FLYHT Aerospace Solutions
Annual Report 2017

Plain-text annual report

Cover page 0- TABLE OF CONTENTS Letter to Shareholders ............................................................................................. 4 Management Discussion & Analysis........................................................................ 6 Non-GAAP Financial Measures Forward-Looking Statements Overview Trends and Economic Factors Contracts and Achievements of Fiscal 2017 Results of Operations Years Ended December 31, 2017 and 2016 o Selected Results o Financial Position o Comprehensive Income o Other Independent Auditors’ Report Consolidated Financial Statements ......................................................................... 25 Notes to the Consolidated Financial Statements .................................................... 29 Corporate Information ............................................................................................. 51 Commonly used Financial Terms and Aviation Acronyms Design Approval Organization ACARS: Aircraft Communications Addressing and Reporting System AFIRSTM: Automated Flight Information Reporting System ANAC: National Civil Aviation Agency of Brazil CAAC: Civil Aviation Administration of China DAO: DGAC: Direccion General de Aeronautica Civil (Mexico’s certification organization) EASA: European Aviation Safety Agency EBITDA: Earnings before interest, taxes, 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 HKCAD: Hong Kong Civil Aviation Department International Air Transport Association IATA: International Civil Aviation Organization ICAO: International Financial Reporting Standards IFRS: MD&A: Management Discussion and Analysis NCAA: Nigerian Civil Aviation Authority NTSB: National Transportation Safety Board OEM: Original Equipment Manufacturer QTD: R&D: SADI: Strategic Aerospace and Defence Initiative SAAU: State Aviation Authority of Ukraine SFP: STC: TCCA: Transport Canada Civil Aviation WINN: Western Innovation Initiative YTD: Statement of Financial Position Supplemental Type Certificate Quarter-to-date Research and Development Year-to-date 1- 2- 3- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 LETTER TO SHAREHOLDERS In 2017, FLYHT took steps to prepare for future growth and establish strategic partnerships with large industry players. FLYHT saw growth in the backlog of Automated Flight Information Reporting System (AFIRSTM) kits and services and this resulted in a 25% increase of shipments in 2017. FLYHT reorganized both our facility and our team. Looking toward 2018, we have continuing trials with Boeing and Inmarsat and actively pursue partnerships with Original Equipment Manufacturers (OEMs), which we feel will lead to revenue growth and improved financial performance. Financially, FLYHT’s revenues for 2017 were within 2% of what the Company posted in 2016 despite being significantly lower in the Parts revenue category. This category includes revenues from spare parts, but the largest component is the license fees that FLYHT receives from the OEM shipment of AFIRS units to the A320/A330 production line. Overall, Parts revenue was down 15% compared to last year, but this decline was largely offset by an increase in AFIRS hardware revenue of 17% over 2016. In fact, quarterly AFIRS hardware revenue was up significantly, with an increase of 76% more than in Q4 2016! We finished the year on a positive note with the shipment of 19 AFIRS units in December and 90 units for the year, which represents an increase of 25% over the prior year. FLYHT has been expecting the revenue for AFIRS hardware to increase due to the significant backlog that the Company has been building these past three years. Since airlines normally install AFIRS during a regularly scheduled “C Check”, a 20 to 24-month (or after a specified number of flight hours) maintenance check, it can take some time to equip a fleet because the fleet operator must cycle their equipment through the check. FLYHT’s backlog of undelivered AFIRS hardware and contracted, but undelivered recurring data services had grown to over $27M at the end of 2017. FLYHT invested in the shipping/receiving/kitting area of the Calgary facility in October 2017 and tripled its size because we anticipated an increase in AFIRS hardware shipments based upon this growing sales backlog. The resulting facility will accommodate much higher volumes of AFIRS kit shipments than we were able to accomplish within the previous area. This made shipping during the fourth quarter, our second highest AFIRS hardware revenue quarter in history, much more efficient for the operations team. FLYHT made important organizational changes in 2017. In the second half of the year, we reorganized the day-to-day including procurement/manufacturing, account management, customer and aircraft certification operations engineering, and software development teams into an organization run by the COO, Matieu Plamondon. This allowed FLYHT to create a Strategic Product Management team led by our CTO, Derek Graham. This was necessary to address the strategic opportunities from Boeing and Inmarsat that were announced in the year. The Strategic Product Management team also helps FLYHT plan and execute our next generation products, which we will begin investing in this year, to enhance our unique position in the industry as the leading provider of real-time data streaming technology. As part of this reorganization, we also converted several contractor positions to in-house staff and grew the sales team modestly to be better prepared as a Company for future opportunities. FLYHT hired industry veteran Steve Newell as VP Business Development to help mature new opportunities with OEMs, airframers and other technology partners so that we could focus our VP Sales and Marketing, David Perez and his sales team on selling AFIRS and UpTimeTM voice and data services to airlines and lessors. While we fell short of our financial targets in 2017, we did have several accomplishments. We signed a contract with Azur in the Middle East, Bahamasair in the Bahamas, an airline in South Korea, a military logistics company and an aircraft lessor. In addition, FLYHT signed contracts with four new Chinese carriers, bringing the number of carriers we serve in China to 23. We also accomplished AS9100C quality registration and revised processes and procedures for the AS9100D transition audit in January. In 2017, the Company also received an important patent from the United States Patent and Trademark Office for FLYHT’s emergency data streaming technology which has been initially enabled in a commercial software product called FLYHTStreamTM. This patent has also been issued in China and is pending in several other countries. This intellectual property can form the basis for industry to meet the “Timely Access to Flight Data” requirements which are levied upon the industry by the International Civil Aviation Organization (ICAO) for new aircraft in 2021. Several of our trials are designed to validate that FLYHT’s solution will satisfy this mandate, which is intended to overcome the problems associated with no access to flight data, such as the tragic loss of Malaysian Air MH370 or the two year wait to access it, as evidenced by Air France AF447. FLYHT added many Supplemental Type Certificates during the year, increasing this valuable library to more than 90 entries. 4- FLYHT is focused on multiple initiatives in 2018. These include the fantastic opportunity to participate as a partner on the Boeing ecoDemonstator Program where we are demonstrating state-of-the-art aircraft tracking, locating and data recovery technologies using our AFIRS and UpTimeTM Cloud. We are excited to be the only Company chosen to demonstrate these capabilities for the program. Similarly, we have announced a trial partnership with Inmarsat, the largest provider of aviation flight-deck Satcom bandwidth, to help them achieve their “Black Box in the Cloud” vision of always-on streaming in the Swiftbroadband-Safety spectrum. We are pursuing other trials where we are working closely with the airlines to tailor our system to solve specific problems and we are integrating our solution with technology from other OEM equipment providers which we believe will bring increased value to our combined solutions. I feel very excited about the prospects for the Company as we move into 2018. We have an excellent team that is focused on meaningful opportunities. Thank you for your continued support of FLYHT! Thomas R. Schmutz Chief Executive Officer 5- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 MANAGEMENT DISCUSSION & ANALYSIS This management discussion and analysis (“MD&A”) is as of April 10, 2018 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, 2017 and 2016 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, 2017 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). 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, deposits and prepaid expenses, and the current portion of unearned revenue net of installations in progress. 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, income tax, depreciation and amortization of assets. 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 forward-looking statements. The forward-looking statements contained herein are current only as of the date of this document. The Company disclaims any intentions or obligation to update or revise any forward-looking statements or comments as a result of any new information, future event or otherwise, unless such disclosure is required by law. FLYHT Overview FLYHT’s mission is to improve aviation safety, efficiency and profitability. The Company is located in Calgary, Canada; publicly traded as: FLY:TSX.V; FLYLF:OTCQX. Airlines, leasing companies, fractional owners and original equipment manufacturers have installed the Automated Flight Information Reporting System (AFIRSTM), developed and produced by FLYHT, on their aircraft to capture, process and stream aircraft data with real-time alerts. AFIRS sends this information through satellite networks to the UpTimeTM Cloud data center, which provides aircraft operators with direct insight into the operational status and health of their aircraft and enables them to take corrective action to maintain the highest standard of operational control. 6- AFIRSTM and UpTimeTM AFIRS is a device installed on aircraft that captures and monitors hundreds of essential functions from the aircraft including data recorded by the black box. AFIRS sends this information through the Iridium satellite network to FLYHT’s UpTime 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 and flight tracking 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 received regulatory certification for installation of AFIRS in a large number of widely used commercial aircraft brands and models (see systems approvals section). 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 voice and data. FLYHTStreamTM 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 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 is happening onboard the aircraft. FLYHT received a U.S. patent for the data streaming technology in 2017. 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. It also provides the aircraft operator with the ability to enable FLYHTStream on their airborne aircraft at any time. FLYHTHealthTM Consists of automated engine trend reporting and real-time engine and airframe exceedance monitoring and remote, real-time diagnostics. Automated 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 reporting system once a problem has been detected. The intent is then for the airline to 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 “turn-time”, 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. 7- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 FLYHTFuelTM A powerful program that focuses attention on areas of greatest savings potential to provide information necessary to make decisions about the operation. Some 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. Underfloor Stowage Unit The Underfloor Stowage Unit offers the flight crew additional stowage space in the cockpit. With this addition, manuals are always within reach of the seated crew and are kept safe, dry and clean inside the stowage unit. In addition, safety equipment and o ther 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. System Approvals FLYHT is a TCCA Approved Manufacturer, an 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). FLYHT is now AS9100 certified with the registrar SAI Global. 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 is currently pursuing STC validations from the SAAU and the HKCAD. 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. 8- STC Chart TCCA FAA EASA CAAC ANAC 220 228 220 228 220 228 220 228 220 228 A A A A A A A A A A A A A A A A A A I A I A A A A A A A A A A A A A A A A A A A A A A A* A A* A A A A A A A A A A A A A A Airbus A319, A320, A321 A* A* A A A A A* A A A A A A A A A A A A A A A A I I A A I A A Airbus A300 Airbus A330 ATR42 -300 ATR42 -500 ATR-72 -100, -200 A I A ATR42-500 "600 Version" *STC Twenty One ATR72-212A "600 Version" *STC Twenty One Boeing B737 -200 A Boeing B737 -300, -400, -500 Boeing B737 -600 A Boeing B737 -700, -800 Boeing B737 -900ER Boeing 747-200 Boeing 757 -200 Boeing 767 -200, -300 Boeing B777 Bombardier DHC 8 -100, -200, -300 *Avmax Bombardier DHC 8 -400 Bombardier CRJ 100, 200, 440 Bombardier CRJ -700, 900 McDonnell Douglas DC-10 (KC-10 military) McDonnell Douglas MD-82 McDonnell Douglas MD-83 Fokker 100 A A A A A Hawker Beechcraft -750, 800XP, 850XP, 900XP A I A Viking Air DHC -7 (LSTC) A Embraer EMB 190 Embraer Legacy 600 and EMB – 135/145 Chart Legend: AFIRS 220 or 228 model, A = Approved, P = Pending (Provisions STC has been received; in final stages before receiving a full STC), I = In Progress. FLYHT has also received an approved AFIRS 228 STC for the Bombardier CRJ- 700, 900 from the DGAC. FLYHT has AFIRS 228 applications in progress with SAAU for B737-300, -400, -500 and B737-700, -800 aircraft. An AFIRS 228 application is also in progress with HKCAD for the Airbus A319, A320 and A321. 9- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 Trends and Economic Factors FLYHT examines the communications issued by leading aviation associations and corporations in order to gain insight on the status of the industry. The Aviation Industry in 2017 The International Air Transport Association’s (IATA) 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 7.6% increase in 2017 compared to the previous year. 2017 results were also ahead of the ten-year average growth rate of 5.5%1. All regions, outside of the Middle East, saw demand growth in International passenger traffic, and load factors that measure the capacity utilization of flights were at a record annual high of 81.4%. Demand in domestic markets at 7.0% was slightly lower than international travel at 7.9%2. Global freight traffic (measured in FTK) increased by 9.0% in 2017, which more than doubled the industry’s 3.6% annual growth in 2016 and is the strongest growth since 20103. All regions experienced positive freight growth. African airlines topped the regions with growth of 25.2% in 2017, followed by Europe, with an increase of 11.9%4. Results from large commercial aircraft manufacturers were mostly to the upside in 2017 and their order backlog numbers remain high. Airbus continued its growth with a new record for aircraft deliveries of 718 aircraft for 85 customers, an increase from last year’s record 688 aircraft to 82 customers5. At the end of 2017, Airbus' overall backlog stood at 7,265 aircraft valued at US $1.059 trillion at list prices. Airbus achieved milestone deliveries in the year and opened the new A330 Completion and Delivery Centre in Tianjin, China6. Boeing’s deliveries increased to 763 aircraft in 2017 from 748 in 20167. Boeing published their backlog at the end of 2017 at 5,800 commercial aircraft. This backlog represents orders of nearly US $421 billion8. Embraer saw a decline in deliveries from 2016 and delivered a total of 101 commercial and 109 executive jets (72 light and 37 large) in 20179. The manufacturer has a backlog of US $18.3 billion. Bombardier delivered less aircraft than the previous year, a total of 213 business and commercial jets compared to 249 aircraft in 2016, though they were in line with the guidance they provided for the year. Bombardier’s backlog at the end of 2017 is $14 billion in business jets and 433 commercial aircraft10. The General Aviation Manufacturers Association (GAMA) reported that numbers in worldwide general aviation airplane shipments in 2017 increased 2.5% to 2,324 compared to 2,268 in 201611. Future Industry Projections According to IATA’s 2018 outlook12, the global aviation industry is continuing to grow and is expected to retain USD $8.9 for every passenger carried in 2018. IATA reports that the industry is expected to add 1,683 new aircraft in 2018, expanding the global commercial fleet to 30,000 aircraft. 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, forecast robust demand to continue over the next twenty years. Boeing increased their prediction about new aircraft from last year’s outlook to a total need of 41,030 new aircraft worth US $6.1 trillion13 and Airbus’ states the demand for 34,900 aircraft worth US $5.3 trillion14. The Asia-Pacific region, which includes India, China and Oceania is expected to become the world’s leading travel market, growing 5.7% annually by 2036 and will constitute nearly 40% of global passenger traffic, with China needing 5,420 new widebody aircraft and 940 single-aisle airplanes15. China is expected to become the largest domestic air travel market, surpassing North America because of the increased growth of the middle class. 1 http://www.iata.org/pressroom/pr/Pages/2018-02-01-01.aspx 2 http://www.iata.org/publications/economics/Reports/pax-monthly-analysis/passenger-analysis-dec-2017.pdf 3 http://www.iata.org/pressroom/pr/Pages/2018-01-31-01.aspx 4 http://www.iata.org/publications/economics/Reports/freight-monthly-analysis/freight-analysis-dec-2017.pdf 5 http://www.airbus.com/newsroom/press-releases/en/2018/01/airbus-commercial-aircraft-delivers-record-performance.html 6 http://www.airbus.com/newsroom/press-releases/en/2018/01/airbus-commercial-aircraft-delivers-record-performance.html 7 http://boeing.mediaroom.com/2018-01-31-Boeing-Reports-Record-2017-Results-and-Provides-2018-Guidance 8 http://boeing.mediaroom.com/2018-01-31-Boeing-Reports-Record-2017-Results-and-Provides-2018-Guidance 9 https://daflwcl3bnxyt.cloudfront.net/m/4155bb8e78b3e665/original/4Q17-Deliveries-Announcement-US.pdf 10 https://www.bombardier.com/en/media/newsList/details.binc-20180215-bombardier-reports-fourth-quarter-and-full-year-20.bombardiercom.html 11 https://gama.aero/news-and-events/press-releases/gama-presents-2017-year-end-aircraft-shipment-and-billings-numbers-at-annual-press- conference/ 12 http://www.iata.org/publications/economics/Reports/Industry-Econ-Performance/IATA-Economic-Performance-of-the-Industry-end-year-2017- report.pdf 13 http://www.boeing.com/resources/boeingdotcom/commercial/market/current-market-outlook-2017/assets/downloads/cmo-2018-01-26.pdf 14 http://www.airbus.com/aircraft/market/global-market-forecast.html 15 http://www.boeing.com/resources/boeingdotcom/commercial/market/current-market-outlook-2017/assets/downloads/cmo-2018-01-26.pdf 10- With the growth in the industry, the aviation market increases it reliance 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 grow16. They increased their forecast from last year’s predictions of the launch of 1,450 satellites between 2016 and 2025, and a market of US $250 billion17 to 3,000 satellites with a market of US $304 billion.18 Regulatory Drivers The International Civil Aviation Organization (ICAO) adopted new amendments to Annex 6 (Operation of Aircraft) that will take effect by 2021. These are applicable to FLYHT because they encompass services that we currently offer. Amendment 39 for Normal Aircraft Tracking makes an aircraft operator responsible for tracking its aircraft in its area of operations with a tracking time interval of 15 minutes, applicable on November 1, 2018 to specific classes of aircraft. Amendment 40 for Autonomous Distress Tracking (ADT) requires aircraft to carry an ADT device that can autonomously transmit location information at least once every minute in distress circumstances. The ADT amendment will come into effect on newly manufactured aircraft starting January 1, 2021. Amendment 40 is the Timely Access to Flight Data Recorder Information and requires aircraft to be equipped with a means to have flight recorder data recovered and available in a timely manner. FLYHT’s Market FLYHT’s technology is available to a number of sectors within the global aerospace industry. The Company’s AFIRS product can be installed on commercial, business or military aircraft, although the latter category represents a small portion of current business. In addition, FLYHT’s UpTime Cloud services are available to these market segments. The technology relies on the use of satellites for real-time communication with aircraft. FLYHT remains an industry leader in real-time data streaming technology that enhances the efficiency and safety of aircraft. The Company focused on the development and launch of a cloud-based UpTime software over the past two years. UpTime Cloud marks an improvement over our previous technology, with configurability pushed to the customer and the ability to scale-up and increase the number of customers using the platform. FLYHT will continue to add functions and features to improve UpTime Cloud capabilities. Such features detect and notify the airline of problems while the aircraft is in flight and allow the operator to prepare for repairs before the aircraft lands, thereby reducing the financial impact of unscheduled maintenance. FLYHT also focused on industry trials in 2017. The Company developed its technology to stream data over the Inmarsat Satellite network for trials with Boeing and Inmarsat. 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. FLYHT’s primary sales target has been commercial passenger and air freight transport customers, while its 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 through OEM partnerships, with a goal to fit AFIRS equipment on the aircraft during production so that UpTime Cloud services can be turned on immediately after delivery to the customer. The strengthening of the Canadian dollar relative to the U.S. dollar throughout 2017 had a negative impact on the Company’s revenue and income compared to 2016. 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 partial natural hedge exists against fluctuations of the Canadian dollar. Contracts and Achievements of Fiscal 2017 Contracts In January, FLYHT announced a contract with an existing customer in the People’s Republic of China (China) for AFIRS 228 valued at USD $1.3 million. In March, FLYHT announced a new commercial airline customer in China for AFIRS 228 hardware, valued at USD $1.68 million. 16 http://www.euroconsult-ec.com/research/satellite-value-chain-2016-extract.pdf 17 http://www.euroconsult-ec.com/13_September_2016 18 http://www.euroconsult-ec.com/11_October_2017 11- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 In March, FLYHT announced customer and parts sales activity in the first quarter of 2017 including USD $1.5 million of parts to an existing OEM partner. One new and seven current customers signed AFIRS 228 units and/or voice and data services for a total of USD $1.5 million. In April, FLYHT announced the sale of AFIRS hardware to a new commercial airline customer in China, valued at USD $1.9 million. In June, FLYHT announced updates to customer and parts sales activity for the second quarter of 2017. FLYHT received parts orders of USD $2.2 million from an existing OEM partner. Seven current customers signed contracts for additional AFIRS 228 hardware and/or voice and data services for a total of USD $833,000. In September, FLYHT announced the sale of AFIRS to two new commercial cargo customers in China, valued at USD $1.4 million. In October, FLYHT announced updates to customer and parts sales activity in the third quarter of 2017 with an addition of USD $1.7 million in contracts and purchase orders. In October, FLYHT announced a sale of AFIRS and FLYHTLog services to Azur Havacilik (Azur Aviation), based in Antalya, Turkey for USD $2.1 million. At the end of the year, FLYHT announced an addition of USD $555,000 in new sales contracts and purchase orders during the fourth quarter of 2017. Achievements In March, FLYHT announced the official launch of its UpTime Cloud software. The UpTime Cloud web portal improves the Company’s software usability, while providing enhancements to security and infrastructure. In the first quarter, FLYHT was awarded STCs for the AFIRS 228 by the FAA for MD82/83 aircraft and from the CAAC for the Boeing 757. In June, FLYHT announced the receipt of a patent from the United States Patent and Trademark Office for FLYHTStream. In the second quarter, FLYHT was awarded an AFIRS 228 STC by CAAC for Boeing 737-300/400/500 aircraft. In July, FLYHT announced it had amended its operating demand loan (“Line of Credit”) with a Canadian chartered bank to increase borrowing availability to CAD $1.5 million. In July, FLYHT announced the TSX Venture Exchange approved a consolidation of its common shares on a 10 to 1 basis. The Consolidation took effect July 17, 2017. In August, FLYHT announced its participation in the Boeing ecoDemonstrator Program. The Program is designed to collect data and produce test reports that are necessary to demonstrate Autonomous Distress Tracking and the Timely Recovery of Flight Data. FLYHT’s portion of the project is expected to be complete in 2018. In September, FLYHT announced a flight trial with Inmarsat to demonstrate the use of AFIRS to send data to the UpTime Cloud management platform via Inmarsat’s secure IP broadband platform, SwiftBroadband-Safety (SB-S). In the third quarter, FLYHT was issued a TCCA STC for AFIRS 228 for the Bombardier Q-400 and revised a TCCA STC in August to allow for modifications on A320 aircraft to introduce AFIRS 228S real-time data services. FLYHT also received the final approval for activation of the TCCA STC for the E-190 Embraer Jet family. In November, FLYHT appointed Matieu Plamondon as Chief Operating Officer. In the fourth quarter, FLYHT was issued the CAAC STC for the E-190 Embraer Jet family. 12- Results of Operations – Years Ended December 31, 2017, 2016 and 2015 Selected Results 2017 Assets Non-current financial liabilities Revenue Cost of sales Gross margin Gross margin % Distribution expenses Administration expenses Research, development and certification engineering expenses Results from operating activities Depreciation EBITDA* Income (loss) Income (loss) per share (basic) Income (loss) per share (fully diluted) 2016 Assets Non-current financial liabilities Revenue Cost of sales Gross margin Gross margin % Distribution expenses Administration expenses Research, development and certification engineering expenses Income (loss) from operating activities Depreciation EBITDA* Income (loss) Income (loss) per share (basic) Income (loss) per share (fully diluted) 2015 Assets Non-current financial liabilities Revenue Cost of sales Gross margin Gross margin % Distribution expenses Administration expenses Research, development and certification engineering expenses Loss from operating activities Depreciation EBITDA* Loss (Loss) per share (basic (Loss) per share (fully diluted) *See Non-GAAP Financial Measures 13- Q4 $ 7,148,847 1,842,439 3,579,296 1,029,288 2,550,008 71.0% 1,170,695 745,423 Q3 $ 6,955,314 1,385,440 3,322,342 1,480,303 1,842,039 55.4% 1,166,972 684,651 Q2 $ 7,710,302 1,209,206 3,388,030 1,124,487 2,263,543 66.8% 1,418,610 1,090,335 Q1 $ 7,615,545 1,072,848 3,729,082 1,138,602 2,590,480 69.5% 1,195,194 638,120 Total $ 7,148,847 1,842,439 14,018,750 4,772,680 9,246,070 66.0% 4,951,471 3,158,529 1,099,869 458,327 399,920 561,158 2,519,274 (465,979) 69,272 (396,707) (520,428) (0.02) (467,911) 26,980 (440,931) (624,425) (0.03) (645,322) 25,093 (620,229) (724,102) (0.03) 196,008 22,148 218,156 113,340 0.01 (1,383,204) 143,493 (1,239,711) (1,755,615) (0.08) (0.02) (0.03) (0.03) 0.01 (0.08) Q4 $ 6,516,206 974,749 4,127,827 1,034,450 3,093,377 74.9% 1,424,211 719,097 Q3 $ 9,189,104 996,121 4,054,368 1,346,341 2,708,027 66.8% 1,101,318 626,733 Q2 $ 9,655,504 1,002,872 3,537,665 1,278,746 2,258,919 63.9% 1,248,783 1,103,399 Q1 $ 5,803,079 602,011 2,611,331 861,965 1,749,366 67.0% 1,132,727 638,427 Total $ 6,516,206 974,749 14,331,191 4,521,502 9,809,689 68.4% 4,907,039 3,087,656 725,739 550,443 336,871 988,176 2,601,229 224,330 18,687 243,017 79,709 0.00 0.00 Q4 $ 5,478,867 390,110 3,769,267 1,340,513 2,428,754 64.4% 1,084,443 1,573,796 429,533 16,302 445,835 303,890 0.01 0.01 Q3 $ 6,140,675 3,267,030 2,519,347 672,341 1,847,006 73.3% 1,142,086 607,755 2,793,032 (1,009,964) 2,436,931 15,562 2,808,594 2,572,061 0.13 16,128 (993,836) (1,242,942) (0.07) 66,679 2,503,610 1,712,718 0.09 0.13 (0.07) 0.09 Q2 $ 6,344,752 3,053,577 1,598,603 562,535 1,036,068 64.8% 987,330 943,931 Q1 $ 7,752,509 5,407,303 2,569,908 637,901 1,932,007 75.2% 763,774 551,471 Total $ 5,478,867 390,110 10,457,125 3,213,290 7,243,835 69.3% 3,977,633 3,676,953 689,195 638,104 737,968 737,285 2,802,552 (918,680) 15,896 (902,784) (1,203,998) (0.07) (0.07) (540,939) 13,652 (527,287) (683,224) (0.04) (0.04) (1,633,161) 13,707 (1,619,454) (1,943,924) (0.11) (0.11) (120,523) 13,618 (106,905) (60,414) (0.00) (0.00) (3,213,303) 56,873 (3,156,430) (3,891,560) (0.23) (0.23) FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 Weighted Average Shares Outstanding 2017 $ 20,926,589 20,926,589 2016 $ 19,507,065 19,541,957 2015 $ 17,242,349 17,242,349 Basic Diluted Financial Position Liquidity and Capital Resource The Company’s cash at December 31, 2017 increased to $2,014,135 from $709,958 at December 31, 2016. On July 7, 2017, the Company amended its operating demand loan with a Canadian chartered bank to increase its borrowing availability to CAD $1.5 million from $250,000. This facility was undrawn as at December 31, 2017. The operating demand loan bears interest at the Canadian chartered bank prime plus 1.5%. Security includes specific accounts receivable, a guarantee under the Export Development Canada’s Export Guarantee Fund and a general security agreement including a security interest in all personal property. This amendment released the GIC of $250,000 previously pledged as security. At December 31, 2017, the Company had positive working capital of $1,761,003 compared to positive $1,724,190 as of December 31, 2016, an increase of $36,813. When non-refundable items (customer deposits, deposits and prepaid expenses, and the current portion of unearned revenue net of installations in progress) are excluded from the working capital calculation, the resulting modified working capital at December 31, 2017 would be positive $3,239,928 compared to positive $2,185,016 at December 31, 2016. The Company funded 2017 operations primarily through cash received from sales, contributions from the Western Innovation Initiative (WINN), and proceeds from exercised share options and warrants. The Company will continue to strive to self-fund operations through 2018. Cash and cash equivalents Restricted cash Trade and other receivables Deposits and prepaid expenses Inventory Trade payables and accrued liabilities Customer deposits Unearned revenue Loans and borrowings Finance lease obligations Current tax liabilities Working capital Unearned revenue Installations in progress Deposits and prepaid expenses Customer deposits Modified working capital* *See Non-GAAP Financial Measures 2017 $ 2,014,135 - 1,887,251 391,191 1,563,558 (1,868,563) (1,687,971) (413,809) (112,578) 2016 $ 709,958 250,000 2,105,385 216,819 1,556,794 (1,845,408) (317,899) (827,235) (97,895) (15,553) (10,776) 1,724,190 827,235 (231,664) (467,489) (216,819) 317,899 2,185,016 (12,211) 1,761,003 413,809 (391,191) 1,687,971 3,239,928 - Variance $ 1,304,177 (250,000) (218,134) 174,372 6,764 (23,155) (1,370,072) 413,426 (14,683) 15,553 (1,435) 36,813 (413,426) 235,825 (174,372) 1,370,072 1,054,912 14- In 2017 option and warrant exercises resulted in the Company issuing a total of 314,451 shares for total proceeds of $538,423 including: Share options Share options Share options Share options Share options Warrants Total Quantity Price $ Proceeds $ 22,500 20,000 30,930 20,000 30,000 191,021 314,451 1.65 1.85 1.90 2.20 2.50 1.50 37,125 37,000 58,767 44,000 75,000 286,531 538,423 As at April 10, 2018 FLYHT’s issued and outstanding share capital was 21,058,617. The consistent achievement of positive earnings is necessary before the Company can consistently improve liquidity. The Company has continued to expand its cash flow potential through its continued marketing drive to clients around the world and contracts for delivery of AFIRS units and related services. 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. For the Company to continue as a going concern longer-term, it will need to achieve 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 deteriorates, or revenue streams and/or markets do not improve, 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. These material uncertainties may cast significant doubt upon the Company’s ability to continue as a going concern. There is no assurance that the Company will be successful in attaining and sustaining profitable operations and cash flow or raising additional capital to meet its working capital requirements. If the Company is unable to satisfy its working capital requirements from these sources, the Company’s ability to continue as a going concern and to achieve its intended business objectives will be adversely affected. These consolidated financial statements do not reflect adjustments that would otherwise be necessary if the going concern assumption was not valid, such as revaluation to liquidation values and reclassification of statement of financial position items. Financial Instruments The Company is exposed to fluctuations in the exchange rates between the Canadian dollar and other currencies, primarily the US dollar, with respect to assets, liabilities, sales, expenses and purchases. The Company monitors fluctuations and may take action if deemed necessary to mitigate its risk. The Company may be 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 credit-worthy or well-established customers. In the case of AFIRS sales, the invoiced amount is frequently payable before the product is shipped to the customer. The Company assesses the financial risk of a customer and based on that analysis may require that a deposit payment be made before services are provided. To further minimize credit exposure, credit insurance 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 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, 2017 Accounts payable Compensation and statutory deductions Accrued liabilities Loans and borrowings Total 15- < 2 months $ 1,340,510 2-12 months $ - 1-2 years $ - 2-5 years $ - > 5 years $ - 46,763 274,647 27,000 - 37,990 - 1,425,263 113,479 119,333 507,459 11,658 137,234 175,892 16,516 1,628,685 1,645,201 - - 822,220 822,220 Total $ 1,340,510 348,410 179,643 2,707,472 4,576,035 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 Operating lease rentals are payable as follows: 2018 2019 2020 2021 Total Premises $ 462,678 462,678 462,678 77,113 1,465,147 Under the Strategic Aerospace and Defence Initiative (SADI), the Company has, at December 31, 2017, an outstanding repayable balance of $1,626,814, compared to $1,730,582 at December 31, 2016. The amount is repayable over 15 years on a stepped basis commencing April 30, 2014. The initial payment on April 30, 2014 was 3.5% of the total contribution received and the payment increases yearly by 15% until April 30, 2028 when the final payment will be 24.5% of the total contribution received. The repayment in 2017 was $103,767 (2016: $90,234). 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, 2017, the Company had received contributions of $1,080,658. A summary of the carrying value of the SADI and WINN loans as at December 31, 2017 and 2016 and changes during these years is presented below. SADI 1,072,641 - - 193,805 (103,767) 1,162,679 112,578 1,050,101 2017 $ WINN - 1,080,658 (318,310) 29,989 - 792,338 - 792,338 SADI 984,507 - - 178,368 (90,234) 1,072,641 97,895 974,746 2016 $ WINN - - - - - - - Balance January 1 Received Grant portion Interest accretion Repayment Balance December 31 Less current portion Non-current portion 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. These deposits are nonrefundable. 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. 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 the 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. The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2017 and 2016 including prepayments for AFIRS sales and Parts. Payment was received for 11 installation kits in the fourth quarter of 2017 compared to 14 received in the fourth quarter of 2016, bringing 2017 year-to-date (“YTD”) total payments for installation kits to 64, compared to a total of 58 in 2016. Opening balance Payments received Moved to unearned revenue Q4 2017 $ 1,106,012 1,801,603 (1,219,644) Q4 2016 $ 508,224 512,257 (702,582) Variance $ 597,788 1,289,346 (517,062) YTD 2017 $ 317,899 5,453,511 (4,083,439) YTD 2016 $ 1,020,675 2,681,987 (3,384,763) Variance $ (702,776) 2,771,524 (698,676) Balance, December 31 1,687,971 317,899 1,370,072 1,687,971 317,899 1,370,072 16- Unearned Revenue The chart below outlines the movement in the Company’s unearned revenue throughout the periods ending December 31, 2017 and 2016. Revenue was recognized for 27 installation kits in 2017’s fourth quarter compared to 12 in the fourth quarter of 2016. YTD, revenue has been recognized for 81 installation kits in 2017, as compared to 73 in 2016. In 2017, 100.0% of the unearned revenue balance at December 31, 2016 was recognized as earned revenue (2016: 100.0%). Q4 2017 $ 579,673 1,219,644 Q4 2016 $ 747,511 702,582 - 19,866 (1,380,282) (637,965) Variance $ (167,838) 517,062 (19,866) (742,317) YTD 2017 $ 827,235 4,083,439 YTD 2016 $ 1,145,341 3,384,763 - 19,866 (4,476,999) (3,703,703) Variance $ (318,106) 698,676 (19,866) (773,296) (5,226) (4,759) (467) (19,866) (19,032) (834) 413,809 827,235 (413,426) 413,809 827,235 (413,426) 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 data they receive from AFIRS and use of functions such as the satellite phone. Usage fees are recognized as the service is provided based on actual customer usage each month. AFIRS sales includes the income from AFIRS hardware sales and related parts required to install the unit along with Dragon hardware sales. Upon shipment, these amounts are deferred as unearned revenue and corresponding expenses are recorded as work in progress. When the system is fully functional and the customer has accepted the system, the deferred amount is recognized as AFIRS sales revenue and the work in progress as cost of sales. Parts sales include the sale of spare AFIRS units, spare installation parts, modems with related manufacturing license fee, and Underfloor Stowage Units. Services revenue includes technical services, repairs and expertise the Company offers including the installation of operations control centres. Revenue sources Q4 2017 $ Q4 2016 $ Variance $ YTD 2017 $ YTD 2016 $ Variance $ Voice and data services 1,001,551 1,169,741 (168,190) 4,312,701 4,375,138 (62,437) AFIRS sales Parts sales Services Total 1,502,910 854,406 648,504 4,600,520 3,931,607 668,913 1,045,075 2,091,720 (1,046,645) 4,951,616 5,808,491 (856,875) 29,760 3,579,296 11,960 4,127,827 17,800 (548,531) 153,913 14,018,750 215,955 14,331,191 (62,042) (312,441) Overall, total revenue decreased 2.2% from $14,331,191 in 2016 to $14,018,750 in 2017. AFIRS sales increased by 17.0%, while Voice and data services decreased by 1.4%, Parts sales decreased by 14.8%, and Services revenue decreased by 28.7%. Voice and data services decreased compared to last year, as although a higher number of aircraft were producing recurring revenue, the average revenue per aircraft decreased, largely due to changes in the value of the USD from 2016 to 2017. Recurring revenue accounted for 28.0% of revenue in Q4 2017 (Q4 2016: 28.3%), and 30.8% YTD 2017 (YTD 2016: 30.5%). Recurring revenue from FLYHT’s existing client base is expected to continue to expand throughout 2017 and future years. AFIRS sales increased in 2017 as compared to 2016 due to an increased number of installation kits meeting the requirements for revenue recognition. YTD, revenue has been recognized for 81 installation kits, compared to 73 in 2016. Revenue was recognized for 27 installation kits in Q4 2017 compared to 12 in Q4 2016. Parts sales decreased both in the quarter and YTD in 2017 from 2016 due to differences in the number of modems with related license fees shipped. Services revenue increased in the quarter while decreasing YTD in 2017 compared to 2016. This revenue category can be expected to vary significantly between periods and years, depending on the level of technical services provided to customers in the period. 17- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 Revenue sources for the last eight quarters were: Voice and data services AFIRS sales Parts sales Services Total Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 1,001,551 998,337 1,158,340 1,154,473 1,169,741 1,122,965 1,014,725 1,067,707 1,502,910 1,045,075 29,760 3,579,296 727,858 977,560 1,392,193 863,221 1,479,402 1,563,918 68,591 33,131 3,729,082 3,322,342 22,430 3,388,030 854,406 1,353,021 2,091,720 1,561,816 16,566 1,286,641 1,126,542 109,757 4,127,827 4,054,368 3,537,665 11,960 437,540 1,028,412 77,672 2,611,331 North America South/Central America Africa Middle East Europe Australasia Asia Total North America South/Central America Africa Middle East Europe Australasia Asia Total Q4 2017 $ 2,075,584 137,732 296,843 349,433 159,818 158,097 401,789 3,579,296 Q4 2017 % 58.0 3.8 8.3 9.8 4.5 4.4 11.2 100.0 Q4 2016 $ 2,919,694 231,270 126,980 262,401 68,184 192,925 326,373 4,127,827 Q4 2016 % 70.7 5.6 3.1 6.4 1.7 4.7 7.9 100.0 YTD 2017 $ 7,683,296 442,603 774,407 873,546 333,152 819,153 3,092,593 14,018,750 YTD 2016 $ 9,007,719 658,319 610,886 987,750 286,489 719,763 2,060,265 14,331,191 YTD 2017 % 54.8 3.2 5.5 6.2 2.4 5.8 22.1 100.0 YTD 2016 % 62.9 4.6 4.3 6.9 2.0 5.0 14.4 100.0 Gross Profit and Cost of Sales FLYHT’s cost of sales includes the direct costs associated with specific revenue types, including the AFIRS unit, installation kits, training and installation support, as well as associated shipping expenses and travel expenses for the Company’s engineering personnel while performing on-site installation support. Installations on aircraft are performed by third parties at the customer’s expense. Cost of sales as a percentage of revenue in the fourth quarter of 2017 was 28.8% compared to 25.1% in 2016’s fourth quarter. A review of the annual results shows the cost of sales as a percentage of revenue also increased from 31.6% in 2016 to 34.0% in 2017. The decrease in gross margin was due to differences in the mix of revenue sources in 2017 versus 2016 and a decrease in average AFIRS sales margin from 44.5% in 2016 to 43.4% in 2017. Gross margin will fluctuate quarter over quarter depending on customer needs and revenue mix. Gross margin for the last eight quarters was: Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Gross Margin % Cost of Sales 56.8 43.2 55.4 44.6 66.8 33.2 69.5 30.5 74.9 66.8 63.9 66.9 25.1 33.2 36.1 33.1 18- Distribution Expenses (Recovery) Consist of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. Major Category Salaries and benefits Share based compensation Contract labour Office Travel Equipment and maintenance Depreciation Marketing Other Total Q4 2017 $ Q4 2016 $ Variance $ YTD 2017 $ YTD 2016 $ Variance $ 420,315 978,347 (558,032) 2,361,046 3,255,326 (894,280) 3,154 4,625 (1,471) 152,272 97,067 55,205 301,633 101,744 125,839 155,528 95,901 139,930 146,105 5,843 (14,091) 881,837 429,294 601,172 498,106 416,733 562,645 383,731 12,561 38,527 18,121 12,614 5,507 53,712 25,006 28,706 10,378 45,337 144,174 1,170,695 10,064 27,202 - 1,424,211 314 18,135 144,174 (253,516) 34,438 268,033 169,667 41,580 113,879 (103,303) 4,951,471 4,907,039 (7,142) 154,154 272,970 44,432 Distribution expenses increased by 0.9% from 2016 to 2017. Salaries and benefits have decreased in 2017 primarily due to the replacement of one sales staff with a contractor, as can be noted in the increases in Contract labour, together with an increased allocation of staffing costs based on research and development activity requirements. Share based compensation has increased in 2017 as a result of an increased number of options granted to employees involved in distribution activities. Travel expense has decreased in the quarter while increasing YTD in support of increased sales efforts, particularly in China. Equipment and maintenance expense increases in the quarter and YTD resulted from purchases of cloud-based services to support UpTime Cloud. Marketing expense has increased in 2017 due to an increased attendance at industry tradeshows, the recording in May 2017 of a program filmed on Worldwide Business with kathy ireland ®, and the costs involved with performing a trial with a potential new customer. Other expense increases are the result of differences in bad debt reserve accrued between 2017 and bad debt recovery in Q2 2016. Administration Expenses Consist of expenses associated with the general operations of the Company that are not directly associated with delivery of 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 Total 19- Q4 2017 $ 306,721 11,828 130,294 81,981 20,015 51,022 37,143 4,923 23,261 38,394 27,038 12,803 Q4 2016 $ 427,797 Variance $ YTD 2017 $ (121,076) 1,326,548 281,675 431,423 305,694 76,446 192,452 158,931 - 11,828 82,198 1,710 1,314 9,047 5,375 48,096 80,271 18,701 41,975 31,768 YTD 2016 $ 1,589,395 228,058 172,014 289,311 166,461 141,650 153,580 Variance $ (262,847) 53,617 259,409 16,383 (90,015) 50,802 5,351 6,154 (1,231) 40,350 61,665 (21,315) 29,584 16,062 3,268 15,421 22,332 23,770 (6,323) 102,348 131,340 59,334 (2,618) 51,988 3,158,529 119,143 79,187 9,704 77,488 3,087,656 (16,795) 52,153 49,630 (25,500) 70,873 745,423 719,097 26,326 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 Administration expenses increased 2.3% from 2016 to 2017. Contract labour expenses were higher both in the quarter and YTD due to fees related to professional services, deploying internal guiding principles, and the appointment of an interim CFO, partially offset by lower Salaries and benefits expenses. Legal fees decreased YTD as several 2016 employee related services were not required in 2017. These included international employment law and treasury matters. Audit and accounting increased in YTD resulting from service adjustments, including evaluation and development of an implementation plan to meet the requirements of IFRS 15. Brokerage, stock exchange, and transfer agent fees have lessened in 2017, as the expenses involved in May 2016’s private placement were not required in 2017. Equipment and maintenance expenses and Depreciation increased YTD mainly due to the implementation and license costs associated with the enterprise resource planning software. Other expenses also decreased in 2017 from the same period in 2016, as the employee relocation in Q2 2016 did not recur in 2017. Research, Development and Certification Engineering Expenses (Recovery) Consist of expenses related to the improvement of existing and development of new technology and products. Major Category Salaries and benefits Share based compensation Contract labour Office Travel Equipment and maintenance Components SR&ED credit Depreciation Government grants Warranty Settlement Total Q4 2017 $ Q4 2016 $ Variance $ YTD 2017 $ YTD 2016 $ Variance $ 699,428 467,494 231,934 2,093,261 1,562,383 530,878 - 87,648 48,557 19,163 32,297 57,518 - 31,856 123,402 - 1,099,869 - - 25,448 37,220 128,310 40,566 12,520 35,335 28,371 8,424 4,719 - - (40,662) 7,991 6,643 (3,038) 29,147 (8,424) 27,137 123,402 - 276,669 127,221 90,911 125,357 165,510 (116,514) 49,721 (318,310) 725,739 - 374,130 2,519,274 315,198 119,530 54,595 111,077 57,171 (211,790) 15,395 - 540,450 2,601,229 (11,772) (38,529) 7,691 36,316 14,280 108,339 95,276 34,326 (318,310) (540,450) (81,955) Research and Development expense was 3.2% lower in 2017 compared to the prior year due mainly to a 2016 settlement of a warranty claim that did not recur in the current year, funding received from WINN in 2017, partially offset by an increase in research and development staffing costs. Research and development costs vary according to specific project requirements. Salaries and benefits have increased mainly due to differences in allocations from other cost centres to R&D and the replacement of a contractor with staff as can be noted in the decreases in Contract labour, together with an increased allocation of staffing costs based on research and development activity requirements. Travel expenses increased YTD due to an increased requirement for certification test flights. Cost of travel varies significantly depending on the location of customers and regions served. Components requirements were higher in 2017 than in 2016 as a higher number of expensed parts were used in development and testing activities. The decreased SR&ED credit in 2017 was due to a difference in costs associated with eligible activities for this program. Depreciation increases concentrated in the fourth quarter were associated with capitalized development-specific software purchased in 2017. Government grants changed due to funding received from WINN in 2017. The $318,310 shown is the portion of funds received that has been accounted for as a grant. 20- Net Finance Costs Major Category Interest (income) Net foreign exchange loss (gain) Bank service charges Interest expense Government loan accretion Debenture interest and accretion Debenture cost amortization - - Q4 2017 Q4 2016 Variance YTD 2017 YTD 2016 Variance $ (6,051) (5,034) 6,107 64 57,323 $ (2,801) 2,814 17,890 1,089 46,475 75,234 - $ $ $ $ (3,250) (15,756) (30,368) 14,612 (7,848) (11,783) (1,025) 10,848 115,979 11,023 38,807 681 37,331 2,736 223,795 178,369 (75,234) - (88,292) - - 509,113 5,295 363,506 713,499 104,956 1,476 (2,055) 45,426 (509,113) (5,295) (349,993) Net finance costs 52,409 140,701 Net foreign exchange loss (gain) will vary between periods due to fluctuations in the value of the Canadian dollar in relation to the U.S. dollar. A YTD strengthening of the 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 assets and liabilities. Government grant accretion is the recognition of the effective interest component of the SADI and WINN grants. Debenture interest and accretion decreases were attributable to the debenture redemption in June 2016, which had no effect on 2017. Net Loss Major Category Net income (loss) Foreign Exchange Q4 2017 $ (520,428) Q4 2016 $ 79,709 Variance $ (600,137) YTD 2017 $ (1,755,615) YTD 2016 $ 1,712,718 Variance $ (3,468,333) 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 2017, 99.0% of the Company’s gross sales were made in U.S. dollars, compared to 99.0% in 2016. The Company expects this to continue as the aviation industry conducts the majority of its transactions in U.S. dollars, thus limiting the opportunity for sales in Canadian dollars or other major currencies. The Company also contracts in U.S. dollars for certain services and products related to cost of sales, which creates a natural hedge. Other Recent Accounting Pronouncements The following new 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 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 audited annual consolidated financial statements. 21- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 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 the Company expects will have an impact on the 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). The Company will adopt this standard effective January 1, 2018. Evaluation of the impact of adoption continues, with identification of performance obligations and the required allocation of the total transaction price key areas of focus. The Company is not able at this time to estimate reasonably the impact that the adoption of this standard will have on the financial statements. 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 175 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. The timing of a c-check for AFIRS installation is an uncertainty to the Company because it results in a delay in initial revenue from the sale of the box and the Company does not receive recurring revenue connected with the monthly service offerings until the device is installed and running. The Company takes steps to mitigate this uncertainty by encouraging customers to install AFIRS at their aircraft’s earliest availability and works with them to provide the product 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 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 when revenue is recognized, but allows the Company to receive cash immediately after signing an agreement. As well, the terms of the Company’s standard agreement states that payment is due a minimum of 45 days prior to the shipment of kits. Foreign currency fluctuations The Company realizes a majority of its sales 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 partial 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 responsible for 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 The Company has completed the development of the AFIRS 228 product line and continues to build out its AFIRS 228 Supplemental Type Certificate portfolio. Continued success is dependent on the maintenance of these certifications and the sustaining engineering activities to maintain the manufacturability of the hardware. The bulk of the Company’s development resources are engaged in the creation of new capabilities of UpTime Cloud. FLYHT is confident the product fills a gap in the industry, as evidenced by sales of the AFIRS 228 throughout 2013 to 2017. The Company’s success will ultimately depend on the success of its products, and future enhancements made to same. 22- Availability of key supplies FLYHT services 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 servicing 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 FLYHT appointed an interim CFO from June 5 to November 5, 2017. The services were provided by a company controlled by a director of FLYHT. No similar services were contracted during 2016. All of the transactions with the related party were at exchange amounts that approximated fair value and were supported by a third party receipt. Amounts included in: Contract labour Accounts payable and accrued liabilities Contractual Arrangement For the three months ended December 31, 2017 For the year ended December 31 2017 $ 19,200 - 2016 $ - - 2017 $ 83,200 - 2016 $ - - 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. Subsequent Events In Q1 2018, the Company received contributions totaling $317,195 under the WINN agreement, bringing the total received to date to $1,397,853. In April 2018, the Company applied to the TSX for an amendment of the exercise price of the share purchase warrants that were originally issued on May 12, 2016 from $2.50 to $1.60 per share purchase warrant. The warrants are set to expire on May 12, 2018. 23- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 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 statement of financial position as at December 31, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, 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 10, 2018 Calgary, Canada 24- CONSOLIDATED STATEMENT OF FINANCIAL POSITION December 31, 2017 $ December 31, 2016 $ Assets Current Assets Cash and cash equivalents (note 6) Restricted cash 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) Customer deposits (note 12) Unearned revenue (note 13) Loans and borrowings (note 14) Finance lease obligations Current tax liabilities (note 26) Total current liabilities Non-current liabilities Loans and borrowings (note 14) Provisions (note 16) Total non-current liabilities Total liabilities Equity (deficiency) Share capital (note 17) Warrants (note 17) Contributed surplus Deficit Total equity (deficiency) Total liabilities and equity See accompanying notes to the consolidated financial statements. Going concern (note 2d) On behalf of the board 2,014,135 - 1,887,251 391,191 1,563,558 5,856,136 398,272 34,992 859,448 1,292,712 7,148,847 1,868,563 1,687,971 413,809 112,578 - 12,211 4,095,132 1,842,439 91,713 1,934,152 6,029,284 58,409,225 911,282 9,349,871 (67,550,815) 1,119,563 7,148,847 709,958 250,000 2,105,385 216,819 1,556,794 4,838,956 335,836 34,992 1,306,422 1,677,250 6,516,206 1,845,408 317,899 827,235 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 ________ Director – Bill Tempany Director – Paul Takalo 25- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) Revenue (note 19) Cost of sales Gross profit Other income (note 21) Distribution expenses (note 22) Administration expenses (note 23) Research, development and certification engineering expenses (note 24) Income (loss) from operating activities Finance income (note 25) Finance costs (note 25) Net finance costs Income (loss) before income tax Income tax expense (note 26) Income (loss) and comprehensive income (loss) for the period For the year ended December 31 2017 $ 14,018,750 4,772,680 9,246,070 2016 $ 14,331,191 4,521,502 9,809,689 - (3,223,166) 4,951,471 3,158,529 2,519,274 4,907,039 3,087,656 2,601,229 (1,383,204) 2,436,931 15,756 379,262 363,506 (1,746,710) 8,905 (1,755,615) 30,368 743,867 713,499 1,723,432 10,714 1,712,718 Income (loss) per share Basic and diluted income (loss) per share (note 18) (0.08) 0.09 See accompanying notes to the consolidated financial statements. 26- CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIENCY) For the years ended December 31, 2017 and 2016 Share Capital $ Convertible Debenture $ Warrants $ Contributed Surplus $ Deficit $ Total Equity (Deficit) $ Balance at December 31, 2016 Loss for the period Total comprehensive loss for the period Contributions by and distributions to owners Share-based payment transactions Share options exercised Warrants exercised Total contributions by and distributions to owners Balance at December 31, 2017 Balance at December 31, 2015 Loss for the period 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 Balance at December 31, 2016 57,514,646 - - - 379,396 515,183 894,579 58,409,225 - - - - - - - - 1,139,934 - 9,017,979 - (65,795,200) (1,755,615) 1,877,359 (1,755,615) - - (1,755,615) (1,755,615) - 459,396 - (228,652) (127,504) - (228,652) 331,892 - - - - 459,396 251,892 286,531 997,819 911,282 9,349,871 (67,550,815) 1,119,563 53,895,046 - 222,531 - - 5,086,512 (345,081) - 18,103 (1,139,934) - - - - - - - - - - - - - 1,139,934 8,439,136 - (67,507,918) 1,712,718 (4,951,205) 1,712,718 - 1,712,718 1,712,718 - - 362,345 (6,033) - - - - - - - - 5,086,512 (345,081) 362,345 12,070 - - 5,115,846 - (222,531) - 222,531 3,619,600 (222,531) 1,139,934 578,843 57,514,646 See accompanying notes to the consolidated financial statements. - 1,139,934 9,017,979 (65,795,200) 1,877,359 27- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended December 31 2017 $ 2016 $ Cash flows from (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 Grant portion of contributions from WINN 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 customer deposits Change in provisions Change in unearned revenue Unrealized foreign exchange loss Interest expense Interest paid Interest income Interest received Income tax expense Income tax paid Net cash from (used in) operating activities Cash flows used in investing activities Acquisitions of property and equipment Disposal of property and equipment Net cash used in investing activities Cash flows from (used in) financing activities Share issue costs Redemption of GIC Proceeds from issue of shares and warrants Proceeds from exercise of share options and warrants Contributions from WINN 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. (1,755,615) 143,493 - - - (318,310) 223,795 459,396 440,210 96,546 (174,372) 78,207 1,370,072 (457,622) (413,426) 146,300 681 (681) (15,756) 15,756 8,905 (7,470) (159,891) (208,416) 2,487 (205,929) - 250,000 - 538,423 1,080,658 - (103,767) (15,553) 1,749,761 1,383,941 709,958 (79,764) 2,014,135 1,712,718 66,679 509,113 (384,873) 5,295 - 178,369 362,345 (210,098) (1,149,742) (78,958) 134,311 (702,776) 285,738 (318,106) 29,368 2,736 (2,736) (30,368) 30,368 10,714 (4,916) 445,181 (199,740) - (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 28- 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, 2017 and 2016 consist of the Company and its subsidiaries. FLYHT’s mission is to improve aviation safety, efficiency and profitability. Airlines, leasing companies, fractional owners and original equipment manufacturers have installed the Automated Flight Information Reporting System (AFIRSTM) on their aircraft to capture, process and stream aircraft data with real-time alerts. AFIRS sends this information through satellite networks to the UpTimeTM cloud-based data center, which provides aircraft operators with direct insight into the operational status and health of their aircraft and enables them to take corrective action to maintain the highest standard of operational control. 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 10, 2018. (b) Basis of measurement The consolidated financial statements have been prepared on a historical cost basis except for financial instruments at fair value through profit or loss, which are measured at fair value in the statement of financial position (“SFP”). (c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. (d) Going concern The 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, 2017 the Company had positive working capital of $1,761,003, a deficit of $67,550,815, a net loss in 2017 of $1,755,615 and negative cash flow from operating activities of $159,891 for the year. The consistent achievement of positive earnings is necessary before the Company can consistently improve liquidity. The Company has continued to expand its cash flow potential through its continued marketing drive to clients around the world and contracts for delivery of AFIRS units and related services. 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. For the Company to continue as a going concern longer-term, it will need to achieve 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 deteriorates, or revenue streams and/or markets do not improve, 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. These material uncertainties may cast significant doubt upon the Company’s ability to continue as a going concern. There is no assurance that the Company will be successful in attaining and sustaining profitable operations and cash flow or raising additional capital to meet its working capital requirements. If the Company is unable to satisfy its working capital requirements from these sources, the Company’s ability to continue as a going concern and to achieve its intended business objectives will be adversely affected. These consolidated financial statements do not reflect adjustments that would otherwise be necessary if the going concern assumption was not valid, such as revaluation to liquidation values and reclassification of statement of financial position items. 29- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 (e) 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 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, 2017, no deferred tax assets were recognized. 3. The Company records amounts for warranty based on historical warranty data including expense incurred in relation to warranty and failure rates. A provision is recognized upon shipment of the underlying products. 4. The Company assesses raw materials and AFIRS finished goods inventory for potential obsolescence or impairment. This provision is determined based on regular reviews of slow moving inventory. 5. The Company used a discount rate to determine the fair value of the WINN contribution, as the contribution is a repayable loan at below market interest rates. The discount rate was determined based on debt market conditions as well as factors specific to the Company’s operations and financial position. 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) 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. 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. (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. 30- 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 trade payables, loans and borrowings and finance lease 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: 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. (c) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories includes expenditures incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing them to their existing location and condition. The amount of inventory that is expected to be recovered more than 12 months after the reporting date is presented as a non-current asset. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Any writedown to net realizable value is recognized as an expense. Reversals of previous writedowns are recognized in profit or loss in the period when the reversal occurs. AFIRS raw material inventories include general parts, which are held pending installation and sales to customers. The weighted average cost method is used to measure cost of the AFIRS raw material inventories. 31- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 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 costs plus a standard labour allocation. Installations-in-progress includes product costs and other direct project costs. (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 that 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. 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 Straight line: 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. (e) Research and development (“R&D”) (i) Recognition and measurement Expenditure on research activities is expensed as incurred. R&D costs consist primarily of consulting expenses and parts related to the design, testing, and manufacture of Automated Flight Information Reporting System (“AFIRSTM”) and the design and testing of all software systems and products (including UpTime, FLYHTASD, FLYHTMail, FLYHTStream, and FLYHTFuel). Other R&D costs include testing, patent application and certification. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use, and borrowing costs on qualifying assets. Other development expenditure is recognized in profit or loss as incurred. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. 32- (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. (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. 33- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 (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 at minimum during the first term of each agreement. Provision required 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. 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. 34- (l) Revenue (i) AFIRS sales Revenue from the sale of units is recognized when the risks and rewards are transferred to the buyer. Depending on the contract that occurs upon shipment or upon installation of the system. (ii) Voice and data services Revenue from Voice and data services is recognized when the services are provided. (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 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 parts and Underfloor Stowage Units is recognized when the unit is shipped 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, including wages, salaries, commissions and variable compensation payments, are measured based on the amount payable and are expensed as the related service is provided. (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 vesting or expiry. (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. 35- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 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 may be issued to the agents as consideration for their services. Warrants are classified as equity and recognized at fair value. 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 in profit or loss as it accrues, using the effective interest method. 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. (p) Foreign currency (ii) Foreign currency transactions Foreign currency transactions are translated to Canadian dollars at the exchange rate in effect on the transaction date. Foreign currency denominated monetary assets and liabilities at each reporting date are retranslated to the functional currency at the exchange rate in effect on that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate in effect on the date of the transaction. Foreign currency differences arising on retranslation are recognized in profit or loss. (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. (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. 36- 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 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 audited annual consolidated financial statements. 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 the Company expects will have an impact on the 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). The Company will adopt this standard effective January 1, 2018. Evaluation of the impact of adoption continues, with identification of performance obligations and the required allocation of the total transaction price a key area of focus. The Company is not able at this time to estimate reasonably the impact that the adoption of this standard will have on the financial statements. 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, all of which are determined using a number of observable inputs other than quoted prices in active markets. (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. 37- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 (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, 2017 $ 1,586,908 300,343 1,887,251 December 31, 2016 $ 2,086,572 18,813 2,105,385 Non-trade receivables consist of earned interest income receivable, input tax credits, and customer receivables pending billable events. The Company’s exposure to credit and currency risks is disclosed in note 27. 8. Inventory AFIRS raw materials AFIRS finished goods Installations in progress Balance Less current portion Non-current portion December 31, 2017 $ 1,742,147 449,195 231,664 2,423,006 (1,563,558) 859,448 December 31, 2016 $ 1,190,659 1,205,068 467,489 2,863,216 (1,556,794) 1,306,422 In 2017 AFIRS raw materials and changes in AFIRS finished goods and installations in progress recognized as cost of sales amounted to $3,586,699 (2016: $3,075,401). Included in this amount was write down of inventories amounting to $93,498 (2016: $112,449) resulting from a review of slow moving inventory parts. All inventories are pledged as security for the bank loan. 38- Computers and Software $ Equipment $ Leasehold Improvements $ 9. Property and equipment 2017 Cost Balance at January 1 Additions Disposals Balance at December 31 Accumulated Depreciation Balance at January 1 Depreciation for the year Disposals Balance at December 31 Carrying Amounts At January 1 At December 31 2016 Cost Balance at January 1 Additions Balance at December 31 705,263 119,961 - 825,224 464,125 115,488 - 579,613 241,138 245,611 Computers and Software $ 510,911 194,352 705,263 Accumulated Depreciation Balance at January 1 Depreciation for the year Balance at December 31 420,379 43,746 464,125 266,426 87,798 9,065 345,159 201,509 21,702 6,578 216,633 64,917 128,526 Equipment $ 265,370 1,056 266,426 184,879 16,630 201,509 48,453 657 - 49,110 18,672 6,303 - 24,975 29,781 24,135 Leasehold Improvements $ 44,121 4,332 48,453 12,369 6,303 18,672 Total $ 1,020,142 208,416 9,065 1,219,493 684,306 143,493 6,578 821,221 335,836 398,272 Total $ 820,402 199,740 1,020,142 617,627 66,679 684,306 Carrying Amounts At January 1 At December 31 90,532 241,138 80,491 64,917 31,752 29,781 202,775 335,836 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, 2017, the net carrying amount of leased property and equipment was nil (2016: $47,367). As of December 31, 2017, all property and equipment is pledged as security for the bank loan (note 14). 10. Intangible assets The intangible asset balance of $34,992 at December 31, 2017 (December 31, 2016: $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 Compensation and statutory deductions Accrued liabilities Total December 31, 2017 $ 1,340,510 348,410 179,643 1,868,563 December 31, 2016 $ 769,261 873,526 202,621 1,845,408 Compensation and statutory deductions include accrued vacation pay, variable compensation, and statutory payroll deductions. 39- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 12. Customer deposits Opening balance Payments received Moved to unearned revenue Balance, December 31 13. Unearned revenue 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, 2017 $ 317,899 5,453,511 (4,083,439) 1,687,971 December 31, 2016 $ 1,020,675 2,681,987 (3,384,763) 317,899 2017 $ 827,235 4,083,439 (4,476,999) - (19,866) 413,809 413,809 - 2016 $ 1,145,341 3,384,763 (3,703,703) 19,866 (19,032) 827,235 827,235 - All amounts recorded in unearned revenue are non-refundable. 14. Loans and borrowings Bank loan The Company currently has no bank debt. On July 7, 2017, the Company amended its operating demand loan with a Canadian chartered bank to increase its borrowing availability to CAD $1.5 million from $250,000. The Line of Credit continues to bear interest at Canadian chartered bank prime plus 1.5%. Security includes specific accounts receivable, a guarantee under the Export Development Canada’s Export Guarantee Fund and a general security agreement including a security interest in all personal property. This amendment released the GIC of $250,000 previously pledged as security. Government loans 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, 2017, the Company had received contributions totaling $1,080,658 (2016: nil). Under SADI, the Company has, at December 31, 2017, an outstanding repayable balance of $1,626,814, compared to $1,730,582 at December 31, 2016. 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 carrying value of the SADI and WINN loans as at December 31, 2017 and 2016 and changes during these years is presented below. Balance January 1 Contributions received Grant portion Interest accretion Repayment Balance December 31 Less current portion Non-current portion 2017 SADI $ 1,072,641 - - 193,805 (103,767) 1,162,679 112,578 1,050,101 2017 WINN $ - 1,080,658 (318,310) 29,910 - 792,338 - 792,338 2017 Total 1,072,641 1,080,658 (318,310) 223,795 (103,767) 1,955,017 112,578 1,842,439 2016 SADI $ 984,507 - - 178,368 (90,234) 1,072,641 97,895 974,746 2016 WINN $ - - - - - - - - 2016 Total 984,507 - - 178,368 (90,234) 1,072,641 97,895 974,746 40- Debentures The face value of the convertible debentures issued December 23, 2010 ($3,039,000) was redeemed in full plus accrued interest on December 23, 2016. Redeemable debentures were redeemed on June 30, 2016 for $2,321,000 which included a 10% premium, plus accrued interest. There were no debentures issued, redeemed or outstanding in 2017. 15. Operating leases Operating lease rentals are payable as follows: 2018 2019 2020 2021 Total Premises $ 462,678 462,678 462,678 77,113 1,465,147 Operating lease payments made in 2017 totaled $458,145 (2016: $453,900). 16. Provisions Product warranty Balance January 1 Provision made during the period Provision re-evaluation Provision used during the period Balance December 31 2017 $ 549,335 15,496 (452,328) (20,790) 91,713 2016 $ 263,596 302,654 - (16,915) 549,335 A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data. 17. 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, 2016 Exercise of employee options Warrants issued Common shares issued (net) Balance December 31, 2016 Consolidation rounding Exercise of employee options Exercise of warrants Balance December 31, 2017 Number of Shares 17,347,764 5,405 - 3,391,008 20,744,177 (11) 123,430 191,021 21,058,617 Value $ 53,895,046 18,103 (1,139,934) 4,741,431 57,514,646 - 379,396 515,183 58,409,225 41- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 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 2017 option and warrant exercises resulted in the Company issuing a total of 314,451 shares for total proceeds of $538,423 including: Share options Share options Share options Share options Share options Warrants Total Stock option plan Quantity 22,500 20,000 30,930 20,000 30,000 191,021 314,451 Price 1.65 1.85 1.90 2.20 2.50 1.50 Proceeds 37,125 37,000 58,767 44,000 75,000 286,531 538,423 The Company grants stock options to its directors, officers, employees and consultants. The following stock options were granted in 2017: • 5,000 stock options to a consultant. The options will expire December 31, 2020 and have an exercise price of $2.55 per share and vested immediately upon grant. 3,660,211 stock options to employees, officers and directors under the stock option plan. The stock options will expire December 31, 2020, and have an exercise price of $2.20 per share and vested immediately upon grant. In the fourth quarter of 2017 the Company granted a total of 95,000 stock options to two employees under the stock option plan. The stock options will expire December 31, 2021 and have an exercise price of $2.10 per share. The options will vest on November 3, 2018. • • All outstanding options to employees were granted at an exercise price not less than fair market value of the stock on the date of issuance. The Company has a policy of reserving up to 10% of the outstanding common shares for issuance to eligible participants. As at December 31, 2017, there were 2,105,862 (2016: 2,074,417) common shares reserved for this purpose. A summary of the Company’s outstanding stock options as at December 31, 2017 and 2016 and changes during these years is presented below. Outstanding, January 1 Options granted Options exercised Options expired Outstanding and exercisable, December 31 Unvested options Outstanding, December 31 2017 2016 Number of options 863,337 391,021 (123,430) (242,430) 888,498 95,000 983,498 Weighted average exercise price $ 2.60 2.21 2.04 3.90 2.17 2.10 2.16 Number of options 873,630 370,482 (5,405) (375,370) 863,337 - 863,337 Weighted average exercise price $ 3.19 1.90 2.23 3.27 2.60 - 2.60 42- Weighted average life remaining for the options outstanding and exercisable is 2.13 years. The exercise prices for options outstanding at December 31, 2017 were as follows: Exercise price: Number All options Weighted average remaining contractual life (years) Number Exercisable options Weighted average remaining contractual life (years) $1.65 $1.85 $1.90 $2.10 $2.20 $2.50 $2.55 $2.75 Total 25,000 5,000 296,432 95,000 335,791 201,275 5,000 20,000 983,498 1.0 2.0 2.0 4.0 3.0 1.0 3.0 2.0 2.1 25,000 5,000 296,432 - 335,791 201,275 5,000 20,000 888,498 1.0 2.0 2.0 - 3.0 1.0 3.0 2.0 2.3 The weighted average fair value of the options granted during the year that were valued using the Black-Scholes option pricing model was $1.10 (2016: $1.00). 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, 2016 Warrants issued Agent warrants issued Outstanding December 31, 2016 Warrants exercised Outstanding December 31, 2017 Number of warrants - 1,695,504 211,517 1,907,021 (191,021) 1,716,000 2017 1.05% 3.52 70% 0.00% Weighted average exercise price $ - 2.50 1.50 2.39 1.50 0.23 2016 0.61% 3.57 73% 0.00% Value $ - 886,748 253,186 1,139,934 (228,652) 911,282 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. 18. Earnings per share Basic earnings per share The calculation of basic and diluted earnings per share for the year ended December 31, 2017 was based on a weighted average number of common shares outstanding of 20,926,589 (basic and diluted) (2016: 19,507,065 (basic) and 19,541,958 (diluted). The calculation of diluted earnings per share did not include stock options of 983,498 (2016: 828,295) and 1,716,000 warrants (2016: 1,850,769) because they would be anti-dilutive. 43- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 19. Revenue Voice and data services AFIRS sales Parts sales Services Total 2017 $ 4,312,701 4,600,520 4,951,616 153,913 14,018,750 2016 $ 4,375,138 3,931,607 5,808,491 215,955 14,331,191 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. 20. Operating segments The Company has one operating segment. Geographical Information The following revenue is based on the geographical location of customers. North America South / Central America Africa Middle East Europe Australasia Asia Total For the year ended December 31 2017 $ 7,683,296 442,603 774,407 873,546 333,152 819,153 3,092,593 14,018,750 2016 $ 9,007,719 658,319 610,886 987,750 286,489 719,763 2,060,265 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 37.5% of the Company’s total revenues for the year ended December 31, 2017 (2016: 47.6%). 21. 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 2016. 22. Distribution expenses Salaries and benefits Stock based compensation Contract labour Office Travel Equipment & maintenance Depreciation Marketing Other Total For the year ended December 31 2017 $ 2,361,046 152,272 881,837 429,294 601,172 53,712 34,438 268,033 169,667 4,951,471 2016 $ 3,255,326 97,067 498,106 416,733 562,645 25,006 41,580 113,879 (103,303) 4,907,039 44- 23. Administration expenses Salaries and benefits Stock based compensation Contract labour Office Legal fees Audit and accounting Investor relations Brokerage, stock exchange, transfer agent fees Travel Equipment and maintenance Depreciation Other Total For the year ended December 31 2017 $ 1,326,548 281,675 431,423 305,694 76,446 192,452 158,931 40,350 102,348 131,340 59,334 51,988 3,158,529 24. Research, development and certification engineering 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 Government grants Warranty settlement Total 2017 $ 2,093,261 25,448 276,669 127,221 90,911 125,357 165,510 (116,514) 49,721 (318,310) - 2,519,274 25. Finance income and finance costs For the year ended December 31 Interest income on bank deposits Finance income Bank service charges Net foreign exchange loss Interest expense Government grant interest accretion Debenture interest expense and accretion Debenture issuance cost amortization Finance costs 2017 $ 15,756 15,756 38,807 115,979 681 223,795 - - 379,262 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 2016 $ 1,562,383 37,220 315,198 119,530 54,595 111,077 57,171 (211,790) 15,395 - 540,450 2,601,229 2016 $ 30,368 30,368 37,331 11,023 2,736 178,369 509,113 5,295 743,867 45- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 26. Income tax expense Current Tax Expense Current income tax expense Deferred income tax expense Deferred Tax Expense Unrecognized deferred tax assets 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 2017 $ 8,905 - 8,905 2017 $ 202,845 71,257 2,157 9,609,044 55,903 8,345,900 2016 $ 10,714 - 10,714 2016 $ 163,565 71,257 4,880 9,445,413 74,706 8,150,696 The Company has non-capital losses for income tax purposes of approximately $35,520,188 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: 18,287,196 17,910,517 Year 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2037 Total Amount $ 195,896 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 1,623,930 35,520,188 Reconciliation of effective tax rate Income (loss) before tax Tax Rate Expected income tax recovery True up from prior year Non-deductible expenses Stock based compensation Change in unrecognized temporary differences 2017 $ (1,746,710) 27% (471,612) (42,456) 13,361 124,036 385,582 8,905 2016 $ 1,723,432 27.0% 465,327 (225,317) 13,431 94,209 (336,936) 10,714 46- 27. Financial risk management 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 27.2% (2016: 38.2%) of the Company’s 2017 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, 2017 Accounts receivable Impairment Net receivable December 31, 2016 Accounts receivable Impairment Net receivable 0-30 days 31-60 days 61-90 days 91+ days $ $ 1,297,204 (2,012) 1,295,192 0-30 days $ 1,872,962 - 1,872,962 195,228 - 195,228 31-60 days $ 81,199 - 81,199 $ 40,177 (3,522) 36,655 61-90 days $ 23,010 - 23,010 $ 510,891 (150,715) 360,176 91+ days $ 710,926 (582,712) 128,214 Total $ 2,043,500 (156,249) 1,887,251 Total $ 2,688,097 (582,712) 2,105,385 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, 2017 and 2016 was: 2017 $ 582,712 160,484 (586,947) 156,249 2016 $ 537,469 45,243 - 582,712 Balance, January 1 Provision Amounts written off Balance, December 31 Liquidity risk 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. 47- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 The following table details the contractual maturities of financial liabilities, including estimated interest payments. December 31, 2017 Accounts payable Compensation and statutory deductions Accrued liabilities Loans and borrowings Total December 31, 2016 Accounts payable Compensation and statutory deductions < 2 months $ 1,340,510 46,763 37,990 - 1,425,263 < 2 months $ 769,261 371,303 2-12 months $ - 274,647 113,479 119,333 507,459 2-12 months $ - 349,223 1-2 years $ - 27,000 11,658 137,234 175,892 1-2 years $ - 2-5 years $ - - 16,516 1,628,685 1,645,201 2-5 years $ - 108,000 45,000 Finance lease liabilities 4,970 10,826 - - 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 > 5 years Total $ - - - 822,220 822,220 $ 1,340,510 348,410 179,643 2,707,472 4,576,035 > 5 years Total $ - - - - 1,030,935 1,030,935 $ 769,261 873,526 15,796 202,620 1,730,582 3,591,785 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 $138,744 (2016: $141,823) and a strengthening of the Canadian dollar would decrease net earnings by approximately $138,744 (2016: $141,823). 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, 2017, working capital denominated in U.S. dollars was approximately positive $878,991 (2016: positive $1,410,075). As a result, a 1% weakening of the Canadian dollar would increase net earnings by approximately $8,790 (2016: $14,101) and a strengthening of the Canadian dollar would decrease net earnings by approximately $8,790 (2016: $14,101). 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, 2017 and 2016 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. 48- Fair values versus carrying amounts As the WINN and SADI contributions are repayable loans at below market rates, the carrying amounts have been determined by employing a discount rate based on debt market conditions as well as factors specific to the Company’s operations and financial position. The fair values of financial assets and all other 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. 28. Related parties FLYHT appointed an interim CFO from June 5 to November 5, 2017. The services were provided by a company controlled by a director of FLYHT. No similar services were contracted during 2016. All of the transactions with the related party were at exchange amounts that approximated fair value and were supported by a third party receipt. Amounts included in: Contract labour Accounts payable and accrued liabilities For the three months ended December 31, 2017 For the year ended December 31 2017 $ 19,200 - 2016 $ - - 2017 $ 83,200 - 2016 $ - - Transactions with key management personnel Key management personnel include 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 2017 $ 1,018,521 203,551 132,500 112,500 350,095 59,956 1,877,123 2016 $ 1,071,619 215,869 161,000 - 226,813 190,737 1,866,038 Directors of the Company control 3.9% (2016: 3.8%) of the voting shares of the Company. Subsidiaries FLYHT Inc. AeroMechanical Services USA Inc. FLYHT Corp. FLYHT India Corp. TFM Inc. Country of Incorporation United States United States Canada Canada Canada Ownership interest 100% 100% 100% 100% 100% 49- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 29. 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. 30. Subsequent events In Q1 2018, the Company received contributions totaling $317,195 under the WINN agreement, bringing the total received to date to $1,397,853. In April 2018, the Company applied to the TSX for an amendment of the exercise price of the share purchase warrants that were originally issued on May 12, 2016 from $2.50 to $1.60 per share purchase warrant. The warrants are set to expire on May 12, 2018. 50- 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 Directors Bill Tempany John Belcher Mike Brown Barry Eccleston Jacques Kavafian Doug Marlin Jack Olcott Mark Rosenker Paul Takalo Officers Thomas R. Schmutz Alana Forbes Derek Graham David Perez Matieu Plamondon Auditor KPMG LLP Legal Counsel Chris Croteau Head Office 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 Aero Company United States Air Force (retired) Director Chief Executive Officer Chief Financial Officer Chief Technical Officer Vice President Sales and Marketing Chief Operating Officer Calgary, Alberta Tingle Merrett LLP, Calgary, Alberta 300E, 1144 - 29 Avenue NE Calgary, Alberta T2E 7P1 51- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2017 

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