investor relations strategy for 2016, it would continue to engage the services of The Howard Group Inc. to assist with its investor relations activities. • In April, FLYHT announced the receipt of the first of two milestone payments of the aggregate $2.5 million USD license fee due from a technology company the “Licensee”. The second milestone was received later in the quarter. • In May, FLYHT announced that it closed a private placement offering for aggregate consideration of $5,086,512. • In May, FLYHT announced STCs for the AFIRS 228. The approved aircraft types include the ATR 42-500 “600 version” and the ATR 72-212A “600 version” from EASA, the Boeing B757-200 aircraft from the FAA and the TCCA STC for the Bombardier DHC 8 -100, 200, 300 series aircraft. • In June, FLYHT announced appointment of Matieu Plamondon, Vice President Operations and Customer Fulfillment and David Perez, Vice President Sales and Marketing as officers of the Company. 29 Results of Operations – Years Ended December 31, 2016, 2015 and 2014 Results of Operations – Years Ended December 31, 2016, 2015 and 2014 Results of Operations – Years Ended December 31, 2016, 2015 and 2014 Selected Results Selected Results 2016 Selected Results 2016 Assets Non-current financial liabilities Assets Revenue Non-current financial liabilities Cost of sales Revenue Distribution expenses Cost of sales Administration expenses Distribution expenses Research, development and Administration expenses certification engineering Research, development and expenses certification engineering Income (loss) from operating expenses activities Income (loss) from operating Depreciation activities EBITDA* Depreciation Income (loss) EBITDA* Income (loss) before R&D Income (loss) Income (loss) per share (basic Income (loss) before R&D & fully diluted) Income (loss) per share (basic 2015 & fully diluted) 2015 Assets Non-current financial liabilities Assets Revenue Non-current financial liabilities Cost of sales Revenue Distribution expenses Cost of sales Administration expenses Distribution expenses Research, development and Administration expenses certification engineering Research, development and expenses certification engineering Loss from operating activities expenses Depreciation Loss from operating activities EBITDA* Depreciation Loss EBITDA* Income (loss) before R&D Loss Income (loss) per share (basic Income (loss) before R&D & fully diluted) Income (loss) per share (basic 2014 & fully diluted) 2014 Assets Non-current financial liabilities Assets Revenue Non-current financial liabilities Cost of sales Revenue Distribution expenses Cost of sales Administration expenses Distribution expenses Research, development and Administration expenses certification engineering Research, development and expenses certification engineering Income (loss) from operating expenses activities Income (loss) from operating Depreciation activities EBITDA* Depreciation Loss EBITDA* Loss before R&D Loss Loss per share (basic & fully Loss before R&D diluted) Loss per share (basic & fully diluted) Q4 $ Q4 6,516,206 $ 974,749 6,516,206 4,127,827 974,749 1,034,450 4,127,827 1,424,211 1,034,450 719,097 1,424,211 719,097 725,739 Q3 $ Q3 9,189,104 $ 996,121 9,189,104 4,054,368 996,121 1,346,341 4,054,368 1,101,318 1,346,341 626,733 1,101,318 626,733 550,443 Q2 $ Q2 9,655,504 $ 1,002,872 9,655,504 3,537,665 1,002,872 1,278,746 3,537,665 1,248,783 1,278,746 1,103,399 1,248,783 1,103,399 336,871 Q1 $ Q1 5,803,079 $ 602,011 5,803,079 2,611,331 602,011 861,965 2,611,331 1,132,727 861,965 638,427 1,132,727 638,427 988,176 Total $ Total 6,516,206 $ 974,749 6,516,206 14,331,191 974,749 4,521,502 14,331,191 4,907,039 4,521,502 3,087,656 4,907,039 3,087,656 2,601,229 725,739 224,330 550,443 429,533 336,871 2,793,032 988,176 (1,009,964) 2,601,229 2,436,931 224,330 18,687 243,017 18,687 79,709 243,017 805,448 79,709 805,448 0.00 0.00 Q4 $ Q4 5,478,867 $ 390,110 5,478,867 3,769,267 390,110 1,340,513 3,769,267 1,084,443 1,340,513 1,573,796 1,084,443 1,573,796 689,195 689,195 (918,680) 15,896 (918,680) (902,784) 15,896 (1,203,998) (902,784) (514,803) (1,203,998) (514,803) (0.01) (0.01) Q4 $ Q4 8,275,546 $ 5,506,179 8,275,546 2,218,681 5,506,179 849,221 2,218,681 990,650 849,221 780,039 990,650 780,039 772,725 429,533 16,302 445,835 303,890 854,333 16,302 445,835 303,890 854,333 0.00 2,793,032 15,562 2,808,594 2,572,061 2,908,932 15,562 2,808,594 2,572,061 2,908,932 0.02 (1,009,964) 16,128 (993,836) 16,128 (1,242,942) (993,836) (254,766) (1,242,942) (254,766) (0.01) 0.00 Q3 $ Q3 6,140,675 $ 3,267,030 6,140,675 2,519,347 3,267,030 672,341 2,519,347 1,142,086 672,341 607,755 1,142,086 607,755 638,104 0.02 Q2 $ Q2 6,344,752 $ 3,053,577 6,344,752 1,598,603 3,053,577 562,535 1,598,603 987,330 562,535 943,931 987,330 943,931 737,968 (0.01) Q1 $ Q1 7,752,509 $ 5,407,303 7,752,509 2,569,908 5,407,303 637,901 2,569,908 763,774 637,901 551,471 763,774 551,471 737,285 2,436,931 66,679 2,503,610 66,679 1,712,718 2,503,610 4,313,947 1,712,718 0.01 4,313,947 0.01 Total $ Total 5,478,867 $ 390,110 5,478,867 10,457,125 390,110 3,213,290 10,457,125 3,977,633 3,213,290 3,676,953 3,977,633 3,676,953 2,802,552 638,104 (540,939) 13,652 (540,939) (527,287) 13,652 (683,224) (527,287) (45,120) (683,224) (45,120) 0.00 737,968 (1,633,161) 13,707 (1,633,161) (1,619,454) 13,707 (1,943,924) (1,619,454) (1,205,956) (1,943,924) (1,205,956) (0.01) 737,285 (120,523) 13,618 (120,523) (106,905) 13,618 (60,414) (106,905) 676,871 (60,414) 676,871 0.00 2,802,552 (3,213,303) 56,873 (3,213,303) (3,156,430) 56,873 (3,891,560) (3,156,430) (1,089,008) (3,891,560) (1,089,008) (0.02) 0.00 Q3 $ Q3 8,968,372 $ 2,728,769 8,968,372 1,808,794 2,728,769 655,927 1,808,794 806,051 655,927 985,756 806,051 985,756 848,119 (0.01) Q2 $ Q2 10,281,225 $ 2,433,044 10,281,225 1,505,767 2,433,044 604,860 1,505,767 816,240 604,860 1,119,379 816,240 1,119,379 (1,277,790) 0.00 Q1 $ Q1 9,734,630 $ 2,262,812 9,734,630 1,348,786 2,262,812 440,043 1,348,786 780,050 440,043 663,344 780,050 663,344 434,695 (0.02) Total $ Total 8,275,546 $ 5,506,179 8,275,546 6,882,028 5,506,179 2,550,051 6,882,028 3,392,991 2,550,051 3,548,518 3,392,991 3,548,518 777,749 772,725 (1,173,954) 848,119 (1,487,059) (1,277,790) 243,078 434,695 (969,346) 777,749 (3,387,281) (1,173,954) 1,932 (1,172,022) 1,932 (1,305,712) (1,172,022) (532,986) (1,305,712) (532,986) (0.01) (1,487,059) 22,127 (1,464,932) 22,127 (1,653,147) (1,464,932) (805,028) (1,653,147) (805,028) (0.01) 243,078 21,859 264,937 21,859 (46,925) 264,937 (1,324,716) (46,925) (1,324,716) (0.00) (969,346) 19,404 (949,942) 19,404 (1,273,101) (949,942) (838,406) (1,273,101) (838,406) (0.01) (3,387,281) 65,322 (3,321,959) 65,322 (4,278,885) (3,321,959) (3,501,136) (4,278,885) (3,501,136) (0.03) (0.01) (0.01) (0.00) (0.01) (0.03) *See Non-GAAP Financial Measures *See Non-GAAP Financial Measures 3- 3- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 30 Weighted Average Shares Outstanding Weighted Average Shares Outstanding Weighted Average Shares Outstanding Basic Diluted 2016 $ 195,070,653 195,560,928 2016 $ 195,070,653 195,419,579 2015 $ 172,423,488 172,423,488 2015 $ 172,423,488 172,423,488 2014 $ 166,441,119 166,441,119 2014 $ 166,441,119 166,441,119 Financial Position Basic Diluted Financial Position Liquidity and Capital Resource Financial Position The Company’s cash at December 31, 2016 decreased to $709,958 from $1,301,955 at December 31, 2015. 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 Liquidity and Capital Resource collateral and a general security agreement. Liquidity and Capital Resource The Company’s cash at December 31, 2016 decreased to $709,958 from $1,301,955 at December 31, 2015. The Company has an available and undrawn operating line of $250,000 at Canadian chartered bank prime plus 1.5%, secured by assignment of cash collateral and a general security agreement. At December 31, 2016, the Company had positive working capital of $1,724,190 compared to negative $5,413,927 as of December 31, 2015, an increase of $7,138,117. Neither customer deposits, nor the current portion of unearned revenue are At December 31, 2016, the Company had positive working capital of $1,724,190 compared to negative $5,413,927 as of December 31, 2015, an increase of $7,138,117. refundable, and if those two items are excluded in the working capital calculation, the resulting modified working capital at 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 December 31, 2016 would be positive $2,869,324 compared to negative $3,306,055 at December 31, 2015. resulting modified working capital at December 31, 2016 would be positive $2,869,324 compared to negative $3,306,055 at December 31, 2015. On May 12, 2016, the Company closed a private placement, issuing 33,910,081 units at a price of $0.15 per unit, for total proceeds On May 12, 2016, the Company closed a private placement, issuing 33,910,081 units at a price of $0.15 per unit, for total proceeds of $5,086,512. Each unit consisted of of $5,086,513. Each unit consisted of one common share and one-half of one share purchase warrant. Each whole warrant entitles one common share and one-half of one share purchase warrant. Each whole warrant entitles the holder to purchase one additional common share of the Company for a the holder to purchase one additional common share of the Company for a period of 24 months from the issuance of the units at a period of 24 months from the issuance of the units at a price of $0.25. Finder’s fees totaled $317,275. A total of 2,115,167 finder’s warrants were also issued, exercisable price of $0.25. Finder’s fees totaled $317,275. A total of 2,115,167 finder’s options were also issued, exercisable into one unit at into one unit at $0.15 per unit within 24 months from the closing date. All of the common shares and warrants issued pursuant to the private placement were subject to $0.15 per unit within 24 months from the closing date. All of the common shares and warrants issued pursuant to the private a 4-month hold period. placement were subject to a 4-month hold period. At December 31, 2016, the Company had positive working capital of $1,724,190 compared to negative $5,413,927 as of December 31, 2015, an increase of $7,138,117. 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, 2016 would be positive $2,869,324 compared to negative $3,306,055 at December 31, 2015. The Company’s cash at December 31, 2016 decreased to $709,958 from $1,301,955 at December 31, 2015. 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. On May 12, 2016, the Company closed a private placement, issuing 33,910,081 units at a price of $0.15 per unit, for total proceeds of $5,086,512. Each unit consisted of one common share and one-half of one share purchase warrant. Each whole warrant entitles the holder to purchase one additional common share of the Company for a period of 24 months from the issuance of the units at a price of $0.25. Finder’s fees totaled $317,275. A total of 2,115,167 finder’s warrants were also issued, exercisable into one unit at $0.15 per unit within 24 months from the closing date. All of the common shares and warrants issued pursuant to the private placement were subject to a 4-month hold period. The Company granted a non-exclusive license to use certain of its intellectual property to a technology company for an aggregate license fee of $3,223,166. Payment The Company granted a non-exclusive license to use certain of its intellectual property to a technology company for an aggregate was received for both contracted milestones in Q2 2016. license fee of $3,223,166. Payment was received for both contracted milestones in Q2 2016. A portion of the net proceeds of the private placement and the non-exclusive license were used to repay the debentures that were due in June 2016 and to redeem the A portion of the net proceeds of the private placement and the non-exclusive license were used to repay the debentures that were debentures that matured on December 23, 2016. due in June 2016 and to redeem the debentures that matured on December 23, 2016. The Company granted a non-exclusive license to use certain of its intellectual property to a technology company for an aggregate license fee of $3,223,166. Payment was received for both contracted milestones in Q2 2016. The Company funded 2016 operations primarily through the private placement, the receipt of the funds resulting from the sale of a non-exclusive license and cash The Company funded 2016 operations primarily through the private placement, the receipt of the funds resulting from the sale of a received from sales. The Company will continue to strive to self-fund operations through 2017. non-exclusive license and cash received from sales. The Company will continue to strive to self-fund operations through 2017. A portion of the net proceeds of the private placement and the non-exclusive license were used to repay the debentures that were due in June 2016 and to redeem the debentures that matured on December 23, 2016. 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) 2016 $ 709,958 250,000 2,105,385 2016 216,819 $ 1,556,794 709,958 (2,163,307) 250,000 (827,235) 2,105,385 (97,895) 216,819 (15,553) 1,556,794 (10,776) (2,163,307) 1,724,190 (827,235) (97,895) 827,235 (15,553) 317,899 (10,776) 2,869,324 1,724,190 The Company funded 2016 operations primarily through the private placement, the receipt of the funds resulting from the sale of a Cash and cash equivalents non-exclusive license and cash received from sales. The Company will continue to strive to self-fund operations through 2017. Restricted cash Trade and other receivables Deposits and prepaid expenses Inventory Cash and cash equivalents Trade payables and accrued liabilities Restricted cash Unearned revenue Trade and other receivables Loans and borrowings Deposits and prepaid expenses Finance lease obligations Inventory Current tax liabilities Trade payables and accrued liabilities Working capital Unearned revenue Loans and borrowings Finance lease obligations Current tax liabilities Working capital *See Non-GAAP Financial Measures *See Non-GAAP Financial Measures Unearned revenue Customer deposits Modified working capital* a) 24,050 options were exercised at $0.19 per share for proceeds of $4,570 a) 24,050 options were exercised at $0.19 per share for proceeds of $4,570 b) 30,000 options were exercised at $0.25 per share for proceeds of $7,500 b) 30,000 options were exercised at $0.25 per share for proceeds of $7,500 Variance $ (591,997) - 1,207,219 Variance 78,958 $ (159,519) (591,997) 594,400 - 259,962 1,207,219 5,742,523 78,958 12,369 (159,519) (5,798) 594,400 7,138,117 259,962 5,742,523 (259,962) 12,369 (702,776) (5,798) 6,175,379 7,138,117 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) In 2016 option exercises resulted in the Company issuing a total of 54,050 shares for total proceeds of $12,070 including: In 2016 option exercises resulted in the Company issuing a total of 54,050 shares for total proceeds of $12,070 including: Unearned revenue Customer deposits Modified working capital* 827,235 317,899 2,869,324 (259,962) (702,776) 6,175,379 1,087,197 1,020,675 (3,306,055) 1,087,197 1,020,675 (3,306,055) *See Non-GAAP Financial Measures In 2016 option exercises resulted in the Company issuing a total of 54,050 shares for total proceeds of $12,070 including: As at April 4, 2017 FLYHT’s issued and outstanding share capital was 208,629,439 31 a) 24,050 options were exercised at $0.19 per share for proceeds of $4,570 b) 30,000 options were exercised at $0.25 per share for proceeds of $7,500 As at April 4, 2017 FLYHT’s issued and outstanding share capital was 208,629,439 4- 4- As at April 4, 2017 FLYHT’s issued and outstanding share capital was 208,629,439. The consistent achievement of positive earnings 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 and signature of an increasing size and number of contracts for delivery of AFIRS units and related services. 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. 2016 revenue was a 37% increase over 2015 which contributed to an operating income of $2,436,931; being $5,650,234 more than 2015. To continue as a going concern, the Company will need to maintain 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 revenue streams and expanding markets adversely change, 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 to revenue 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. There is a credit risk associated with accounts receivable where the customer fails to pay invoices. The Company extends credit to 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 credit-worthy or well-established customers. In the case of AFIRS sales the invoiced amount is frequently payable before the 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 product is shipped to the customer. The Company assesses the financial risk of a customer and based on that analysis may of a customer and based on that analysis may require that a deposit payment be made before services are provided. To further minimize credit exposure credit insurance require that a deposit payment be made before services are provided. To further minimize credit exposure credit insurance is is obtained on select customers whose balances have not been prepaid. In the case of monthly recurring revenue, the Company has the ability to disable the AFIRS unit obtained on select customers whose balances have not been prepaid. In the case of monthly recurring revenue, the Company has transmissions where the customer has not fulfilled its financial obligations. 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, 2016 Accounts payable Compensation and statutory deductions < 2 months $ 769,261 2-12 months $ - 1-2 years $ - 2-5 years $ - > 5 years $ - Total $ 769,261 371,303 349,223 108,000 45,000 - 873,526 Finance lease liabilities 4,970 10,826 - - - Accrued liabilities 83,497 Loans and borrowings - Total 1,229,031 82,206 103,768 546,023 11,658 25,259 - 119,333 238,991 476,546 546,805 1,030,935 1,730,582 1,030,935 3,591,785 15,796 202,620 Under SADI, the Company has, at December 31, 2016, an outstanding repayable balance of $1,730,582, compared to $1,820,816 Under SADI, the Company has, at December 31, 2016, an outstanding repayable balance of $1,730,582, compared to $1,820,816 at December 31, 2015. The amount at December 31, 2015. The amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment 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 on April 30, 2014 was 3.5% of the total contribution received and the payment increases yearly by 15% until April 30, 2028 when 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 2016 was $90,234 the final payment will be 24.5% of the total contribution received. The repayment in 2016 was $90,234 (2015: $78,462). A summary of the SADI loan carrying value as at December 31, 2016 and 2015 and changes during these years is presented below. (2015: $78,462). Balance January 1 Interest accretion Repayment Balance December 31 Less current portion Non-current portion 2016 $ 984,507 178,368 (90,234) 1,072,641 103,768 968,873 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, 2016 and 2015 and changes during these years is presented below. Balance January 1 Repayment Balance December 31 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 32 2016 $ 1,820,816 (90,234) 1,730,582 2015 $ 1,899,278 (78,462) 1,820,816 The redeemable debenture issued in two tranches on April 18 and May 28, 2013, for an aggregate $2,110,000, matured on June 30, 2016 and was redeemed for $2,321,000. The convertible 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, to December 23, 2016. The debentures were redeemed on December 23, 2016 for $3,039,000 plus accrued interest. On November 9, 2016, the Company signed a contribution agreement with Western Economic Diversification Canada for a Western Innovation initiative (WINN) loan to support plans for technology development in the air and ground components of the products. Under the terms of the agreement, a repayable unsecured WINN contribution to the value of the lesser of 50% of the eligible project costs to March 31, 2019 or $2,350,000 will be received. The amount is repayable over five years commencing January 1, 2020. At December 31, 2016, the Company had not yet received a contribution and no loan amount was outstanding. 5- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 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 There is a credit risk associated with accounts receivable where the customer fails to pay invoices. The Company extends credit to product is shipped to the customer. The Company assesses the financial risk of a customer and based on that analysis may credit-worthy or well-established customers. In the case of AFIRS sales the invoiced amount is frequently payable before the require that a deposit payment be made before services are provided. To further minimize credit exposure credit insurance is product is shipped to the customer. The Company assesses the financial risk of a customer and based on that analysis may obtained on select customers whose balances have not been prepaid. In the case of monthly recurring revenue, the Company has require that a deposit payment be made before services are provided. To further minimize credit exposure credit insurance is the ability to disable the AFIRS unit transmissions where the customer has not fulfilled its financial obligations. obtained on select customers whose balances have not been prepaid. 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, 2016 December 31, 2016 Accounts payable Accounts payable Compensation and statutory deductions Compensation and statutory deductions Finance lease liabilities < 2 months < 2 months $ 2-12 months 2-12 months $ 1-2 years 1-2 years $ 769,261 $ 769,261 371,303 371,303 - $ - 349,223 349,223 4,970 10,826 $ - - 108,000 108,000 - 2-5 years 2-5 years $ - $ - 45,000 45,000 > 5 years > 5 years $ $ - - - - - - Finance lease liabilities Accrued liabilities 4,970 83,497 10,826 82,206 - 11,658 - 25,259 - - Accrued liabilities Loans and borrowings Loans and borrowings Total Total - 83,497 - 1,229,031 1,229,031 82,206 103,768 103,768 546,023 546,023 11,658 119,333 119,333 238,991 238,991 25,259 476,546 476,546 546,805 546,805 1,030,935 - 1,030,935 1,030,935 1,030,935 Total Total $ 769,261 $ 769,261 873,526 873,526 15,796 15,796 202,620 202,620 1,730,582 1,730,582 3,591,785 3,591,785 Under SADI, the Company has, at December 31, 2016, an outstanding repayable balance of $1,730,582, compared to $1,820,816 at December 31, 2015. The amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment Under SADI, the Company has, at December 31, 2016, an outstanding repayable balance of $1,730,582, compared to $1,820,816 on April 30, 2014 was 3.5% of the total contribution received and the payment increases yearly by 15% until April 30, 2028 when at December 31, 2015. The amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment the final payment will be 24.5% of the total contribution received. The repayment in 2016 was $90,234 (2015: $78,462). A on April 30, 2014 was 3.5% of the total contribution received and the payment increases yearly by 15% until April 30, 2028 when summary of the SADI loan carrying value as at December 31, 2016 and 2015 and changes during these years is presented below. the final payment will be 24.5% of the total contribution received. The repayment in 2016 was $90,234 (2015: $78,462). A A summary of the SADI loan carrying value as at December 31, 2016 and 2015 and changes during these years is presented below. summary of the SADI loan carrying value as at December 31, 2016 and 2015 and changes during these years is presented below. Balance January 1 Interest accretion Balance January 1 Repayment Interest accretion Balance December 31 Repayment Less current portion Balance December 31 Non-current portion Less current portion Non-current portion Balance January 1 Repayment Balance January 1 Balance December 31 Repayment Balance December 31 2016 $ 2016 984,507 $ 178,368 984,507 (90,234) 178,368 1,072,641 (90,234) 103,768 1,072,641 968,873 103,768 968,873 2016 $ 2016 1,820,816 $ (90,234) 1,820,816 1,730,582 (90,234) 1,730,582 2015 $ 2015 899,600 $ 163,369 899,600 (78,462) 163,369 984,507 (78,462) 90,234 984,507 894,273 90,234 894,273 2015 $ 2015 1,899,278 $ (78,462) 1,899,278 1,820,816 (78,462) 1,820,816 A summary of the SADI outstanding payable balance as at December 31, 2016 and 2015 and changes during these years is A summary of the SADI outstanding payable balance as at December 31, 2016 and 2015 and changes during these years is presented below. presented below. A summary of the SADI outstanding payable balance as at December 31, 2016 and 2015 and changes during these years is presented below. The redeemable debenture issued in two tranches on April 18 and May 28, 2013, for an aggregate $2,110,000, matured on June 30, 2016 and was redeemed for The redeemable debenture issued in two tranches on April 18 and May 28, 2013, for an aggregate $2,110,000, matured on June $2,321,000. 30, 2016 and was redeemed for $2,321,000. The redeemable debenture issued in two tranches on April 18 and May 28, 2013, for an aggregate $2,110,000, matured on June 30, 2016 and was redeemed for $2,321,000. The convertible 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 The convertible debenture issued December 23, 2010 had an original face value of $3,159,000 and was set to mature on approval was received to extend the maturity date of the debentures then remaining outstanding from four to six years, to December 23, 2016. The debentures were December 23, 2014. On December 22, 2014 approval was received to extend the maturity date of the debentures then remaining The convertible debenture issued December 23, 2010 had an original face value of $3,159,000 and was set to mature on redeemed on December 23, 2016 for $3,039,000 plus accrued interest. outstanding from four to six years, to December 23, 2016. The debentures were redeemed on December 23, 2016 for $3,039,000 December 23, 2014. On December 22, 2014 approval was received to extend the maturity date of the debentures then remaining plus accrued interest. outstanding from four to six years, to December 23, 2016. The debentures were redeemed on December 23, 2016 for $3,039,000 On November 9, 2016, the Company signed a contribution agreement with Western Economic Diversification Canada for a Western Innovation initiative (WINN) plus accrued interest. repayable contribution to support plans for technology development in the air and ground components of the products. Under the terms of the agreement, a repayable On November 9, 2016, the Company signed a contribution agreement with Western Economic Diversification Canada for a Western Innovation initiative (WINN) loan to support plans for technology development in the air and ground components of the unsecured WINN contribution to the value of the lesser of 50% of the eligible project costs to March 31, 2019 or $2,350,000 will be received. The amount is repayable On November 9, 2016, the Company signed a contribution agreement with Western Economic Diversification Canada for a products. Under the terms of the agreement, a repayable unsecured WINN contribution to the value of the lesser of 50% of the Western Innovation initiative (WINN) loan to support plans for technology development in the air and ground components of the over five years commencing January 1, 2020. At December 31, 2016, the Company had not yet received a contribution and no loan amount was outstanding. eligible project costs to March 31, 2019 or $2,350,000 will be received. The amount is repayable over five years commencing products. Under the terms of the agreement, a repayable unsecured WINN contribution to the value of the lesser of 50% of the January 1, 2020. At December 31, 2016, the Company had not yet received a contribution and no loan amount was outstanding. Minimum lease payments are as follows. Minimum lease payments are as follows. eligible project costs to March 31, 2019 or $2,350,000 will be received. The amount is repayable over five years commencing Total January 1, 2020. At December 31, 2016, the Company had not yet received a contribution and no loan amount was outstanding. $ Total 15,796 $ 15,796 Minimum lease payments are as follows. 2017 2017 Year Year Customer Deposits FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 5- Customer Deposits Customer Deposits 5- FLYHT’s revenue recognition for AFIRS sales and Parts sales occurs in a series of steps. The process begins with the receipt of 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, customer deposits, followed by shipment, installation and finally customer usage of the AFIRS Solution. 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 Customers are frequently required to pay for AFIRS units and installation kits prior to the planned shipment date. This prepayment 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 revenue recognition criteria is recorded as a customer deposit, which is recognized as an accrued liability upon receipt. When the AFIRS unit and installation for each contract has been met, at which point the unearned revenue is recognized as AFIRS sales revenue. where it will remain until the revenue recognition criteria for each contract has been met, at which point the unearned revenue is recognized as AFIRS sales revenue. kit are shipped, the customer deposit is reclassified to unearned revenue, where it will remain until the revenue recognition criteria for each contract has been met, 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 deposit. The Parts sales revenue is recognized when the ordered part or unit is shipped. When customers order spare parts or Underfloor Stowage Units and a prepayment is required, it is also recorded as a customer 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 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. Customer deposits are amounts received for AFIRS sales and parts that have not yet been shipped to the customer, and services (“SFP”) in trade payables and accrued liabilities. that have not yet been completed. These deposits are nonrefundable, and are included on the Statement of Financial Position The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2016 and 2015. Payment was received for 14 The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2016 (“SFP”) in trade payables and accrued liabilities. installation kits in the fourth quarter of 2016 compared to 11 received in the fourth quarter of 2015, bringing 2016 year-to-date (“YTD”) total payments for installation and 2015. Payment was received for 14 installation kits in the fourth quarter of 2016 compared to 11 received in the fourth quarter The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2016 of 2015, bringing 2016 year-to-date (“YTD”) total payments for installation kits to 58, compared to a total of 36 in 2015. kits to 58, compared to a total of 36 in 2015. and 2015. Payment was received for 14 installation kits in the fourth quarter of 2016 compared to 11 received in the fourth quarter of 2015, bringing 2016 year-to-date (“YTD”) total payments for installation kits to 58, compared to a total of 36 in 2015. Opening balance Payments received Moved to unearned revenue Opening balance Payments received Balance, December 31 Moved to unearned revenue Balance, December 31 Unearned Revenue Q4 2016 $ Q4 2016 508,224 $ 512,257 508,224 (702,582) 512,257 317,899 (702,582) Q4 2015 $ Q4 2015 524,325 $ 1,229,085 524,325 (732,735) 1,229,085 1,020,675 (732,735) Variance $ Variance (16,101) $ (716,828) (16,101) 30,153 (716,828) (702,776) 30,153 YTD 2016 $ YTD 2016 1,020,675 $ 2,681,987 1,020,675 (3,384,763) 2,681,987 317,899 (3,384,763) YTD 2015 $ YTD 2015 790,405 $ 2,828,055 790,405 (2,597,785) 2,828,055 1,020,675 (2,597,785) Variance $ Variance 230,270 $ (146,068) 230,270 (786,978) (146,068) (702,776) (786,978) 317,899 1,020,675 (702,776) 317,899 1,020,675 (702,776) 33 Unearned Revenue The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2016 and 2015. Revenue was recognized for 12 installation kits in 2016’s fourth quarter compared to 28 in the fourth quarter of 2015. The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2016 YTD, revenue has been recognized for 73 installation kits in 2016, as compared to 58 in 2015. In 2016, 100.0% of the unearned and 2015. Revenue was recognized for 12 installation kits in 2016’s fourth quarter compared to 28 in the fourth quarter of 2015. revenue balance at December 31, 2015 was recognized as earned revenue (2015: 65.9%). YTD, revenue has been recognized for 73 installation kits in 2016, as compared to 58 in 2015. In 2016, 100.0% of the unearned revenue balance at December 31, 2015 was recognized as earned revenue (2015: 65.9%). Q4 2016 Q4 2015 Variance YTD 2016 YTD 2015 Variance $ Q4 2016 747,511 $ $ Q4 2015 1,922,504 $ $ Variance (1,174,993) $ YTD 2016 1,145,341 $ $ 702,582 747,511 732,735 1,922,504 (30,153) (1,174,993) 3,384,763 1,145,341 19,866 702,582 732,735 19,033 (30,153) 833 3,384,763 19,866 YTD 2015 1,675,746 $ $ 2,597,785 1,675,746 2,597,785 19,033 Variance (530,405) $ $ 786,978 (530,405) 786,978 833 (637,965) 19,866 (1,524,940) 19,033 886,975 833 (3,703,703) 19,866 (3,131,261) 19,033 (572,442) 833 (637,965) (4,759) (1,524,940) (3,991) 886,975 (768) (19,032) (3,703,703) (15,962) (3,131,261) (3,070) (572,442) 827,235 (4,759) 1,145,341 (3,991) (318,106) (768) 827,235 (19,032) 1,145,341 (15,962) (318,106) (3,070) 827,235 1,145,341 (318,106) 827,235 1,145,341 (318,106) Opening balance AFIRS sales shipped Opening balance Voice and data services AFIRS sales shipped prepaid Voice and data services AFIRS sales recognized prepaid Voice and data services AFIRS sales recognized recognized Voice and data services Balance, December 31 recognized Balance, December 31 Comprehensive Income Comprehensive Income 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 use of functions such as the satellite phone. Usage fees are recognized as the service is In the categories listed in the revenue sources chart, Voice and data services is the recurring revenue from customers’ usage of provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales and related data they receive from AFIRS and use of functions such as the satellite phone. Usage fees are recognized as the service is parts required to install the unit along with Dragon hardware sales. Upon shipment, these amounts are deferred as unearned provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales and related revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and the customer has 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 6- 6- Minimum lease payments are as follows. Year 2017 Total $ 15,796 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. 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 kit are shipped, the customer deposit is reclassified to unearned revenue, where it will remain until the revenue recognition criteria for each contract has been met, 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 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 deposits are nonrefundable, and are included on the Statement of Financial Position (“SFP”) in trade payables and accrued liabilities. The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2016 and 2015. Payment was received for 14 installation kits in the fourth quarter of 2016 compared to 11 received in the fourth quarter of 2015, bringing 2016 year-to-date (“YTD”) total payments for installation kits to 58, compared to a total of 36 in 2015. Q4 2016 Q4 2015 Variance YTD 2016 YTD 2015 Variance $ $ $ $ $ $ Opening balance Payments received 508,224 524,325 (16,101) 1,020,675 790,405 230,270 512,257 1,229,085 (716,828) 2,681,987 2,828,055 (146,068) Moved to unearned revenue (702,582) (732,735) 30,153 (3,384,763) (2,597,785) (786,978) Balance, December 31 317,899 1,020,675 (702,776) 317,899 1,020,675 (702,776) Unearned Revenue Unearned Revenue The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2016 The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2016 and 2015. Revenue was recognized for and 2015. Revenue was recognized for 12 installation kits in 2016’s fourth quarter compared to 28 in the fourth quarter of 2015. 12 installation kits in 2016’s fourth quarter compared to 28 in the fourth quarter of 2015. YTD, revenue has been recognized for 73 installation kits in 2016, as compared YTD, revenue has been recognized for 73 installation kits in 2016, as compared to 58 in 2015. In 2016, 100.0% of the unearned to 58 in 2015. In 2016, 100.0% of the unearned revenue balance at December 31, 2015 was recognized as earned revenue (2015: 65.9%). revenue balance at December 31, 2015 was recognized as earned revenue (2015: 65.9%). Q4 2016 $ Q4 2015 $ Variance $ YTD 2016 $ YTD 2015 $ 747,511 702,582 1,922,504 732,735 (1,174,993) (30,153) 1,145,341 3,384,763 1,675,746 2,597,785 Variance $ (530,405) 786,978 19,866 19,033 833 19,866 19,033 833 (637,965) (1,524,940) 886,975 (3,703,703) (3,131,261) (572,442) (4,759) (3,991) (768) (19,032) (15,962) (3,070) 827,235 1,145,341 (318,106) 827,235 1,145,341 (318,106) Opening balance AFIRS sales shipped Voice and data services prepaid AFIRS sales recognized Voice and data services recognized Balance, December 31 Comprehensive Income Comprehensive Income Revenue Revenue 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 data they receive from AFIRS and data they receive from AFIRS and use of functions such as the satellite phone. Usage fees are recognized as the service is 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 provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales and related 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 parts required to install the unit along with Dragon hardware sales. Upon shipment, these amounts are deferred as unearned 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 revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and the customer has 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 accepted the system, the deferred amount is recognized as AFIRS sales revenue and the work in progress as cost of sales. Parts 6- parts, modems with related manufacturing license fee, and Underfloor Stowage Units. Services revenue includes technical services, repairs and expertise the Company 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 offers including the installation of operations control centres. installation of operations control centres. Revenue sources Revenue sources Q4 2016 $ Q4 2015 $ Variance $ YTD 2016 $ YTD 2015 $ Variance $ Voice and data services 1,169,741 1,067,894 101,847 4,375,138 3,986,813 388,325 AFIRS sales Parts sales Services Total 854,406 1,574,559 (720,153) 3,931,607 3,372,421 559,186 2,091,720 1,123,803 967,917 5,808,491 2,932,100 2,876,391 11,960 3,011 8,949 215,955 165,791 50,164 4,127,827 3,769,267 358,560 14,331,191 10,457,125 3,874,066 Overall, total revenue increased 37.0% from $10,457,125 in 2015 to $14,331,191 in 2016. Voice and data services increased by Overall, total revenue increased 37.0% from $10,457,125 in 2015 to $14,331,191 in 2016. Voice and data services increased by 9.7%, Parts sales increased by 98.1%, 9.7%, Parts sales increased by 98.1%, AFIRS sales increased by 16.6%, while Services revenue increased by 30.3%. AFIRS sales increased by 16.6%, while Services revenue increased by 30.3%. Voice and data services increased compared to last year, due to a higher number of aircraft producing recurring revenue. Voice and data services increased compared to last year, due to a higher number of aircraft producing recurring revenue. Recurring revenue accounted for 28.3% of Recurring revenue accounted for 28.3% of revenue in Q4 2016 (Q4 2015: 28.3%), and 30.5% YTD 2016 (YTD 2015: 38.1%). revenue in Q4 2016 (Q4 2015: 28.3%), and 30.5% YTD 2016 (YTD 2015: 38.1%). Recurring revenue from FLYHT’s existing client base is expected to continue to expand Recurring revenue from FLYHT’s existing client base is expected to continue to expand throughout 2017 and future years. throughout 2017 and future years. AFIRS sales increased in 2016 as compared to 2015 due to an increased number of installation kits meeting the requirements for revenue recognition. YTD, revenue has been recognized for 73 installation kits, compared to 58 in 2015. Revenue was recognized AFIRS sales increased in 2016 as compared to 2015 due to an increased number of installation kits meeting the requirements for revenue recognition. YTD, revenue has for 12 installation kits in Q4 2016 compared to 28 in Q4 2015. been recognized for 73 installation kits, compared to 58 in 2015. Revenue was recognized for 12 installation kits in Q4 2016 compared to 28 in Q4 2015. Parts sales increased both in the quarter and YTD in 2016 from 2015 due to differences in the number of modems with related license fees ordered in 2016. Parts sales increased both in the quarter and YTD in 2016 from 2015 due to differences in the number of modems with related license fees shipped in 2016. Services revenue increased in the quarter and YTD in 2016 compared to 2015 due to a higher number of technical services Services revenue increased in the quarter and YTD in 2016 compared to 2015 due to a higher number of technical services provided to customers throughout 2016. This provided to customers throughout 2016. This revenue category can be expected to vary significantly between periods and years. revenue category can be expected to vary significantly between periods and years. Revenue sources for the last eight quarters were: Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Voice and data services AFIRS sales Parts sales Services 1,169,741 1,122,965 1,014,725 854,406 1,353,021 2,091,720 1,561,816 16,566 11,960 1,286,641 1,126,542 109,757 1,067,707 1,067,894 1,100,238 855,121 963,560 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 34 437,540 1,574,559 1,028,412 1,123,803 3,011 77,672 613,229 682,476 123,404 434,102 285,459 23,921 750,531 840,362 15,455 Total 4,127,827 4,054,368 3,537,665 2,611,331 3,769,267 2,519,347 1,598,603 2,569,908 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 expense. Cost of sales as a percentage of revenue in the fourth quarter of 2016 was 25.1% compared to 35.6% in 2015’s fourth quarter. A review of the annual results shows the cost of sales as a percentage of revenue also increased from 30.7% in 2015 to 31.6% in 2016. The decrease in gross margin was due to differences in the mix of revenue sources in 2016 versus 2015 and a decrease in average AFIRS sales margin from 47.9% in 2015 to 44.5% in 2016. Gross margin will fluctuate quarter over quarter depending on customer needs and revenue mix. 7- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 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 2016 Q4 2015 Variance YTD 2016 YTD 2015 Variance $ $ $ $ $ $ Voice and data services 1,169,741 1,067,894 101,847 4,375,138 3,986,813 388,325 AFIRS sales Parts sales Services Total 854,406 1,574,559 (720,153) 3,931,607 3,372,421 559,186 2,091,720 1,123,803 967,917 5,808,491 2,932,100 2,876,391 11,960 3,011 8,949 215,955 165,791 50,164 4,127,827 3,769,267 358,560 14,331,191 10,457,125 3,874,066 Overall, total revenue increased 37.0% from $10,457,125 in 2015 to $14,331,191 in 2016. Voice and data services increased by 9.7%, Parts sales increased by 98.1%, AFIRS sales increased by 16.6%, while Services revenue increased by 30.3%. Voice and data services increased compared to last year, due to a higher number of aircraft producing recurring revenue. Recurring revenue accounted for 28.3% of revenue in Q4 2016 (Q4 2015: 28.3%), and 30.5% YTD 2016 (YTD 2015: 38.1%). Recurring revenue from FLYHT’s existing client base is expected to continue to expand throughout 2017 and future years. AFIRS sales increased in 2016 as compared to 2015 due to an increased number of installation kits meeting the requirements for revenue recognition. YTD, revenue has been recognized for 73 installation kits, compared to 58 in 2015. Revenue was recognized for 12 installation kits in Q4 2016 compared to 28 in Q4 2015. Parts sales increased both in the quarter and YTD in 2016 from 2015 due to differences in the number of modems with related license fees ordered in 2016. Services revenue increased in the quarter and YTD in 2016 compared to 2015 due to a higher number of technical services provided to customers throughout 2016. This revenue category can be expected to vary significantly between periods and years. Revenue sources for the last eight quarters were: Revenue sources for the last eight quarters were: Voice and data services AFIRS sales Parts sales Services Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 1,169,741 1,122,965 1,014,725 1,067,707 1,067,894 1,100,238 855,121 963,560 854,406 1,353,021 2,091,720 1,561,816 16,566 11,960 1,286,641 1,126,542 109,757 437,540 1,574,559 1,028,412 1,123,803 3,011 77,672 613,229 682,476 123,404 434,102 285,459 23,921 750,531 840,362 15,455 Total 4,127,827 4,054,368 3,537,665 2,611,331 3,769,267 2,519,347 1,598,603 2,569,908 Gross Profit and Cost of Sales Gross Profit and Cost of Sales FLYHT’s cost of sales includes the direct costs associated with specific revenue types, including the AFIRS unit, installation kits, training and installation support, as well 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 performed by third parties at the customer’s expense. Cost of sales as a percentage of revenue in the fourth quarter of 2016 was 25.1% compared to 35.6% in 2015’s personnel while performing on-site installation support. Installations on aircraft are performed by third parties at the customer’s fourth quarter. A review of the annual results shows the cost of sales as a percentage of revenue also increased from 30.7% in 2015 to 31.6% in 2016. The decrease in expense. Cost of sales as a percentage of revenue in the fourth quarter of 2016 was 25.1% compared to 35.6% in 2015’s fourth quarter. A review of the annual results shows the cost of sales as a percentage of revenue also increased from 30.7% in 2015 to gross margin was due to differences in the mix of revenue sources in 2016 versus 2015 and a decrease in average AFIRS sales margin from 47.9% in 2015 to 44.5% in 31.6% in 2016. The decrease in gross margin was due to differences in the mix of revenue sources in 2016 versus 2015 and a 2016. Gross margin will fluctuate quarter over quarter depending on customer needs and revenue mix. decrease in average AFIRS sales margin from 47.9% in 2015 to 44.5% in 2016. Gross margin will fluctuate quarter over quarter depending on customer needs and revenue mix. Gross margin for the last eight quarters was: Gross margin for the last eight quarters was: Gross margin for the last eight quarters was: Q4 2016 Q4 2016 Q3 2016 Q3 2016 Q2 2016 Q2 2016 Q1 2016 Q1 2016 Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q2 2015 Q2 2015 Q1 2015 Q1 2015 Gross Margin % Gross Margin % Cost of Sales % Cost of Sales % 74.9 74.9 25.1 25.1 66.8 66.8 33.2 33.2 63.9 63.9 36.1 36.1 Distribution Expenses (Recovery) Distribution Expenses (Recovery) Distribution Expenses (Recovery) 66.9 66.9 33.1 33.1 64.4 64.4 73.3 73.3 64.8 64.8 75.2 75.2 35.6 35.6 26.7 26.7 35.2 35.2 24.8 24.8 Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 7- Major Category Major Category Salaries and benefits Salaries and benefits Share based Share based compensation compensation Contract labour Contract labour Office Office Travel Travel Equipment and Equipment and maintenance maintenance Depreciation Depreciation Marketing Marketing Other Other Total Total Q4 2016 Q4 2016 $ $ 978,347 978,347 Q4 2015 $ Q4 2015 $ Variance $ Variance $ YTD 2016 $ YTD 2016 $ YTD 2015 YTD 2015 $ $ Variance Variance $ $ 598,925 598,925 379,422 379,422 3,255,326 3,255,326 1,983,579 1,983,579 1,271,747 1,271,747 4,625 4,625 (1,392) (1,392) 6,017 6,017 97,067 97,067 91,658 91,658 5,409 5,409 155,528 155,528 95,901 95,901 139,930 139,930 12,614 12,614 10,064 10,064 27,202 27,202 - - 1,424,211 1,424,211 204,594 112,159 144,210 204,594 112,159 144,210 (5,052) (5,052) 9,385 9,385 21,614 21,614 - - (49,066) (49,066) (16,258) (16,258) (4,280) (4,280) 17,666 17,666 679 679 5,588 5,588 - - 498,106 416,733 562,645 498,106 416,733 562,645 25,006 25,006 829,298 328,855 472,078 829,298 328,855 472,078 40,216 40,216 (331,192) 87,878 90,567 (331,192) 87,878 90,567 (15,210) (15,210) 41,580 113,879 (103,303) 41,580 113,879 (103,303) 4,907,039 29,840 100,169 101,940 29,840 100,169 101,940 3,977,633 11,740 13,710 (205,243) 11,740 13,710 (205,243) 929,406 1,084,443 339,768 1,084,443 339,768 4,907,039 3,977,633 929,406 Distribution expenses increased compared to 2015 due mainly to higher people costs offset by a recovery of a bad debt that had been written off in 2014. Distribution expenses increased compared to 2015 due mainly to higher people costs offset by a recovery of a bad debt that had been written off in 2014. Salaries and benefits increased in 2016 as compared to 2015 due to an increase in sales and customer satisfaction staff. Salaries and benefits increased in 2016 as compared to 2015 due to an increase in sales and customer satisfaction staff. Contract labour decreased both in the quarter and YTD as a contract resource engaged in early 2015 was converted to full time staff, together with non-recurrence of a recruitment fee paid in Q2 2015 to seek additional sales resources. Contract labour decreased both in the quarter and YTD as a contract resource engaged in early 2015 was converted to full time staff, together with non-recurrence of a recruitment fee paid in Q2 2015 to seek additional sales resources. Office expenses increased in 2016 from 2015 mainly as the result of an increased rent allocation. Office expenses increased in 2016 from 2015 mainly as the result of an increased rent allocation. Travel expenses decreased in the quarter due to decreased travel associated with sales activities. Travel will vary significantly depending on the location of customer contracts and regions served. Travel expenses decreased in the quarter due to decreased travel associated with sales activities. Travel will vary significantly depending on the location of customer contracts and regions served. Equipment and maintenance expenses decreased in 2016 versus 2015 largely due to a non-recurring 2015 purchase of equipment used to demonstrate FLYHT’s services to prospective customers. Equipment and maintenance expenses decreased in 2016 versus 2015 largely due to a non-recurring 2015 purchase of equipment used to demonstrate FLYHT’s services to prospective customers. Other expenses decrease was the result of lower net bad debt reserves required; in Q2 and Q3 2016 a bad debt amount written off in 2014 was recovered. Other expenses decrease was the result of lower net bad debt reserves required; in Q2 and Q3 2016 a bad debt amount written off in 2014 was recovered. 35 8- 8- Distribution expenses increased compared to 2015 due mainly to higher people costs offset by a recovery of a bad debt that had been written off in 2014. Salaries and benefits increased in 2016 as compared to 2015 due to an increase in sales and customer satisfaction staff. Contract labour decreased both in the quarter and YTD as a contract resource engaged in early 2015 was converted to full time staff, together with non-recurrence of a recruitment fee paid in Q2 2015 to seek additional sales resources. Office expenses increased in 2016 from 2015 mainly as the result of an increased rent allocation. Travel expenses decreased in the quarter due to decreased travel associated with sales activities. Travel will vary significantly depending on the location of customer contracts and regions served. Equipment and maintenance expenses decreased in 2016 versus 2015 largely due to a non-recurring 2015 purchase of equipment used to demonstrate FLYHT’s services to prospective customers. Other expenses decrease was the result of lower net bad debt reserves required; in Q2 and Q3 2016 a bad debt amount written off in 2014 was recovered. Administration Expenses Administration Expenses Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of services or sales. services or sales. Major Category Salaries and benefits Share based compensation Contract labour Office Legal fees Audit and accounting Investor relations Brokerage, stock exchange, and transfer agent fees Travel Equipment and maintenance Depreciation Other Q4 2016 $ 427,797 - 48,096 80,271 18,701 41,975 31,768 6,154 29,584 16,062 3,268 15,421 Q4 2015 $ 1,058,602 37,099 52,024 61,836 91,212 24,000 148,810 3,601 60,823 11,953 2,304 21,532 Variance $ (630,805) (37,099) (3,928) 18,435 (72,511) 17,975 (117,042) YTD 2016 $ 1,589,395 228,058 172,014 289,311 166,461 141,650 153,580 YTD 2015 $ 1,972,362 276,008 153,594 257,614 160,360 85,840 399,619 Variance $ (382,967) (47,950) 18,420 31,697 6,101 55,810 (246,039) 2,553 61,665 59,544 2,121 (31,239) 4,109 964 (6,111) 119,143 79,187 9,704 77,488 211,307 64,138 10,098 26,469 (92,164) 15,049 (394) 51,019 Total 719,097 1,573,796 (854,699) 3,087,656 3,676,953 (589,297) Administration expenses were lower in 2016 due mainly to changes in people costs, a decrease in investor relations consultants Administration expenses were lower in 2016 due mainly to changes in people costs, a decrease in investor relations consultants and lower travel costs. These decreases and lower travel costs. These decreases were offset by increases in audit and accounting costs and other costs associated with were offset by increases in audit and accounting costs and other costs associated with employee relocation expenses. employee relocation expenses. Salaries and benefits were lower in 2016 compared with 2015, mainly due to decreased employee severance costs. Salaries and benefits were lower in 2016 compared with 2015, mainly due to decreased employee severance costs. Share based compensation differences in the quarter and YTD were the result of timing and volume differences in share options awarded throughout the year. Share based compensation differences in the quarter and YTD were the result of timing and volume differences in share options awarded throughout the year. Contract Labour increased for services related to the enterprise resource planning software. Contract Labour increased for services related to the enterprise resource planning software. Office expenses increased throughout 2016 mainly as a result of increased subscriptions, telephone and rent costs. Office expenses increased throughout 2016 mainly as a result of increased subscriptions, telephone and rent costs. Legal fees decreased in the quarter mostly due to expenses associated with the private placement in 2015 not required in 2016. YTD fees remained consistent with prior year. Legal fees decreased in the quarter mostly due to expenses associated with the private placement in 2015 not required in 2016. YTD fees remained consistent with prior year. Audit and accounting increases YTD are mainly due to service adjustments in the prior year. Investor relations expense decreased due to a reduction in the number of investor relations firms engaged with the Company. Audit and accounting increases YTD are mainly due to service adjustments in the prior year. Travel decreases are the result of a reduced requirement for travel in 2016 for administrative staff. Travel for this group will vary based on the activity level of industry Investor relations expense decreased due to a reduction in the number of investor relations firms engaged with the Company. groups and investor relations firms. Travel decreases are the result of a reduced requirement for travel in 2016 for administrative staff. Travel for this group will vary Equipment and maintenance expenses increased mainly due to upgrade of software products. based on the activity level of industry groups and investor relations firms. Other expense increased YTD as the result of non-recurring employee relocation expenses. Equipment and maintenance expenses increased mainly due to upgrade of software products. Other expense increased YTD as the result of non-recurring employee relocation expenses. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 36 9- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 Research, Development and Certification Engineering Expenses (Recovery) Consist of expenses related to the improvement of existing and development of new technology and products. - 467,494 Q4 2015 $ YTD 2016 $ Research, Development and Certification Engineering Expenses (Recovery) Q4 2016 Major Category Research, Development and Certification Engineering Expenses (Recovery) $ YTD 2015 Variance $ $ Consist of expenses related to the improvement of existing and development of new technology and products. Consist of expenses related to the improvement of existing and development of new technology and products. 1,964,388 (6,520) 75,011 1,635 Variance 595,821 (32,896) $ 197,618 10,354 (6,520) 1,964,388 52,143 5,618 1,635 75,011 65,038 14,971 (32,896) 595,821 37,912 27,877 10,354 197,618 8,424 (216,708) 5,618 52,143 16,936 1,409 14,971 65,038 24,428 (4,363) 37,912 27,877 - - (216,708) 8,424 1,409 16,936 2,802,552 (4,363) 24,428 - - Salaries and benefits Share based compensation Major Category Contract labour Office Salaries and benefits Travel Share based compensation Equipment and maintenance Contract labour Components Office SRED credit Travel Depreciation Equipment and maintenance Other Components Warranty Settlement SRED credit Total Depreciation Other Warranty Settlement 1,562,383 37,220 YTD 2016 315,198 $ 119,530 1,562,383 54,595 37,220 111,077 315,198 57,171 119,530 (211,790) 54,595 15,395 111,077 - 57,171 540,450 (211,790) 15,395 2,601,229 - 540,450 474,014 (1,635) Q4 2015 161,206 $ 30,212 474,014 6,902 (1,635) 20,364 161,206 (9,541) 30,212 - 6,902 3,310 20,364 4,363 (9,541) - - 3,310 689,195 4,363 - Q4 2016 128,310 $ 40,566 467,494 12,520 - 35,335 128,310 28,371 40,566 8,424 12,520 4,719 35,335 28,371 8,424 4,719 YTD 2015 $ 725,739 - - - - 36,544 Variance $ (402,005) (37,791) Variance (280,623) $ (78,088) (402,005) 2,452 (37,791) 46,039 (280,623) 29,294 (78,088) 4,918 2,452 (1,541) 46,039 (24,428) 29,294 540,450 4,918 (1,541) (24,428) 540,450 (201,323) Research and Development expense was lower than the prior year due to changes in people costs, and office expenditures, and other expenses partially offset by the settlement of a warranty claim and higher equipment maintenance. R&D costs will vary according to specific project requirements. 725,739 2,802,552 (201,323) 2,601,229 689,195 36,544 Total Research and Development expense was lower than the prior year due to changes in people costs, and office expenditures, and other expenses partially offset by the Research and Development expense was lower than the prior year due to changes in people costs, and office expenditures, and Salaries and benefits expended in this category decreased from 2015 to 2016, as the increased effort committed to enhancing settlement of a warranty claim. R&D costs will vary according to specific project requirements. other expenses partially offset by the settlement of a warranty claim and higher equipment maintenance. R&D costs will vary revenue sources for ground based server applications, and enhancements made to FLYHTStream in early 2015 were not required according to specific project requirements. in 2016. People costs will fluctuate with customer and industry demands for new products and enhancements of existing products, Salaries and benefits expended in this category decreased from 2015 to 2016, as the increased effort committed to enhancing revenue sources for ground based as well as differences in allocations from other cost centres to R&D. server applications, and enhancements made to FLYHTStream in early 2015 were not required in 2016. People costs will fluctuate with customer and industry demands Salaries and benefits expended in this category decreased from 2015 to 2016, as the increased effort committed to enhancing Share based compensation decreased compared to the same period last year. A larger number of options were granted in 2016 revenue sources for ground based server applications, and enhancements made to FLYHTStream in early 2015 were not required for new products and enhancements of existing products, as well as differences in allocations from other cost centres to R&D. in 2016. People costs will fluctuate with customer and industry demands for new products and enhancements of existing products, under the share option plan, however the allocation to this group correlates with the decrease in salaries and benefits. Share based compensation decreased compared to the same period last year. A larger number of options were granted in 2016 under the share option plan, however as well as differences in allocations from other cost centres to R&D. the allocation to this group correlates with the decrease in salaries and benefits. Contract labour has decreased in the current year. There were several contractors engaged throughout 2015 to assist in building Share based compensation decreased compared to the same period last year. A larger number of options were granted in 2016 the FLYHTASD program and certain non-recurring certification engineering on multiple time-sensitive STC’s in early 2015 that was under the share option plan, however the allocation to this group correlates with the decrease in salaries and benefits. Contract labour has decreased in the current year. There were several contractors engaged throughout 2015 to assist in building the FLYHTASD program and certain not repeated in 2016. non-recurring certification engineering on multiple time-sensitive STC’s in early 2015 that was not repeated in 2016. Contract labour has decreased in the current year. There were several contractors engaged throughout 2015 to assist in building Office expenses were lower in 2016 compared to 2015 as a result of a decreased rent allocation. the FLYHTASD program and certain non-recurring certification engineering on multiple time-sensitive STC’s in early 2015 that was Office expenses were lower in 2016 compared to 2015 as a result of a decreased rent allocation. not repeated in 2016. Equipment and maintenance expenses increased both QTD and YTD in 2016 due to additional software and associated Equipment and maintenance expenses increased both QTD and YTD in 2016 due to additional software and associated licensing fees required for research and licensing fees required for research and development activities. Office expenses were lower in 2016 compared to 2015 as a result of a decreased rent allocation. development activities. Components increases are the result of higher costs attributable to STCs in the year. Costs will vary depending on the number Equipment and maintenance expenses increased both QTD and YTD in 2016 due to additional software and associated and location of STCs required. Components increases are the result of higher costs attributable to STCs in the year. Costs will vary depending on the number and location of STCs required. licensing fees required for research and development activities. Other expenses attributable to relocation costs in 2015 were not required in 2016. Other expenses attributable to relocation costs in 2015 were not required in 2016. Components increases are the result of higher costs attributable to STCs in the year. Costs will vary depending on the number and location of STCs required. Settlement amounts were due to the resolution of a partner’s warranty claim in Q1 2016. Settlement amounts were due to the resolution of a partner’s warranty claim in Q1 2016. Other expenses attributable to relocation costs in 2015 were not required in 2016. Net Finance Costs Net Finance Costs Settlement amounts were due to the resolution of a partner’s warranty claim in Q1 2016. Net Finance Costs Major Category Q4 2016 Q4 2015 Variance YTD 2016 YTD 2015 Variance $ $ $ $ $ $ Interest (income) Major Category Net foreign exchange loss (gain) Bank service charges Interest (income) Interest expense Net foreign exchange loss (gain) Government grant accretion Bank service charges Debenture interest and accretion Interest expense Debenture cost amortization Government grant accretion Net finance costs Debenture interest and accretion (2,801) Q4 2016 2,814 $ 17,890 (2,801) 1,089 2,814 46,475 17,890 75,234 1,089 - 46,475 140,701 75,234 - Q4 2015 25,721 $ 6,352 - 821 25,721 42,628 6,352 204,272 821 2,691 42,628 282,485 204,272 (2,801) Variance (30,368) YTD 2016 YTD 2015 (2,128) (28,240) Variance (22,907) $ 11,538 (2,801) 268 (22,907) 3,847 11,538 (129,038) 268 (2,691) 3,847 (141,784) (129,038) 11,023 $ 37,331 (30,368) 2,736 11,023 178,369 37,331 509,113 2,736 5,295 178,369 713,499 509,113 (237,247) $ 22,699 (2,128) 3,917 (237,247) 163,368 22,699 711,993 3,917 10,677 163,368 673,279 711,993 248,270 $ 14,632 (28,240) (1,181) 248,270 15,001 14,632 (202,880) (1,181) (5,382) 15,001 (202,880) 40,220 Debenture cost amortization - 2,691 (2,691) 5,295 10,677 (5,382) Net finance costs 140,701 282,485 (141,784) 713,499 673,279 40,220 37 10- 10- Interest income was earned on higher cash balances as a result of the cash received from the private placement and on the non- Interest income was earned on higher cash balances as a result of the cash received from the private placement and on the non-exclusive license revenue. exclusive license revenue. Net foreign exchange loss will vary between periods due to fluctuations in the value of the Canadian dollar in relation to the U.S. dollar. A strengthening of the Net foreign exchange loss will vary between periods due to fluctuations in the value of the Canadian dollar in relation to the U.S. dollar. A strengthening of the Canadian dollar has given rise to increased foreign exchange losses on U.S. dollar denominated Canadian dollar has given rise to increased foreign exchange losses on U.S. dollar denominated sales and purchases, in combination with fluctuations in U.S. denominated sales and purchases, in combination with fluctuations in U.S. denominated assets and liabilities. assets 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 were attributable to the debenture redemption in June 2016, requiring six months of Debenture interest and accretion decreases were attributable to the debenture redemption in June 2016, requiring six months of interest and accretion in 2016 interest and accretion in 2016 versus twelve months in 2015, which was partially offset by increased accretion on the convertible versus twelve months in 2015, which was partially offset by increased accretion on the convertible debenture that matured in December 2016. debenture that matured in December 2016. Net Loss Net Loss Major Category Net income (loss) Q4 2016 $ 79,709 Q4 2015 $ (1,203,998) Variance $ 1,283,707 YTD 2016 $ 1,712,718 YTD 2015 $ (3,891,560) Variance $ 5,604,278 Net income (loss) without R&D 805,448 (514,803) 1,320,251 4,313,947 (1,089,008) 5,402,955 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 foreign exchange fluctuations. In 2016, 99.0% of the Company’s gross sales were made in U.S. dollars, compared to 98.4% in 2015. The Company expects this to continue 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 2016, 99.0% 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 98.4% in 2015. 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 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 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, 2018). 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. 11- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 38 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 recognition of 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, running and contracted for services. 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. The terms of the Company’s standard agreement states that payment is due a minimum of 45 days prior to the shipment of kits. Foreign currency fluctuations The Company does a majority of its business in U.S. dollars so there is a risk of currency fluctuation. The major portion of the operating and overhead costs are denominated in Canadian dollars, though 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. 39 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 to 2016. 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. The Company’s success will ultimately depend on the success of its products, and future enhancements made to same. 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 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. No amounts relating to this party were included in either contract labour nor accounts payable for the year ended December 31, 2016 (2015: contract labour: $30,114; included in accounts payable and accrued liabilities: $30,114). 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. Contractual Arrangement Certain of the Company’s sales contracts require that, in the event the Chinese government restricts use of the Iridium satellite constellation, the Company may be required to repurchase, at discounted rates, certain AFIRS units. The Iridium license was renewed by the Chinese authorities during 2015 for a further five-year term and the likelihood of a liability under these contracts is considered to be remote. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 40 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, 2016 and 2015, the consolidated statements of comprehensive income (loss), changes in equity 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 consolidated 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, 2016 and 2015, 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. is dependent upon maintaining 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 4, 2017 Calgary, Canada 41 Consolidated Statement of Financial Position December 31, 2016 $ December 31, 2015 $ 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 709,958 250,000 2,105,385 216,819 1,556,794 4,838,956 335,836 34,992 1,306,422 1,677,250 6,516,206 2,163,307 827,235 97,895 15,553 10,776 3,114,766 - 974,746 - 549,335 1,524,081 4,638,847 57,514,646 - 1,139,934 9,017,979 (65,795,200) 1,877,359 6,516,206 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 See accompanying notes to the consolidated financial statements. Going concern (note 2d). On behalf of the board Director – Bill Tempany Director – Paul Takalo FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 42 Consolidated Statement of Comprehensive Income (Loss) For the year ended December 31 Revenue (note 18) Cost of sales Gross profit Other income (note 20) Distribution expenses (note 21) Administration expenses (note 22) Research, development and certification engineering expenses (note 23) Income (loss) from operating activities Finance (income) (note 24) Finance costs (note 24) Net finance costs Income (loss) before income tax Income tax expense (note 25) Income (loss) for the period Total comprehensive income (loss) for the period Income (loss) per share Basic and diluted loss per share (note 17) See accompanying notes to the consolidated financial statements. 2016 $ 14,331,191 4,521,502 9,809,689 (3,223,166) 4,907,039 3,087,656 2,601,229 2,436,931 (30,368) 743,867 (713,499) 1,723,432 10,714 1,712,718 1,712,718 0.01 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) 43 Consolidated Statement of Changes in Equity (Deficiency) For the years ended December 31, 2016 and 2015 Share Capital $ Convertible Debenture $ Warrants $ Contributed Surplus $ Deficit $ Total Equity (Deficit) $ Balance at December 31, 2015 Income for the period 53,895,046 - 222,531 - - - - 8,439,136 - (67,507,918) 1,712,718 (4,951,205) 1,712,718 - 1,712,718 1,712,718 - - Total comprehensive loss for the period Contributions by and distributions to owners Issue of common shares Share issue costs Share-based payment transactions Share options exercised Warrants issued Reclassified to Contributed Surplus Total contributions by and distributions to owners 5,086,512 (345,081) - 18,103 (1,139,934) - - - - - - (222,531) - - - - 1,139,934 - - - 362,345 (6,033) - 222,531 3,619,600 (222,531) 1,139,934 578,843 - - - - - - - 5,086,512 (345,081) 362,345 12,070 - - 5,115,846 Balance at December 31, 2016 57,514,646 - 1,139,934 9,017,979 (65,795,200) 1,877,359 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) See accompanying notes to the consolidated financial statements. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 44 Consolidated Statement of Cash Flows For the year ended December 31 2016 $ 1,712,718 66,679 509,113 (384,873) 5,295 178,369 362,345 (210,098) (1,149,742) (78,958) (568,465) 285,738 (318,106) 29,368 2,736 (2,736) 10,714 (4,916) 445,181 (199,740) (30,368) 30,368 (199,740) (345,081) 5,086,512 12,070 (5,360,000) (90,234) (27,923) (724,656) (479,215) 1,301,955 (112,782) 709,958 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 Cash flows used in operating activities Income (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 from (used in) operating activities Cash flows used in investing activities Acquisitions of property and equipment Interest income Interest received Net cash used in investing activities Cash flows from (used in) financing activities Share issue costs Proceeds from issue of shares and warrants Proceeds from exercise of share options and warrants Repayment of debenture Repayment of borrowings Payment of finance lease liabilities Net cash from (used in) 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 the consolidated financial statements. 45 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, 2016 and 2015 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. FLYHT is a provider of Iridium satellite communications, global flight tracking including live flight data recorder streaming capabilities, and aircraft health monitoring solutions. The Company supports aviation customers in different sectors including commercial, business, leasing and military operators. FLYHT’s headquarters are located in Calgary, Canada with representation in the United States, China, and Australasia. 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 4, 2017. (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, 2016 the Company had positive working capital of $1,724,190, a deficit of $ 65,795,200, net income in 2016 of $1,712,718 and positive cash flow from operating activities of $445,181 for the year. The Company has incurred significant operating losses and negative cash flows from operations over the past years. Consistent achievement of positive earnings will be necessary for the Company to maintain 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. Given a large portion of the funds raised in Q2 2016 originated from a one-time sale of intellectual property, for the Company to continue as a going concern longer-term, it will need to maintain profitability and may require additional financing to fund ongoing operations. If general economic conditions in the industry or the financial condition of a major customer deteriorate, or revenue streams and expanding markets adversely change, 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 annual 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. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 46 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, 2016, 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 revenue recognition criteria for each contract has been met, 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 other parts is recognized when 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. 47 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. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 48 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. (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 Enterprise Reporting Software Equipment Leasehold improvements 30% declining balance 12 months straight line 60 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. 49 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 UpTimeTM, FLYHTASDTM, FLYHTMailTM, FLYHTStreamTM, and FLYHTFuelTM). 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 and some office equipment. (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. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 50 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. 51 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). When the revenue recognition criteria for each contract has been met, the full deferred amount is recognized in revenue along with the installations in progress as cost of sales. (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 received for the use of FLYHT’s assets (i.e., trademarks, patents, and software) are recognized on an accrual basis when terms of an executed sales agreement have been met, recovery of the consideration is probable, and the amount of revenue can be measured reliably. (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. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 52 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. 53 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, 2018). 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. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 54 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 debentures, the market rate of interest is determined by reference to similar liabilities that do not have a conversion feature. (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, 2016 December 31, 2015 $ 2,086,572 18,813 2,105,385 $ 874,112 24,054 898,166 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, 2016 December 31, 2015 $ 1,190,659 1,205,068 467,489 2,863,216 (1,556,794) 1,306,422 $ 946,082 1,047,415 659,621 2,653,118 (1,716,313) 936,805 In 2016 AFIRS raw materials and changes in AFIRS finished goods and installations in progress recognized as cost of sales amounted to $3,075,401 (2015: $2,289,676). Included in this amount was a write down of inventories amounting to $112,449 in 2016 (2015: $66,196) resulting from a review of slow moving inventory parts. All inventories are pledged as security for the bank loan. 55 9. Property and equipment 2016 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 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 Computers and Software $ 510,911 194,352 705,263 420,379 43,746 464,125 90,532 241,138 Computers and Software $ 491,800 19,111 510,911 385,118 35,261 420,379 106,682 90,532 Equipment $ 265,370 1,056 266,426 184,879 16,630 201,509 80,491 64,917 Equipment $ 242,019 23,351 265,370 169,570 15,309 184,879 72,449 80,491 Leasehold improvements $ 44,121 4,332 48,453 12,369 6,303 18,672 31,752 29,781 Leasehold improvements $ 44,121 - 44,121 6,066 6,303 12,369 38,055 31,752 Total $ 820,402 199,740 1,020,142 617,627 66,679 684,306 202,775 335,836 Total $ 777,940 42,462 820,402 560,754 56,873 617,627 217,186 202,775 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, 2016, the net carrying amount of leased property and equipment was $47,367 (2015: $65,033). As of December 31, 2016, all property and equipment is pledged as security for the bank loan (note 13). FLYHT did not enter into any new lease agreements in 2016. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 56 10. Intangible assets The intangible asset balance of $34,992 at December 31, 2016 (December 31, 2015: $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. 11. Trade payables and accrued liabilities Trade payables Non-refundable customer deposits Compensation and statutory deductions Accrued liabilities Total December 31, 2016 December 31, 2015 $ 769,261 317,899 873,526 202,621 2,163,307 $ 1,037,011 1,020,675 570,659 129,362 2,757,707 Compensation and statutory deductions include accrued vacation pay, variable compensation, and statutory payroll deductions. 12. Unearned revenue Unearned revenue classified as current consists of revenue on sales type agreements that will be recognized when customer acceptance of the AFIRS Solution has been obtained. The current portion is expected to be recognized as revenue within the next year. All amounts recorded in unearned revenue are non-refundable. 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 December 31, 2016 December 31, 2015 $ 1,145,341 3,384,763 (3,703,703) 19,866 (19,032) 827,235 827,235 - $ 1,675,746 2,597,785 (3,131,261) 19,033 (15,962) 1,145,341 1,087,197 58,144 57 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 (2015: $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, 2016 and 2015, 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. On November 9, 2016, the Company signed a contribution agreement with Western Economic Diversification Canada for a Western Innovation initiative (WINN) loan, to support plans for technology development in the air and ground components of the Company’s products. Under the terms of the agreement, a repayable unsecured WINN contribution to the value of the lesser of 50% of the eligible project costs to March 31, 2019 or $2,350,000 will be received. The amount is repayable over five years commencing January 1, 2020. At December 31, 2016, the Company had not yet received a contribution. Under SADI, the Company has, at December 31, 2016, an outstanding repayable balance of $1,730,582, compared to $1,820,816 at December 31, 2015. 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, 2016 and 2015 and changes during these years is presented below. Balance January 1 Interest accretion Repayment Balance December 31 Less current portion Non-current portion 2016 $ 984,507 178,368 (90,234) 1,072,641 103,768 968,873 A summary of the SADI outstanding payable balance as at December 31, 2016 and 2015 and changes during these years is presented below. Balance January 1 Repayment Balance December 31 2016 $ 1,820,816 (90,234) 1,730,582 2015 $ 899,600 163,369 (78,462) 984,507 90,234 894,273 2015 $ 1,899,278 (78,462) 1,820,816 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 58 13. Loans and borrowings (Continued) Convertible debentures 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. The debenture face value of $3,039,000 was redeemed in full plus accrued interest on December 23, 2016 (face value of debenture outstanding on December 31, 2015: $3,039,000). The conversion feature had a carrying value of $222,531 as at December 31, 2015. The debenture warrants expired on December 23, 2015. The debentures were secured against all personal property of the Company, with the exception of the Company’s intellectual property, and were subordinated in right of payment to all existing and future bank and/or governmental indebtedness of the Company. The debenture, until redemption, bore 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 debentures in a debt offering. The debentures matured on June 30, 2016 and bore interest at a rate of 12% per annum on the contributed amounts, 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 owed, 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 were not listed on any stock exchange and not convertible into common shares. The debentures were secured against all personal property of FLYHT, including FLYHT’s intellectual property and were 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. The debentures were redeemed on June 30, 2016 for $2,321,000 which includes the 10% premium, plus accrued interest. 2016 $ 1,072,641 - - 1,072,641 (97,895) 974,746 2015 $ 984,507 2,269,545 2,960,921 6,214,973 (5,840,418) 374,555 SADI Debenture payable Convertible debenture payable Balance December 31 Less current portion Non-current portion 14. Operating leases Operating lease rentals are payable as follows: 2017 2018 2019 2020 2021 Total Premises $ 458,145 462,678 462,678 462,678 77,113 1,923,292 Operating lease payments made in 2016 totaled $453,900 (2015: $426,539). 59 15. Provisions Product warranty Balance January 1 Provision made during the period Provision used during the period Balance December 31 2016 $ 263,596 302,654 (16,915) 549,335 2015 $ 235,019 72,735 (44,158) 263,596 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, 2015 Exercise of employee options Exercise of warrants Debenture conversions Balance December 31, 2015 Exercise of employee options Warrants issued Issue of common shares Balance December 31, 2016 Number of Shares 172,180,135 600,000 542,500 155,000 173,477,635 54,050 - 33,910,081 207,441,766 Value $ 53,496,969 183,920 152,157 62,000 53,895,046 18,103 (1,139,934) 4,741,431 57,514,646 On May 12, 2016, the Company closed a private placement, issuing 33,910,081 units at a price of $0.15 per unit, for total proceeds of $5,086,512. Each unit consisted of one common share and one-half of one share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company for a period of 24 months from the issuance of the units at a price of $0.25. Agent’s fees totaled $317,275. A total of 2,115,167 agent’s warrants were also issued, exercisable into one unit at $0.15 per unit within 24 months from the closing date. All of the common shares and warrants issued pursuant to the private placement were subject to a 4-month hold period. In 2016 option exercises resulted in the Company issuing a total of 54,050 shares for total proceeds of $12,070, including: a) 24,050 options were exercised at $0.19 per share for proceeds of $4,570 b) 30,000 options were exercised at $0.25 per share for proceeds of $7,500 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 60 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 2016 the Company granted 3,454,817 stock options to employees, officers and directors under the stock option plan. The stock options will expire December 31, 2019, and have an exercise price of $0.19 per share. The Company also granted 200,000 options to a consultant which are exercisable at $0.185 per share and vested in equal portions quarterly over the year. In the fourth quarter of 2016 the Company granted 50,000 stock options to an employee under the stock option plan. The stock options will expire December 31, 2019 and have an exercise price of $0.185 per share. The Company has a policy of reserving up to 10% of the outstanding common shares for issuance to eligible participants. As at December 31, 2016, there were 20,744,177 (2015: 17,347,764) common shares reserved for this purpose. All outstanding options to employees 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, 2016 and 2015. A summary of the Company’s outstanding and exercisable stock options as at December 31, 2016 and 2015 and changes during these years is presented below. 2016 Number of options Outstanding, January 1 Options granted Options exercised Options expired Outstanding and Exercisable, December 31 8,736,300 3,704,817 (54,050) (3,753,700) 8,633,367 Weighted average exercise price $ 0.32 0.19 0.21 0.33 0.26 2015 Number of options 7,802,250 3,778,050 (600,000) (2,244,000) 8,736,300 Weighted average exercise price $ 0.34 0.23 0.23 0.27 0.32 Weighted average life remaining for the options outstanding and exercisable is 2.1 years. The exercise prices for options outstanding at December 31, 2016 were as follows: All options Exercisable options Exercise price: $0.165 $0.185 $0.190 $0.250 $0.400 $0.420 $0.530 Total Number 475,000 250,000 3,380,567 2,345,050 1,982,750 50,000 150,000 8,633,367 Weighted average remaining contractual life (years) 2.0 2.2 3.0 2.0 1.0 1.0 1.0 2.1 Number 475,000 250,000 3,380,567 2,345,050 1,982,750 50,000 150,000 8,633,367 Weighted average remaining contractual life (years) 2.0 2.2 3.0 2.0 1.0 1.0 1.0 2.1 61 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 $0.10 (2015: $0.12). The fair value of the options granted and valued using the Black-Scholes option pricing model were valued with the following weighted average assumptions: Risk-free interest rate Expected life (years) Volatility in the price of the Company’s common shares Dividend yield rate Warrants Outstanding January 1, 2015 Warrants extended Warrants exercised Warrants expired Outstanding December 31, 2015 Warrants issued Agent warrants issued Warrants exercised Warrants expired Number 3,948,750 - (542,500) (3,406,250) - 16,955,041 2,115,167 - - Outstanding December 31, 2016 19,070,208 2016 0.61% 3.57 73% 0.00% Weighted average exercise price $ 0.75 - 0.20 0.20 - 0.25 0.15 - - 0.23 2015 0.75% 3.37 76% 0.00% Value $ 163,771 154,001 (43,657) (274,115) - 886,748 253,186 - - 1,139,934 On May 12, 2016, the Company closed a private placement, issuing 33,910,081 units consisting of one common share and one-half of one share purchase warrant. 16,955,041 warrants were issued with each whole warrant entitling the holder to purchase one additional common share of the Company for a period of 24 months from the issuance at a price of $0.25 per share. 2,115,167 agent’s warrants were also issued, exercisable into one unit at $0.15 per unit within 24 months from the closing date. All of the common shares and warrants issued pursuant to the private placement were subject to a 4-month hold period. 17. Earnings per share Basic earnings per share The calculation of basic and diluted earnings per share for the year ended December 31, 2016 was based on a weighted average number of common shares outstanding of 195,070,653 (basic) and 195,419,579 (diluted) (2015 basic and diluted: 172,423,488). The calculation of diluted earnings per share did not include stock options of 8,282,947 (2015: 8,736,300), 18,507,690 warrants (2015: nil) and convertible debentures of nil (2015: 7,597,500) because they would be anti- dilutive. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 62 18. Revenue Voice and data services AFIRS sales Parts sales Services Total 2016 $ 4,375,138 3,931,607 5,808,491 215,955 14,331,191 For the year ended December 31 2015 $ 3,986,813 3,372,421 2,932,100 165,791 10,457,125 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, modems with related license fees and Underfloor Stowage Units. Services include technical, repair and installation support services. 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 For the year ended December 31 2015 $ 5,754,913 266,203 1,432,230 542,037 694,992 1,766,750 10,457,125 2016 $ 9,007,719 658,319 1,273,655 349,684 719,763 2,322,051 14,331,191 All non-current assets (property and equipment and intangible assets) reside in Canada. Major customers Revenues from the three largest customers represent approximately 47.6% of the Company’s total revenues for the year ended December 31, 2016 (2015: 42.9%). 20. Other Income The Company granted a non-exclusive license to use certain of its intellectual property to a technology company for a license fee of $3,223,166 in Q2 2016. 63 21. Distribution expenses Salaries and benefits Stock based compensation Contract labour Office Travel Equipment & maintenance Depreciation Marketing Other Total 22. Administration expenses Salaries and benefits Stock based compensation Contract labour Office Legal fees Audit and accounting Investor relations Brokerage, stock exchange, and transfer agent fees Travel Equipment and maintenance Depreciation Other Total 2016 $ 3,255,326 97,067 498,106 416,733 562,645 25,006 41,580 113,879 (103,303) 4,907,039 2016 $ 1,589,395 228,058 172,014 289,311 166,461 141,650 153,580 61,665 119,143 79,187 9,704 77,488 3,087,656 For the year ended December 31 For the year ended December 31 2015 $ 1,983,579 91,658 829,298 328,855 472,078 40,216 29,840 100,169 101,940 3,977,633 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 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 64 23. Research and development expenses To date, all development costs have been expensed as incurred. For the year ended December 31 Salaries and benefits Stock based compensation Contract labour Office Travel Equipment and maintenance Components SRED tax credit Depreciation Other Warranty settlement Total 24. Finance income and finance costs Interest income on bank deposits Net foreign exchange gain Finance income Bank service charges Net foreign exchange loss Interest expense Government grant interest expense Debenture interest expense and accretion Debenture issuance cost amortization Finance costs 2016 $ 1,562,383 37,220 315,198 119,530 54,595 111,077 57,171 (211,790) 15,395 - 540,450 2,601,229 2016 $ 30,368 - 30,368 37,331 11,023 2,736 178,369 509,113 5,295 743,867 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 2015 $ 2,128 237,247 239,375 22,699 - 3,917 163,368 711,993 10,677 912,654 For the year ended December 31 65 25. Income tax expense Current Tax Expense Current income tax expense Deferred income tax expense Deferred Tax Expense Unrecognized deferred tax assets 2016 $ 10,714 - 10,714 2015 $ 4,978 - 4,978 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 2016 $ 163,565 71,257 4,880 9,445,413 74,706 8,150,696 17,910,517 2015 $ 145,562 77,332 2,162 12,071,922 20,598 7,535,586 19,853,162 The Company has non-capital losses for income tax purposes of approximately $34,462,323 which are available to be applied against future year’s taxable income. The benefit of these non-capital losses has not been recognized in the consolidated financial statements because it is not probable that future taxable profit will be available against which FLYHT can use the benefits. These losses will expire as follows: Year 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Total Amount $ 761,961 5,596,948 6,997,140 2,791,748 6,596,636 4,351,802 2,313,225 1,464,723 1,890,509 1,697,631 34,462,323 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 66 25. Income tax expense (Continued) Reconciliation of effective tax rate Income (loss) before tax Tax Rate Expected income tax expense (recovery) True up from prior year Non-deductible expenses Stock based compensation Change in unrecognized temporary differences 26. Financial risk management 2016 $ 1,723,432 27.0% 465,327 (225,317) 13,431 94,209 (336,936) 10,714 2015 $ (3,891,560) 26.0% (1,011,806) (1,241,807) 11,582 115,096 2,131,913 4,978 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 38.2% (2015: 28.5%) of the Company’s 2016 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 be required to transact with FLYHT only on a prepayment basis. To further minimize credit exposure, the sale of many AFIRS Solutions requires payment in advance of any product shipment. Additionally, credit insurance has been obtained on select customers whose balances have not been prepaid. At each reporting date, the Company establishes an allowance for impairment that represents its estimate of incurred losses. The aging of receivables at the reporting date was: December 31, 2016 Accounts receivable Impairment Net receivable December 31, 2015 Accounts receivable Impairment Net receivable 0-30 days $ 1,872,962 - 1,872,962 0-30 days $ 865,067 - 865,067 31-60 days $ 81,199 - 81,199 31-60 days $ 39,128 - 39,128 61-90 days $ 23,010 - 23,010 61-90 days $ (5,953) - (5,953) 91+ days $ 710,926 (582,712) 128,214 91+ days $ 537,393 (537,469) (76) Total $ 2,688,097 (582,712) 2,105,385 Total $ 1,435,635 (537,469) 898,166 67 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, 2016 and 2015 was: Balance, January 1 Provision Amounts written off Balance, December 31 Liquidity risk 2016 $ 537,469 45,243 - 582,712 2015 $ 391,855 165,164 (19,550) 537,469 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, maintaining a conservative capital structure, 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, 2016 Accounts payable Compensation and statutory deductions Finance lease liabilities Accrued liabilities Loans and borrowings Total December 31, 2015 Accounts payable Compensation and statutory deductions Finance lease liabilities Accrued liabilities Loans and borrowings Total < 2 months $ 2-12 months $ 1-2 years $ 2-5 years $ > 5 years $ 769,261 371,303 4,970 83,497 - 1,229,031 < 2 months $ 1,034,319 84,525 4,970 39,215 - 1,163,029 - 349,223 10,826 82,206 103,768 546,023 2-12 months $ 2,692 270,134 24,849 61,650 5,840,418 6,199,743 - 108,000 - 11,658 119,333 238,991 1-2 years $ - - 45,000 - 25,259 476,546 - - - - 1,030,935 546,805 1,030,935 2-5 years $ > 5 years $ - 108,000 108,000 15,794 9,715 103,768 237,277 - 18,782 414,386 541,168 - - - - 1,212,427 1,212,427 Total $ 769,261 873,526 15,796 202,620 1,730,582 3,591,785 Total $ 1,037,011 570,659 45,613 129,362 7,570,999 9,353,644 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 68 Currency risk A significant portion of the Company’s revenues and a portion of its expenses are denominated in U.S. dollars. Management estimates that a 1% weakening of the Canadian dollar relative to the U.S. dollar would increase net earnings by approximately $141,823 (2015: $102,932) and a strengthening of the Canadian dollar would decrease net earnings by approximately $141,823 (2015: $102,932). 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, 2016, working capital denominated in U.S. dollars was approximately positive $1,410,075 (2015: positive $90,053). As a result, a 1% weakening of the Canadian dollar would increase net earnings by approximately $14,101 (2015: $901) and a strengthening of the Canadian dollar would decrease net earnings by approximately $14,101 (2015: $901). 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, 2016 and 2015 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 due to the short-term nature of the instruments. 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 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. No similar services were contracted during 2016. Included in contract labour: Included in accounts payable and accrued liabilities: For the three months ended December 31 For the year ended December 31 2016 $ - 2015 $ 30,114 2016 $ - 2015 $ 41,114 Total December 31 2016 $ - 2015 $ 30,114 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. 69 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. 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 3.8% (2015: 2.6%) of the voting shares of the Company. 2016 $ 1,071,619 215,869 161,000 - 226,813 190,737 1,866,038 2015 $ 1,299,019 167,494 368,870 324,000 305,855 123,858 2,589,096 Subsidiaries FLYHT Inc. AeroMechanical Services USA Inc. FLYHT Corp. FLYHT India Corp. TFM Inc. 28. Contractual Arrangement Country of Incorporation Ownership interest United States United States Canada Canada Canada 100% 100% 100% 100% 100% Certain of the Company’s sales contracts require that, in the event the Chinese government restricts use of the Iridium satellite constellation, the Company may be required to repurchase, at discounted rates, certain AFIRS units. The Iridium license was renewed by the Chinese authorities during 2015 for a further five-year term and the likelihood of a liability under these contracts is considered to be remote. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016 70 i 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 INVESTOR RELATIONS Email: investors@flyht.com Telephone: 1-403-250-9956 Toll free: 1-866-250-9956 www.flyht.com The Howard Group Inc. Dave Burwell Email: dave@howardgroupinc.com Telephone: 1-403-410-7907 www.howardgroupinc.com DIRECTORS Bill Tempany John Belcher Mike Brown Barry Eccleston Jacques Kavafian Doug Marlin Jack Olcott Mark Rosenker Paul Takalo OFFICERS Chairman, FLYHT Aerospace Solutions Ltd. Former Chairman and Chief Executive Officer, ARINC Inc. Partner, Geselbracht Brown President, Airbus Americas, Inc. Director President, Marlin Ventures Ltd. President, General Aviation Company United States Air Force (retired) Director Thomas R. Schmutz Nola M. Heale Derek Graham David Perez Matieu Plamondon Chief Executive Officer Chief Financial Officer Chief Technical Officer Vice President Sales and Marketing Vice President Operations and Customer Fulfillment AUDITOR 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 EXPECTS 2017 TO ALSO BRING NEW OPPORTUNITIES GIVEN OUR DEMONSTRATED, COMMERCIALLY AVAILABLE EXPERTISE IN REAL-TIME ACCESS TO FLIGHT RECORDER DATA.” 6 1 0 2 T R O P E R L A U N N A . D T L S N O I T U L O S E C A P S O R E A T H Y L F 72 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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