FLYHT Aerospace Solutions Annual Report 2016

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FY2016 Annual Report · FLYHT Aerospace Solutions

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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.”

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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

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

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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

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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).

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

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REVENUE SOURCES

$7,000,000

$5,250,000

$3,500,000

$1,750,000

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

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

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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.

“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.

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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.

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.

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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.”

“WE ARE MAKING PROGRESS
WORLDWIDE WITH AIRLINES
AND CHINA CONTINUES TO
BE A GROWING MARKET
FOR FLYHT.”

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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.

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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.”

“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.”

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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.

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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.

• 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

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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.

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

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.

TCCA

FAA

EASA

CAAC

ANAC

220
A

228
A

220
A

228
A

220
A

228
A

220
A

228
A

220

228

Airbus A319, A320, A321

Airbus A330

ATR42 -300

ATR42 -500

ATR-72 -100, -200

ATR42-500 "600 Version" *STC Twenty One

ATR72-212A "600 Version" *STC Twenty One

Boeing B737 -200

Boeing B737 -300, -400, -500

Boeing B737 -600

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

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

Viking Air DHC -7 (LSTC)

Embraer EMB 190

Embraer Legacy 600 and EMB – 135/145

FLYHT has also received an approved AFIRS 228 STC for the Bombardier CRJ- 700, 900 from the 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

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

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

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.

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)

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)

(0.00)

(0.01)

(0.03)

*See Non-GAAP Financial Measures

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016

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

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)

*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

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

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

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.

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

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

December 31, 2016

Accounts payable

Compensation and

statutory deductions

Compensation and

statutory deductions

Finance lease liabilities

< 2 months

2-12 months

1-2 years

769,261

371,303

349,223

4,970

10,826

108,000

2-5 years

45,000

> 5 years

Finance lease liabilities

Accrued liabilities

4,970

83,497

10,826

82,206

11,658

25,259

Accrued liabilities

Loans and borrowings

Total

83,497

1,229,031

82,206

103,768

546,023

11,658

119,333

238,991

25,259

476,546

546,805

1,030,935

Total

769,261

873,526

15,796

202,620

1,730,582

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

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)

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

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

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

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

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

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.

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

Q1 2016

Q4 2015

Q3 2015

Q2 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

36.1

Distribution Expenses (Recovery)
Distribution Expenses (Recovery)
Distribution Expenses (Recovery)

66.9

66.9
33.1

33.1

64.4

73.3

64.8

75.2

35.6

26.7

35.2

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
$

Variance
$

YTD 2016
$

YTD 2015
YTD 2015
$
$

Variance
Variance
$
$

598,925

379,422

3,255,326

1,983,579

1,271,747

4,625
4,625

(1,392)

6,017

97,067

91,658

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

25,006

829,298
328,855
472,078

829,298
328,855
472,078
40,216

40,216

(331,192)
87,878
90,567

(15,210)

41,580
113,879
(103,303)

4,907,039

29,840
100,169
101,940

3,977,633

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.

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

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

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

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.

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

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

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

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

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)

(0.02)

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

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)

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

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.

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”).

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

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.

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

3. Significant accounting policies (Continued)

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.

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

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.

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

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.

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

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.

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

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

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

1,675,746

2,597,785

(3,131,261)

19,033

(15,962)

1,145,341

1,087,197

58,144

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

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

(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).

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

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

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

0.25

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

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.

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

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

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

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

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

2015
$

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

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

0-30 days
$

865,067

31-60 days
$

81,199

31-60 days
$

39,128

61-90 days
$

23,010

61-90 days
$

(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

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

15,794

9,715

103,768

237,277

18,782

414,386

541,168

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

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.

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%

FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2016

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

“FLYHT EXPECTS 2017 TO ALSO BRING
NEW OPPORTUNITIES GIVEN OUR
DEMONSTRATED, COMMERCIALLY
AVAILABLE EXPERTISE IN REAL-TIME
ACCESS TO FLIGHT RECORDER DATA.”

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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