FLYHT Aerospace Solutions
Annual Report 2018

Plain-text annual report

TABLE OF CONTENTS Letter to Shareholders .............................................................................................. 4 Management Discussion & Analysis ........................................................................ 5 Non-GAAP Financial Measures Forward-Looking Statements Overview Trends and Economic Factors Contracts and Achievements of Fiscal 2018 Results of Operations Years Ended December 31, 2018 and 2017 o Selected Results o Financial Position o Comprehensive Income o Other Independent Auditors’ Report Consolidated Financial Statements ......................................................................... 30 Notes to the Consolidated Financial Statements .................................................... 34 Corporate Information ............................................................................................. 58 Commonly used Financial Terms and Aviation Acronyms ACARS: AFIRSTM: ANAC: CAAC: DAO: DGAC: EASA: EBITDA: ECAA: FAA: Flightlink: GAAP: GAMECO: IATA: ICAO: IFRS: MD&A: OEM: PAC: PWS: QTD: R&D: SADI: SAAU: SFP: STC: TAMDAR: TCCA: WINN: YTD: Aircraft Communications Addressing and Reporting System Automated Flight Information Reporting System National Civil Aviation Agency of Brazil Civil Aviation Administration of China Design Approval Organization Direccion General de Aeronautica Civil (Mexico’s certification organization) European Aviation Safety Agency Earnings before interest, taxes, depreciation and amortization Egyptian Civil Aviation Authority Federal Aviation Administration An Iridium Satellite Data Unit Generally Accepted Accounting Principles Guangzhou Aircraft Maintenance Engineering Company Limited International Air Transport Association International Civil Aviation Organization International Financial Reporting Standards Management Discussion and Analysis Original Equipment Manufacturer Panasonic Avionics Corporation Panasonic Weather Solutions Quarter-to-date Research and Development Strategic Aerospace and Defence Initiative State Aviation Authority of Ukraine Statement of Financial Position Supplemental Type Certificate Tropospheric Airborne Meteorological Data Reporting Transport Canada Civil Aviation Western Innovation Initiative Year-to-date 3- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 LETTER TO SHAREHOLDERS FLYHT’s highlights for 2018 included the acquisition of the assets of Panasonic Weather Solutions (PWS) in Littleton Colorado from Panasonic Avionics Corporation and the successful completion of a live data streaming trial as part of the 2018 Boeing ecoDemonstrator Project. Financially, FLYHT continued to see Hardware Sales and Software as a Service (SaaS) replace licensing as the primary revenue sources. FLYHT’s sales order backlog finished the year at over $60 million and the contracted sales for the year 2018 were over $33 million. Looking forward to 2019, we will complete the integration of PWS assets, manage delivery of enhanced weather products to AirAsia, and we expect to demonstrate continued success in China with the maturing Satcom mandate there. We are expanding our Original Equipment Manufacturer (OEM) customer opportunity pipeline by winning new positions and are extremely well positioned for changes in the industry driven by regulatory change. We anticipate 2019 will be a very exciting year. FLYHT acquired the assets of PWS in early October 2018. The details of this unique acquisition can be found in the FLYHT Press Release dated October 10, 2018 and in the Marketing section of this report. The practical implications are that FLYHT will be paid a baseline US$3.3 million to add a group of very talented USA employees, to receive valuable real-time weather collecting intellectual property and enterprise systems, and to add $20 million of contracted backlog with 12 airline customers and Synoptic Data PBC (Synoptic). The most immediate impact can be found in the Q4 2018 SaaS revenues which more than doubled: +126% versus Q4 2017 and +97% versus Q3 2018. Augmented hardware and corresponding SaaS revenues will begin in Q2 2019 as we start shipping PWS acquired backlog. Also, FLYHT will continue to provide TAMDAR observations to the USA National Mesonet Program funded by the National Atmospheric and Oceanographic Administration (NOAA). FLYHT will grow the TAMDAR installation footprint and increase weather revenue opportunities with various international meteorological agencies through our sales partner, Synoptic. Finally, we engaged PWS executive Jeffrey Rex to lead our Sales and Marketing team. FLYHT conducted the Boeing ecoDemonstrator Program early in 2018 and jointly published the results with Boeing and Embraer in August at the Airlines Electronic Engineering Committee (AEEC) Global Aircraft Tracking (GAT) Working Group meeting in Kelowna, Canada. The three partners concluded that “existing, commercially available equipment and network services (FLYHT’s AFIRS and Inmarsat SwiftBroadband) are suitable for providing distress flight data and audio streaming capabilities that support ICAO objectives.” This was the first time the entire feed for an aircraft’s Flight Data Recorder (FDR) has been streamed over a satellite network for the duration of a flight, thereby validating the Black-Box-in-the-Cloud use case. Additional first-time milestones included cockpit audio streaming, and the concurrent triggered transmission of historical FDR and cockpit audio data with real-time data and audio. Management is confident that this positive trial result, the FLYHTStream Triggered Data Streaming Patent issued in China, United States and Canada (pending elsewhere); and FLYHT’s selection as Inmarsat’s inaugural Aviation Certified Application Provider (CAP) for Inmarsat’s new SwiftBroadband-Safety services, has FLYHT well positioned to provide solutions to satisfy the upcoming January 2021 ICAO regulations regarding Timely Recovery of Flight Recorder Data (Modifications to Annex 6, Amendment 40). FLYHT is focused on multiple initiatives in 2019. We are focused on winning new OEM positions. We are expanding our weather products portfolio as a result of interactions with AirAsia. We are developing next generation products with the aid of our second Western Innovation Initiative (WINN) interest free loan of $2.76 million. FLYHT remains very engaged in China where the CCAR 121 Rev.5 2019 deadline creates opportunities to capture more carriers for Satcom, and ultimately SaaS services. Thank you for your continued support of FLYHT! Thomas R. Schmutz Chief Executive Officer 4- MANAGEMENT DISCUSSION & ANALYSIS This management discussion and analysis (“MD&A”) is as of April 10, 2019 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, 2018 and 2017 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, 2018 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 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 performance and profitability. 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 and the letter to the shareholders accompanying this discussion includes certain statements that may be deemed “forward-looking statements” or “forward-looking information” 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. Forward-looking information is based on the opinions and estimates of management at the date the statements are made and are founded on the basis of expectations, assumptions and hypotheses made by the Company, including, but not limited to, the following: projected costs, future plans, projected revenues, objectives of management for future operations, trends in the airline industry, the global financial outlook, expanding markets, foreign exchange rate outlooks, sales projections, cost increases and/or decreases as related to marketing, R&D, administration expenses. The forward-looking information included in this this discussion and the letter to the shareholders accompanying this discussion has been prepared using assumptions (all of which are supportable and reflect the Company’s planned courses of action for the next 12 months) as to the most probable set of economic conditions. Such assumptions are consistent with the purpose of the information but are not necessarily the most probable in management’s judgement. 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. The forward-looking information has been provided to the readers to assist in assessing the impact of the information disclosed herein on the Company and such forward-looking information may not be appropriate for other purposes. We undertake no duty to update any of the forward-looking information to conform such information to actual results or to changes in our expectations except as otherwise required by applicable securities legislation. Readers are cautioned not to place undue reliance on forward-looking information. 5- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 FLYHT Overview FLYHT’s mission is to improve aviation safety, efficiency and profitability. Globally, and for more than 20 years, airlines, leasing companies, fractional owners and original equipment manufacturers have installed FLYHT’s differentiated aircraft and enterprise-based solutions to deliver real-time, flight-deck, satellite connectivity for tracking, health monitoring, and streaming of operational, maintenance and weather data. FLYHT is publicly traded as FLY in Canada on the TSX.V; and as FLYLF in the USA on the OTCQX. FLYHT is based in Calgary, Canada with an office in Littleton, Colorado and is an AS9100 Quality registered company. For more information visit www.flyht.com. 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 flight data recorder (aka the “black box”). AFIRS sends this information through satellite networks 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. UpTime is an enterprise server that communicates with AFIRS through satellite connectivity and serves our customers with real-time applications. Uptime was originally implemented on a fixed server and some of FLYHT’s customers still receive services via redundant servers located in different cities across Canada. In 2017, FLYHT launched UpTime Cloud and began rehosting and enhancing aspects of the UpTime server onto the Amazon Web Services (AWS) Cloud. FLYHT hosts Cloud instances in different countries according to customer needs and requirements. UpTime provides a user interface for our customers through a secure internet login and provides a means to enable, configure, software upgrade and manage deployed AFIRS units around the globe. FLYHT sells different service products through the interaction of AFIRS and Uptime. These applications save aircraft operators money, streamline their operations and proactively enhance their safety; which can prevent accidents and save lives. FLYHT’s customers purchase these software service products a la carte and typically pay a simple per aircraft, per month fee for the services. Service contracts are typically five years in length with renewal options. As these service products are integrated into our customer’s operational and maintenance day to day operations, they are very “sticky,” and the resulting customer service churn is low, upselling of additional services is high and customers typically resign for existing services when contracts expire. 6- 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 has been awarded Canadian, U.S. and Chinese patents for this data streaming technology, pending in other countries. 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. Over time, FLYHT intends to migrate customers to AirMap, described in the FLYHTWeather section below. FLYHTHealthTM Consists of three different but related functions: automated engine trend reporting, real-time engine and airframe exceedance monitoring and remote, real-time diagnostics. Engine trend reporting automates the delivery of required engine trend data to engine manufacturers and third-party maintenance support companies to satisfy engine warranty requirements. Exceedance monitoring keeps watch over thousands of aircraft data parameters and creates automated exceedance reports when an out of bounds condition exists on the aircraft. 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 diagnostics 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 and phase of flight 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. FLYHTFuelTM FLYHTFuel is a powerful program that focuses attention on areas of greatest savings potential to provide information necessary in making operational decisions. 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. This 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. 7- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 FLYHTWeatherTM FLYHTWeather is the combination of Panasonic Weather Solutions’ FlightLink™, TAMDAR™, and AirMap™ products. With plans to integrate PWS’ AirMap with its own UpTime server, FLYHT intends to create a best-of-breed situation and tracking service. This solution will take advantage of the benefits of the Company’s patented and unique real-time aircraft exceedance monitoring, engine trending, flight data recorder streaming, fuel training modules and “Virtual Cockpit” capabilities. More detail on the systems is below. FlightLink FlightLink is an Iridium enabled satellite communication terminal and provides Satcom to the flight deck and connects to the TAMDAR device to collect and transmit real-time weather and aircraft tracking and aircraft fuel data. TAMDAR Tropospheric Airborne Meteorological Data Reporting (TAMDAR) is a unique sensor installed on aircraft that captures temperature, pressure, winds aloft, icing, turbulence and relative humidity. It bundles the data with GPS (Global Positioning System) data and transmits the information, in real-time, over satellite networks. Like the data traditionally gathered by worldwide weather balloons, this information is used to update weather models. Unlike weather balloons, TAMDAR collects the data continuously and in real-time. TAMDAR technology is protected by several U.S. and worldwide patents, and the relative humidity data, gathered throughout an aircraft’s flight, makes these weather soundings particularly valuable to meteorologists. AirMap The AirMap technology enhances the FLYHTLog and FLYHTASD products, including flight tracking, Out-Off-On-In (OOOI) messages and an Aircraft Situational Display (ASD). Additional capabilities include an ACARS communications function for pilots, plus the ability to ingest flight plans and provide warnings when aircraft deviate from plan or exhibit low fuel relative to plan. Underfloor Stowage Unit The Underfloor Stowage Unit offers the flight crew additional stowage space in the cockpit. With this addition, manuals are always within reach of the seated crew and are kept safe, dry and clean inside the stowage unit. In addition, safety equipment and other items required by the flight crew can be accessed any time throughout the flight without leaving the cockpit. The stowage unit is certified to be installed in Bombardier CRJ series, Challenger and DHC-8s and can also be installed in other aircraft types. Acquisition of Panasonic Weather Solutions Assets In October 2018, FLYHT acquired the assets of Panasonic Weather Solutions (PWS) based in Littleton, Colorado. Panasonic Avionics Corporation (PAC) had invested significant monies into this non-core business which augmented their dominant position in the In-Flight Entertainment (IFE) avionics space. PWS consisted of two functional components, an aviation electronics solution provider based in Littleton, CO and secondly a weather forecasting and modelling solution provider based in Raleigh, NC. Littleton was focused on building Tropospheric Airborne Meteorological Data Reporting (TAMDAR) sensors and Iridium-based FlightLink communication units, selling these to airline customers, creating the necessary STCs for installing the equipment, and delivering software solutions for real-time tracking and flight plan deviation reporting for airlines in an enterprise product called AirMap. The weather data which was collected from TAMDAR sensors was delivered to Raleigh where it was used to build improved atmospheric predictive models, sold to government and commercial agencies. Panasonic Corporation and PAC together paid US$280M in fines to resolve foreign corrupt practices act offences in April of 2018 for violations (see U.S. Securities and Exchange Commission Press Release dated April 30, 2018). Prior to this, the leadership changes were made, and strategies were re-evaluated. A decision was made to sell the PWS business. FLYHT was contacted during the initial business offering and FLYHT made PAC aware that FLYHT was interested in the assets associated with the Littleton based operations. Ultimately this was agreed to in an asset transfer which was closed in October 2018. The assets FLYHT acquired include among other things, 27 employees; 10 service contracts with airlines in North America, Europe and Southeast Asia, including AirAsia Berhad; an Iridium Value Added Reseller (VAR) license, and a Federal Aviation Administration Parts Manufacturer Approval (PMA) capability; the technology and intellectual property for the FlightLink™ Iridium Satellite Data Unit and Tropospheric Airborne Meteorological Data Reporting (TAMDAR™) sensor; and a weather observation contract through Synoptic Data PBC, supplying weather data observations to NOAA (the National Oceanic and Atmospheric Administration). Backlog business that transferred to FLYHT totaled $20M. FLYHT received contracts with 10 airlines, including a contract with Kuala Lumpur based AirAsia to expand the FlightLink/AirMap/TAMDAR hardware installations and monthly services from 90 to 190 total A320 aircraft. (See Press Release dated December 10, 2018). Backlog also includes the contract with Synoptic that was novated to FLYHT, which participates in the NOAA/National Weather Service National Mesonet Program and pays US$2M per year for existing TAMDAR weather observations. 8- Pursuant to a transition agreement between the parties which ends March 31, 2020 (the “Transition Period”), FLYHT and PAC will work closely together to complete several ongoing FlightLink and TAMDAR deployment programs, while also providing Tier 1 and warranty support via PAC’s Customer Performance Center and Panasonic Technical Services’ facilities. This Transition Period will give FLYHT time to integrate business and operational functions between its Calgary, Alberta and PWS’ Littleton, CO locations. In addition, to keep the asset acquisition cash-flow neutral to FLYHT during this period, PAC will pay FLYHT a subsidy of USD$3.3 million. FLYHT received the first quarterly payment of US$742 thousand in late December 2018. Depending whether the acquired contracts meet established income targets, the supplemental payment may increase to US$4.3 million (See Press Release dated October 10, 2018). Pursuant to the terms of the acquisition of PWS assets and the transition agreement, FLYHT payed no monetary consideration to PAC for the PWS assets. FLYHT has been actively integrating the operations from the assets of PWS as a part of its “OneFLYHT” program, with a great deal of success, including achieving Parts Manufacturing Approval from the FAA for the Littleton facility and PWS products. This provides FLYHT the right to manufacture and ship the $20+ million in backlog FlightLink and TAMDAR hardware and monthly services which were acquired with PWS. This PMA approval was received more than a month earlier than expected. Also completed as part of the “OneFLYHT” integration is the FAA reissuing the six (6) PWS Supplemental Type Certificates (STCs) for FlightLink and TAMDAR products to FLYHT. FLYHT also received FAA approval to issue minor changes to FLYHT FAA STCs. FLYHT will continue to install the significant sales contract backlog included with this asset transfer according to customer provided schedules. This transaction is expected to almost double (1.74x) FLYHT’s current overall revenue (adding approximately USD$8.4 million at margins of 41%) and more than double (2.47x) FLYHT’s current SaaS revenues (adding approximately USD$5.2 million at 52% margin), when calculated on an annualized basis at the end of the Transition Period (assuming the install schedules are completed as currently anticipated). The asset acquisition plan anticipates new revenue of approximately USD$11.7 million contributing 45% gross margin during the Transition Period. It is important to note that during the Transition Period, FLYHT will need to increase the number of worldwide TAMDAR installations to preserve the total planned weather observation related revenues, which at approximately USD$3 million represents 46% of SaaS revenue increases during such period. Also, FLYHT will need to earn additional business and/or reduce expenses related to these new assets and operations for them to add positively to FLYHT’s income. Boeing ecoDemonstrator Program FLYHT is extremely well positioned to provide solutions for mandates created as a result of the AF447 and MH370 aircraft disasters. ICAO published updated Standards and Recommended Practices (SARPs) which have been introduced into ICAO Annex 6 Part 1 regarding Flight Recorder Data Recovery and Location of an Aircraft in Distress. These new SARPs specify capabilities for operators that began to take effect in 2018. Of particular interest for FLYHT’s technology is the requirement for Timely Recovery of Flight Recorder Data. FLYHT holds a patent for the triggered streaming of flight data over satellite communication channels through autonomous trigger, or manually by the pilot or ground crew. ICAO is providing additional guidance in the ICAO Doc 10054 “Manual on Location of Aircraft in Distress and Flight Recorder Data Recovery,” where they indicate that two different solutions comply with the timely recovery of flight recorder data: (i) Satellite Data Streaming and (ii) Automatic Deployable Flight Recorder. FLYHT was uniquely selected by Boeing to conduct a Tracking, Locating, and Data Recovery (TLDR) trial as part of their 2018 ecoDemonstrator program to evaluate the ability to meet the Autonomous Distress Tracking and Timely Access to Flight Recorder Data components of the new ICAO SARPs. FLYHT provided and Boeing installed the AFIRS 228S product in the ecoDemonstrator along with a FLYHT provided digital cockpit audio microphone (CAM) which connected to the AFIRS equipment via an ARINC 429 bus. The FLYHT equipment was configured to stream the ARINC 717 data and the cockpit audio over both SwiftBroadband and Iridium networks to FLYHT’s Uptime Enterprise server. 9- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 FLYHT demonstrated state-of-the-art animations from the real-time data streams including an animation of the B777 from the real-time attitude and terrain information from the aircraft data stream and location information. Flight deck instrumentation was updated real-time via the AFIRS FLYHTStream while the cockpit audio was also streaming - creating a “Virtual Cockpit.” The flight data from the flight data recorder was accessible via Uptime and each individual FDR parameter could be dragged into an analysis window for real-time analysis. The trial was conducted with Boeing and Embraer and the results were captured in a joint Whitepaper entitled, “Analysis of Flight Data Streaming Trials on the Boeing 2018 EcoDemonstrator,” which was published at the AEEC meeting in August in Kelowna, CA. The joint conclusion reached was as follows: that support “The trial has shown that existing, commercially available equipment and network services (FLYHT’s AFIRS paired with an Inmarsat SwiftBroadband system) are suitable for providing distress flight data ICAO streaming capabilities Inmarsat trial concludes objectives. The SwiftBroadband provided excellent capability for data and voice streaming ICAO document 10054 recommendations. Additional study and solution hardening are needed to demonstrate robustness in commercial operation; however, it is the recommendation of the trial team that this technology is worthy of further development and trials in a commercial setting.” that supports that the the Core findings include: Capability of current equipment (with suitable modifications) to provide distress flight data streaming capabilities that support the ICAO objectives. Excellent capability of broadband safety services to support data and voice streaming that supports the ICAO document 10054 recommendations. That even limited bandwidth options such as the Iridium SBD services used in these tests can provide useful flight data streaming capability. In this case it was to stream sufficient aircraft dynamics parameters to allow near real time display and analysis of the aircraft trajectory and flight dynamics. FLYHT believes that the solution set provided to Boeing and Embraer, based on the existing technological readiness, patent protections, along with the vast STC provisioning will create enormous growth opportunities for FLYHT to satisfy future regulatory implementations of these new ICAS SARPs. 10- System Approvals FLYHT holds FAA Parts Manufacturer Approval (PMA), is a TCCA Approved Manufacturer, a TCCA Approved Maintenance Organization (AMO) and an EASA and 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 AS9100 certified with the registrar SAI Global. The Company also holds multiple STCs to make appropriate modifications, such as installing FLYHT’s AFIRS, FlightLink and TAMDAR technologies, to an aircraft’s approved design. FLYHT has received STC approvals from TCCA (Canada), FAA (United States), EASA (European Union), CAAC (China), ANAC (Brazil), DGAC (Mexico), SAAU (Ukraine) and ECAA (Egypt) for various aircraft models to address a variety of customer requirements. FLYHT is currently pursuing STC validation from the Federal Air Transport Agency of Russia. 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 and TSOs 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 two delegated engineers, allowing for the approval of changes to the systems and electrical design aspects of an airworthiness certification. If an issue is encountered during the STC or TSO process, the delegate has the authority to approve necessary changes and continue the process without the involvement of an external party. Further, for FLYHT-held FAA STCs, FLYHT has a Minor Change Agreement with the FAA which allows a range of changes to be made to the STC data package without direct involvement from the FAA. 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 by opening an application with the regulator before an STC package is created. The data package is prepared, including engineering documents outlining how FLYHT equipment is substantiated and installed on the aircraft, and the package is submitted to the regulator 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 the regulator, confirming all regulatory requirements have been met and the unit is fit for operation on that aircraft type as designed. From there, the regulator approves the submission and an STC is issued. To acquire an STC validation from a different national regulator, FLYHT submits an application through a regulator such as 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. 11- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Timelines required for the approval process will vary depending on aircraft and workloads, but typically take about three to four months through TCCA, with an additional three to eight months if an STC is required from an additional regulator like the FAA or EASA. STC Chart AFIRS and UpTime FAA USA TCCA Canada EASA EU CAAC China 220 A 228 A 220 A P A A A A A A A A A A A A A A A A A A A A A A A* A A A A A A A A A A A A A A A A A 228 A I A I A A A A A A A A* I A A A A A A ANAC Brazil 220 228 A A A A 220 A 228 A 220 A 228 A A* A* A A A A A* A A A A A A A A A A A A A A A A I I A A I A A A A A A Airbus A319, A320, A321 Airbus A300 Airbus A330 ATR42 -300 ATR42 -500 ATR-72 -100, -200 ATR42-500 "600 Version" *STC Twenty One ATR72-212A "600 Version" *STC Twenty One Boeing B737 -200 Boeing B737 -300, -400, -500 Boeing B737 -600 Boeing B737 -700, -800 Boeing B737 -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 Hawker Beechcraft -750, 800XP, 850XP, 900XP Viking Air DHC -7 (LSTC) 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 AFIRS 228 STCs for the Bombardier CRJ- 700, 900, Boeing 737-300, -400, -500 and 737-700, -800 from the DGAC (Mexico). FLYHT has received AFIRS 228 STCs for the Boeing 737-300,-400, -500, -700, -800 and the 767-300 from the State Aviation Administration of the Ukraine (SAAU). An AFIRS 228 application is also in progress with the Federal Air Transport Agency of Russia for the Boeing 767 aircraft. STC Chart FLYHTWeather DGCA Indonesia FL TR A* A* DCA Malaysia TR A* FL A* DGAC Mexico TR FL CAA Philippines FL TR A* A* CAA Thailand FL TR A* A* A* A* A* A* A A EASA TR A* A* FL A* A* A* A * FAA TR FL A* A* A A A A A A A* A* A Airbus A318/A319/A320/A321 Boeing 757 Boeing 737-700/800/900 Boeing 737Max-8/9 DHC-8-100/200/300/400 EMB 135/145 EMB ERJ 190-100/200 EMB ERJ 190-100/200 Hawker Beechcraft 1900 Saab 340 Saab 2000 Chart Legend: TAMDAR (TR) or FLIGHTLINK (FL) model, A = Approved, P = Pending, I = In Progress * = Partnered with 3rd party, ‡ = Approval in progress. 12- Trends and Economic Factors FLYHT examines the results of measurements made by leading aviation associations and corporations in order to gain insight on the status of the industry. The Aviation Industry in 2018 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 6.5% increase in 2018 compared to 2017.1 Global freight traffic (measured in FTK) increased by 3.5% in 2018 compared to 20172. This shows broad market growth, though not as robust as was found in 2017. Results from large commercial aircraft manufacturers were mixed for the first three quarters of 2018. Airbus delivered 800 commercial aircraft in 2018, compared to 718 in the same period of 20173. Boeing delivered 806 airplanes, up from 763 in 2017.4 Embraer announced the delivery of 90 commercial aircraft and 91 executive jets in 2018 which were in the outlook ranges the company had published.5 Bombardier delivered 35 commercial aircraft during 2018, down from 56 deliveries in 2017. Bombardier also delivered 137 business aircraft in 2018, which was similar to its performance in 2017 when they delivered 138 business aircraft.6 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 and 2018. The Company developed its technology to stream data over the Inmarsat Satellite network for trials with Boeing and Inmarsat. FLYHT is now in the weather business with the acquisition of Panasonic Weather Solutions (PWS). The PWS product set includes FlightLink, an Iridium Satellite Data Unit, and TAMDAR which is a real time weather sensor which collects weather soundings similar to weather balloon, but is streamed in real time over the Iridium satellite network. Also, particularly valuable is the AirMap situational display which was purpose built for AirAsia and serves as their primary flight display at their aircraft operations center in Kuala Lumpur. 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 Canadian dollar was slightly down relative to the U.S. dollar throughout Q4 20187 and the company experienced a positive impact on the Company’s revenue and income compared to Q4 2017. As a result of these currency movements, the Company’s revenues, which are substantially all denominated in U.S. dollars, were higher than they would have been had the foreign exchange rates not changed. It is the standard of the aviation industry to conduct business in U.S. dollars. While the majority of the Company’s operating and overhead costs are denominated in Canadian dollars, a significant portion of the cost of sales, marketing and distribution costs are U.S. dollar denominated, and therefore a partial natural hedge exists against fluctuations of the Canadian dollar. 1 https://www.iata.org/pressroom/pr/Pages/2019-02-07-01.aspx 2 https://www.iata.org/pressroom/pr/Pages/2019-02-06-01.aspx 3 https://www.airbus.com/newsroom/press-releases/en/2019/01/airbus-achieves-new-commercial-aircraft-delivery-record-in-2018.html 4 https://www.investors.com/news/boeing-deliveries-boeing-orders-2018/ 5 https://embraer.com/global/en/news?slug=1206500-embraer-delivers-181-total-jets-in-2018 6 https://www.flightglobal.com/news/articles/bombardier-swings-to-318m-profit-in-2018-455794/ 7 https://tradingeconomics.com/canada/currency 13- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Contracts and Achievements for 2018 Contracts* FLYHT announced US$33.6 million in new sales contracts and contract renewals during 2018. All these contract figures assume that the Company provides services over the full term of these contracts. The by-quarter breakdown of these sales announcements is collected here. Fourth Quarter FLYHT announced US$21.1* million in new sales contracts, purchase orders and transition agreement during the fourth quarter of 2018 and gained two new customers and a new Original Equipment manufacturing position (OEM) independent from those new customers and contracts acquired through the acquisition of assets from PWS. These new sales orders included:  A minimum US$15 million contract with Synoptic Data PBC assuming the Company delivers an annually increasing number of weather-related soundings over the term of the five-year contract by increasing the quantity of TAMDAR installations (See Press Release dated October 24, 2018).  a US$1.1 million contract with a Chinese airline for FLYHTHealth SaaS (See Press Release dated November 5, 2018).  A contract with Jambojet in Africa for US$650 thousand for AFIRS hardware and SaaS products FLYHTLog, FLYHTASD and FLYHTHealth (See Press Release dated October 15, 2018).  An initial order for a new OEM aircraft position along with an order for non-recurring engineering  An AFIRS order from a previously established OEM  Additional AFIRS orders from two existing Chinese airline customers  New technical services orders Third Quarter FLYHT announced USD$5.1* million in new sales contracts and purchase orders and gained three new customers in the third quarter:  An original equipment manufacturer (OEM) selected FLYHT’s Automated Flight Information Reporting System (AFIRS™) 228S with Technical Service Order (TSO) C159b for integration to achieve Future Air Navigation System (FANS) certification on an Antonov aircraft for USD$404 thousand dollars.  One African airline obtained Canada Regional Jet (CRJ) aircraft with AFIRS installed from a previous FLYHT customer enabled UpTime Software as a Service (SaaS) FLYHTLog and FLYHTHealth (Engine Trending, Engine and Airframe Exceedances) services for these aircraft, and purchased FLYHTASD (Aircraft Situational Display) for a total contract value of USD$157 thousand dollars.  One African customer, who purchased AFIRS 228B units, will enable FLYHTLog and purchase FLYHTASD for a total contract value of USD$312 thousand dollars.    FLYHT renewed a SaaS contract with an existing Australasian airline for USD$3.1 million. (See Press Release dates July 16, 2018). FLYHT renewed a contract for UpTime SaaS and sold additional AFIRS 228B units to an existing Middle Eastern customer for a total contract value of USD$848 thousand dollars. FLYHT also sold AFIRS hardware kits, technical services, or data services for a total of USD$235 thousand dollars to the following customers: o o o o an existing Canadian lessor; an existing United States lessor; an existing Canadian airline; and an existing Chinese cargo airline. Second Quarter FLYHT announced USD$4.45* million in new sales contracts and purchase orders and gained two new customers in the second quarter:  One European operator who signed an agreement to receive CAN-TSO-159b approved Automated Flight Information Reporting System (AFIRSTM) 228S hardware units with a contract value of USD $360,000 to integrate into their aircraft to achieve Future Air Navigation System (FANS) compliance. 14-  One Australian operator that enabled FLYHTLog, FLYHTHealth and FLYHTVoice on leased aircraft that they recently received which had AFIRS products installed. This five-year agreement will yield USD $260,200 if services are provided during the duration of the contract.    FLYHT renewed or expanded contracts for UpTime SaaS for five years for five airlines (based in Africa, Mexico, the Caribbean and Canada) and one lessor with a total contract value of USD $564,360. FLYHT renewed and expanded a SaaS contract with a North American airline for USD$1.43 million (See Press Release dated June 7, 2018). FLYHT renewed a SaaS contract with a North American airline for USD$1.03 million (See Press Release dated May 22, 2018).  Also included in the new sales contract amount is an additional order from an existing OEM partner (see release on July 15, 2014) of USD $315,621 for license fees.  FLYHT sold AFIRS hardware kits or technical services for USD $491,342 to the following existing customers: o an existing operator in China, o an existing operator in the Middle East, and o an existing commercial OEM customer. First Quarter FLYHT announced USD$2.9* million in new sales contracts and purchase orders and gained one new OEM position and a new weather customer:  Ten customers renewed their sales contracts for UpTime data services. o The renewal was broad and included operators in Canada, the Middle East, Australia, the Caribbean and Mexico. o One operator in the Middle East re-signed for a portion of their fleet through a third-party contract which FLYHT had reported expired last summer. o Two of the ten also expanded their fleets with Automated Flight Information Reporting System (AFIRSTM) orders.  FLYHT also sold AFIRS hardware kits to: o o o a new aerospace and defense Original Equipment Manufacturer (OEM) for integration into one of its airframes, a new global leasing company, and an existing commercial OEM customer.  Included in new sales contract amounts are additional orders from: o o an existing OEM partner (see Press Release dated July 15, 2014) for parts with related license fees for delivery, and a new agreement with a large global organization to monetize weather data from certain aircraft. *Amounts are calculated assuming the Company provides services over the full term of the contracts Achievements & Activities FLYHT accomplished several achievements which were identified throughout the year. This section identifies these successes by quarter. Fourth Quarter   FLYHT was issued a validation of the Embraer E- 190 AFIRS 228 STC by the FAA. FLYHT received approval for a $2.76 million interest-free Western Innovation Initiative (WINN) loan by Western Economic Diversification Canada (See Press Release dated November 27, 2018). Third Quarter  Boeing, Embraer and FLYHT jointly released a whitepaper and corresponding presentation, describing the results of the Autonomous Distress Tracking and Timely Recovery of Flight Recorder Data trial (see press release dated September 4, 2018). The whitepaper and presentation are published on the FLYHT Website. (Whitepaper and Presentation Link).   15- FLYHT announced the integration of its AFIRS 228 product with Spectralux’s ENVOY, FANS over Iridium Solution (see Press Release dated September 13, 2018). FLYHT received a Federal Aviation Administration (FAA) Supplemental Type Certificate (STC) for the Company’s AFIRS 228 system on the Airbus A319/320/321 family of aircraft from a contracted American certification supplier. FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018  FLYHT closed a convertible debt financing of $2 million dollars (see Press Release dated July 24, 2018). Second Quarter     FLYHT was issued two Supplemental Type Certificates (STC) for AFIRS 228 in the second quarter. FLYHT received the Mexican Civil Aviation Authority (DGAC) STC for the Boeing 737–300/400/500/700/800 series, and the Brazilian Civil Aviation Authority (ANAC) validation of the Transport Canada STC for the Embraer E190-100 series. FLYHT announced the issuance of the FLYHTStream patent in Canada, previously issued in the United States and China (see Press Release dated May 30, 2018). FLYHT was recognized by Inmarsat PLC. as the first world wide recipient of the Certified Application Provider (CAP) Programme for their Swift Broadband-Safety network (see Press Release dated May 24, 2018). FLYHT shipped its 2000th AFIRS unit to Azur Aviation (See Press Release dated April 30, 2018). First Quarter  FLYHT was issued five Supplemental Type Certificates (STC) for AFIRS 228 in the first quarter. FLYHT received the European Aviation Safety Agency (EASA) STCs for the Boeing 737– 300/400/500/700/800, the Boeing 757-200 and the Boeing 767- 200/300 aircraft. FLYHT was also granted STCs from the Federal Aviation Administration (FAA) for the Boeing 737-900ER and Bombardier CRJ 100, 200, 440, 700, 705 and 900 models.  The Boeing ecoDemonstrator Program started flying in March and continued into April. FLYHT streamed flight data from the FedEx Express Boeing 777 Freighter to an UpTime Cloud animation which simulates the flight deck instrumentation, displays position on a map and creates a flying aircraft visualization. By also streaming flight deck audio, FLYHT has virtualized the flight deck environment on the ground, enhancing situational awareness and potentially satisfying future regulatory requirements. 16- Results of Operations Selected Results 2018 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 Subsidy + bargain purchase EBITDA* Income (loss) Income (loss) per share (basic) Income (loss) per share (fully diluted) 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) *See Non-GAAP Financial Measures Q4 $ 9,097,270 4,420,714 4,033,826 1,775,657 2,258,169 56.0% 2,075,217 1,258,097 789,203 (1,864,348) 57,143 1,861,050 53,845 217,954 0.01 0.01 Q4 $ 6,994,139 1,842,439 3,450,007 816,331 2,633,676 76.3% 1,169,069 747,607 1,099,869 (382,869) 18,687 (364,182) (437,318) (0.02) (0.02) Q3 $ 6,401,513 4,385,051 3,092,113 1,344,643 1,747,470 56.5% 1,395,475 780,899 398,275 (827,179) 34,624 - (792,555) (953,034) (0.03) (0.03) Q3 $ 6,556,520 1,385,440 3,221,380 1,514,363 1,707,017 53.0% 1,166,972 684,651 458,327 (602,933) 26,980 (575,953) (759,447) (0.02) (0.02) Q2 $ 5,105,186 2,246,731 3,146,266 1,075,402 2,070,864 65.8% 1,281,935 682,575 704,731 (598,377) 36,588 - (561,789) (649,293) (0.03) (0.03) Q2 $ 7,374,048 1,209,206 3,242,382 1,014,111 2,228,271 68.7% 1,420,236 1,088,709 399,920 (680,594) 25,093 (655,501) (759,374) (0.04) (0.04) Q1 $ 5,711,684 2,117,334 3,318,311 1,328,994 1,989,317 59.9% 1,240,609 530,037 739,236 (520,565) 33,134 - (487,431) (582,375) (0.03) (0.03) Q1 $ 7,168,914 1,027,848 3,781,119 1,184,575 2,596,544 68.7% 1,195,194 638,120 561,158 202,072 22,148 224,220 119,404 0.01 0.01 Weighted Average Shares Outstanding 2018 $ 21,058,855 21,132,875 2017 $ 20,926,589 20,926,589 2016 $ 19,507,065 19,541,957 Basic Diluted Financial Position Liquidity and Capital Resource The Company’s cash at December 31, 2018 increased to $2,406,769 from $2,014,135 at December 31, 2017. The Company has an operating demand loan available through a Canadian chartered bank for up to a maximum of $1.5 million CAD or 90% of the Company’s receivable balance, drawn either in CAD or USD. The operating demand loan bears interest at the Canadian chartered bank prime plus 1.5% (CAD) or US prime plus 4.5% (USD). 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 facility was undrawn as at December 31, 2018. 17- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 At December 31, 2018, the Company had positive working capital of $2,878,024 compared to positive $2,014,662 (restated for IFRS 15) as of December 31, 2017, an increase of $863,362. When non-refundable customer deposits, less deposits and prepaid expenses are excluded from the working capital calculation, the resulting modified working capital at December 31, 2018 would be positive $3,312,792 compared to positive $3,311,442 (restated for IFRS 15) at December 31, 2017. The Company funded 2018 operations primarily through cash received from sales, contributions from the Western Innovation Initiative (WINN), issue of a convertible debenture, and subsidies paid by PAC from the October 2018 asset acquisition. The Company will continue to receive subsidy from PAC while striving to self-fund operations through 2019. Cash and cash equivalents Trade and other receivables Contract assets Deposits and prepaid expenses Inventory Trade payables and accrued liabilities Customer deposits Contract liabilities Loans and borrowings Current tax liabilities Working capital Deposits and prepaid expenses Customer deposits Modified working capital* 2018 $ 2,406,769 3,440,767 395,695 227,065 1,066,946 (2,342,754) (661,833) (1,524,894) (129,465) (272) 2,878,024 (227,065) 661,833 3,312,792 2017* $ 2,014,135 1,650,574 313,634 391,191 1,331,893 (1,874,005) (1,687,971) - (112,578) (12,211) 2,014,662 (391,191) 1,687,971 3,311,442 Variance $ 392,634 1,790,193 82,061 (164,126) (264,947) (468,749) 1,026,138 (1,524,894) (16,887) 11,939 863,362 164,126 (1,026,138) (1,350) *See Non-GAAP Financial Measures, 2017 restated for IFRS 15 In 2018 warrant exercises resulted in the Company issuing a total of 10,000 shares for total proceeds of $16,000. No options were exercised in the year. As at April 10, 2019 FLYHT’s issued and outstanding share capital was 21,088,340. 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 hardware units and related services. Additionally, the acquisition of PWS provides the Company the opportunity to realize efficiencies of scale through increasing both service and hardware revenues. SaaS revenues in Q4 2018 were double that in Q3 2018, as a result of the additional customer contracts generating SaaS revenues effective from the date of acquisition forward. 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. The Company has an undrawn credit facility of $1.5 million, $2.97 million in contributions under WINN loans not yet received and if the need arises due to market opportunities, the Company may meet cash-flow 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. 18- 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 Hardware 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, 2018 Accounts payable Compensation and statutory deductions Accrued liabilities Loans and borrowings Total < 2 months $ 1,737,710 2-12 months $ - 1-2 years $ - 2-5 years $ - > 5 years $ - 3,112 343,343 - 1,942 - 1,742,764 240,130 297,234 880,707 11,658 629,820 641,478 - 4,858 - - 4,194,230 1,003,399 6,124,683 4,199,088 1,003,399 8,467,436 Total $ 1,737,710 346,455 258,588 Under the Strategic Aerospace and Defence Initiative (SADI), the Company has, at December 31, 2018, an outstanding repayable balance of $1,507,481, compared to $1,626,814 at December 31, 2017. 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. Amounts repaid in 2018 totaled $119,333 (2017: $103,767). In November 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, 2018, the Company had received contributions totaling $2,137,202 (2017: 1,080,658). In November 2018, the Company signed a second contribution agreement with Western Economic Diversification Canada for a Western Innovation initiative (WINN) loan, to support development of the next generation of AFIRS hardware and embedded software to address parts obsolescence issues and add new market-driven features. Under the terms of the agreement, a repayable unsecured WINN contribution to the value of the lesser of 44% of the eligible project costs to April 30, 2021 or $2,761,000 will be received. A March 31, 2019 amendment adjusted the end date for eligible project costs to September 30, 2021. The amount is repayable over five years commencing October 1, 2021. At December 31, 2018, the Company had not received contributions under this loan. A summary of the carrying value of the SADI and WINN loans as at December 31, 2018 and 2017 and changes during these years is presented below. Balance January 1 Received Grant portion Interest accretion Repayment Balance December 31 Less current portion Non-current portion SADI 1,162,679 - - 209,397 (119,333) 1,252,743 129,465 1,123,278 2018 $ WINN 792,338 1,056,544 (391,697) 112,478 - 1,569,663 - 1,569,663 SADI 1,072,641 - - 193,805 (103,767) 1,162,679 112,578 1,050,101 2017 $ WINN - 1,080,658 (318,310) 29,990 - 792,338 - 792,338 19- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Convertible Debenture The Debentures were issued on July 24, 2018 and will mature on July 24, 2021 (if not otherwise converted) and will bear interest at a rate of 8% per annum, which shall be accrued and paid annually in arrears. The Debentures shall be convertible at the option of the debenture holder into common shares of FLYHT (Common Shares) at a conversion rate of $1.30 per share at any time prior to maturity, subject to a forced conversion (at a conversion rate of $1.30 per share) into Common Shares should the closing price of the Company’s Common Shares be equal to or exceed $1.80 for 20 consecutive trading days. 769,200 warrants (Warrants) were issued to the purchasers of the Debentures (for every $1.00 principal amount of Debentures acquired pursuant to the offering, Debenture holders received approximately 0.3846 Warrants). Each whole Warrant is exercisable to acquire one Common Share of FLYHT for a period of two (2) years from the date of issuance at an exercise price of $1.45 per share. The Warrants are subject to an acceleration clause, whereby, if after four months and one day following the date the Warrants are issued, the closing price of the Company’s Common Shares is equal to or exceeds $1.90 for 20 consecutive trading days (with the 20th such trading date hereafter referred to as the “Eligible Acceleration Date”), the Warrant expiry date shall accelerate to the date which is 30 calendar days following the date a press release is issued by the Company announcing the reduced warrant term, provided, no more than five business days following the Eligible Acceleration Date: (i) the press release is issued; and (ii) notices are sent to all warrant holders. The Debentures are secured against all personal property of the Company and are subordinated in right of payment to all existing and future secured bank and/or governmental indebtedness of the Company and any existing security already registered against FLYHT’s assets. A summary of the carrying value of the debenture as at December 31, 2018 and changes during the year is presented below. Proceeds on issue Transaction costs allocated Net proceeds Amount classified as equity (net of transactions costs) Accrued interest Carrying amount of liability at December 31, 2018 Contract Liabilities - Customer Deposits 2018 $ 1,950,000 (84,376) 1,865,624 (257,984) 120,133 1,727,773 Customers are frequently required to pay for Hardware prior to the planned shipment date, or for Technical Services in advance of delivery. This non-refundable prepayment is recorded as a Customer Deposit liability upon receipt. When the associated items are shipped, or services provided, the deposit is applied to clear the resulting trade receivable. The chart below outlines the movement in the Company’s customer deposits throughout the periods ending December 31, 2018 and 2017. Payment was received for 8 installation kits in the fourth quarter of 2018 compared to 11 received in the fourth quarter of 2017, bringing 2018 year-to-date (“YTD”) total payments for installation kits to 74, compared to a total of 64 in 2017. Opening balance Payments received Recognized as revenue Balance, December 31 *2017 restated for IFRS 15 Q4 2018 $ 925,225 1,961,212 (2,224,604) Q4 2017* $ 1,106,012 2,236,658 (1,654,699) Variance $ (180,787) (275,446) (569,905) YTD 2018 $ 1,687,971 4,820,111 (5,846,249) YTD 2017* $ 317,899 5,543,241 (4,173,169) Variance $ 1,370,072 (723,130) (1,673,080) 661,833 1,687,971 (1,026,138) 661,833 1,687,971 (1,026,138) 20- Comprehensive Income Revenue In tandem with adopting the requirements of IFRS 15, the Company re-assessed revenue categories to isolate licensing from other parts purchases, to establish one category for all hardware sales, and to rename revenue from recurring voice and data services. In the categories listed in the revenue sources chart, Software as a Service (SaaS) is the recurring revenue from the Company’s product that allows customers to utilize and analyze data they receive from hardware, use of functions such as the satellite phone and the sale of weather data from TAMDAR units. These usage fees are recognized as the service is provided based on actual customer usage each month. Hardware includes the income from hardware sales and related parts required to install the unit, spare units, spare installation parts, and Underfloor Stowage Units. Licensing includes sales of modems with a related manufacturing license fee. Technical Services includes all services offered by the Company, including repairs and other expertise. Revenue sources SaaS Hardware Licensing Technical Services Total *2017 restated for IFRS 15 Q4 2018 $ 2,261,211 1,464,475 249,833 58,307 4,033,826 Q4 2017* $ Variance $ 1,001,551 1,259,660 1,942,636 (478,161) 444,931 (195,098) 60,889 3,450,007 (2,582) 583,819 YTD 2018 $ 5,528,822 5,536,687 2,265,262 259,745 13,590,516 YTD 2017* $ Variance $ 4,312,702 1,216,120 5,444,844 91,843 3,752,301 (1,487,039) 185,041 13,694,888 74,704 (104,372) Overall, total revenue decreased 0.8% from $13,694,888 in 2017 to $13,590,516 in 2018. Hardware sales increased by 1.7%, while SaaS increased by 28.2%, Licensing decreased by 39.6%, and Technical Services revenue increased by 40.4%. SaaS Recurring revenue accounted for 56.1% of revenue in Q4 2018 (Q4 2017: 29.0%), and 40.7% YTD 2018 (YTD 2017: 31.5%). The acquisition of customer contracts from PAC contributed to an increase in Q4 2018 from Q4 2017 of 125.8%. Recurring revenue from FLYHT’s existing client base is expected to continue to expand throughout 2019 and future years. Hardware sales increased in 2018 as compared to 2017 due to an increased number of installation kits being shipped. YTD, 99 AFIRS installation kits were shipped, compared to 81 in 2017. Licensing decreased both in the quarter and YTD in 2018 from 2017 due to differences in the number of modems with related license fees shipped. Technical Services revenue decreased in the quarter while increasing YTD in 2018 compared to 2017. 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. Revenue sources for the last eight quarters were: Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017* Q3 2017* Q2 2017* Q1 2017* SaaS 2,261,211 1,145,368 1,079,214 1,043,030 1,001,551 998,337 1,158,340 1,154,473 Hardware Licensing Technical Services Total 1,464,475 249,833 58,307 4,033,826 1,651,592 265,492 29,661 3,092,113 854,350 1,122,974 89,728 3,146,266 1,566,270 626,962 82,049 3,318,311 1,942,636 444,931 60,889 3,450,007 1,689,030 743,115 465,422 1,318,497 22,430 68,591 3,242,382 3,221,380 1,070,064 1,523,451 33,131 3,781,119 *2017 restated for IFRS 15 North America South/Central America Africa Middle East Europe Australasia Asia Total *2017 restated for IFRS 15 21- Q4 2018 Q4 2017* $ $ 1,651,318 246,361 255,776 197,492 83,418 159,429 1,440,032 4,033,826 1,948,062 91,754 213,102 452,265 98,570 157,686 488,568 3,450,007 YTD 2018 $ 5,935,692 660,007 588,473 1,794,439 770,574 646,989 3,194,342 13,590,516 YTD 2017* $ 7,476,508 396,591 774,402 976,490 348,037 632,299 3,090,561 13,694,888 FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Gross Profit and Cost of Sales FLYHT’s cost of sales includes the direct costs associated with specific revenue types, including the hardware 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 2018 was 44.5% compared to 23.7% in 2017’s fourth quarter. A review of the annual results shows the cost of sales as a percentage of revenue also increased from 33.1% in 2017 to 39.6% in 2018. The decrease in gross margin was due to differences in the mix of revenue sources in 2018 versus 2017. Gross margin will fluctuate quarter over quarter depending on customer needs and revenue mix. Gross margin for the last eight quarters was: Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Gross Margin % Cost of Sales 55.5 44.5 56.5 43.5 65.8 34.2 59.9 40.1 76.3 23.7 53.0 68.7 47.0 31.3 68.7 31.3 Distribution Expenses 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 Q4 2018 $ Q4 2017 $ Variance $ YTD 2018 $ YTD 2017 $ Variance $ 1,435,259 420,315 1,014,944 3,592,664 2,361,046 1,231,618 6,093 3,154 2,939 40,068 152,272 (112,204) Contract labour Office Travel Equipment and maintenance Depreciation Marketing Other Total 163,901 134,483 179,903 17,330 13,685 26,415 98,148 301,633 (137,732) 100,118 125,839 34,365 54,064 725,677 402,191 647,515 881,837 (156,160) 429,294 601,172 (27,103) 46,343 18,121 (791) 190,470 53,712 136,758 10,378 45,337 144,174 3,307 (18,922) (46,026) 906,148 37,641 165,615 191,395 34,438 3,203 268,033 (102,418) 169,667 21,728 5,993,236 4,951,471 1,041,765 2,075,217 1,169,069 Distribution expenses increased by 21.0% from 2018 to 2017. Salaries and benefits have increased in 2018 primarily due to the PWS acquisition of new employees and the replacement of contract labour with permanent staff, as can be noted in the offsetting decreases in Contract labour. Share based compensation has increased in 2018 as a result of an increased number of options granted to employees involved in distribution activities. Travel expense has increased in the quarter and YTD in support of integration and customer service efforts with the acquisition of PWS and increased sales efforts, particularly in China. Equipment and maintenance expense increases YTD resulted from purchases of cloud-based services to support UpTime Cloud and AirMap. Marketing expense has decreased in 2018 due to reduced attendance at industry tradeshows. Other expense decreases in the fourth quarter compared to an increase YTD are the result of differences in reserves for bad debts throughout 2018. 22- 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 Q4 2018 $ 527,278 156,112 123,394 119,363 53,029 71,627 34,193 11,377 44,283 73,298 27,570 16,573 Q4 2017 $ 306,721 11,828 130,294 81,981 20,015 51,022 37,143 4,923 23,261 38,394 27,038 13,021 Variance $ 220,557 144,284 (6,900) 37,382 33,014 20,605 (2,950) YTD 2018 $ 1,457,388 190,209 289,983 376,094 195,143 197,852 114,866 YTD 2017 $ 1,326,548 281,675 431,423 306,034 76,446 192,452 158,931 Variance $ 130,840 (91,466) (141,440) 70,060 118,697 5,400 (44,065) 6,454 34,205 40,350 (6,145) 21,022 34,904 532 3,552 120,297 166,179 80,381 29,011 102,348 131,340 59,334 52,206 17,949 34,839 21,047 (23,195) 92,521 Total 1,258,097 745,641 512,456 3,251,608 3,159,087 Administration expenses increased by 2.9% from 2017 to 2018. Salaries and benefits have increased in 2018 primarily due to the acquisition of new employees and the replacement of contract labour with permanent staff, as can be noted in the decreases in Contract labour. Legal fees and Audit and accounting costs have increased YTD as a result of services required for the acquisition of PWS assets. Equipment and maintenance expenses and Depreciation increased YTD mainly with the acquisition of computing software from PAC. Other expenses also decreased in 2018 from the same period in 2017 due to employee relocation costs required in 2017, while this type of expense was not required in 2018. 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 Other Total Q4 2018 $ 715,446 3,003 54,978 30,618 21,242 10,632 23,273 - 15,838 (85,851) 24 Q4 2017 $ Variance $ YTD 2018 $ YTD 2017 $ Variance $ 699,428 - 87,648 48,557 19,163 32,297 57,518 - 31,856 123,402 - 16,018 3,003 (32,670) (17,939) 2,079 (21,665) (34,245) - (16,018) (209,253) 24 (310,666) 2,443,060 8,008 225,529 79,263 75,196 69,733 77,399 - 43,437 (391,697) 1,517 2,093,261 25,448 276,669 127,221 90,911 125,357 165,510 (116,514) 49,721 (318,310) - 2,631,445 2,519,274 349,799 (17,440) (51,140) (47,958) (15,715) (55,624) (88,111) 116,514 (6,284) (73,387) 1,517 112,171 789,203 1,099,869 Research and Development expense was 4.5% higher in 2018 compared to the prior year due to no SR&ED credits received in 2018 partially offset by additional funding received from WINN in 2018. Research and development costs vary according to specific project requirements. 23- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Salaries and benefits have increased mainly due to replacement of contracts with staff as can be noted in the decreases in Contract labour. 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 lower in 2018 than in 2017 as a lower number of expensed parts were used in development and testing activities. The decreased SR&ED credit in 2018 was due to a difference in eligible expenses, as expenses formerly SR&ED eligible were funded instead by the WINN program. Net Finance Costs Major Category Interest (income) Q4 2018 Q4 2017 Variance YTD 2018 YTD 2017 Variance $ $ $ $ $ (7,712) (6,051) (1,661) Net foreign exchange loss (gain) (139,411) (5,034) (134,377) Bank service charges Interest expense Government loan accretion Debenture interest and accretion Net finance costs 6,973 174 89,731 79,854 29,609 6,107 64 57,323 - 52,409 866 110 32,408 79,854 (22,800) (16,628) (15,756) (189,971) 115,979 26,849 2,719 38,807 681 321,875 223,795 120,132 264,976 - 363,506 $ (872) (305,950) (11,958) 2,038 98,080 120,132 (98,530) 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 weakening of the Canadian dollar has given rise to increased foreign exchange gains on U.S. dollar denominated sales and purchases, in combination with fluctuations in U.S. denominated assets and liabilities. Government grant accretion is the recognition of the effective interest component of the SADI and WINN grants. Debenture interest and accretion is the recognition of the effective interest on the liability portion of the debenture and the amortization of the issuance cost. Net Loss Major Category Net income (loss) *2017 restated for IFRS 15 Foreign Exchange Q4 2018 $ 217,954 Q4 2017* $ (437,318) Variance $ 655,272 YTD 2018 $ (1,966,748) YTD 2017* $ (1,836,735) Variance $ (130,013) 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 2018, 99% of the Company’s gross sales were made in U.S. dollars, compared to 99% in 2017. 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. 24- Other Recent Accounting Pronouncements In January 2016, the International Accounting Standards Board issued the final version of IFRS 16, Leases. IFRS 16 will replace the existing leases Standard, IAS 17 Leases, and related Interpretations. The Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., the lessee and the lessor). IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Currently, operating lease expenses are charged to the statement of comprehensive income (loss). The Standard also contains enhanced disclosure requirements for lessees. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. The effective date for adoption of IFRS 16 is annual periods beginning on or after January 1, 2019, and the Company will adopt IFRS 16 for the annual period beginning on January 1, 2019. The transition to IFRS 16 consists of three key phases: identifying and analyzing all contracts that could contain a lease, analyzing impact of transition, and implementing any required changes to policies and internal controls. The Company has completed its identification of all outstanding leases as at December 31, 2018 and is currently in the process of completing its calculations and analysis to finalize transition results for Q1 2019. In the context of transition to IFRS 16, as of January 1, 2019 the Company will recognize right-of-use assets and lease liabilities in the statements of financial position. The Company will transition to IFRS 16 in accordance with the modified retrospective approach. Impacts of IFRS 16 prior to January 1, 2019 are not adjusted. As part of the initial application of IFRS 16, the Company chose to apply the following transition options and exemptions: Critical judgements and estimates will be applied in the transition to IFRS 16, such as assessing whether an arrangement contained a lease, determining the lease term, and calculating discount rates on a lease-by-lease basis. These aforementioned estimates have a significant risk of material adjustment within the next financial year. Effective January 1, 2018 the Company adopted the amendments of IFRS 15, which implemented a single model that applies to contracts with customers with two approaches to recognizing revenue: at a point in time and over time. The model features a contract-based five step analysis of transactions to determine whether, how much and when revenue is recognized. The retrospective method was used to ensure comparability, which required quarterly restatement of comparative periods. No restatement was made for contracts completed by January 1, 2017. Opening 2017 retained earnings was adjusted for the cumulative effect prior to that date. Effective January 1, 2018 the Company also adopted the amendments of IFRS 9 which replaced the 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. The Company evaluates impairment of receivables using an expected credit loss model, which involves assessing potential credit impairment at each reporting date. Adopting this standard has not had a material impact on the Company’s 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 228, FlightLink and TAMDAR, can take approximately 150-200 person-hours to install on an aircraft, depending on the product, aircraft type and installation crew. Since the installation period is non-trivial, 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, though most aircraft are available annually. The timing of a c-check for hardware 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 hardware components are installed and running. The Company takes steps to mitigate this uncertainty by encouraging customers to install hardware 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. The Company also offers special discounts for upfront payment for all units as another mitigation tool. 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. 25- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Enterprise Network Risks The Company currently operates at least three different types of networks to provide its SaaS products to our customer base. Uptime Classic services many of FLYHT’s early adopters and is implemented on redundant fixed server platforms in Canada. Uptime Cloud services many of FLYHT’s newer AFIRS customers and is implemented in Amazon Web Services (AWS) equipment in the United States and China. The AirMap suite is operated on fixed equipment in a hosting center in the United States. Part of FLYHT’s agreement with Panasonic Avionics Corporation will result in the AirMap suit being ported to AWS at no cost to FLYHT. This is a non-trivial technology transfer and it is possible that disruption in the task could impact exiting customers and negatively impact FLYHT’s relationship with these clients. It is FLYHT’s longer term goal to migrate all customers and services onto a common AWS platform and reduce the number of systems, increasing efficiencies and reducing costs. All the enterprise services exist with the possibility that their security could be compromised. FLYHT uses best practices to ensure that the services are as secure as practical and periodically test the penetrability of the systems according to best practices within the enterprise community. A security breach could expose our customer data to external, unauthorized third parties and create a breach in our contracts with our customers. To date, no such breach has knowingly occurred on any of these systems. FLYHT will continue to monitor and improve our solutions. In particular, the hosting of our solutions on AWS brings with it the benefits of taking advantage of state of the art security provisions which are introduced on that platform with great velocity 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 the Company offers. To address this risk, the sales team has developed several 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, we may find success 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 enables the Company to complete STCs in a timely and cost-efficient manner. Similarly, the Company must interact with the FAA for its USA based STCs and PMA certifications. The Company has worked over the past few years to distribute the specified knowledge among several 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, FlightLink and TAMDAR product lines and continues to build out its 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 within the AirMap suite of applications of and UpTime Cloud. FLYHT is confident these products fill a gap in the industry, as evidenced by increasing sales of the AFIRS 228these products throughout from 2013 to 2018. The Company’s success will ultimately depend on the success of its products, and future enhancements made to them. Revenues associated with TAMDAR TAMDAR is currently installed and collecting weather data on approximately 200 aircraft. FLYHT supplies this weather data to Synoptic Data DBC as part of their participation in the National Mesonet program. FLYHT is receiving revenues from Synoptic based upon this participation with a targeted number of observations. If these observations fall below an established number or if they are not perceived to have the original perceived value, then the existing payments for the TAMDAR data could be diminished or stop, depending upon a variety of factors including procurement changes from the United States Government. FLYHT attempts to mitigate these potential problems and potentially grow the revenues derived from TAMDAR by expanding the number of installed TAMDAR sensors and by investing in quality control programs to ensure that the sensors are properly calibrated and producing valid and valuable data. 26- Availability of key supplies FLYHT services its products differently, depending on the product.   The AFIRS 220 is no longer in production and all units are repaired in-house at FLYHT-Calgary. Certain parts can be delayed in shipping or availability, which can cause a delay in servicing the AFIRS 220. FLYHT aims to avoid the risk of not having the necessary supplies by managing inventories and storing extra key parts. 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. The 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 receiving 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. The AFIRS 228 is serviced in different ways; by the contract manufacturer, at FLYHT-Calgary or by our contract maintenance facility GAMECO in Guangzhou, China. Where a unit is repaired or serviced depends on a multitude of factors and is managed by FLYHT’s customer support team.  FlightLink and TAMDAR are assembled at FLYHT-Littleton using subassemblies that the company relies on from partners, suppliers and using special parts to complete unit builds. Certain parts can be delayed in shipping or availability, which can cause a delay in receiving assemblies for final units. FLYHT aims to avoid the risk of not having the necessary supplies by managing inventories and storing extra key parts. 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. FlightLink and TAMDAR are currently serviced by Panasonic owned maintenance and repair facilities in Washington State, USA and Singapore at no charge to FLYHT. This relationship can exist until March 31, 2020 at which time FLYHT may also create a Part 145 repair facility at FLYHT-Littleton. Whether FLYHT continues to use Panasonic repair facilities after March 31, 2020 is being evaluated at this time. 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. This company also provided certain financial services in Q2 2018. All transactions with the related party were at exchange amounts that approximated fair value. Amounts included in: Contract labour Contractual Arrangement For the three months ended December 31 2018 $ - 2017 $ 19,200 For the year ended December 31 2018 $ 12,900 2017 $ 83,200 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. . 27- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Independent Auditors’ Report To the Shareholders of FLYHT Aerospace Solutions Ltd. Opinion We have audited the consolidated financial statements of FLYHT Aerospace Solutions Ltd. (the "Company"), which comprise: • the consolidated statements of financial position as at December 31, 2018 and December 31, 2017; • the consolidated statements of comprehensive income (loss) for the years then ended; • the consolidated statements of changes in equity (deficiency) for the years then ended; • the consolidated statements of cash flows for the years then ended; • and notes to the consolidated financial statements, including a summary of significant accounting policies. Hereinafter referred to as the “financial statements”. In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2018 and December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material Uncertainty Related to Going Concern We draw attention to Note 2 in the financial statements, which indicates that the Company’s operating results and cash flows from operations are negative in both 2018 and 2017. As stated in Note 2 in the financial statements, these events or conditions, along with other matters as set forth in Note 2 in the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Other Information Management is responsible for the other information. Other information comprises the information included in Management’s Discussion and Analysis to be filed with the relevant Canadian Securities Commissions. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained the information included in the Management’s Discussion and Analysis to be filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard. 28- Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company‘s financial reporting process. Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Company's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represents the underlying transactions and events in a manner that achieves fair presentation. • Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. • Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this auditors’ report is Reinier Deurwaarder. “KPMG LLP” Chartered Professional Accountants April 10, 2019 Calgary, Canada 29- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION December 31, 2018 $ December 31, 2017 $ Assets Current Assets Cash and cash equivalents (note 6) Trade and other receivables (note 7) Contract assets Deposits and prepaid expenses Inventory (note 8) 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) Contract liabilities (note 13) Loans and borrowings (note 14) 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) Convertible debenture – Equity feature Warrants (note 17) Contributed surplus Cumulative Translation Adjustment Deficit Total equity (deficiency) Total liabilities and equity 2,406,769 3,440,767 395,695 227,065 1,066,946 7,537,242 480,270 34,992 1,044,766 1,560,028 9,097,270 2,342,754 661,833 1,524,894 129,465 272 4,659,218 4,420,714 43,701 4,464,415 9,123,633 58,430,455 207,273 50,712 10,494,208 35,638 (69,244,650) (26,364) 9,097,270 2,014,135 1,650,574 313,634 391,191 1,331,893 5,701,427 398,272 34,992 859,448 1,292,712 6,994,139 1,874,005 1,687,971 - 112,578 12,211 3,686,765 1,842,439 91,713 1,934,152 5,620,917 58,409,225 - 911,282 9,349,871 (19,254) (67,277,902) 1,373,222 6,994,139 See accompanying notes to condensed consolidated interim financial statements, including the going concern note (note 2d). Under the transition method chosen for application of IFRS15, comparative information has been restated (note 3). On behalf of the board ________ Director – Bill Tempany Director – Paul Takalo 30- CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) For the year ended December 31 Revenue (note 19) Cost of sales Gross profit Distribution expenses (note 22) Administration expenses (note 23) Research, development and certification engineering expenses (note 24) Income (loss) from operating activities Other Income (note 21) Finance income (note 25) Finance costs (note 25) Net finance costs Income (loss) before income tax Income tax expense (recovery) (note 26) Income (loss) for the period Foreign currency translation adjustment Comprehensive income (loss) for the period 2018 $ 13,590,516 5,524,696 8,065,820 5,993,236 3,251,608 2,631,445 (3,810,469) 1,861,050 206,599 471,575 264,976 (2,214,395) (247,647) (1,966,748) 54,892 (1,911,856) 2017 $ 13,694,888 4,529,380 9,165,508 4,951,471 3,159,087 2,519,274 (1,464,324) - 15,756 379,262 363,506 (1,827,830) 8,905 (1,836,735) (5,102) (1,841,837) Income (loss) per share Basic and diluted income (loss) per share (note 18) (0.09) (0.09) 31- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIENCY) For the years ended December 31, 2018 and 2017 Convertible Debenture $ Warrants $ Contributed Surplus $ Cumulative Translation Adjustment Deficit $ Total Equity (Deficit) $ 911,282 9,349,871 (19,254) (67,277,902) 1,373,222 - - - - 54,892 (1,966,748) (1,911,856) 54,892 (1,966,748) (1,911,856) Share Capital $ 58,409,225 - - - - - 21,230 - - Balance at December 31, 2017 Income for the period Total comprehensive loss for the period Contributions by and distributions to owners Share-based payment transactions Warrants issued Warrants re-priced Warrants exercised Warrants expired Conversion feature on debenture Total contributions by and distributions to owners Balance at December 31, 2018 - - - - - - - - - 105,018 50,712 133,267 (5,230) - - - (1.039,319) 1,039,319 207,273 - - 21,230 207,273 (860,570) 1,144,337 - - - - - - - - - - - - - - 105,018 50,712 133,267 16,000 - 207,273 512,270 58,430,455 207,273 50,712 10,494,208 35,638 (69,244,650) (26,364) Balance at January 1, 2017 57,514,646 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 Total contributions by and distributions to owners Balance at December 31, 2017 - 379,396 515,183 894,579 58,409,225 - - - - - - - - - - - - 459,396 (127,504) (228,652) - (228,652) 331,892 1,139,934 9,017,979 (14,152) (65,441,167) 2,217,240 - - (5,102) (1,836,735) (1,841,837) (5,102) (1,836,735) (1,841,837) - - - - 459,396 251,892 286,531 997,819 911,282 9,349,871 (19,254) (67,277,902) 1,373,222 32- CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended December 31 2018 $ Cash flows from (used in) operating activities Income (loss) for the period Depreciation – property and equipment Convertible debenture accretion Grant portion of contributions from WINN Government loan accretion Equity-settled share-based payment transactions Warrant re-price Bargain purchase Change in inventories Change in trade and other receivables Change in contract assets Change in prepayments Change in trade and other payables Change in customer deposits Change in provisions Provision realized Unearned revenue Unrealized foreign exchange loss Other interest expense Interest paid Interest income Interest received Income tax expense (recovery) Income tax paid Net cash from (used in) operating activities Cash flows used in investing activities Acquisitions of property and equipment (PPE) Disposal of PPE Net cash used in investing activities Cash flows from (used in) financing activities Redemption of GIC Subsidy payment received Less subsidy recognized (note 13) Proceeds from debenture Proceeds from exercise of share options and warrants Contributions from WINN Repayment of borrowings Payment of finance lease liabilities Net cash from (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning Effect of exchange rate fluctuations on cash held Cash and cash equivalents, ending (1,966,748) 161,489 120,132 (391,697) 321,875 105,018 133,267 (658,920) 835,266 (1,690,798) (82,061) 164,126 469,051 (1,026,138) (32,205) (15,807) - (110,142) 2,719 (2,719) (16,628) 16,628 (247,647) (8,272) (3,920,211) (96,224) - (96,224) - 2,727,024 (1,202,130) 1,865,624 16,000 1,056,543 (119,333) - 4,343,728 327,293 2,014,135 65,341 2,406,769 2017 $ (1,836,735) 143,493 - (318,310) 223,795 459,396 - - 204,387 219,885 (199,909) (174,419) 78,207 1,370,072 (436,832) (20,790) (19,866) 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 33- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 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. FLYHT is publicly traded as FLY in Canada on the TSX.V; and as FLYLF in the USA on the OTCQX. FLYHT is based in Calgary, Canada with an office in Littleton, Colorado and is an AS9100 Quality registered company. For more information visit www.flyht.com. The consolidated financial statements of the Company as at and for the years ended December 31, 2018 and 2017 consist of the Company and its subsidiaries. FLYHT’s mission is to improve aviation safety, efficiency and profitability. Globally, and for more than 20 years, airlines, leasing companies, fractional owners and original equipment manufacturers have installed FLYHT’s differentiated aircraft and enterprise-based solutions to deliver real-time, flight-deck, satellite connectivity for tracking, health monitoring, and streaming of operational, maintenance and weather data. 2. Basis of preparation (a) Basis of accounting 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, 2019. (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. At December 31, 2018, the Company had positive working capital of $2,878,024 compared to positive $2,014,662 (restated for IFRS 15) as of December 31, 2017, an increase of $863,362. The Company’s operating results and cash flows from operations are negative in both 2018 and 2017. 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 hardware units and related services. Additionally, the acquisition of PWS provides the Company the opportunity to realize efficiencies of scale through increasing both service and hardware revenues. 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. The Company has an undrawn credit facility of $1.5 million, $2.97 million in contributions under WINN loans not yet received and if the need arises due to market opportunities, the Company may meet cash-flow 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. 34- These consolidated financial statements do not reflect adjustments that would otherwise be necessary if the going concern assumption was not valid, such as revaluation to liquidation values and reclassification of statement of financial position items. (e) Use of judgements and 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 estimation uncertainties, and assumptions used in preparing our financial statements: 1. Recognition of deferred tax assets: the availability of future taxable profit against which deductible temporary differences and tax losses carried forward can be utilized. 2. Recognition and measurement of provisions and contingences: key assumptions about the likelihood and magnitude of an outflow of resources. 3. Measurement of expected credit loss allowance for trade receivables: the expected credit loss is determined by assessing potential credit impairment at each reporting date. 4. The Company assesses raw materials and finished goods inventory for potential obsolescence or impairment. This provision is determined based on regular reviews of slow-moving inventory. 5. The fair value of WINN contributions: a discount rate is used to determine the portion of the contribution to be categorized as 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. 6. Asset acquisition for which no consideration was paid: measured at the fair value of the consideration transferred and fair value of assets acquired and liabilities assumed. 7. Valuation of convertible debt instruments: a discount rate is used to determine the fair value of the loan, and is a method of allocating the equity portion between the different equity classes. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated annual financial statements including by FLYHT’s subsidiaries. (a) Basis of consolidation (i) Business combinations The Company accounts for business combinations using the acquisition method when control is transferred. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transactions costs are expenses as incurred, except if related to the issue of debt or equity securities. Any contingent consideration is measured at fair value at the date of acquisition. Obligations to pay a contingent consideration are remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. (ii) Subsidiaries Subsidiaries are entities controlled by FLYHT. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. 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. 35- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 (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 Effective January 1, 2018 the Company adopted IFRS 9 – Financial Instruments which replaced 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. (i) Recognition and measurement The Company initially recognizes trade receivables and trade payables, loans and borrowings and finance lease liabilities on the date they are originated. All other financial instruments are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. 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. 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. (ii) Derecognition 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. The Company derecognizes a financial liability when its contractual obligations are discharged, canceled or expires. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid is recognized in profit or loss. (iii) Offsetting 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. (iv) Share capital Common shares are classified as equity if settlement results in the company delivering a fixed number of its own shares in exchange for a fixed number of other cash or financial assets. If settlement results in the Company delivering a fixed number of its own shares in exchange for a fixed number of other cash or financial assets. 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. (v) 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. 36- 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 at maturity, 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 write-down to net realizable value is recognized as an expense. Reversals of previous write-downs are recognized in profit or loss in the period when the reversal occurs. 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 raw material inventories. Finished goods consists of 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 units. (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 over lease term 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. 37- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 (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 AFIRS, FlightLink and TAMDAR systems and the design and testing of all software systems and products (including AirMap, UpTime, FLYHTASD, FLYHTMail, FLYHTStream, and FLYHTFuel). Other R&D costs include testing, patent application and certification. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use, and borrowing costs on qualifying assets. Other development expenditure is recognized in profit or loss as incurred. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. (ii) Subsequent expenditure Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in profit or loss as incurred. (iii) Amortization Amortization is calculated based on the asset’s cost less its residual value. Estimates of amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Any changes in these estimates are accounted for prospectively. (f) Leased assets Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for according to the accounting policy applicable to that asset. Other leases are operating leases and the Company does not recognize the leased assets in its statement of financial position. Initial direct costs for operating leases are expensed immediately. As a lessee, FLYHT has several finance leases for computer hardware. 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. An intangible asset is derecognized on disposal or when no future economic benefits are expected from its use or disposal. 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. (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 the grant will be received and the Company will comply with the conditions associated with the grant. 38- (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. (j) Provisions A provision is recognized if, as the 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 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 and failure rates. (k) Impairment (i) Non-derivative financial assets The Company recognizes allowances for expected credit loss on financial assets measured at amortized cost. Loss allowances for trade receivables and contract assets are measured at an amount equal to lifetime expected credit loss. Lifetime expected credit losses are the losses that result from all possible default events over the expected life of a financial instrument. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating expected credit losses, the Company considers reasonable and supportable information that is relevant and available without undue cost of effort. This includes both quantitative and qualitative information and analysis based on historical experience and informed credit assessment including forward-looking information. The Company assumes that the credit risk on a financial asset has increased significantly if it is more than 90 days past due. Expected credit losses are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls being the difference between the cash flows due to the Company in accordance with the contract and the cash flows that the Company expects to receive. (ii) Non-financial assets At each reporting date, the Company reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the assets recoverable amount is estimated. For impairment testing, assets 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. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present values using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 39- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss. (l) Revenue Effective January 1, 2018 the Company adopted IFRS 15, which implemented a single model that applies to contracts with customers with two approaches to recognizing revenue: at a point in time and over time. The model features a contract-based five step analysis of transactions to determine whether, how much and when revenue is recognized. The retrospective method was used to ensure comparability, which required restatement of comparative periods. No restatement was made for contracts completed by January 1, 2017. Opening 2017 retained earnings was adjusted for the cumulative effect of adjustments prior to that date. The following describes the accounting policies for each revenue stream, including the timing of each performance obligation and any significant payment terms. (i) SaaS Revenue from sales of Software as a Service is recognized over time as these services are provided. Invoices based on usage are generated monthly and typically are payable within 30 days. (ii) Hardware Control of Hardware is transferred upon shipment. Invoices are generated, and revenue is recognized at that point in time. Payment terms are based on the creditworthiness of each customer, which results in either a grant of net terms or a requirement to transact on a prepayment basis only. Transaction price is determined by contract or purchase order. Under IAS 18, revenue was deferred until the risks and rewards had been transferred to the buyer. For contracts under which customer acceptance was determined based on installation of the system, revenue and associated cost of goods sold is recognized sooner under IFRS 15 than IAS 18. (iii) Licensing Control over modems and associated IP licenses is transferred upon shipment, at which point the revenue is recognized. Payment is typically due net 30 post shipment. (iv) Technical Services Revenue from Technical Services is recognized over time, as the services are provided or as the associated asset is developed. Payment terms for these services typically follow terms established for Hardware. The effect of initially applying this standard is mainly earlier recognition of revenue from Hardware sales. IFRS 15 did not have a significant impact on revenue from SaaS, Licensing, nor Technical Services. Under IFRS 15, revenue is recognized when a customer obtains control of the goods or services. Determination of the timing of this transfer often requires judgement. Management assesses each contract for appropriate allocation of transaction price among performance obligations, including an expected margin analysis and evaluation of consistently applied pricing methods. The following tables summarize the impact of the Company’s transition to IFRS 15. Comprehensive statement of income, affected categories: For the year ended December 31, 2017 $ Previously reported 14,018,750 IFRS 15 adjustments (323,862) Amounts adjusted for IFRS 15 13,694,888 4,772,680 (243,300) 4,529,380 9,246,070 (80,562) 9,165,508 Revenue Cost of sales Gross profit 40- Comprehensive statement of financial position, affected categories: December 31, 2017 $ January 1, 2017 $ Previously reported IFRS 15 adjustments Amounts adjusted for IFRS 15 Previously reported IFRS 15 adjustments Amounts adjusted for IFRS 15 Trade and other receivables Contract assets Current inventory Unearned revenue Deficit 1,887,251 - 1,563,558 (413,809) (67,550,815) (236,677) 313,634 (231,665) 413,809 259,101 1,650,574 313,634 1,331,893 - (67,291,714) 2,105,385 - 1,556,794 (827,235) (65,795,200) (113,725) 113,725 (467,488) 807,369 339,881 1,991,660 113,725 1,089,306 (19,866) (65,455,319) (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 equity-settled 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. 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. 41- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 (o) Finance income and finance costs Finance income comprises interest income and the foreign currency gain on financial assets and financial liabilities which is recognized in profit or loss as it accrues using the effective interest method. Finance costs comprise interest expense and accretion on borrowings, unwinding of the discount on provisions, and the foreign currency loss on financial assets and financial liabilities, and are recognized in profit or loss using the effective interest method whereby the amount of the discount is amortized to interest expense over the expected life of the instrument. (p) Foreign currency (i) Foreign currency transactions Foreign currency transactions are translated to Canadian dollars at the exchange rate in effect on the transaction date. Foreign currency denominated monetary assets and liabilities at each reporting date are retranslated to the functional currency at the exchange rate in effect on that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate in effect on the date of the transaction. Foreign currency differences arising on retranslation are recognized in profit or loss. (ii) Foreign operations The assets and liabilities of foreign operations are translated to Canadian dollars at exchange rates in effect at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at exchange rates in effect on the transaction dates. Foreign currency differences are recognized in other comprehensive income in the cumulative translation account. (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. (i) Current tax 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. (i) Deferred tax Deferred tax is recognized in respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. When a taxable temporary difference arises from the initial recognition of the equity component separately from the liability component of a compound financial instrument, the resulting deferred tax liability is charged directly to the carrying amount of the equity component. 42- (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 In January 2016, the International Accounting Standards Board issued the final version of IFRS 16, Leases. IFRS 16 will replace the existing leases Standard, IAS 17 Leases, and related Interpretations. The Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., the lessee and the lessor). IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Currently, operating lease expenses are charged to the statement of comprehensive income (loss). The Standard also contains enhanced disclosure requirements for lessees. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. The effective date for adoption of IFRS 16 is annual periods beginning on or after January 1, 2019, and the Company will adopt IFRS 16 for the annual period beginning on January 1, 2019. The transition to IFRS 16 consists of three key phases: identifying and analyzing all contracts that could contain a lease, analyzing impact of transition, and implementing any required changes to policies and internal controls. The Company has completed its identification of all outstanding leases as at December 31, 2018 and is currently in the process of completing its calculations and analysis to finalize transition results for Q1 2019. As of January 1, 2019 the Company will recognize right-of-use assets and lease liabilities in the statements of financial position. The Company will transition to IFRS 16 in accordance with the modified retrospective approach. Impacts of IFRS 16 prior to January 1, 2019 are not adjusted. As part of the initial application of IFRS 16, the Company chose to apply the following transition options and exemptions: Critical judgements and estimates will be applied in the transition to IFRS 16, such as assessing whether an arrangement contained a lease, determining the lease term, and calculating discount rates on a lease-by-lease basis. These aforementioned estimates have a significant risk of material adjustment within the next financial year. 5. Measurement of fair values A number of the Company’s accounting policies and disclosures require the measurement 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. (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, 2018 $ 3,274,135 166,632 3,440,767 December 31, 2017 $ 1,463,187 187,387 1,650,574 Non-trade receivables consist of interest income receivable, and input tax credits. The Company’s exposure to credit and currency risks is disclosed in note 27. 43- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 8. Inventory Raw materials Finished goods Balance Less current portion Non-current portion December 31, 2018 $ 1,416,670 695,042 2,111,712 (1,066,946) 1,044,766 December 31, 2017 $ 1,336,892 854,449 2,191,341 (1,331,893) 859,448 In 2018 Raw materials and Finished goods recognized as cost of sales amounted to $5,524,696 (2017: $4,529,380 restated for IFRS 15). Included in this amount was a write down of inventories amounting to $157,852 (2017: $93,498) resulting from a review of slow moving inventory parts. All inventories are pledged as security for the bank loan and the convertible debenture (note 14). 9. Property and equipment 2018 Cost Balance at January 1 Additions Acquisition through business combinations Balance at December 31 Accumulated Depreciation Balance at January 1 Depreciation for the year Balance at December 31 Carrying Amounts At January 1 At December 31 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 Computers and Software $ Equipment $ Leasehold Improvements $ 825,224 94,916 96,770 1,016,910 579,613 123,206 702,819 245,611 314,091 345,159 1,308 35,569 382,036 216,633 30,446 247,079 128,526 134,957 49,110 - 14,924 64,034 24,975 7,837 32,812 24,135 31,222 Computers and Software $ Equipment $ Leasehold Improvements $ 705,263 119,961 - 825,224 464,125 115,488 - 579,613 241,138 245,611 266,426 87,798 9,065 345,159 201,509 21,702 6,578 216,633 64,917 128,526 48,453 657 - 49,110 18,672 6,303 - 24,975 29,781 24,135 Total $ 1,219,493 96,224 147,263 1,462,980 821,221 161,489 982,710 398,272 480,270 Total $ 1,020,142 208,416 9,065 1,219,493 684,306 143,493 6,578 821,221 335,836 398,272 As of December 31, 2018, all property and equipment are pledged as security for the bank loan and the convertible debenture (note 14). 44- 10. Intangible assets The IP Licenses are 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. Intangible assets are pledged as security for the bank loan and the convertible debenture (note 14). 11. Trade payables and accrued liabilities Trade payables Compensation and statutory deductions Accrued liabilities Balance, December 31 December 31, 2018 $ 1,737,710 346,456 258,588 2,342,754 December 31, 2017 $ 1,345,952 348,410 179,643 1,874,005 Compensation and statutory deductions include accrued vacation pay, variable compensation, and statutory payroll deductions. 12. Customer deposits Opening balance Payments received Recognized as revenue Balance, December 31 13. Contract liabilities Opening balance Payments received Recognized in Other Income Less subsidy receivable Balance, December 31 December 31, 2018 $ 1,687,971 4,820,111 (5,846,249) 661,833 December 31, 2018 $ - 2,621,106 (1,202,130) 106,008 1,524,984 December 31, 2017 $ 317,899 5,543,241 (4,173,169) 1,687,971 December 31, 2017 $ - - - - - In October 2018 FLYHT acquired the assets of PWS. Pursuant to a transition agreement between the parties, to keep the asset acquisition cash-flow neutral to FLYHT during an 18-month transition period, FLYHT is expected to receive a subsidy of $3.3 million USD. This subsidy can be increased or reduced if FLYHT’s income relating to the acquired assets falls short or exceeds certain agreed upon thresholds. The subsidy is being paid over the term of the transition period, and the portion of the amounts received that relate to future periods are held in Contract Liabilities until they are recognized in Other Income on the Statement of Comprehensive Income. 14. Loans and borrowings 2018 Face value $ 2018 Carrying value $ 2017 Face value $ 2017 Carrying value $ Secured bank loan SADI loan WINN loan Convertible debenture Balance, December 31 Less current portion Non-current portion - 1,507,481 2,137,202 2,480,000 6,124,683 137,233 5,987,450 - 1,252,743 1,569,663 1,727,773 4,550,179 129,465 4,420,714 - 1,626,814 1,080,658 - 2,707,472 119,333 2,588,139 - 1,162,679 792,338 - 1,955,017 112,578 1,842,439 45- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Bank loan On July 7, 2017, the Company amended its operating demand loan with a Canadian chartered bank to increase its borrowing availability up to a maximum of CAD $1.5 million or 90% of the Company’s receivable balances, from $250,000 and also resulted in the release of the GIC of $250,000 previously pledged as security. Any amount drawn on the Line of Credit bears 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. On February 26, 2019, the Company amended its operating demand loan to allow the Company to draw funds either in CAD or USD. USD funds drawn will bear interest at Canadian chartered bank US prime plus 4.5%. The aggregate of these two facilities is not to exceed CAD $1.5 million. The other terms of the agreement remain the same. Government loans In November 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, 2018, the Company had received contributions totaling $2,137,202 (2017: 1,080,658). In November 2018, the Company signed a second contribution agreement with Western Economic Diversification Canada for a Western Innovation initiative (WINN) loan, to support development of the next generation of AFIRS hardware and embedded software to address parts obsolescence issues and add new market-driven features. Under the terms of the agreement, a repayable unsecured WINN contribution to the value of the lesser of 44% of the eligible project costs to April 30, 2021 or $2,761,000 will be received. A March 31, 2019 amendment adjusted the end date for eligible project costs to September 30, 2021. The amount is repayable over five years commencing October 1, 2021. At December 31, 2018, the Company had not received contributions under this loan. Under SADI, the Company has, at December 31, 2018, an outstanding repayable balance of $1,507,481 (2017: $1,626,814). 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, 2018 and 2017 and changes during these years is presented below. 2018 SADI $ 1,162,679 - - 209,397 (119,333) 1,252,743 129,465 1,123,278 2018 WINN $ 792,338 1,056,544 (391,697) 112,478 - 1,569,663 - 1,569,663 2018 Total 1,955,017 1,056,544 (391,697) 321,875 (119,333) 2,822,406 129,465 2,692,941 2017 SADI $ 1,072,641 - - 193,805 (103,767) 1,162,679 112,578 1,050,101 2017 WINN $ - 1,080,658 (318,310) 29,990 - 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 Balance January 1 Contributions received Grant portion Interest accretion Repayment Balance December 31 Less current portion Non-current portion Convertible Debenture The Company issued the Debentures on July 24, 2018. They will mature on July 24, 2021 (if not otherwise converted) and bear interest at a rate of 8% per annum, which shall be accrued and paid annually in arrears. The Debentures shall be convertible at the option of the debenture holder into common shares of FLYHT (Common Shares) at a conversion rate of $1.30 per share at any time prior to maturity, subject to a forced conversion (at a conversion rate of $1.30 per share) into Common Shares should the closing price of the Company’s Common Shares be equal to or exceed $1.80 for 20 consecutive trading days. 769,200 warrants (Warrants) were issued to the purchasers of the Debentures. Each whole Warrant is exercisable to acquire one Common Share of FLYHT for a period of two (2) years from the date of issuance at an exercise price of $1.45 per share. The Warrants are subject to an acceleration clause, whereby, if after four months and one day following the date the Warrants are issued, the closing price of the Company’s Common Shares is equal to or exceeds $1.90 for 20 consecutive trading days, the Warrant expiry date shall accelerate to the date which is 30 calendar days following the date a press release is issued by the Company announcing the reduced warrant term. 46- The Debentures are secured against all personal property of the Company and are subordinated in right of payment to all existing and future secured bank and/or governmental indebtedness of the Company and any existing security already registered against FLYHT’s assets. 2018 $ 1,950,000 (84,376) 1,865,624 (257,984) 120,133 1,727,773 Proceeds on issue Transaction costs allocated Net Proceeds Amount classified as equity (net of transactions costs) Accrued interest Carrying amount of liability at December 31, 2018 15. Operating leases Operating lease rentals are payable as follows: 2019 2020 2021 2022 Total Premises $ 738,749 836,908 459,523 96,114 2,131,294 Operating lease payments made in 2018 totaled $529,245 (2017: $458,145). 16. Provisions Product warranty Balance January 1 Provision made during the period Provision extinguished Provision re-evaluation Provision used during the period Balance December 31 2018 $ 91,713 12,050 (39,736) 2,314 (22,640) 43,701 2017 $ 549,335 15,496 - (452,328) (20,790) 91,713 A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data. The provision extinguished was for a warranty claim from a partner that was withdrawn in 2018. 47- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 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, 2017 Consolidation rounding Exercise of employee options Exercise of warrants Balance December 31, 2017 Exercise of warrants Balance December 31, 2018 Number of Shares 20,744,177 (11) 123,430 191,021 21,058,617 10,000 21,068,617 Value $ 57,514,646 - 379,396 515,183 58,409,225 21,230 58,430,455 In 2018 warrant exercises resulted in the Company issuing a total of 10,000 shares for total proceeds of $16,000. No options were exercised in the year. Stock option plan   The Company grants stock options to its directors, officers, employees and consultants. The following stock options were granted in 2018: 7,500 stock options with an exercise price of $1.17 to an employee. The options will vest in equal tranches on August 8, 2019, 2020 and 2021 and will expire on August 8, 2022. 421,015 stock options to employees, officers and directors under the stock option plan with an exercise price of $1.55. The options will vest in equal tranches on May 4, 2019, 2020 and 2021 and will expire on May 4, 2022. 30,000 stock options to a consultant with an exercise price of $1.33. The options will vest in equal tranches on September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019. These options are set to expire on May 15, 2021. 10,000 stock options with an exercise price of $1.33 to an employee. The options will vest 1/3 each on November 7, 2019, 2020 and 2021 and will expire on December 31, 2022.   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, 2018, there were 2,106,862 (2017: 2,105,862) common shares reserved for this purpose. A summary of the Company’s outstanding stock options as at December 31, 2018 and 2017 and changes during these years is presented below. Outstanding, January 1 Options granted Options exercised Options expired Outstanding December 31 Unvested options Outstanding and exercisable, December 31 2018 2017 Number of options 983,498 468,515 - (386,168) 1,065,845 404,435 661,410 Weighted average exercise price $ 2.16 1.39 - 2.01 1.86 1.53 2.07 Number of options 863,337 486,021 (123,430) (242,430) 983,498 95,000 888,498 Weighted average exercise price $ 2.60 2.21 2.04 3.90 2.17 2.10 2.16 48- The exercise prices for options outstanding at December 31, 2018 were as follows: Exercise price: Number All options Weighted average remaining contractual life (years) Number Exercisable options Weighted average remaining contractual life (years) $1.17 $1.33 $1.33 $1.55 $1.90 $2.10 $2.20 $2.55 $2.75 Total 7,500 30,000 10,000 371,935 285,365 20,000 316,045 5,000 20,000 1,065,845 3.6 2.4 4.0 3.3 1.0 3.0 2.0 2.0 1.0 2.2 - 15,000 - - 285,365 20,000 316,045 5,000 20,000 661,410 - 2.4 - - 1.0 3.0 2.0 2.0 1.0 1.6 The weighted average fair value of the options granted during the year that were valued using the Black-Scholes option pricing model was $0.45 (2017: $1.10). 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 2018 1.91% 2.02 52% 0.00% 2017 1.05% 3.52 70% 0.00% Number of warrants 1,907,021 (191,021) 1,716,000 769,200 (10,000) (1,706,000) 769,200 Weighted average exercise price $ 2.39 1.50 2.30 1.45 1.60 1.60 1.45 Value $ 1,139,934 (228,652) 911,282 50,712 (5,230) (906,052) 50,712 Outstanding January 1, 2017 Warrants exercised Outstanding December 31, 2017 Warrants issued (note 14) Warrants exercised Warrants expired Outstanding December 31, 2018 18. Earnings per share Basic earnings per share The calculation of basic and diluted earnings per share for the year ended December 31, 2018 was based on a weighted average number of common shares outstanding of 21,058,736 (basic and diluted) (2017: 20,926,589 basic and diluted). 49- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 19. Disaggregation of revenue The Company has one operating segment. The following revenue is based on the geographical location of customers. All non-current assets (property and equipment and intangible assets) reside in Canada, with the exception of property and equipment valued at $145,725, located at FLYHT’s offices in Littleton, CO. North America South/Central America Africa Middle East Europe Australasia Asia Total For the year ended December 31 2018 $ 2017* $ 5,935,692 7,476,508 660,007 588,473 1,794,439 770,574 646,989 396,591 774,402 976,490 348,037 632,299 3,194,342 3,090,561 13,590,516 13,694,888 * Under the transition method chosen for application of IFRS15, comparative information has been restated (note 3). The following shows revenue per major product and service categories. SaaS Hardware Licensing Technical Services Total For the year ended December 31 2018 $ 5,528,822 5,536,687 2,265,262 259,745 13,590,516 2017* $ 4,312,702 5,444,844 3,752,301 185,041 13,694,888 * Under the transition method chosen for application of IFRS15, comparative information has been restated (note 3). In the categories listed in the revenue sources chart, Software as a Service (SaaS) is the recurring revenue from the Company’s product that allows customers to utilize and analyze data they receive from units, use of functions such as the satellite phone and the sale of weather data collected by units. These usage fees are recognized as the service is provided based on actual customer usage each month. Hardware includes the income from hardware sales and related parts required to install the unit, spare units, spare installation parts, and Underfloor Stowage Units. Licensing includes sales of modems with a related manufacturing license fee. Technical Services includes all services offered by the Company, including repairs and other expertise. Major customers Revenues from the three largest customers represent approximately 32% of the Company’s total revenues for the year ended December 31, 2018 (2017: 38%). 21. Other Income Bargain Purchase (note 30) Subsidy recovery (note 13) Total For the year ended December 31 2018 $ 658,920 1,202,130 $1,861,050 50- 22. Distribution expenses Salaries and benefits Stock based compensation Contract labour Office Travel Equipment & maintenance Depreciation Marketing Other Total 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 2018 $ 3,592,664 40,068 725,677 402,191 647,515 190,470 37,641 165,615 191,395 5,993,236 2017 $ 2,361,046 152,272 881,837 429,294 601,172 53,712 34,438 268,033 169,667 4,951,471 For the year ended December 31 2018 $ 1,457,388 190,209 289,983 376,094 195,143 197,852 114,866 34,205 120,297 166,179 80,381 29,011 3,251,608 2017 $ 1,326,548 281,675 431,423 306,034 76,446 192,452 158,931 40,350 102,348 131,340 59,334 52,206 3,159,087 24. Research, development and certification engineering expenses To date, all development costs have been expensed as incurred. Salaries and benefits Stock based compensation Contract labour Office Travel Equipment and maintenance Components SRED tax credit Depreciation Government grants Other Total For the year ended December 31 2018 $ 2,443,060 8,008 225,529 79,263 75,196 69,733 77,399 - 43,437 (391,697) 1,517 2,631,445 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 51- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 25. Finance income and finance costs For the year ended December 31 Interest income on bank deposits Net foreign exchange gain Finance income Bank service charges Net foreign exchange loss Other interest expense Government grant interest accretion Debenture interest expense and accretion Finance costs 26. Income tax expense Current Tax Expense Current income tax (recovery) expense Deferred income tax (recovery) 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 2018 $ 16,628 189,971 206,599 26,849 - 2,719 321,875 120,132 471,575 2018 $ (3,667) (243,980) (247,647) 2018 $ 244,717 71,257 - 9,948,952 37,269 8,464,230 2017 $ 15,756 - 15,756 38,807 115,979 681 223,795 - 379,262 2017 $ 8,905 - 8,905 2017 $ 202,845 71,257 2,157 9,609,044 55,903 8,345,900 The Company has non-capital losses for income tax purposes of approximately $37,239,348 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: 18,766,425 18,287,106 Year 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2037 2038 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 1,725,517 1,617,573 37,239,348 52- Reconciliation of effective tax rate Income (loss) before tax Tax Rate Expected income tax recovery Bargain purchase tax impact True up from prior year Non-deductible expenses Stock based compensation Change in unrecognized temporary differences * Comparative tax information has not been restated under IFRS 15 (note 3). 27. Financial risk management 2018 $ 2017* $ (2,214,395) 27% (597,887) (177,908) (145,669) 16,077 64,337 593,403 (247,647) (1,746,710) 27% (471,612) - (42,456) 13,361 124,036 385,582 8,905 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 16% (2017: 27%) of the Company’s 2018 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 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, 2018 Accounts receivable Impairment Net receivable December 31, 2017 Accounts receivable Impairment Net receivable 0-30 days $ 2,776,145 (4,802) 2,771,343 0-30 days $ 1,060,527 (2,012) 1,058,515 31-60 days $ 565,523 (5,799) 559,724 31-60 days $ 195,228 - 195,228 61-90 days $ 103,264 (2,199) 101,065 61-90 days $ 40,177 (3,522) 36,655 91+ days $ 291,978 (283,343) 8,635 91+ days $ 510,891 (150,715) 360,176 Total $ 3,736,910 (296,143) 3,440,767 Total $ 1,806,823 (156,249) 1,650,574 The Company believes that the unimpaired amounts that are past due by more than 30 days are still collectible, based on historic payment behavior. 53- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 The movement in the allowance for impairment in respect of trade and other receivables for the years ended December 31, 2018 and 2017 was: Balance, January 1 Provision Amounts written off Balance, December 31 Liquidity risk 2018 $ 156,249 139,894 - 296,143 2017 $ 582,712 160,484 (586,947) 156,249 The Company’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, without incurring unacceptable losses or risking damage to the Company’s reputation. The Company manages its liquidity risks by having cash available, maintaining a conservative capital structure, prudently managing its credit risks, and by maintaining its relationship with the capital markets to meet any near-term liquidity requirements. The following table details the contractual maturities of financial liabilities, including estimated interest payments. December 31, 2018 Accounts payable Compensation and statutory deductions Accrued liabilities Loans and borrowings Total December 31, 2017 Accounts payable Compensation and statutory deductions Accrued liabilities Loans and borrowings Total Currency risk < 2 months $ 1,737,710 3,112 1,942 - 1,742,764 < 2 months $ 1,340,510 46,763 37,990 - 1,425,263 2-12 months $ - 343,343 240,130 297,234 880,707 2-12 months $ - 274,647 113,479 119,333 507,459 1-2 years $ - - 11,658 629,820 641,478 1-2 years $ - 27,000 11,658 137,234 175,892 2-5 years $ - - 2-5 years $ - - 4,858 4,194,230 4,199,088 - 1,003,399 1,003,399 > 5 years Total > 5 years Total $ - - $ - - $ 1,737,710 346,455 258,588 6,124,683 8,467,436 $ 1,340,510 348,410 179,643 2,707,472 4,576,035 16,516 1,628,685 1,645,201 - 822,220 822,220 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 $147,252 (2017: $138,744) and a strengthening of the Canadian dollar would decrease net earnings by approximately $147,252 (2017: $138,744). 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, 2018, working capital denominated in U.S. dollars was approximately positive $2,474,528 (2017: positive $878,991). As a result, a 1% weakening of the Canadian dollar would increase net earnings by approximately $24,745 (2017: $8,790) and a strengthening of the Canadian dollar would decrease net earnings by approximately $24,745 (2017: $8,790). 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. 54- 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, 2018 and 2017 was minimal as the credit facility had not been drawn. Market risk Market risk is the risk that changes in market conditions, such as foreign exchange rates, interest rates and equity prices will affect the Company’s income or the value of its financial instruments. The Company’s objective in managing market risk is to manage and control exposure, while optimizing return. Fair values versus carrying amounts 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 (note 14). 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. This company also provided certain financial services in Q2 2018. 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 Transactions with key management personnel For the year ended December 31 2018 $ 12,900 2017 $ 83,200 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 2018 $ 1,158,088 207,505 295,000 - 54,385 58,866 1,773,844 2017 $ 1,018,521 203,551 132,500 112,500 350,095 59,956 1,877,123 Directors of the Company control 3.9% (2017: 3.9%) of the voting shares of the Company. 55- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 Subsidiaries FLYHT Inc. AeroMechanical Services USA Inc. FLYHT Corp. FLYHT India Corp. TFM Inc. 29. Contractual Arrangement Country of Incorporation United States United States Canada Canada Canada Ownership interest 100% 100% 100% 100% 100% Certain of the Company’s sales contracts require that, in the event the Chinese government restricts use of the Iridium satellite constellation, the Company may be required to repurchase, at discounted rates, certain AFIRS units. The Iridium license was renewed by the Chinese authorities during 2015 for a further five-year term and the likelihood of a liability under these contracts is considered to be remote. 30. Business combination – asset acquisition On October 9, 2018, the Company acquired the assets of Panasonic Weather Solutions, a division of Panasonic Avionics Corporation. The assets acquired included 10 airline service contracts, a weather observation contract; the technology and intellectual property for the FlightLink Iridium Satellite Data Unit and TAMDAR sensor; AirMap operating software, and several STC’s for these technologies. There were no liabilities assumed. Pursuant to a transition agreement between the parties which ends March 31, 2020, the Company and PAC will work closely together to complete several ongoing deployment programs, while PAC will also provide warranty services and a level of customer support. This transition period will give FLYHT time to integrate business and operational functions. In addition, to keep the asset acquisition cash-flow neutral to FLYHT during this period, the Company will receive a subsidy of US$3.3 million. The total subsidy can be increased or reduced if the income relating to the acquired contracts falls short of or exceeds certain agreed upon thresholds. Pursuant to the terms of the acquisition of PWS assets and the transition agreement, FLYHT payed no monetary consideration to PAC for the PWS assets, accordingly no fair value was assessed for the intangible assets, per IFRS 3 (Business Combinations). The Company incurred acquisition-related costs of $170,403 in due diligence and legal fees. These costs have been included in Administrative Expenses (note 23). The fair values of the identifiable assets as at the date of acquisition were: Property and equipment Inventory Deferred tax liability Bargain purchase arising on acquisition Purchase consideration Fair value recognized on acquisition 147,263 755,637 (243,980) (658,920) - The valuation techniques used for measuring the fair value of assets acquired were as follows: Assets acquired Valuation technique Property and equipment Inventory Fair value assessment considered market prices for similar items when they were available, and depreciated replacement cost when appropriate. Inventory acquired was assessed for impairment, and valued at cost or at a reduced value when appropriate. It is impracticable to report net income on a segregated basis. Integration of the assets started immediately after acquisition, and as a result costs can no longer be separated. 56- 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 Adelaide Capital Markets Inc. Deborah Honig Telephone: 1-647-203-8793 Email: deborah@adelaidecapital.ca www.adelaidecapitalmarkets.com Liolios Group Inc. Telephone: 1-949-574-3860 Email: fly@liolios.com https://liolios.com/ Directors Bill Tempany John Belcher Mike Brown Barry Eccleston Jacques Kavafian Doug Marlin Jack Olcott Mark Rosenker Paul Takalo Nina Jonsson Officers Thomas R. Schmutz Alana Forbes Matieu Plamondon Derek Graham Jeffrey Rex 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. (retired) Director President, Marlin Ventures Ltd. President, General Aero Company United States Air Force (retired) Director Director Chief Executive Officer Chief Financial Officer Chief Operating Officer Chief Technical Officer Vice President Sales and Marketing Calgary, Alberta Tingle Merrett LLP, Calgary, Alberta 300E, 1144 - 29 Avenue NE Calgary, Alberta T2E 7P1 57- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2018 

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