ANNUAL REPORT FLYHT AEROSPACE SOLUTIONS LTD. 20 22 Table of Contents Letter to Shareholders ............................................................................................................................................................. 4 Management Discussion & Analysis ....................................................................................................................................... 5 Non-GAAP Financial Measures .......................................................................................................................................... 5 Forward-Looking Statements .............................................................................................................................................. 5 FLYHT Overview ................................................................................................................................................................. 6 Trends and Economic Factors .......................................................................................................................................... 11 Environmental, Social and Corporate Governance .......................................................................................................... 13 Results of Operations ....................................................................................................................................................... 15 Selected Results ......................................................................................................................................... 15 Financial Position ........................................................................................................................................ 16 Comprehensive Income .............................................................................................................................. 18 Other ........................................................................................................................................................... 24 Auditors’ Involvement ............................................................................................................................................................ 28 Consolidated Statements of Financial Position ......................................................................................................................33 Consolidated Statements of Comprehensive Loss ............................................................................................................... 34 Consolidated Statements of Changes in Equity.................................................................................................................... 35 Consolidated Statements of Cash Flows .............................................................................................................................. 36 Notes to the Consolidated Financial Statements .................................................................................................................. 37 Corporate Information ........................................................................................................................................................... 63 2- Aircraft Based Observations Aircraft Communications Addressing and Reporting System Aircraft Condition and Monitoring System Automatic Dependent Surveillance - Contract Aircraft Interface Device Automated Flight Information Reporting System Aircraft Health Monitoring Aircraft Meteorological Data Relay Aircraft Maintenance and Engineering Operating System National Civil Aviation Agency of Brazil Auxiliary Power Unit Business Development Bank of Canada Civil Aviation Administration of China The Coronavirus Aid, Relief, and Economic Security Act Canada Emergency Rent Subsidy Canada Emergency Wage Subsidy Controller Pilot Data Link Communications 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 Electronic Flight Bag Employee Retention Tax Credit Environmental, Social, Governance Federal Aviation Administration Future Air Navigation System Flight Data Recorder COMMONLY USED FINANCIAL TERMS AND AVIATION ACRONYMS ABOs: ACARS: ACMS: ADS-C: AID: AFIRSTM: AHM: AMDAR: AMOSTM: ANAC: APU: BDC: CAAC: CARES: CERS: CEWS: CPDLC DAO: DGAC: EASA: EBITDA: ECAA: EFB: ERTC: ESG: FAA: FANS: FDR: FlightLinkTM: An Iridium Satellite Data Unit GAAP: GAMECO: HASCAP: IATA: ICAO: IFRS: MD&A: MRO: MTBF: OEM: PAC: PPP: PWS: QAR: QTD: R&D: RPK: SaaS: SADI: SAAU: STC: TAMDARTM: TCCA: TCFD: WINN: WVSS: YTD: Generally Accepted Accounting Principles Guangzhou Aircraft Maintenance Engineering Company Limited Highly Affected Sectors Credit Availability Program International Air Transport Association International Civil Aviation Organization International Financial Reporting Standards Management Discussion and Analysis Maintenance, Repair, and Overhaul Mean Time Between Failures Original Equipment Manufacturer Panasonic Avionics Corporation Paycheck Protection Program Panasonic Weather Solutions Quick Access Recorder Quarter-to-date Research and Development Revenue Passenger Kilometers Software as a Service Strategic Aerospace and Defence Initiative State Aviation Authority of Ukraine Supplemental Type Certificate Tropospheric Airborne Meteorological Data Reporting Transport Canada Civil Aviation Task Force on Climate Related Disclosures Western Innovation Initiative Water Vapour Sensing System Year-to-date 3- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 LETTER TO SHAREHOLDERS My name is Kent Jacobs, and late in 2022 I was appointed to the expanded position of President and Interim CEO of FLYHT. Bill Tempany, our CEO, passed away unexpectedly on December 20th of last year. It is with both a heavy heart and an unwavering commitment to his vision and legacy that I write this year- end 2022 shareholder letter. He is deeply missed by everyone at FLYHT and by me as my colleague, mentor, and friend. When Bill returned to FLYHT as our CEO in 2020, he set the tone for our software focused vision and formed the team that successfully continues his work today. I am proud to lead that team. 2022 was a year of exciting accomplishments and opportunities. As I consider my 20+ years at FLYHT I have never been more optimistic about our current state and future opportunities. With the strong execution of our strategy, we delivered record revenue of nearly $24 million, representing a doubling of our 2021 revenues, while also generating positive EBITDA in the second half of 2022. The continued recovery of the airline industry coupled with FLYHT’s approach has placed us in a strong position to benefit from the ongoing robust demand for our legacy products and surging interest for our new and innovative solutions. FLYHT’s vision to become a global force in providing innovative aviation and environmental solutions for our customers is coming to fruition. We are on the verge of obtaining the initial Supplemental Type Certificates (“STCs”) of our newest innovation, the AFIRS Edge™. The 5G enabled AFIRS Edge utilizes cellular, Iridium Certus®, and Wi-Fi capabilities to provide powerful situation awareness by delivering data in real-time. Its light-weight form and versatility bridge the end-to end digital divide and makes narrow body connectivity a reality. Our STC rollout strategy is to first address the Airbus A320 and Boeing 737 fleets around the world. By focusing on these narrow body fleets, we are targeting roughly 70% of the commercial aircraft worldwide. FLYHT envisions an addressable market of ~25,000 aircraft with the Edge poised to become the dominant avionics of choice for Wireless Quick Access Recorders (“WQARs”) and Aircraft Interface Device (“AID”) functions, enabling operations in finite airspace and in a progressively carbon free environment. Building upon the AFIRS Edge infrastructure, weather and environmental services are becoming an increasingly important component of FLYHT’s SaaS operating model. As presented in FLYHT’s recent testimony to the Subcommittee on Environment of the United States House of Representatives’ Committee on Science, Space, and Technology,1 FLYHT’s WVSS-II water vapour sensor system installed on an aircraft with an AFIRS Edge is a critical component of weather Aircraft Based Observations (“ABOs”) for meteorologists and airlines. Weather constantly changes, making real- time ABOs a prime source of recurring revenue as ongoing support to weather forecasting models and aviation operations. As part of the global focus on environmental impacts of aviation, researchers have projected that clouds formed from contrails (contrail cirrus) are responsible for approximately half of aviation’s climate effect, making contrail detection and avoidance programs a priority.2 The FLYHT-WVSS-II sensor provides accurate water vapour detection thus providing valuable data and services regarding aircraft induced cloudiness and contrail avoidance. Initially, these services are expected to support the research community and governments, with airline and military operational applications to follow. Validation of FLYHT’s environmental strategy was received last year, as the United Kingdom’s Meteorological Office (UKMet) announced their intent to purchase FLYHT’s WVSS-II water vapour sensor system. While the AFIRS Edge is our new flagship offering, demand for the complementary AFIRS 228™ Satcom remains at an all time high. In 2022 FLYHT landed and fulfilled our single largest licencing order, totaling more than $7 million. The success of the Airbus A220/A320/A330 aircraft means we fully expect additional orders to continue from our licencing agreement with L3 Harris. Additionally, with its proven track record, the AFIRS 228 has allowed us to maintain our base of loyal customers. Over the years we have developed a library of more than 100 STCs which we continue to expand in concert with new airliner development including the Airbus NEO and Boeing Max fleets. In addition to FLYHT’S AFIRS 228 and the AFIRS Edge both supporting all our products and services, we have also developed standalone SaaS offerings as part of our recurring revenue strategy. The recent introduction of ClearPort, our aircraft turn management tool, represents FLYHT’s latest standalone SaaS product. As we expand into Artificial Intelligence and Machine Learning models, and further develop our Data Warehouse capabilities, we look forward to reaching our full SaaS revenue potential. As in any year, 2022 is all about the people who make it happen. As we moved forward from development to market introduction, we brought on board four new members with a combined 75+ years of skill and experience in the aviation industry. These team members bring with them a sterling track record of success and an elite professional network thereby enhancing FLYHT’s reputation and improving our time to market. Our innovative technologies and vision were paramount in attracting such talent to our organization. Their impact has been immediately felt and will reflect in future results. As we accelerate out of COVID-19 and honour Bill’s legacy, we remain steadfast in our execution of FLYHT’s vision. I would like to thank our dedicated staff for their hard work and perseverance, our loyal shareholders for your continued support, and our customers for allowing us to continue to provide service and value. Yours truly, Kent Jacobs Written Statement of Meredith Bell, Atmospheric Program Manager for FLYHT Aerospace Solutions Ltd. Reauthorizing the Weather Act: Data and Innovation for Predictions March 28, 2023. 1 Canada’s Aviation Climate Action Plan 2022–2030, pp.32-33. 2 4- MANAGEMENT DISCUSSION & ANALYSIS This management discussion and analysis (“MD&A”) is as of April 12, 2023 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, 2022 and 2021 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, 2022 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, and earnings before interest, income tax, depreciation and amortization (EBITDA). FLYHT defines working capital as current assets less current liabilities. EBITDA is defined as income for the period, before net finance costs, income tax, depreciation and amortization of assets. These non-GAAP to assess a company’s liquidity, operational efficiency, and short-term financial health. EBITDA can be used to analyze and compare profitability among companies and industries, as it eliminates the effects of financing and capital expenditures. 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. indicated. Working capital can be used financial measures are always clearly 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, litigation matters, and sales order backlog 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, including, but not limited to, the effects of the COVID-19 pandemic being experienced worldwide, 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 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., German 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, global 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, including, but not limited to, the effects of the COVID-19 pandemic being experienced worldwide, 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 5- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 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. FLYHT Overview FLYHT provides airlines with Actionable Intelligence to transform operational insight into immediate, quantifiable action, and delivers industry leading solutions to improve aviation safety, efficiency, and profitability. This unique capability is driven by a suite of patented aircraft certified hardware products and software solutions. These include AFIRS™, an aircraft satcom/interface device, which enables cockpit voice communications, real-time aircraft state analysis, and the transmission of aircraft data while inflight. The AFIRS Edge (Edge) is a state-of-the-art 5G Wireless Quick Access Recorder (WQAR), Aircraft Interface Device (AID), and Aircraft Condition and Monitoring System (ACMS). The Edge can be interfaced with FLYHT’s TAMDAR probe and/or the FLYHT-WVSS-II relative humidity sensor to deliver airborne weather and humidity data in real-time. FLYHT complements the AFIRS airborne systems with enterprise applications that help airlines improve operational efficiency and situational awareness including UpTime, FleetWatch, FuelSense and ClearPort services. CrossConsense, FLYHT’s wholly owned subsidiary, offers highly skilled services to the commercial aviation industry and provides preventative maintenance solutions. These include Aircraft Fleet View, a native application that gives a real-time view of airline fleet status; AviationDW, a managed data warehouse for enhanced business intelligence; and ACSIS, a visualization and predictive maintenance alerting tool. FLYHT is headquartered in Calgary, Canada, and is an AS9100 Quality registered company. CrossConsense, located in Frankfurt, Germany, is an ISO9001 certified operation. For more information visit www.flyht.com. 1. Actionable Intelligence Solutions Actionable Intelligence solutions maximize customers’ operational efficiency and safety with reliable, easy to use, flexible, and cost- effective solutions. This industry differentiator provides not only economic value but also opportunities for customers and FLYHT to meet their sustainability goals. FLYHT aims to leave no data stranded and no related opportunity to take corrective or opportunistic action left unrealized. Cloud-based enterprise servers complement AFIRS data with external airline, airport and other industry data sources. These external sources have many components aiding in aircraft operations, maintenance, and ground operations as well as flight planning and scheduling. The combination of this wide set of data sources allows for the creation of a data lake to which machine learning can be applied, allowing FLYHT to provide customers with Actionable Intelligence solutions. FLYHT continues to add to the suite of Actionable Intelligence solutions. The service offering provides FLYHT with a recurring, SaaS (Software as a Service) revenue stream that is incremental to its existing revenue sources. While every Actionable Intelligence solution will thrive with real-time inputs from an AFIRS unit, the broader approach to incorporate third-party inputs allows FLYHT’s solutions to be leveraged in any airline environment. WQAR As 2G/3G/LTE cellular networks around the world are decommissioned, FLYHT’s AFIRS Edge provides a seamless transition to WQAR (Wireless Quick Access Recorder) file transmission over existing 3G/4G and new 5G networks. 5G networks allow for a significant increase in data volumes transmitted from an aircraft, enabling additional SaaS and Actionable Intelligence solutions to be implemented. As these become available FLYHT can provide immediate access for airlines to maximize benefits of the new networks, setting up airlines for long term success. QAR data forms one of the foundations for the Actionable Intelligence solutions that FLYHT provides. SaaS opportunities to enhance airline operational control and decrease airline costs are derived from QAR recordings and wireless distribution functions, by expanding data harvesting that is fully under airline control. Aircraft Interface Device AFIRS Edge provides AID functions to supply an aircraft’s own data to the flight deck for Electronic Flight Bag (EFB) applications. By conforming to the ARINC 834 standard, own-ship information is transmitted from the AFIRS Edge to Actionable Intelligence applications running on the flight deck. Whether airlines run their own EFB applications or run third party programs, they will always have access to the rich set of aircraft data provided by the AFIRS Edge. The AFIRS Edge AID functions are easily and remotely configurable. As airlines update or add new EFB applications the need for new aircraft data points will arise. By remotely updating the AID service of the Edge, new Actionable Intelligence solutions can be enabled on the flight deck without personnel having to individually update each aircraft in a fleet. 6- FleetWatch Situational awareness remains a primary objective of any Operations Control Centre (OCC) and frontline staff. FLYHT’s FleetWatch provides a configurable fleet wide situational awareness platform in a form factor most relevant to the role of the receiver. In addition to taking direct inputs from any AFIRS unit, FleetWatch can incorporate third-party inputs as part of its situational display. Unlike traditional Aircraft Situational Displays, FleetWatch incorporates the concept of Actionable Intelligence into its design. The primary user interface is not only a source of real-time aircraft position and state but is also a tool for OCCs to receive Actionable Intelligence information. Information relevant to the efficient operation of an airline is directly displayed in FleetWatch. Airline operations that need immediate attention or that require direct action from staff can be displayed on the FleetWatch main page. By providing this real-time display with meaningful information, airline staff are immediately notified when situations requiring their attention are identified. From diagnosing a fault while airborne to instructing ground crews of unnecessary APU operation, FleetWatch is a primary conveyor of Actionable Intelligence to our airline customers. FuelSense Fuel and emissions are a significant concern for all airlines. The FuelSense application provides insight to an airline’s management and usage of fuel. By providing targeted guidance through impactful decision support, airline operational change can be achieved. FuelSense incorporates the concept of Actionable Intelligence to provide meaningful information to an operator. Fuel optimization includes minimizing APU usage and optimizing dispatch, pilot and ground personnel actions. ClearPort Better asset utilization has a direct impact on airlines long-term sustainability. ClearPort provides Actionable Intelligence to support optimizing ground operations. By providing a clear view into the status of an aircraft in a turn, ClearPort allows an airline to move beyond reporting of operational delays into a state where Actionable Intelligence can be used to manage and avoid situations that affect operations. ClearPort draws attention to opportunities for personnel to better manage aircraft turns and immediately mitigate risks of late departures. 2. Airborne Hardware AFIRS Edge™ The Edge is FLYHT’s latest addition to the AFIRS hardware family and is delivered as an extensible multifunction avionics platform. The Edge’s modular functionality allows different configurations and features to be implemented as an airline needs them. Communication options include 5G/4G/3G cellular capabilities (the first 5G solution on the market), a modular Iridium Certus satcom, Bluetooth and WiFi capabilities, and the ability to incorporate with existing onboard broadband solutions. AFIRS Edge turn-key applications include AID functionality (ARINC 834 compliant), a multi-channel wireless Quick Access Recorder, bulk aircraft system data acquisition and recording, and AFIRS analytics through our enhanced, customized ACMS. The WQAR function of the AFIRS Edge provides an industry-first move towards 5G transmission of aircraft recorded FDR data. By using the most efficient method of data transfer off an aircraft, data volumes can be increased while cost of transmission decreases. The fully compliant 4G/3G features provide compatibility while existing ground cellular infrastructures are updated. With the future of 5G expected to last beyond 2040, the WQAR functions of the AFIRS Edge provide an opportunity for airlines to upgrade their WQAR capabilities in one move that will serve them for many years. The AFIRS Edge provides a configurable airborne platform for FLYHT to implement current and future Actionable Intelligence solutions for FLYHT’s customers and the industry. There are two models within the AFIRS Edge product line: the AFIRS Edge, a flange mounted device, and the Edge+, a 4 MCU (ARINC 600 connector) unit, giving flexibility depending upon the aircraft type and customer requirements. AFIRS™ The Automated Flight Information Reporting System (AFIRS) is a family of avionics installed on aircraft that captures and monitors hundreds of essential functions from the aircraft including data recorded by the FDR (the “Black Box”). AFIRS transmits this information in real-time through various technologies to FLYHT’s servers, which use that data to power solutions such as displaying real-time fleet visualizations and providing fleet wide Actionable Intelligence. In addition to data monitoring and flight tracking functions, the AFIRS family of products provides voice and text messaging capabilities in both safety services level security and regular satcom. The system supports many value-added solutions including tracking aircraft, fuel management and monitoring aircraft health as well as weather observations that include relative humidity data. FLYHT’s real-time, global coverage is enabled through the Iridium satellite network, providing service to customers anywhere on the planet. 7- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 FLYHT has received regulatory certification for installation of AFIRS on most commercial aircraft types and models (see systems approvals section). The AFIRS 228S features cater to the evolving needs of airlines by providing a customizable and flexible product. FLYHT’s in-house aircraft certification group allows for easy addition of new data sources to the reporting capabilities of AFIRS. FLYHT’s AFIRS 228S conforms to the Canadian Technical Standard Order (CAN-TSO) Design Approval, CAN-TSO-C159b. The certification, granted by Transport Canada, represents an additional level of airworthiness standards met by AFIRS to provide safety services voice and data. FLYHT’s CAN-TSO-C159b Iridium SATCOM solution provides the aircraft with reliable FANS 1/A, ADS-C, CPDLC and ACARS over Iridium messaging capabilities. Benefits offered by FANS include a more efficient route structure, reduced flight times, reduced fuel burns, and enhanced communications between Air Traffic Control (ATC) and the aircraft. FLYHT’s systems and solutions provide enhanced global flight tracking capabilities that meet and exceed ICAO’s Global Aeronautical Distress and Safety System (GADSS) definitions for both normal and abnormal tracking. FLYHT-WVSS-II (Water Vapour Sensing System) The FLYHT-WVSS-II is an externally mounted aircraft sensor that detects and reports water vapour as relative humidity. This relative humidity value is incorporated with other aircraft weather information to generate Aircraft Based Observations (ABOs) which can be fed to different weather models around the world. ABOs are grouped together during the ascent and descent phases of a flight to generate soundings. By adding relative humidity to the standard AMDAR payload, FLYHT significantly increases the value of our weather data. A FLYHT-WVSS-II can be paired with an AFIRS 228 unit, or with an AFIRS Edge for transmission of weather sounding data in real-time. As with AMDAR and TAMDAR soundings, FLYHT-WVSS-II enhanced ABOs are provided to government and private weather modeling systems around the world. Industry standardized and accepted formats for data transmission of weather data to these models is maintained. TAMDAR FLYHT’s Tropospheric Airborne Meteorological Data Reporting (TAMDAR) system is a unique sensor device installed on aircraft that captures temperature, atmospheric pressure, winds aloft, icing, turbulence and relative humidity. It bundles the data with Global Positioning System (GPS) data and transmits the information in real-time over satellite networks. TAMDAR provides real-time, high- quality atmospheric data collected from 100+ aircraft in North America, Asia, and Europe through frequent soundings and continuous observations including all the metrics of radiosonde observations plus icing and turbulence. Like the data traditionally gathered by weather balloons, the information collected by TAMDAR is used to update weather models. Unlike weather balloons, TAMDAR collects the data continuously and in real-time by transmitting “soundings” or batches of data to weather offices. The relative humidity data, gathered throughout an aircraft’s flight, makes these weather soundings particularly valuable to meteorologists. 3. Communications FLYHT provides two-way text messaging to the flight deck 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 in real-time. Real-time text messaging helps manage diversions due to weather, mechanical issues, or other unforeseen situations making it easy for the flight crew and dispatch personnel to keep each other updated on the progress of their flight or any required deviations from plan. Our latest auxiliary hardware products provide both power and connectivity to the devices used by pilots to create a secure, reliable platform for Electronic Flight Bags (EFBs). The AFIRS voice solution uses the Iridium satellite constellation with global coverage and an onboard satellite phone to provide a rapid and reliable private satcom communication channel to the flight deck. When operating remote or oceanic flights, this allows for communication between dispatch and crew with no delay. The voice capability is particularly valuable when operating in remote regions with little to no VHF/HF coverage. FLYHT’s communication solutions include long range satcom, as well as Air Traffic Safety (ATS) Services voice, providing a higher performance alternative to that of legacy High Frequency (HF) communications. AFIRS 228S TSO complies with the FAA Advisory Circular AC 20-150B as one of the two required Long Range Communication Systems (LRCS). The AFIRS 228S TSO is a TSO-C159b certified Iridium satcom solution providing the aircraft with reliable FANS 1/A, ADS-C, CPDLC and ACARS over Iridium messaging capabilities. The AFIRS Edge includes 5G/4G/3G cellular capabilities, a modular Iridium Certus satcom, and the ability to integrate with existing onboard broadband solutions. 8- 4. MRO Services CrossConsense assists the aviation industry in using and applying SWISS Aviation’s comprehensive AMOS software solution for maintenance, engineering and logistics needs, including required hardware, database and 1st and 2nd level application support. In addition to maintenance system software solutions, CrossConsense provides data migration services for customers transitioning from other MRO platforms to AMOS, business intelligence and customization services, and consulting services. Through expert understanding of MRO products, and an understanding of airline maintenance operations, CrossConsense develops Actionable Intelligence solutions in the MRO market. SYSTEM APPROVALS FLYHT 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’s quality system is AS9100D certified with the registrar Intertek. 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 STC approvals from TCCA (Canada), the 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’s expertise in airworthiness certification allowed the Company 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 lessens application wait times and reduces costs and reliance on contractors. As a component of its DAO status, FLYHT employs the services of delegated engineers, allowing for the approval of changes to the structural or 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 can take considerable 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 new national regulator, FLYHT submits an application to the new regulator such as the FAA or EASA with the STC data package previously approved by TCCA. The new regulator then reviews the package and issues an STC for that country based on their validation of the TCCA STC. Timelines required for the approval process vary depending on aircraft and workloads, but typically take about three to four months to obtain TCCA approval, with an additional three to eight months if an STC is required from an additional regulator. 9- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 ANAC Brazil 220 228 A A A A STC Chart: AFIRS 220 and 228 FAA USA TCCA Canada EASA EU CAAC China 228 A 220 A 228 A 220 A 228 A 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 A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A* A* A A A A A* A A A A A A A Airbus A319, A320, A321 Airbus A330 ATR42-300 ATR42-500 and ATR72-212A "500 Version" ATR72-100, -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 MAX 8 Boeing B737-900ER Boeing 747-200 Boeing 757-200 Boeing 767-200, -300 Boeing B777-200, -300 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 ERJ 190-100 Embraer Legacy 600 and ERJ–135, -145 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). FLYHT has also received an AFIRS 228 STC validation from CAAM (Civil Aviation Authority of Malaysia) for the Boeing 767-200, -300. STC Chart: TAMDAR EASA TR A* A* FL A* A* A* A * FAA TR FL A* A* A A A A A A A* A* A 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 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 STC Chart: AFIRS Edge FAA USA EASA EU CAAC China ANAC Brazil TCCA Canada I I P Boeing B737-600, -700, -800 Boeing B737-MAX 8 Airbus A319, A320, A321, NEO *Chart Legend: A = Approved, P = Pending (Provisions STC has been received; in final stages before receiving a full STC), I = In Progress. 10- Trends and Economic Factors FLYHT examines the results of measurements made by leading aviation associations and corporations in order to gain insight into the status of the industry. Many commercial airlines and aircraft leasing organizations continue to face extreme stress stemming from the COVID-19 pandemic and Ukraine/Russia conflict. A few key points are as follows1. • • • In 2022, air passenger traffic gained momentum globally and recovered substantially from 41.7% of 2019 revenue passenger-kilometers (RPKs) in 2021 to 68.5% in 2022. Domestic RPKs recovered to 79.6% of pre-pandemic passenger traffic in 2022 and grew 10.9% year-on-year (YoY) from 2021 levels. International RPKs recovered to 62.2% of 2019 traffic and grew 152.7% YoY from 2021 levels. Industry-wide RPKs increased by 39.7% YoY in December and reached 76.9% of pre-pandemic levels for the same month. Compared to December 2021, domestic passenger traffic grew 2.6% while international traffic grew 80.2%. • Monitored domestic markets continued to show resilience and steady traffic levels. International passenger traffic within and • between the Asia Pacific region and the rest of the world also continued to show positive trends. Total domestic ticket sales have seen an uptick over the month of January 2023. This positive development is mainly attributable to China reopening. On the other hand, international ticket sales have caught up to domestic in terms of recovery to 2019 sales volumes. The Aviation Industry in 2022 International Air Transport Association’s (IATA) industry results, measured in RPK and Cargo Tonne Kilometers (CTKs), are the passenger and freight contributions to airline revenue and are significant markers to determine the health of the industry. Over the course of 2022, global air passenger traffic gained momentum and recovered substantially as travel restrictions were taken down and passengers expressed a very strong willingness to travel. Passenger traffic recovered from 41.7% of 2019 volumes in 2021 to 68.5% in 2022. At the industry level, passenger demand was met by offered seat capacity in 2022, as available seat kilometers (ASKs) recovered to 71.9% of 2019 levels, while maintaining industry-wide passenger load factors of 78.7%. Passenger load factors for 2022 were only 3.9 percentage points (ppts) below the load factors achieved before the pandemic in 2019. Similar observations can also be made at the regional level. Globally, domestic operations ramped up quicker than international as domestic travel policies offered more certainty to passengers. Despite the setbacks caused by lingering travel restrictions, international traffic took off significantly in 2022 wherever these restrictions were taken down. As a result, international RPKs surged from 26.8% of 2019 levels in 2021 to 62.2% in 2022. Airlines faced uneven outcomes in 2022. North American carriers led the industry by achieving close to pre-pandemic passenger traffic levels with total RPKs 11.3% under 2019 volumes, followed by Latin American and European carriers at 14.2% and 22.2%, respectively, below 2019 levels. Over the past year, re-openings in many economies of the Asia Pacific region allowed for passengers and airlines to return to the skies, greatly accelerating traffic growth in both domestic and international markets. While performed RPKs in 2022 were 54.4% under the levels of 2019 for this region’s airlines, the recent developments related to the reopening of international travel in China PR give a positive outlook for the months to come.1 Industry-wide air cargo demand, measured by cargo tonne-kilometers (CTKs), remained broadly unchanged at 20.6 billion in December. This represents a 15.3% decline compared to the same month in 2021 and is also 7.4% lower than the corresponding pre-pandemic level. The industry did not perform as well as expected in a traditional peak season due to multiple headwinds in the current global economy. For the full 2022 calendar year, industry-wide CTKs were 8.0% below 2021 levels and 1.6% below 2019 levels. Compared to December 2019, North America continued to be the only region fully recovered to pre-pandemic levels in terms of total CTKs. Latin America sustained its lead in the growth of international CTKs among all regions, registering a 2.3% YoY growth in December. Defense & Security Monitor posted on January 16, 2023, that Boeing and Airbus delivered 69 and 98 commercial jets in December 2022, compared to 38 and 93 deliveries, respectively, in the same month last year. Year to date, Boeing and Airbus have delivered 480 and 663 aircraft, compared to 340 and 611, respectively, in 2021. 3 1 https://www.iata.org/en/iata-repository/publications/economic-reports/air-passenger-market-analysis---december-2022/ 2 https://www.iata.org/en/iata-repository/publications/economic-reports/air-cargo-market-analysis---december-2022/ 3 Airbus and Boeing Report December and Full-Year 2022 Commercial Aircraft Orders and Deliveries – Defense Security Monitor (forecastinternational.com) FLYHT’s Market FLYHT has been providing real-time communications leveraging satellite networks to commercial, business and military aircraft since 1998 with its AFIRS solution. In the past year, FLYHT has expanded its AFIRS portfolio with its AFIRS Edge product line, providing 5G cellular data communications, Iridium Certus real-time IP communications, global voice and data flight deck communications, while still supporting and interfacing with other data channels on the aircraft including the legacy technologies still in use. This means FLYHT customers can move larger amounts of data off the aircraft while in the air, in real-time or on the ground post flight, and value can be more quickly realized from the data on board. This data value is achieved via the AFIRS Edge on-wing computing platform, or on the 11- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 ground in the cloud via the JetBridge platform, feeding Actionable Intelligence applications, as well as making it easy for data to be consumed by other value generating applications and services used by the airline in the air (e.g., Electronic Flight Bags via the Aircraft Interface Device (AID) functionality of the Edge) and on the ground. On the ground, FLYHT’s Actionable Intelligence provides airlines with a sophisticated toolset allowing the Company an opportunity to further expand into artificial intelligence opportunities. Actionable Intelligence provides insight into customers’ total operations to identify areas for improvement. That insight triggers actions based upon rules or previous observations to direct corrective action in near real time. These steps allow the airline to control the profitability of their operations, improving customer satisfaction with better on time performance and allows for empowered employees who are able to solve problems on the spot. FLYHT assists airlines in aligning the passenger experience, airline operations and positive working environment for enhanced profit opportunity, supported by a seamless technology partnership. FLYHT’s primary markets are commercial passenger and air freight transport operators who seek safer, more efficient and more reliable operations through making better use of available data, connectivity and information technologies. While competitors offer various point solutions to address one or some of the challenges airlines face, FLYHT offers a unique and wide-ranging combination of avionics hardware, services and SaaS solutions that leverage the latest technologies available. Other markets include business jets and government/military air transport aircraft. An expanding market for FLYHT is the world’s meteorological agencies and weather services providers. FLYHT enables its weather data customers to work with airlines to implement FLYHT’s weather systems and solutions. FLYHT is the only provider that enables the full suite of Aircraft Based Observations, uniquely including water vapour humidity data that enables enhanced weather forecasting capabilities. The resulting predictive weather intelligence can also help airlines avoid disruptions, recover quicker following better predicted weather disruptions, and fly more efficiently by updating flight plans to avert weather systems that may impact fuel consumption and flight comfort, as well as costly re-routing for airport closures or planning for ground support and gate shutdowns due to severe weather. Foreign Currency The Canadian dollar weakened relative to both the U.S. dollar and the euro throughout 2022, so overall the Company experienced a resulting positive impact to net income compared to 2021. As a result of these currency movements, the Company’s revenues, of which a majority are denominated in U.S. dollars, with the proportion contributed by CrossConsense denominated in euros, were higher than they would have been had the foreign exchange rates not changed throughout 2022. It is generally the standard of the aviation industry to conduct business in U.S. dollars. While a majority of the Company’s operating and overhead costs are denominated in Canadian dollars, a significant portion of costs are U.S. dollar and euro denominated, and therefore a partial natural hedge exists against fluctuations of the Canadian dollar. Environmental, Social and Governance FLYHT is committed to implementing the highest standards of Environmental, Social and Governance (ESG) throughout its operations. ESG factors are important to business operations and can impact company value and investor decision making. In 2022 FLYHT started to review its ESG practices and set priorities for measurement and goals for implementation. Each department was tasked with exploring their own opportunities and contributions to FLYHT’s ESG strategy. The Company has set reporting metrics and is continually updating a roadmap and implementation timelines. The Board of Directors and Management at FLYHT selected the Annual Report as the communication method regarding FLYHT’s ESG programs because they believe it is important for investors to see FLYHT’s ESG commitments. Subsequent financial reports will be used to share updates as progress continues. Environment Sustainability has been integral to FLYHT’s operations for many years. Early initiatives had FLYHT playing a key role in the effort to achieve a paperless cockpit, reducing waste and improving operational efficiency. FLYHT’s data capabilities can also support airlines in meeting their environmental regulatory filing requirements, such as CORSIA and EU ETS. The Company’s products support the industry’s commitment to attain and measure net-zero 2050 in a couple of key areas: increased operational efficiency and reduction of emissions. More recently, FLYHT has been focused on helping our customers improve their environmental impact by optimizing their use of aircraft and ground infrastructure for efficiency and safety. FLYHT’s FuelSense and ClearPort products provide support to make policy improvements and justify performance-based maintenance activities. With the addition of real-time notifications to frontline personnel, FLYHT’s customers can mitigate the negative impact of inefficiencies as situations develop. As announced in March 2022, FLYHT showcased its partnership with Swoop Airlines to reduce emissions by eliminating non-essential Auxilary Power Unit (APU) usage. The FLYHT real-time APU monitoring and notification program allows an airline to reduce its APU run times by providing timely, targeted and actionable notifications, thereby reducing CO2 emissions and providing cost savings for the airline. This initiative is aligned with FLYHT’s goal of providing environmentally beneficial solutions that enhance the profit potential for an airline and that create a greener, safer world. The APU consumes approximately 250 lbs of fuel per hour under normal operation. 12- Measurable impacts internal to FLYHT since 2017 include an 86% reduction in our operation’s reliance on paper and the diversion of over 60 computers, four servers, and 100 monitors from landfills to be repurposed for those in need in the local community. We have upgraded our on-premises server from previous generation hardware to a more energy efficient hyper-converged model, allowing for greater virtualization with less hardware. FLYHT has also moved most users to smaller, more efficient laptop computers, replacing inefficient desktop computers. In addition, FLYHT has shifted to increased virtualization, relying on Amazon Web Services (AWS) data centers, which operate with 65% renewable energy as well as utilizing more efficient services and facilities to reduce consumption of non- renewable energy. Social FLYHT has established corporate policies dedicated to improving efficiency in the use of resources and staying abreast of the UN’s Sustainable Development Goals and ESG frameworks that are being implemented industry wide. FLYHT’s focus on product quality, continuous improvement, data security, and safety has been consistent and has been of the utmost importance to the success of the Company and its products. FLYHT prioritizes a healthy work life balance by having flexible hours, encouraging a flexible hybrid workplace, providing paid time off for sickness and family responsibilities, providing opportunities and support to pursue training and professional development, and ensuring comprehensive health benefits. Policies that promote these areas include a career development and training policy, and a flexible workplace policy. In addition, FLYHT conducts a staff survey regularly to allow all employees to provide anonymous feedback on aspects related to company culture, workplace satisfaction, workload and recognition among others. FLYHT also tracks employee health and safety statistics to monitor that proper procedures are being followed to protect staff. The development of a robust ESG policy is important to our employees. As the Company becomes more conscious of our contributions, a focus on ESG impacts our employees’ well-being and is an example of how we can operate as environmental and social citizens. Employees can apply the same principles in their personal lives. Employee participation was critical in forming the Company’s ESG direction and identifying key areas to focus on in each area of the business. FLYHT has implemented a Security Management System (SecMS) to ensure that cyber, corporate, and product security protocols consistently fulfill all requirements mandated by government regulation and industry standards; are based on accurate assessment and effective mitigation of security risks; support the Company’s vision and mission, values, and core business objectives; and are conducted in the most efficient and cost-effective manner, considering the operational and business environment. The SecMS applies to the protection of FLYHT’s people, data, assets, technology systems, Intellectual Property, and products and services. It consists of eight core elements that provide the overall governance, risk, business resilience, and continuous improvement protocols that can be scaled to include various operational security functions. FLYHT is committed to providing a workplace that is diverse, inclusive, and welcoming. Responsible recruitment, increased flexibility and balance, as well as training and development opportunities have resulted in creating an environment that fosters engaged contribution, innovation, and collaboration. Improvements in diversity can be seen over the past two years and can be measured from entry level to the executive team and Board of Directors, providing a workplace where everyone contributes to the vision of being a global force in innovative data solutions. FLYHT is fully committed to doing what it takes to succeed in this area. The Board of Directors and the senior management team believe that diversity is important to provide a range of perspectives, experiences and expertise to achieve effective stewardship. The Board of Directors and senior management teams have been developed with a wide range of viewpoints, backgrounds, skills, and expertise specific to the aviation technology sector and other industries or sectors that the Board of Directors believe are beneficial to the Company and its shareholders. At this time, the Company has not adopted: (i) a written diversity policy relating to the identification and nomination of members of designated groups; nor (ii) a target number or percentage, or range, for members of designated groups. Governance The Company’s Corporate Disclosure Policy assists in governance of the conduct of its directors, officers, spokespersons and employees as it relates to communications with the public. Multiple Company policies form a code of conduct for its directors, officers, employees and consultants. The Board of Directors believes that the Company's size also facilitates informal review of and discussions with employees and consultants. The Company has a whistleblower policy in place which is acknowledged by all employees upon hire, and which is periodically reviewed with all staff. A comprehensive anti-corruption policy ensures all relevant staff and consultants are aware and are trained appropriately. Relevant consultants are required to attest to compliance on a regular basis and all business opportunities are evaluated with this policy in mind. Directors are kept apprised of activities undertaken to minimize risk in this area. The Board of Directors monitors ethical conduct of the Company and ensures that it complies with applicable legal and regulatory requirements, including those of relevant securities commissions and stock exchanges. The fiduciary duties placed on individual directors by the Company's governing corporate legislation and the common law, as well as the restrictions placed by applicable corporate legislation on the individual director's participation in decisions of the Board of Directors in which the director has an interest, have been sufficient to ensure that the Board of Directors operates independently of management and in the best interests of the Company. 13- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 Next steps Along with the ESG focus, FLYHT will focus on climate-related disclosures. This involves following international guidelines for reporting by the Task Force on Climate Related Disclosures (TCFD). It is anticipated that TCFD, or similar frameworks, will be required by stock exchanges shortly. Although as a TSX Venture Issuer FLYHT’s implementation effort at this point will be largely voluntary, the Board of Directors believes it is important to assess material implications for the business around climate change risks and opportunities. Jurisdictions around the world are requiring that companies report within disclosure frameworks and it is a strategic decision to evaluate the Company’s efforts using a framework such as TCFD. FLYHT anticipates next steps to include a review of climate change risks and opportunities, and an assessment of finance and investment policy alignment with environmental goals. In the coming years FLYHT plan to be able to report on our material climate risks and monitor further mandates and requirements for disclosure. 2022 Achievements and Activities • • • • • • • • • • • • In January 2022 FLYHT signed a contract with Coral Jet to equip the airline’s future fleet of seven A319/320 aircraft with AFIRS and to provide SaaS services from FLYHT’s Actionable Intelligence suite of applications. The contract is expected to generate revenue of approximately $760k USD over the five-year contract term, assuming the Company provides services over the full term of the contract. In March 2022 the Company acquired 100% of the shares of CrossConsense GmbH & Co. KG (“CrossConsense”). This acquisition is expected to accelerate FLYHT’s strategic roadmap to build out a maintenance software capability, and fulfilled the Company’s goal to increase its presence in the European and Middle East markets. In March 2022 FLYHT announced a partnership with Swoop Airlines to reduce emissions by eliminating non-essential Auxiliary Power Unit (APU) usage, partially funded through a grant of $150k from the Alberta Innovates Product Demonstration Program. In May 2022 FLYHT partnered with MBS Electronic Systems to develop a secure wireless avionics software and onboard data loading solution prototype. The Company received a purchase order in May 2022 for US $5.65 million from a long-time OEM partner for the delivery of Iridium modems and associated license fees. Coral Jet signed an agreement with FLYHT to be the launch customer for the AFIRS Edge A320 platform. In June 2022 FLYHT announced the completion of the first AFIRS installation on the China Express ARJ-21 aircraft. In September 2022, the Company made two additions to its leadership team, Scott Chambers (Vice President Sales and Marketing) and Murray Skelton (Vice President Business Development). FLYHT joined IATA’s Aviation Cyber Security Strategic Partnerships program. The Company retained Satichi Consulting Inc. for corporate development and capital markets communications services. FLYHT achieved Amazon Web Services (AWS) Travel and Hospitality Competency status. FLYHT signed a reseller agreement with SITA for its AIRCOM® Cockpit Services, initially focusing on developing the market for Iridium Certus. 14- Results of Operations Selected Results Assets Non-current financial liabilities* Revenue Cost of sales Gross profit Gross profit % Distribution expenses Administration expenses Research, development and certification engineering expenses Results from operating activities Depreciation and amortization EBITDA* Income (loss) Income (loss) per share (basic) Income (loss) per share (diluted) Assets Non-current financial liabilities* Revenue Cost of sales Gross profit Gross profit % Distribution expenses Administration expenses Research, development and certification engineering expenses Results from operating activities Depreciation and amortization EBITDA* Income (loss) Income (loss) per share (basic) Income (loss) per share (diluted) *See Non-GAAP Financial Measures Q4 2022 $ 16,540,154 6,322,769 7,241,758 2,384,329 4,857,429 67.1% 1,661,256 1,209,188 Q3 2022 $ 14,873,106 6,307,401 6,725,373 1,853,079 4,872,294 72.4% 1,531,091 1,199,337 Q2 2022 $ 14,674,263 6,392,197 4,881,372 2,156,364 2,725,008 55.8% 1,339,537 1,361,728 Q1 2022 $ 16,482,757 6,231,765 5,030,657 2,279,528 2,751,129 54.7% 1,379,783 1,312,039 1,079,052 1,329,944 1,046,294 1,165,197 907,933 262,250 1,170,183 718,689 0.01 0.01 Q4 2021 $ 13,250,186 5,920,735 2,527,961 1,276,348 1,251,613 49.5% 969,992 1,086,536 1,119,319 (1,924,234) 179,234 (1,745,000) (2,444,054) (0.08) (0.08) 811,922 112,758 924,680 703,765 0.02 0.02 Q3 2021 $ 14,675,428 4,948,252 3,173,331 1,010,084 2,163,247 68.2% 1,000,059 786,699 1,359,405 (982,916) 170,950 (811,966) (1,107,195) (0.03) (0.03) (1,022,551) 116,771 (905,780) (1,141,140) (0.03) (0.03) Q2 2021 $ 11,181,967 5,018,668 2,926,122 1,393,065 1,533,057 52.4% 896,024 741,109 1,048,841 (1,152,917) 172,306 (980,611) (1,395,889) (0.05) (0.05) (1,105,890) 168,260 (937,630) (1,284,347) (0.03) (0.03) Q1 2021 $ 12,773,454 4,635,956 2,691,275 1,169,621 1,521,654 56.5% 1,003,667 769,365 919,636 (1,171,014) 170,398 (1,000,616) (912,068) (0.03) (0.03) Weighted Average Shares Outstanding Basic Diluted 2022 $ 38,151,602 38,383,777 2021 $ 31,415,175 31,691,451 2020 $ 26,677,439 28,457,009 15- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 Financial Position Liquidity and Capital Resource The Company’s cash and cash equivalents at December 31, 2022 decreased to $2,647,650 from $4,520,591 at December 31, 2021, while increasing from $1,779,074 at September 30, 2022. The Company has an operating demand loan available through a Canadian chartered bank for up to a maximum of $2.0 million, drawn either in CAD or USD. The amount available under this facility was increased from $1.5 million in October 2022. 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 accounts receivable, cash collateral in the form of a Guaranteed Investment Certificate, 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 at December 31, 2022. The Company funded 2022 operations primarily through the use of cash reserves, cash proceeds received from sales, and funding obtained from the ERTC, Alberta Innovates, and WINN governmental programs. 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 Lease liability Current tax liabilities Working capital* *See Non-GAAP Financial Measures December 31, 2022 $ December 31, 2021 $ Variance $ 2,647,650 5,127,338 121,046 349,132 1,385,048 (2,736,269) (376,668) (922,952) (828,345) (436,581) (10,541) 4,318,858 4,520,591 1,590,473 151,616 377,688 1,683,006 (1,703,309) (609,555) - (664,470) (373,756) - 4,972,284 (1,872,941) 3,536,865 (30,570) (28,556) (297,958) (1,032,960) 232,887 (922,952) (163,875) (62,825) (10,541) (653,426) As at April 12, 2023 FLYHT’s issued and outstanding share capital was 38,806,774. The consistent achievement of positive earnings is necessary before the Company can consistently improve liquidity. Positive earnings and operating cash flow in the final quarter of 2022 reflect recent progress in this area. 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. It is the Company’s intention to continue to fund operations by adding revenue and its resulting cash flow, as well as continuing to manage outgoing cash flows. The Company’s results showed losses from operating activities on an annual basis in both 2022 and 2021. At December 31, 2022, the Company had positive working capital of $4.3 million compared to positive $4.9 million as of December 31, 2021, a decrease of $0.6 million. The Company ended Q4 2022 with balances of $2.6 million in cash and cash equivalents and an undrawn credit facility of $2.0 million. For the Company to continue as a going concern longer-term, it will need to consistently achieve profitability and positive operating cash flows. The Company plans to continue to expand its earnings and cash flow potential through its focused marketing efforts, particularly the presentation of Actionable Intelligence tools to our customer and prospects, which are expected to result in additional contracts for delivery of hardware units and related services. The intention is to provide profit enhancement opportunities to customers and prospects without requisite capital expenditures by them and thereby return to the Company’s core benefit to shareholders of high value SaaS revenue growth. Until achieving consistent positive earnings and cash flows, it is the Company’s intention to continue to fund operations through revenue and its resulting cash flow as well as continue to manage outgoing cash flows. The Company may elect to scale back operations to create positive cash from existing revenue and/or raise the necessary financing in the capital markets through debt and/or equity. General economic conditions in the industry and the financial condition of major customers may significantly impact the Company’s ability to achieve positive earnings and cash flows. The negative impact to the commercial air industry resulting from the COVID-19 pandemic has been unprecedented. Starting in early 2020 FLYHT saw impact of the pandemic in revenue and trade receivable payments due to the impact of the pandemic on our customers. There has been recovery in our customer base, with aircraft re-commencing operations as well as receivable payments being made, although geographic differences in rates and timing of recovery continue to be seen. There is continued risk until such a time as the global aviation industry recovers fully. 16- There is no assurance that the Company will be successful in attaining and sustaining profitable operations and positive cash flow and/or raising additional capital to meet its 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 material uncertainties may cast doubt upon the Company’s ability to continue as a going concern. The 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 and the euro, 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. This facility was undrawn at December 31, 2022. 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, or halt provision of service and support. The recoverability of the Company’s receivables has been impacted by the consequences of the pandemic on the global airline industry, which has been reflected in the bad debt reserve. As at April 12, 2023 $4,685,811 of the balances outstanding at December 31, 2022 had been collected. Contractual Obligations The following table details the contractual maturities of financial liabilities, including estimated interest payments. December 31, 2022 Accounts payable Compensation and statutory deductions Accrued liabilities Lease payments Loans and borrowings < 1 year $ 2,161,822 1-2 years $ - 2-5 years $ - > 5 years $ - Total $ 2,161,822 323,685 250,762 436,581 851,387 - - - - - - 323,685 250,762 455,774 1,165,601 1,103,715 3,161,671 1,295,757 3,075,971 1,418,268 6,641,383 Total 4,024,237 1,751,531 4,241,572 2,521,983 12,539,323 Government Loans Funding obtained via four governmental programs are included in the Loans and Borrowings totals on the Consolidated Statements of Financial Position. Under the Strategic Aerospace and Defence Initiative (SADI), at December 31, 2022 the Company has an outstanding repayable balance of $1,030,934. 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 January 31, 2029 (adjusted from April 30, 2028 in response to the COVID-19 pandemic) when the final payment will be 24.5% of the total contribution received. Repayment of $181,493 was made in 2022 (2021: $157,820). The carrying value of the amount owing under this program at December 31, 2022 is $1,331,720 (December 31, 2021: $1,306,656). In November 2016, the Company signed a contribution agreement with Western Economic Diversification Canada for a 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 was received. The amount is repayable over five years commencing January 1, 2020. Amendments in 2020 adjusted the payment dates due to COVID-19, with the final payment date pushed back to September 2025. Repayments in 2022 totaled $468,000 (2021: $468,000). The carrying value of the amount owing under this program at December 31, 2022 is $1,132,345 (December 31, 2021: $1,472,209). 17- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 In November 2018, the Company signed a second contribution agreement with Western Economic Diversification Canada for a 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 this 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 was received, repayable over five years commencing October 1, 2021. Amendments in 2021 extended the timeframe for eligible project cost submission to September 30, 2023 and adjusted the repayment start date to October 1, 2023. The carrying value of the amount owing under this program at December 31, 2022 is $2,202,931 (December 31, 2021: $1,455,540). In May 2021, the Company received funding of $250,000 through the BDC’s HASCAP loan program, designed to support small and medium sized businesses affected by COVID-19. This loan carries interest of 4% per annum over a 10-year term commencing May 10, 2021. Payments in the first year following funding are comprised of interest only, with the principal and accrued interest payable over the remaining 9 years. Principal repayments in 2022 totaled $16,204 (2021: nil). The carrying value of the amount owing under this program at December 31, 2022 is $210,777 (December 31, 2021: $221,881). A summary of the carrying value of the government loans as at December 31, 2022 and 2021 and changes during these three and twelve months is presented below. For the three months ended December 31 For the year ended December 31 2022 $ 4,741,988 278,209 (142,676) 126,576 - (126,324) 4,877,773 828,345 4,049,428 2021 $ Variance $ 3,652,584 529,084 (162,266) 120,553 439,194 (122,863) 4,456,286 664,470 3,791,816 1,089,404 (250,875) 19,590 6,023 (439,194) (3,461) 421,487 163,875 257,612 2022 $ 4,456,286 947,368 (324,926) 474,580 - (675,535) 4,877,773 828,345 4,049,428 2021 $ Variance $ 3,732,670 1,275,370 (277,169) 442,036 (84,938) (631,683) 4,456,286 664,470 3,791,816 723,616 (328,002) (47,757) 32,544 84,938 (43,852) 421,487 163,875 257,612 Opening Balance Received Grant Portion Interest accretion Gain on payment deferral Repayment Carrying amount at December 31 Less current portion Non-current portion Customer Deposits 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 technical 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, 2022 and 2021. Payments were received for 4 installation kits in the fourth quarter of 2022 compared to 9 received in the fourth quarter of 2021. For the year ended December 31, 2022 payment was received for 64 installation kits, compared to 57 in 2021. Opening balance Payments received Recognized as revenue Q4 2022 $ 713,369 557,270 (893,971) Q4 2021 $ 534,911 493,195 (418,551) Variance $ 178,458 64,075 (475,420) YTD 2022 $ 609,555 2,376,293 (2,609,180) YTD 2021 $ 492,679 2,029,607 (1,912,731) Variance $ 116,876 346,686 (696,449) Balance, December 31 376,668 609,555 (232,887) 376,668 609,555 (232,887) Comprehensive Loss Revenue SaaS is the recurring revenue from the Company’s products that allow customers to utilize and analyze data they receive from hardware, use of functions such as the satellite phone, the sale of weather data, and hosting and support of maintenance systems and associated data. These fees are recognized as the service is provided each month. Hardware includes the income from hardware sales and related parts required to install the unit, spare units and installation parts. Licensing includes sales of modems with a related manufacturing license fee. Technical Services includes all services offered by the Company, including repairs, training services and other expertise. 18- Revenue sources SaaS Hardware Licensing Technical Services Total Q4 2022 Q4 2021 Variance YTD 2022 YTD 2021 Variance $ $ 2,253,618 1,500,110 1,217,860 3,030,368 739,912 590,975 356,197 80,679 $ 753,508 626,885 $ $ $ 8,157,886 5,993,521 2,164,365 4,720,204 3,394,228 1,325,976 2,674,171 9,101,130 1,551,000 7,550,130 659,233 1,899,940 379,940 1,520,000 7,241,758 2,527,961 4,713,797 23,879,160 11,318,689 12,560,471 For the year ended December 31, 2022, total revenue increased 111.0% from $11,318,689 in 2021 to $23,879,160 in 2022, with Q4 2022 seeing a 186.5% increase over Q4 2021. SaaS revenue increased 50.2% in Q4 2022 over Q4 2021, with an annual variance of $2.2 million between 2022 and 2021. The addition of CrossConsense SaaS revenues contributed to these increases. Hardware revenue in 2022 saw an increase year over year of 39.1%. There was an increase in Q4 2022 as compared to Q4 2021 of 106.1%.This was a result of a total of 69 installation kits being shipped in 2022, compared to 54 in 2021. For the quarter, 16 kits were shipped in Q4 2022 compared to 9 in Q4 2021. Licensing revenue increased $2.7 million from Q4 2021 and by $7.6 million for the year due to increases in the number of modems and associated license fees ordered for delivery in comparative periods, as the Company delivered on an order received in Q2 2022 for $5.65 million USD. Technical Services revenue increased 400% for 2022 compared to 2021 and 817% for Q4 2022 compared to Q4 2021 as a result of the addition of CrossConsense services to this revenue category. Revenues in this category can be expected to vary between periods and years, depending on the level of additional technical services provided to customers in each relevant period. Revenue sources for the last eight quarters were: Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 SaaS 2,253,618 2,073,284 2,155,912 1,675,072 1,500,110 1,507,366 1,446,221 1,539,825 Hardware Licensing Technical Services Total 1,217,860 3,030,368 739,912 7,241,758 480,064 3,536,153 635,872 6,725,373 912,682 1,399,903 412,875 4,881,372 2,109,598 1,134,706 111,281 5,030,657 590,975 356,197 80,679 2,527,961 567,356 1,004,698 93,911 3,173,331 1,404,193 7,924 67,784 2,926,122 831,704 182,181 137,565 2,691,275 Geographical distribution of revenue sources were: Q4 2022 Q4 2021 YTD 2022 YTD 2021 United States & Mexico Asia China Middle East Canada Australia Africa Europe South/Central America Total $ 3,782,947 239,138 593,659 134,681 638,758 200,242 126,699 1,510,949 14,685 7,241,758 % 52.2 3.3 8.2 1.9 8.8 2.8 1.7 20.9 0.2 100.0 $ 984,455 211,676 474,510 246,920 263,172 61,956 184,754 85,212 15,306 2,527,961 % $ 38.9 12,224,340 975,081 1,963,049 607,445 2,900,423 472,278 495,874 4,069,501 171,169 100.0 23,879,160 8.4 18.8 9.8 10.4 2.4 7.3 3.4 0.6 % 51.2 4.1 8.2 2.5 12.1 2.0 2.1 17.1 0.7 $ 4,428,683 602,743 2,051,290 1,006,363 1,976,939 267,700 549,019 359,306 76,646 100.0 11,318,689 % 39.1 5.3 18.1 8.9 17.5 2.4 4.8 3.2 0.7 100.0 19- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 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 Q4 2022 was 32.9% compared to 50.5% in Q4 2021. Gross profit increased from 57.2% in 2021 to 63.7% in 2022 due to differences in the mix of revenue sources. Gross profit will fluctuate quarter over quarter depending on the mix of revenue categories. Gross profit for the last eight quarters was: Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Gross Profit % Cost of Sales 67.1 32.9 72.4 27.6 55.8 44.2 54.7 45.3 49.5 50.5 68.2 31.8 52.4 47.6 56.5 43.5 Distribution Expenses (Recovery) Consists of overhead expenses associated with the sale and delivery of products and services to customers, and marketing. Major Category Q4 2022 Q4 2021 Variance YTD 2022 YTD 2021 Variance $ $ $ $ $ $ Salaries and benefits 1,046,312 280,257 4,136,208 3,294,529 Share based compensation Contract labour Office Travel Equipment and maintenance Depreciation and amortization Marketing Government grants Bad debt reserve Total 27,640 270,044 70,483 109,759 57,054 43,774 81,378 766,055 16,252 149,491 50,704 43,502 9,796 95,240 13,892 - (15,755) (45,188) (159,185) 1,661,256 969,992 11,388 120,553 19,779 66,257 47,258 (51,466) 67,486 15,755 113,997 691,264 57,674 880,600 219,720 266,070 177,730 204,962 158,281 47,058 661,853 231,233 107,017 39,147 365,120 40,737 (222,108) 32,530 (455,987) (460,965) 841,679 10,616 218,747 (11,513) 159,053 138,583 (160,158) 117,544 233,879 493,495 5,911,667 3,869,742 2,041,925 Distribution expenses have increased 71.3% from Q4 2021 to Q4 2022 and 52.8% year over year, due mainly to the addition of CrossConsense personnel and associated expenses as of March 2022. Both Salaries and benefits and Contract labour increased in the quarter and year to date due to additional staff mainly with the addition of the CrossConsense workforce, as well as an increased emphasis on the business development of new SaaS solutions to support our customers in their post-pandemic recovery plans. Travel increased in Q4 2022 compared to Q4 2021 reflecting a corresponding YTD trend, with an increase in in-person meetings and conferences as compared to 2021. Equipment and maintenance have increased YTD 2022 compared to YTD 2021 with the addition of costs related to CrossConsense’s third-party server hosting facility. These costs also contribute to the increase in these expenses between Q4 2021 and Q4 2022. Depreciation and amortization was lower in 2022 than 2021, as leased premises in Colorado were downsized at the end of the lease agreement term to align with a reduction in space requirements for FLYHT’s US operations. Marketing expenses have increased in 2022 as a result of increased participation in tradeshows as compared to 2021. Government grants in 2021 comprised funding received via Canadian governmental funding programs (CEWS, CERS and HASCAP) in support of businesses throughout the pandemic, relating to expenses in both the salaries and office categories. Grants received in 2022 consisted of government funding from the United States’ ERTC program. Differences in funding levels over time are reflective of variances in eligible expenses as well as changes in government funding made available under programs in each respective period. Bad debt reserve quarter over quarter and YTD variances reflect differences in bad debt estimates in each period, with both Q4 2021 and 2022 showing recoveries of previously reserved amounts. 20- Administration Expenses (Recovery) Consists of expenses associated with the general operations of the Company that are not directly associated with delivery of services or sales. Major Category Q4 2022 Q4 2021 Variance YTD 2022 YTD 2021 Variance $ $ $ $ $ $ Salaries and benefits Share based compensation Contract labour Office Legal fees Audit and accounting Investor relations Travel Equipment and maintenance Depreciation and amortization Government grants Other Total 250,159 43,935 238,522 172,733 17,990 142,187 22,002 35,425 96,855 178,107 - 11,273 328,830 34,006 183,993 135,814 212,552 75,520 32,196 22,274 69,215 20,804 (38,442) 9,774 (78,671) 1,712,234 1,197,969 9,929 54,529 36,919 (194,562) 66,667 (10,194) 13,151 27,640 157,303 38,442 1,499 101,355 1,179,042 672,276 173,751 350,840 145,091 153,295 348,842 273,445 (48,258) 20,379 126,601 720,439 570,779 289,829 242,939 126,500 58,011 307,012 101,533 (368,392) 10,489 514,265 (25,246) 458,603 101,497 (116,078) 107,901 18,591 95,284 41,830 171,912 320,134 9,890 1,209,188 1,086,536 122,652 5,082,292 3,383,709 1,698,583 Administration expenses increased by 50.2% from full year 2021 to 2022, and 11.3% Q4 2022 compared to Q4 2021, mainly due to the addition of CrossConsense personnel and expenses associated with the March 2022 acquisition, one time contractor costs and higher government funding in 2021 than was available to the company in 2022. Salaries and benefits have increased year to date due to additional staff engaged in post-pandemic recovery, as well as a reduction in allocation of administrative staff efforts deployed in support of research and development activities. Q4 2022 saw a reduction due to changes in the workforce that occurred during the quarter. Contract labour increases from 2021 to 2022 for both the year and quarter related to advisory services contracted in support of CrossConsense integration activities as well as increased investor relations efforts. Office expenses have increased for both the year and quarter with the addition of CrossConsense related expenses as well as a rise in insurance costs due to a combination of market conditions and contractual requirements. Legal expenses have decreased for the quarter and year as the costs incurred in 2021 for the acquisition of CrossConsense did not re-occur at the same level in 2022. Audit and accounting expenses have increased in 2022 and the fourth quarter as compared to 2021 due to the requirement for additional support to prepare regulatory filings in Germany, and acquisition valuation and integration evaluation and substantiation. Travel increased throughout 2022 and the fourth quarter with an increase in in-person meetings and conferences as compared to 2021. Depreciation and amortization has increased during the fourth quarter and overall 2022 due to the amortization of newly acquired intangible assets from the CrossConsense business combination. Government grants in 2021 comprised funding received via Canadian governmental funding programs (CEWS, CERS and HASCAP) in support of businesses throughout the pandemic, relating to expenses in both the salaries and office categories. Grants received in 2022 consisted of government funding from the United States’ ERTC program. Differences in funding levels over time are reflective of variances in eligible expenses as well as changes in government funding available under programs in each respective period. 21- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 Research, Development and Certification Engineering Expenses (Recovery) Consists of expenses related to the improvement of existing and development of new technology and products. Major Category Q4 2022 Q4 2021 Variance YTD 2022 YTD 2021 Variance $ $ $ $ $ $ Salaries and benefits 1,056,219 1,003,732 52,487 4,359,273 4,247,751 111,522 Share based compensation Contract labour Office Travel Equipment and maintenance Components Depreciation and amortization SR&ED credit Government grants Other Total 6,586 115,497 38,209 12,682 56,103 8,562 40,369 - 4,308 54,717 49,112 862 22,208 8,288 63,190 - 2,278 60,780 (10,903) 11,820 33,895 274 (22,821) - (255,175) (92,098) (163,077) - 5,000 (5,000) 19,870 441,551 138,624 54,035 118,477 45,186 181,632 (148,637) (589,663) 139 20,432 319,409 206,066 24,638 44,842 17,368 (562) 122,142 (67,442) 29,397 73,635 27,818 226,236 (44,604) - (148,637) (665,445) 5,904 75,782 (5,765) 1,079,052 1,119,319 (40,267) 4,620,487 4,447,201 173,286 Research and Development expenses were 3.6% lower in Q4 2022 compared to the prior year’s fourth quarter, and overall experienced a 3.9% increase year over year. Overall costs were offset by the refundable portion of the SR&ED credit available through the Canadian government, as well as other government grant funding. Research and development costs vary according to specific project requirements. Salaries and benefits and Contract labour expenses increased in 2022 to meet the requirements of R&D initiatives, as the Company continues to invest in the Actionable Intelligence suite of products and in the AFIRS Edge. The SR&ED credit recognized in 2022 reflected a return to eligible expenses under this Canadian governmental program. Expenses formerly SR&ED eligible were funded instead by the WINN program between 2018 and 2022. Government grants variances reflect 2021 pandemic support received via Canadian government programs (CEWS, CERS and HASCAP). Grants received in 2022 consisted of government funding from the United States’ ERTC program and the Alberta Innovates program, and in differing levels of expenses eligible for funding under the WINN program between 2022 and 2021. Recoveries relating to WINN funding are the portion of the amounts received from WINN that have been accounted for as a grant. Net Finance Costs Major Category Interest income Net foreign exchange loss (gain) Bank service charges Other loss (gain) Interest expense Government loan accretion Debenture interest and accretion Q4 2022 Q4 2021 Variance YTD 2022 YTD 2021 Variance $ $ $ $ $ $ (13,336) 61,648 12,009 (4,368) (2,984) 7,870 (8,968) 64,632 4,139 25,650 126,573 - 23,740 83,782 - 1,910 42,791 - (26,576) (17,581) (8,995) (13,741) 39,217 (1,980) 32,796 110,426 474,580 114,054 433,274 (11,761) 6,421 84,938 (3,628) 41,306 - 152,248 (152,248) - 413,104 (413,104) - (84,938) Net finance costs 212,544 521,144 (308,600) 583,906 627,873 (43,967) Net foreign exchange loss (gain) will vary between periods due mainly to fluctuations in the value of the Canadian dollar in relation to the U.S. dollar and the euro. A strengthening of the Canadian dollar in Q4 2022 gave rise to foreign exchange losses in Q4 2022 compared to foreign exchange gains in Q4 2021 on U.S. dollar denominated sales and purchases, in combination with fluctuations in U.S. denominated assets and liabilities. Other loss (gain) reflects the 2021 recognition of the benefit derived from payment deferral of the Company’s government loans. Debenture interest relates to the convertible debenture retired in 2021, which did not impact costs in 2022. 22- Net Income (loss) & EBITDA Major Category Net income (loss) Finance costs Tax expense Q4 2022 $ 718,689 Q4 2021 $ (2,444,054) Variance $ 3,162,743 YTD 2022 $ (1,003,033) YTD 2021 $ (5,859,206) Variance $ 4,856,173 212,544 521,144 (308,600) 583,906 627,873 (43,967) (23,300) (1,324) (21,976) 10,541 252 10,289 Depreciation and amortization 262,250 179,234 83,016 660,039 692,888 (32,849) EBITDA 1,170,183 (1,745,000) 2,915,183 251,453 (4,538,193) 4,789,646 Business Combination On March 17, 2022 the Company acquired 100% of the shares of CrossConsense GmbH & Co. KG (“CrossConsense”). Founded in 2002, Frankfurt Germany-based CrossConsense develops and markets software to support commercial aviation maintenance management. Products include a predictive maintenance troubleshooting and engineering tool; software to support aircraft maintenance, repair and data migration; and live data dashboards to assist aircraft maintenance teams. CrossConsense has also constructed a progressive web application plus native apps that offer up-to-date data on an airline’s fleet status. Additionally, CrossConsense offers consulting and support services as well as hosting, database operation and performance monitoring of commercial aircraft maintenance applications. This acquisition is expected to accelerate FLYHT’s strategic roadmap to build out a maintenance software capability and fulfills the Company’s goal to increase its presence in the European and Middle East markets. Under terms of the agreement, FLYHT (through its wholly owned German subsidiary formed as part of this transaction) acquired all of the outstanding securities of CrossConsense for $1.25 million in cash and 1.9 million common shares of the Company, valued at $1.235 million based on the fair value of each common share of the Company on the closing date of $0.65 per share. The shares are being held in escrow and will be released equally in 1/3 increments at 4-, 16- and 28-months following issuance on the transaction’s closing date. Also included in the purchase price was other consideration valued at $192,000. The Company incurred acquisition-related costs of $254,903 in due diligence and legal fees in 2021 and a further $150,121 in 2022. Additionally, in Q1 2022 finders’ fees of $100,000 were paid to a third party in connection with the closing of the transaction. These costs have been included in Administrative Expenses. The value allocated to the purchase price on the closing date was as follows: Cash paid Common shares issued Other consideration Total consideration $ 1,250,000 1,235,000 192,000 2,677,000 The value of acquired assets and assumed liabilities were as follows: Cash and cash equivalents Trade and other receivables Deposits and prepaid expenses Property and equipment Leased assets Intangible asset: customer relationships Intangible asset: tradename Goodwill Trade payables and accrued liabilities Contract liabilities Lease liability Total consideration $ 1,195,226 590,512 18,002 9,322 278,467 1,527,150 217,281 837,258 (910,669) (807,082) (278,467) 2,677,000 Goodwill is attributable to the workforce of the acquired business as well as the expected opportunities for growth and synergies across products, staff, customers and geographies. Goodwill is allocated to the Company’s single operating segment and is fully deductible for tax purposes. 23- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 The fair value of the assets acquired approximates book value and includes trade receivables of $409,985. The gross amount due under contracts is $413,398, of which $3,413 is anticipated to be uncollectible. The acquired business contributed revenues of $4,015,700 and earnings of $26,558 to the consolidated results for the period from March 17, 2022 to December 31, 2022. If the acquisition had occurred on January 1, 2022, consolidated proforma revenue and loss for the year ended December 31, 2022 would have been $24,765,919 and $1,030,715 respectively. The pro forma results are as follows: For the year ended December 31 2022 $ 24,765,919 9,128,610 15,637,309 6,098,425 5,215,898 4,769,723 (446,737) 583,978 (1,030,715) Revenue Cost of sales Gross profit Distribution expenses Administration expenses Research, development and certification engineering expenses Loss from operating activities Net finance (income) costs Loss for the period Other 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, but it is important to identify any that could have a material effect on business or results of operations. Such risks are listed below; the areas defined are not inclusive. Impact of COVID-19 pandemic on Commercial Air Industry General economic conditions in the industry and the financial condition of major customers may significantly impact the Company’s ability to achieve consistent positive earnings and cash flows. The negative impact to the commercial air industry resulting from the COVID-19 pandemic was unprecedented. Starting in early 2020, FLYHT saw impact of the pandemic in revenue and trade receivable payments due to the impact of the pandemic on our customers. The COVID-19 pandemic has also had an impact on the supply chain in the form of longer lead-times and pricing increases. These longer lead-times and pricing increases are expected to subside over time but have resulted in pressure to increase inventory holdings to mitigate potential schedule delays. There has been recovery in FLYHT’s customer base, with aircraft re-commencing operations as well as receivable payments being made, although geographic differences in rates and timing of recovery continue to be seen. There is continued risk until such a time as the industry recovers fully. Production and Physical Workspace Risk FLYHT relies on a physical infrastructure to carry out certain activities. Local as well as widespread impacts such as fire and extreme weather could impact FLYHT’s ability to carry out operations. FLYHT maintains a business continuity plan to mitigate the impact of such events. Climate Change Risk Airlines are responsible for a significant portion of the emissions that are known to have negative climate impact. This is both an opportunity and a risk for FLYHT. FLYHT’s products can aid our customers in reducing their environmental impact through optimizing the use of their assets, including a reduction in emissions. The most significant risk to FLYHT is a reduction in customers’ operations due to social or other pressures, or regulation, to limit flights. If this risk were to be realized, it could eventually erode FLYHT’s revenue in tandem with that of our customers. Policy and Regulation Risk FLYHT customers operate in a variety of jurisdictions. Government policy and regulation changes could have impact on FLYHT, both positively and negatively. Impacts could include, but not be limited to, FLYHT’s ability to collect data, disseminate data and other constraints related to provision of services. Changes to governmental policy and regulations is an inherently challenging area and could have material impact to FLYHT’s future revenue and expenses. 24- Geo-political Risk Geopolitical risk covers a wide array of risks associated with any sort of conflict or tension between states, with the potential to impact global trade, security, and political relations, with secondary results including impacts to commercial aviation, and commodity pricing increases. The Company has a globally diverse customer base, with diversity also in customer operations, including both passenger travel and freight operations. This multi-level diversity helps mitigate the impact of regional reductions and market segment reductions in aviation due to travel restrictions, sanctions, or degradation in infrastructure. If further pressure due to geopolitical factors emerge, FLYHT will respond accordingly. Employee Travel Risk FLYHT staff are resuming global travel to meet with current and potential customers, some of whom are in jurisdictions where there may be increased risk to their personal safety and security. Travel requests are reviewed to ensure that staff are not travelling to locations that place them at undue risk. Travel safety and security resources are available to staff, including pre-departure risk assessments, travel briefings, safety awareness training, flight and hotel itinerary tracking, and access to a 24/7 contact for emergency travel medical assistance. Installations at C-checks Some of the Company’s hardware products 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 operating. 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 profit slightly when revenue is recognized but allows the Company to receive cash immediately after signing an agreement. Additionally, the terms of the Company’s standard agreement states that payment is due a minimum of 45 days prior to the shipment of kits. Enterprise Network Risks The Company currently operates several different types of networks to provide its SaaS products to our customer base. UpTime Classic software services many of FLYHT’s early adopters and is implemented on redundant fixed server platforms in Canada. CrossConsense hosts software services on redundant fixed server platforms in Germany. Other services are implemented in the Amazon Web Services (AWS) cloud in various AWS regions. 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 engages third parties for security assessment and to test the penetrability of the systems according to best practices within the enterprise community. A security breach could expose data to external, unauthorized third parties, result in a limited loss of data and cause various contractual breaches. To date, no such breach has knowingly occurred on any of the Company’s systems. FLYHT continues make improvements to the security posture of systems, with a particular emphasis on transitioning systems to the cloud where it is contractually and financially viable. Foreign Currency Fluctuations The Company recognizes a majority of its sales in U.S. dollars with a lesser amount recognized in euros, so there is a risk of currency fluctuation. The major portion of operating and overhead costs are denominated in Canadian dollars, though certain payroll costs, costs of goods sold, marketing and distribution costs are U.S. dollar and euro 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, particularly on a value-added product such as the Company offers. To address this risk, FLYHT’s 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. The Company 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 continually documents and distributes the specified knowledge among several key individuals. This reduces risk and ensures the Company can still function effectively were it to lose specialized staff. 25- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 Revenues Associated with TAMDAR TAMDAR has been installed on almost 300 aircraft for the purpose of collecting weather data, which is supplemented with AMDAR weather data. FLYHT supplies this weather data to Synoptic Data PBC as part of their participation in the National Mesonet program. FLYHT is receiving revenues from Synoptic based upon this participation, which is correlated to the number and quality of the weather soundings provided. If these observations fall in number or if they are not perceived to have the original perceived value, then the existing payments for the TAMDAR and AMDAR data could be diminished or stop. This lack of perceived value could depend upon a variety of factors including procurement changes from the United States Government. FLYHT’s strategy to mitigate these potential problems and potentially grow the revenues derived from TAMDAR data has been to invest in quality control programs to ensure that the sensors are properly calibrated and producing valid and valuable data, and to supplement this data whenever possible with AMDAR weather data. Worldwide, the number of flights has decreased as compared to pre-pandemic, decreasing the amount of weather data being collected from those aircraft with TAMDAR sensors installed, which has been reflected in the Company’s revenues. Employee Retention The high demand for technology workers, particularly in the areas of software development and data science, together with employee retention challenges faced by most companies, present challenges for FLYHT in attracting and retaining top talent. The pandemic related shift to remote-first workplaces has been both an opportunity and a threat to FLYHT. As FLYHT has embraced aspects of remote-first work, the Company has been able to benefit from a larger talent pool. Conversely, FLYHT employees are likely targets for recruiting. FLYHT mitigates this risk by encouraging a healthy work environment, work-life balance and competitive compensation. 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. 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 in 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 receiving newly built AFIRS 228 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 in the future. The AFIRS 228 is serviced in different ways; by the contract manufacturer, at FLYHT’s facility or by the Company’s contract maintenance facility in China. Where a unit is repaired or serviced depends on a multitude of factors and is managed by FLYHT’s customer support team. Proprietary Protection Patent rights are important to the Company, with the AFIRS technology being one of the Company’s primary revenue sources. 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. In general, there are many risks associated with the pursuit, the prosecution, the ultimate receipt of and the enforceability or defense of patents. The scope of patent protection available to us in the United States and in other countries is uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our owned patents. The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, maintain, enforce, or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Generally, the patent position of advanced technology companies is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or product candidates or which effectively prevent others from commercializing competitive technologies and products. The ultimate outcome of any pending or allowed patent application we file is uncertain, and the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Any patents that we hold may be challenged, narrowed, circumvented, or invalidated by third parties. Consequently, we do not know whether any of our technology will be protectable or remain protected by valid and enforceable patents. 26- The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and our patents may be challenged in the courts or patent offices in the United States and in other jurisdictions. Competitors may claim that they invented the inventions claimed in such issued patents or patent applications prior to our inventors or may have filed patent applications before our inventors did. A competitor may also claim that our products and services infringe its patents and that we therefore cannot practice our technology as claimed under our patent applications, if issued. Competitors may also contest our patents, if issued, by showing that the invention was not patent-eligible, was not novel, was obvious or that the patent claims failed to meet any other requirement for patentability. Cyber Security Risk Cyber security incudes the protection and resiliency of both the Company’s corporate and customer facing systems from information disclosure, theft or damage to hardware, software, electronic data, as well as the disruption or misdirection of the services they provide. FLYHT has also become an IATA Aviation Cyber Security Strategic Partner, which provides FLYHT a key opportunity to contribute to the development of industry standards, influence the cyber security regulatory environment for aviation, and to collaborate with key aviation cyber security leaders, including major international airlines, equipment manufactures, and international regulatory bodies. FLYHT has responded to the increase in cyber threats within our recently implemented Security Management System (SecMS), with an emphasis on addressing these threats within the industry. Specifically, the Company has taken actions to assess potential threats, identify and implement recommendations, including the addition of dedicated resources to further harden our systems, and improve our preparedness. Contractual Arrangement Certain of the Company’s sales contracts require that, in the event the Chinese government restricts use of the Iridium satellite network, the Company may be required to repurchase, at discounted rates, certain AFIRS units. The Chinese government has continued with a process of issuing waivers for the use of the Iridium frequency to aircraft needed for usage in China. This is the same process that has been used for many years, but more recently they moved to issuing three-year grants to Iridium Satellite LLC. versus the former annual grant system. Given the prevalent use of Iridium services in China and the extensions of waivers reported by Iridium Satellite LLC, the likelihood of a liability under these contracts is considered to be remote. Transactions with Related Parties Since 2020, a company related to an officer of FLYHT has provided marketing services to FLYHT. A company related to a director of FLYHT provided financial consulting services from Q3 2021 to Q2 2022. All the transactions with both related parties were at terms equivalent to those that prevail in arm’s length transactions. For the three months ended December 31 For the year ended December 31 Amounts included in: Contract labour Accounts payable 2022 $ 30,000 26,885 2021 $ 62,000 32,972 2022 $ 153,271 26,885 2021 $ 185,970 32,972 27- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 KPMG LLP 205 5th Avenue SW Suite 3100 Calgary AB T2P 4B9 Tel 403-691-8000 Fax 403-691-8008 www.kpmg.ca INDEPENDENT AUDITOR’S 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, 2022 and December 31, 2021 the consolidated statements of comprehensive loss for the years then ended the consolidated statements of changes in equity 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, 2022 and December 31, 2021, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS) as issued by the International Financial Accounting Standards Board (IASB). 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 “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our auditor’s 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. KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG Canada provides services to KPMG LLP. Material Uncertainty Related to Going Concern We draw attention to Note 2(e) in the financial statements, which indicates that the Company incurred losses of $1.0 million and $5.9 million for the years ended 2022 and 2021 respectively and as at December 31, 2022 has a deficit of $80 million. As stated in Note 2(e) in the financial statements, these events or conditions, along with other matters as set forth in Note 2(e) 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. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended December 31, 2022. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the “Material Uncertainty related to Going Concern” section of the auditor’s report, we have determined the matters described below to be the key audit matters to be communicated in our auditor’s report. Evaluation of the acquisition-date fair value of the customer relationship intangible assets acquired in the CrossConsense GmbH & Co. KG (“CrossConsense”) acquisition Description of the matter We draw attention to Note 2(f) and Note 5 to the financial statements. On March 17, 2022, the Company acquired 100% of the shares of CrossConsense for total consideration of $2,677,000. Judgement was required in identifying the assets acquired and liabilities assumed and in the estimation of their fair values. In connection with the CrossConsense acquisition, the Company recorded customer relationship intangible assets with an acquisition-date fair value of $1,527,150. The Company engaged an independent valuation consultant to estimate the acquisition-date fair value of intangible assets. The acquisition-date fair value of the customer relationship intangible assets was determined using an estimated discounted future cash flows methodology which requires the Company to make significant assumptions. The significant assumptions used in determining the estimated acquisition-date fair value of the customer relationship intangible assets included forecasted revenue, forecasted cost of sales, the estimated customer attrition rates and discount rate. Why the matter is a key audit matter We identified the evaluation of the acquisition-date fair values of the customer relationship intangible assets acquired in the CrossConsense acquisition as a key audit matter. This matter created a significant risk of a material misstatement requiring significant auditor judgment to evaluate the results of our audit procedures regarding the Company’s significant assumptions with respect to the estimated acquisition-date fair value of the customer relationship intangible assets. In addition, specialized skills and knowledge were required in evaluating the results of our audit procedures. 2 How the matter was addressed in the audit The primary procedures we performed to address this key audit matter included the following: • We compared the Company’s forecasted revenue and forecasted cost of sales associated with the customer relationship intangible assets to 2021 and 2022 historical results of CrossConsense. We took into account changes in conditions and events affecting the customer relationships to assess the adjustments or lack of adjustments made by the Company in arriving at the assumptions. • We inspected a selection of customer contracts and cost of sales invoices. • We compared the estimated customer attrition rates to the historical customer attrition data of CrossConsense. We took into account changes in conditions and events affecting the customer relationships to assess the adjustments or lack of adjustments made by the Company in arriving at the assumptions. • We evaluated the competence, capabilities and objectivity of the independent valuation consultant engaged by the Company. We involved valuation professionals with specialized skills and knowledge, who assisted in: • Evaluating the appropriateness of the discounted future cash flows methodology used by the Company to estimate the acquisition-date fair value of the customer relationship intangible assets • Evaluating the appropriateness of the Company’s discount rate, by comparing it against a discount rate range that was independently developed using a capital asset pricing model and weighted average cost of capital. Other Information Management is responsible for the other information. Other information comprises: • • the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions. the information, other than the financial statements and the auditor’s report thereon, included in the document entitled “2022 Annual Report”. 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 and remain alert for indications that the other information appears to be materially misstated. We obtained the information included in Management’s Discussion and Analysis and 2022 Annual Report filed with the relevant Canadian Securities Commissions as at the date of this auditor’s 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 auditor’s report. We have nothing to report in this regard. 3 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 International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), 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. Auditor’s 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 auditor’s 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. 4 • 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 auditor’s 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 auditor’s 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 represent 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. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. • Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this auditor’s report is Stephanie Regier Pankratz. Chartered Professional Accountants Calgary, Canada April 12, 2023 5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, 2022 $ December 31, 2021 $ Assets Current assets Cash and cash equivalents (note 6) Trade and other receivables (note 7) Contract assets Deposits and prepaid expenses Inventory (note 8) Total current assets Non-current assets Property and equipment (note 9) Goodwill (note 10) Intangible assets (note 11) Inventory (note 8) Total non-current assets Total assets Liabilities Current liabilities Trade payables and accrued liabilities (note 12) Customer deposits (note 13) Contract liabilities (note 14) Loans and borrowings (note 15) Lease liability (note 16) Tax liability Total current liabilities Non-current liabilities Loans and borrowings (note 15) Lease liability (note 16) Provisions (note 17) Total non-current liabilities Total liabilities Equity Share capital (note 18) Warrants (note 18) Contributed surplus Cumulative translation adjustment Deficit Total equity Total liabilities and equity 2,647,650 5,127,338 121,046 349,132 1,385,048 9,630,214 2,839,104 867,726 1,886,029 1,317,081 6,909,940 16,540,154 2,736,269 376,668 922,952 828,345 436,581 10,541 5,311,356 4,049,428 2,273,341 11,087 6,333,856 11,645,212 72,427,102 - 12,462,645 147,829 (80,142,634) 4,894,942 16,540,154 4,520,591 1,590,473 151,616 377,688 1,683,006 8,323,374 2,812,606 - 264,218 1,849,988 4,926,812 13,250,186 1,703,309 609,555 - 664,470 373,756 - 3,351,090 3,791,816 2,128,919 13,850 5,934,585 9,285,675 70,779,594 954,535 11,421,730 (51,747) (79,139,601) 3,964,511 13,250,186 See accompanying notes to consolidated financial statements, including the going concern note (note 2e). On behalf of the board Director – Doug Marlin Director – Paul Takalo 33- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the year ended December 31 Revenue (note 20) Cost of sales Gross profit Distribution expenses (note 21) Administration expenses (note 22) Research, development and certification engineering expenses (note 23) Loss from operating activities Finance income (note 24) Finance costs (note 24) Net finance costs Loss before income tax Income tax expense (note 25) Loss for the period Foreign currency translation adjustment Comprehensive loss for the period Loss per share 2022 $ 23,879,160 8,673,300 15,205,860 5,911,667 5,082,292 4,620,487 (408,586) (40,317) 624,223 583,906 (992,492) (10,541) (1,003,033) 199,576 (803,457) 2021 $ 11,318,689 4,849,118 6,469,571 3,869,742 3,383,709 4,447,201 (5,231,081) (104,499) 732,372 627,873 (5,858,954) (252) (5,859,206) (747) (5,859,953) Basic and diluted loss per share (note 19) (0.03) (0.19) 34- CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, 2022 and 2021 Share Capital $ 70,779,594 - - 1,235,000 - - 412,508 1,647,508 72,427,102 Convertible Debenture $ Warrants $ Contributed Surplus $ Cumulative Translation Adjustment Deficit $ Total Equity (Deficit) $ - - - - - - - - - 954,535 11,421,730 (51,747) (79,139,601) 3,964,511 - - - - (954,535) - - - - 178,899 954,535 (92,519) (954,535) 1,040,915 199,576 (1,003,033) (803,457) 199,576 (1,003,033) (803,457) - - - - - - - - - - 1,235,000 178,899 - 319,989 1,733,888 - 12,462,645 147,829 (80,142,634) 4,894,942 63,995,030 173,524 1,195,396 10,832,085 (51,000) (73,280,395) 2,864,640 - - 6,786,614 (55,712) - - - - - - - - (173,524) - - - - - - - - (240,861) - - - - - 194,092 173,524 240,861 (18,832) 6,784,564 (173,524) (240,861) 589,645 (747) (747) (5,859,206) (5,859,953) (5,859,206) (5,859,953) - - - - - - - - - - - - - - 6,786,614 (55,712) 194,092 - - 34,830 6,959,824 70,779,594 - 954,535 11,421,730 (51,747) (79,139,601) 3,964,511 Balance at January 1, 2022 Loss for the period Total comprehensive loss Contributions by and distributions to owners Issue of common shares Share-based payment transactions Warrants expired Share options exercised Total contributions by and distributions to owners Balance at December 31, 2022 Balance at January 1, 2021 Loss for the period Total comprehensive loss Contributions by and distributions to owners Issue of common shares Share issue costs Share-based payment transactions Conversion of debt Warrants expired Total contributions by and distributions to owners Balance at December 31, 2021 Share options exercised 53,662 35- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31 Cash flows from (used in) operating activities Loss for the period Depreciation, amortization and impairment of non-financial assets Disposal of non-financial assets Convertible debenture accretion & interest Lease liability accretion Grant portion of contributions from WINN Grant portion of BDC (HASCAP) loan Government grants Gain on loan modification Government loan accretion Equity-settled share-based payment expenses Issuance of common shares 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 contract liabilities Change in provisions Provision used Unrealized foreign exchange loss Other interest expense BDC (HASCAP) interest paid Debenture interest paid Lease interest paid Interest income Interest received Income tax expense Income tax paid Net cash from (used in) operating activities Cash flows used in investing activities Acquisitions of property and equipment Acquisition of CrossConsense FLYHT WVSS-II intellectual property Proceeds on the sale of property and equipment Net cash used in investing activities Cash flows from financing activities Net proceeds from private placement Proceeds from exercise of share options Payment of lease liabilities Contributions from ERTC Contributions from Alberta Innovates Contributions from WINN Contributions from BDC (HASCAP) Repayment of convertible debenture Repayment of borrowings Net cash from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning Effect of exchange rate fluctuations on cash held Cash and cash equivalents, ending 2022 $ (1,003,033) 660,039 54,145 - 110,426 (324,926) - (535,103) - 474,580 178,899 - 830,865 (3,402,747) 33,002 28,556 1,092,624 (232,887) 922,952 14,482 (6,839) (14,166) - (9,838) - (106,586) (26,576) 24,144 10,541 (10,406) (1,237,852) (81,356) (1,442,000) - 100 (1,523,256) - 319,989 (285,299) 422,603 112,500 947,368 - - (665,697) 851,464 (1,909,644) 4,520,591 36,703 2,647,650 2021 $ (5,859,206) 692,889 3,854 152,248 105,293 (246,153) (31,016) - (84,938) 433,274 194,092 165,000 (314,326) (5,999) 40,578 166,364 (427,029) 116,876 - 298 (10,523) (1,980) 8,760 (5,863) (133,949) (103,760) (17,581) 13,279 252 (280) (5,149,546) (369,547) - (229,226) 482 (598,291) 6,565,901 34,830 (445,675) - - 1,025,370 250,000 (1,674,359) (625,820) 5,130,247 (617,590) 5,127,963 10,218 4,520,591 36- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2022 and 2021 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 offices in Denver CO, USA and Frankfurt, Germany. FLYHT Aerospace Solutions Ltd is an AS9100 Quality registered company. For more information visit www.flyht.com. FLYHT provides airlines with Actionable Intelligence to transform operational insight into immediate, quantifiable action and delivers industry leading solutions to improve aviation safety, efficiency, and profitability. This unique capability is driven by a suite of patented aircraft certified hardware products and software solutions. These include AFIRS, an aircraft satcom/interface device, which enables cockpit voice communications, real-time aircraft state analysis, and the transmission of aircraft data while inflight. The AFIRS Edge is a state-of-the-art 5G Wireless Quick Access Recorder (WQAR), Aircraft Interface Device (AID), and Aircraft Condition and Monitoring System (ACMS). The Edge can be interfaced with FLYHT’s TAMDAR probe or the FLYHT-WVSS-II relative humidity sensor to deliver airborne weather and humidity data in real-time. FLYHT complements the AFIRS airborne systems with enterprise applications that help airlines improve operational efficiency and situational awareness including UpTime, FleetWatch, FuelSense and ClearPort services. 2. Basis of preparation (a) Basis of accounting These consolidated annual financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were approved by the Board of Directors on April 12, 2023. (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. (c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. The functional currency of the Company’s USA subsidiary is US dollars, and of the Company’s German subsidiary is the euro. (d) COVID-19 Starting in early 2020 FLYHT saw impact of the pandemic in revenue and trade receivable payments due to the impact of the pandemic on our customers. There has been recovery in FLYHT’s customer base, with aircraft re-commencing operations as well as receivable payments being made, although geographic differences in rates and timing of recovery continue to be seen. Various segments of the aviation industry were impacted differently throughout the pandemic, with the decline in commercial aviation being partially offset by an increased demand for cargo services. Geographic differences continue, as pandemic waves affect different parts of the globe at different times, vaccination programs vary greatly between countries, and remote locations of the world maintain their supply chain and connection to the rest of the world via air transport. Although recovery is evident in FLYHT’s increase in revenues since the pandemic low in early 2021, the Company anticipates continued negative revenue impact in the near-term as compared to pre-pandemic periods due to customers rescheduling orders and continued decreases in air traffic in some areas of the world. This may continue to impact the Company’s corresponding hardware and SaaS revenues, and have a potential impact on the Company’s ability to collect accounts receivable. There is continued risk until such a time as the global aviation industry recovers fully. There exists a possibility that an extended industry recovery could cause FLYHT to scale back operations to create positive cash from existing revenue and/or raise the necessary financing in the capital markets through debt and/or equity. 37- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 To preserve the Company’s liquidity through this period of commercial aviation uncertainty, the following measures were undertaken: Focused effort on development of strategic SaaS partnerships Focused development on Actionable Intelligence SaaS products Access to governmental support Cost containment and cash conservation • • • • • Working with existing partner airlines to assist in their recovery The Company will continue to monitor industry conditions and implement these and other measures, as the situation dictates. In 2022, the Company recognized a total of $423 thousand (2021: $1.2 million) in government financial relief related to COVID-19 which has been applied to offset associated expenses in all three expense categories (Distribution, Administration and Research & Development). All grant funds received to date have been recognized in profit and loss. (e) 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. 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 incurred losses in both 2022 and 2021 of $1.0 million and $5.9 million respectively and as at December 31, 2022 has a deficit of $80 million. In 2022, the Company used $1.2 million of cash in operations. At December 31, 2022, the Company had positive working capital of $4.3 million compared to positive $4.9 million as of December 31, 2021, a decrease of $0.6 million. The Company ended 2022 with balances of $2.6 million in cash and cash equivalents and an undrawn credit facility of $2.0 million. For the Company to continue as a going concern longer-term, it will need to achieve profitability and positive operating cash flows. Positive earnings and operating cash flow in the final quarter of 2022 reflect recent progress in this area. The Company will continue to expand its earnings and cash flow potential through its focused marketing efforts, particularly the presentation of Actionable Intelligence tools to our customers and prospects, which are expected to result in additional contracts for delivery of hardware units and related services. Until achieving consistent positive earnings and cash flows, it is the Company’s intention to continue to fund operations through revenue and its resulting cash flow as well as continue to manage outgoing cash flows. The Company may elect to scale back operations to create positive cash from existing revenue and/or raise the necessary financing in the capital markets through debt and/or equity. 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. There is no assurance that the Company will be successful in attaining and sustaining profitable operations and positive cash flow and/or raising additional capital to meet its 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. As a result of these factors, there is a material uncertainty that may cast doubt as to the Company’s ability to continue as a going concern. The 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. (f) Use of judgements and estimates 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. 38- 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 is determined based on debt market conditions as well as factors specific to the Company’s operations and financial position. 6. Revenue recognition: accounting for revenue from customers requires management to make judgements when identifying performance obligations in each contract. Estimates are required to be made when determining the transaction price and when allocating the transaction price to the performance obligations identified, and, for certain contracts, when measuring progress of the transfer of the performance obligation. 7. Valuation of WVSS-II assets acquired: a discount rate and a market royalty rate were used to determine the fair value of the intangible assets acquired. 8. Valuation of CrossConsense business combination: judgement was required in identifying the assets acquired and liabilities assumed and in the estimation of their fair values. The company engaged an independent valuation consultant to estimate the acquisition-date fair value of intangibles assets. The process employed widely accepted valuation techniques, with key assumptions being discount rates and anticipated future revenues and expenses, with growth rates specific to the acquired assets and assumed liabilities. Changes to assumptions could significantly impact the fair value of certain assets, such as intangible assets like customer relationships. The acquisition-date fair value of customer relationship intangible assets was determined using an estimated discounted future cash flow methodology which requires the Company to make significant assumptions. The significant assumptions used in determining the estimated acquisition-date fair value of intangible assets related to customer relationships included estimated customer attrition rates, forecasted revenue, forecasted cost of sales and discount rate. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements including by FLYHT’s subsidiaries. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by FLYHT. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. These consolidated financial statements consolidate the accounts of FLYHT and its wholly owned subsidiaries, FLYHT Inc., FLYHT Germany GmbH, CrossConsense GmbH and Co. KG, CrossConsense Services GmbH, FLYHT Corp., FLYHT India Corp., and AeroMechanical Services USA Inc. The latter three subsidiaries are inactive. (ii) Transactions eliminated on consolidation Intra-group balances, transactions, and any unrealized income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. (b) Financial instruments (i) 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. Trade receivables are financial assets with fixed or determinable payments that are solely payments of principal and interest. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, trade receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and borrowings 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. 39- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 (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) Equity Instruments 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. 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 weighted average cost method is used to measure cost of all inventories. 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 or assembly. Finished goods consists of units that have been assembled or purchased and are held pending sale to customers. 40- (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 and 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. Depreciation rates are as follows: Computers Software Enterprise Reporting Software Equipment Leasehold improvements Leased assets 30% declining balance 12 months straight line 60 months straight line 20% declining balance Straight line over the expected period of use, which is normally the lease term Straight line over the expected period of use, which is normally the 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. (e) Research and development (“R&D”) (i) Recognition and measurement R&D costs consist primarily of consulting expenses and parts related to the design, testing, and manufacture of AFIRS, the AFIRS Edge, FLYHT WVSS-II systems and the design and testing of all software systems and products (including AirMap, UpTime, FLYHTASD, FleetWatch, FuelSense, ClearPort, and Actionable Intelligence). Other R&D costs include testing, patent application and certification. Expenditure on research activities is expensed as incurred. Development activities involve a plan or design for the production of new or substantially improved systems or solutions. Development expenditure is capitalized when development costs can be measured reliably, the product or process can be designed, constructed, operated, or carried out to accomplish its goals and objectives, using accepted engineering and other technical principles and concepts, where the development benefits are expressed as far as possible in monetary terms so that they can be compared on an equal level. A development activity is assessed as economically viable if the project benefits exceed the project costs 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. To date, all development costs have been expensed as incurred. 41- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 (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) Leases (i) Recognition and measurement The Company leases properties and office equipment. The Company recognizes right-of-use assets (“ROA”) and lease liabilities at the commencement date of the lease (i.e., the date the underlying asset is available for use). The ROA is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made on or before the commencement date, initial direct costs and any lease incentives received. At the commencement date of the lease, the Company also recognizes the associated lease liability, measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any lease incentives received. In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liability is increased to reflect the accretion of interest and reduced for the lease payments made. The lease liability is remeasured when there is change in future lease payments arising from a change in an index or rate, if there is a change in management’s estimate of the amount expected to be payable under a residual value guarantee, if management changes its assessment of whether it will exercise a purchase, extension, or termination option, or if there is a revised in- substance fixed lease payments. The Company expenses the lease payments associated with short-term leases with durations of less than 12 months, and leases of low- value assets. (ii) Amortization The ROA is depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the ROA and the end of the lease term. In addition, the ROA is reduced for any impairment losses. (g) Intangible assets and goodwill Intangible assets that are acquired by the Company and have finite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. Intangible assets with finite lives are amortized using a straight-line basis over their estimated useful lives, which are reviewed each reporting period. Useful lives are as follows: Customer relationships Tradenames 5-10 years 10 years Intangible assets acquired by the Company with indefinite useful lives and goodwill are measured at cost less accumulated impairment losses. Goodwill is assessed for impairment annually. Intangible assets are tested annually for impairment or when there are indicators of impairment. An intangible asset is derecognized on disposal or impaired when no future economic benefits are expected from its use or disposal. 42- (h) Government assistance (i) Government grants Government grants, including forgiveness of government loans, 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. (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) Business combinations The Company accounts for business combinations using the acquisition method when control is obtained. 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 expensed 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. (j) Asset Acquisitions The Company accounts for asset acquisitions using the cost accumulation method when control is obtained. The individual identifiable assets are determined and the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair value. This allocation can result in the recognition of some assets at a value other than their fair market value. (k) 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. (l) Warranties The Company typically warrants that product shall be free of defects at minimum during the first term of each agreement, which is usually 3-5 years. Provision required for warranties is recognized at the later of the date the underlying products or services are shipped, or the effective date of the agreement granting the warranty. The provision is based on historical failure rates and repair costs. (m) 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. 43- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 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 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. At each reporting date, the Company reviews the carrying amounts of its non-financial assets (other than goodwill, 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. The cash-generating units that goodwill has been allocated to are tested annually for impairment. 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. An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss. (n) Revenue Revenue is assessed based on a model 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 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 are generated monthly and typically are payable within 30 days. The Company uses the practical expedient to recognize revenue at the amount to which it has a right to invoice, which corresponds directly to the value to the customer of the entity’s performance completed to date. (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. (iii) Licensing Control over modems and associated IP licenses is transferred upon shipment, at which point the revenue is recognized. Payment is typically due 30 days after shipment although may vary per purchase order. This category also includes arrangements for exclusive access to weather data sets which is recognized over the relevant licensing period. (iv) Technical Services Revenue from Technical Services is recognized over time, as the services are provided. Payment terms for these services typically follow terms established for Hardware. The Company uses the practical expedient to recognize revenue at the amount to which it has a right to invoice, which corresponds directly to the value to the customer of the entity’s performance completed to date. (o) 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. 44- 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. (p) 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. (q) 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 and lease liabilities, and the unwinding of the discount on provisions, 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. (r) 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, categorized as finance income or costs. (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. (s) 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. 45- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 (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. (ii) 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. (t) 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. 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. When measuring the fair value of an asset or a liability, the Company uses observable market data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: - - - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. 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 (Level 2). (a) Cash and cash equivalents, trade and other receivables, trade payables and accrued liabilities: carrying value approximates fair value, due to the short-term nature of the instruments. (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. 46- 5. Business Combination On March 17, 2022, the Company acquired 100% of the shares of CrossConsense GmbH & Co. KG (“CrossConsense”). Founded in 2002, Frankfurt Germany-based CrossConsense develops and markets software to support commercial aviation maintenance management. Products include a predictive maintenance troubleshooting and engineering tool; software to support aircraft maintenance, repair and data migration; and live data dashboards to assist aircraft maintenance teams. CrossConsense has also constructed a progressive web application plus native apps that offer up-to-date data on an airline’s fleet status. Additionally, CrossConsense offers consulting and support services as well as hosting, database operation and performance monitoring of commercial aircraft maintenance applications. This acquisition is expected to accelerate FLYHT’s strategic roadmap to build out a maintenance software capability and fulfills the Company’s goal to increase its presence in the European and Middle East markets. Under terms of the agreement, FLYHT (through its wholly owned German subsidiary formed as part of this transaction) acquired all of the outstanding securities of CrossConsense for $1.25 million in cash and 1.9 million common shares of the Company, valued at $1.235 million based on the fair value of each common share of the Company on the closing date of $0.65 per share. The shares are being held in escrow and will be released equally in 1/3 increments at 4-, 16- and 28-months following issuance on the transaction’s closing date. Also included in the purchase price was other consideration valued at $192,000. The Company incurred acquisition-related costs of $254,903 in due diligence and legal fees in 2021 and a further $150,121 in 2022. Additionally, in Q1 2022 finders’ fees of $100,000 were paid to a third party in connection with the closing of the transaction. These costs have been included in Administrative Expenses. The value allocated to the purchase price on the closing date was as follows: Cash paid Common shares issued Other consideration Total consideration $ 1,250,000 1,235,000 192,000 2,677,000 The value of acquired assets and assumed liabilities were as follows: Cash and cash equivalents Trade and other receivables Deposits and prepaid expenses Property and equipment Leased assets Intangible asset: customer relationships Intangible asset: tradename Goodwill Trade payables and accrued liabilities Contract liabilities Lease liability Total consideration $ 1,195,226 590,512 18,002 9,322 278,467 1,527,150 217,281 837,258 (910,669) (807,082) (278,467) 2,677,000 Goodwill is attributable to the workforce of the acquired business as well as the expected opportunities for growth and synergies across products, staff, customers and geographies. Goodwill is allocated to the Company’s single operating segment and is fully deductible for tax purposes. 47- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 The fair value of the assets acquired approximates the book value and includes trade receivables of $409,985. The gross amount due under contracts is $413,398, of which $3,413 is anticipated to be uncollectible. The acquired business contributed revenues of $4,015,700 and earnings of $26,558 to FLYHT for the period from March 17, 2022 to December 31, 2022. If the acquisition had occurred on January 1, 2022, consolidated proforma revenue and loss for the year ended December 31, 2022 would have been $24,765,919 and $1,030,715 respectively. The pro forma results are as follows: Revenue Cost of sales Gross profit Distribution expenses Administration expenses Research, development and certification engineering expenses Loss from operating activities Net finance (income) costs Loss for the period 6. Cash and cash equivalents For the year ended December 31 2022 $ 24,765,919 9,128,610 15,637,309 6,098,425 5,215,898 4,769,723 (446,737) 583,978 (1,030,715) 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 (note 26) Non-trade receivables and accrued receivables Total December 31, 2022 $ 5,030,473 96,865 5,127,338 December 31, 2021 $ 1,588,011 2,462 1,590,473 Non-trade receivables consist of input tax credits. The Company’s exposure to credit and currency risks is disclosed in note 26. 8. Inventory Raw materials Work in progress Finished goods Balance Less current portion Non-current portion December 31, 2022 $ 1,601,058 - 1,101,071 2,702,129 (1,385,048) 1,317,081 December 31, 2021 $ 2,235,640 15,491 1,281,863 3,532,994 (1,683,006) 1,849,988 In 2022 Raw materials and Finished goods recognized as cost of sales amounted to $3,261,573 (2021: $2,229,777). Included in this amount was a write down of inventories amounting to $598,002 (2021: $382,992) resulting from the review of slow-moving inventory parts. All inventories are pledged as security for the bank loan (note 15). 48- 9. Property and equipment 2022 Cost Balance at January 1 Additions Disposals Cumulative translation adjustment Balance at December 31 Accumulated Depreciation Balance at January 1 Depreciation for the year Disposals Cumulative translation adjustment Balance at December 31 Carrying Amounts At January 1 At December 31 2021 Cost Balance at January 1 Additions Disposals Cumulative translation adjustment Balance at December 31 Accumulated Depreciation Balance at January 1 Depreciation for the year Disposals Cumulative translation adjustment Balance at December 31 Carrying Amounts At January 1 At December 31 Computers and Software $ 829,347 67,461 (26,415) 3,710 874,103 607,336 73,719 (19,336) 10,233 671,952 Equipment $ 784,915 11,924 (5,880) 2,004 792,963 293,008 53,927 (2,991) 7,486 351,430 Leasehold Improvements $ 17,687 5,322 (18,830) 1,143 5,322 16,370 2,408 (18,830) 335 283 Leased Assets $ 3,374,835 482,209 (1,069,182) 63,113 2,850,975 1,277,464 388,191 (1,058,948) 53,887 660,594 Total $ 5,006,784 566,916 (1,091,105) 69,970 4,552,565 2,194,178 518,245 (1,070,903) 71,941 1,713,461 222,011 202,151 491,907 441,533 1,317 5,039 2,097,371 2,190,381 2,812,606 2,839,104 Computers and Software $ 806,453 123,049 (100,061) (94) 829,347 590,953 112,590 (96,954) 747 607,336 Equipment $ 541,023 246,366 (2,469) (5) 784,915 223,969 69,816 (1,240) 463 293,008 Leasehold Improvements $ 17,706 - - (19) 17,687 11,114 5,222 - 34 16,370 Leased Assets $ 3,771,693 112,628 (508,434) (1,052) 3,374,835 1,275,447 505,261 (506,596) 3,352 1,277,464 Total $ 5,136,875 482,043 (610,964) (1,170) 5,006,784 2,101,483 692,889 (604,790) 4,596 2,194,178 215,500 222,011 317,054 491,907 6,592 1,317 2,496,246 2,097,371 3,035,392 2,812,606 As of December 31, 2022, all property and equipment are pledged as security for the bank loan (note 15). 49- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 10. Goodwill December 31, 2022 $ December 31, 2021 $ Gross carrying amount Balance at January 1 Acquired through business combination (note 5) Cumulative translation adjustment Balance at December 31 Accumulated impairment Balance at January 1 Impairment loss Balance at December 31 Carrying Amounts At January 1 At December 31 - 837,258 30,468 867,726 - - - - 867,726 - - - - - - - - - 50- 11. Intangible assets 2022 Cost Balance at January 1 Acquired through business combination (note 5) Disposals Cumulative translation adjustment Balance at December 31 Accumulated Amortization Balance at January 1 Amortization for the year Impairment loss Disposals Cumulative translation adjustment Balance at December 31 Carrying Amounts At January 1 At December 31 2021 Cost Balance at January 1 Additions Disposals Cumulative translation adjustment Balance at December 31 Accumulated Amortization Balance at January 1 Amortization for the year Disposals Cumulative translation adjustment Balance at December 31 Carrying Amounts At January 1 At December 31 Licenses $ 34,992 - (34,992) - - - - - - - - Customer Relationships $ - 1,527,150 - 55,573 1,582,723 - 125,064 - - 8,214 133,278 Tradenames $ - 217,281 - 7,907 225,188 - 16,730 - - 1,100 17,830 Intellectual Property $ Total $ 229,226 264,218 - - - 229,226 - - - - - - 1,744,431 (34,992) 63,480 2,037,137 - 141,794 - - 9,314 151,108 34,992 - - 1,449,445 - 207,358 229,226 229,226 264,218 1,886,029 Licenses $ Customer Relationships $ 34,992 - - - 34,992 - - - - - 34,992 34,992 - - - - - - - - - - - - Tradenames $ - - - - - - - - - - - - Intellectual Property $ - 229,226 - - 229,226 - - - - - Total $ 34,992 229,226 - - 264,218 - - - - - - 229,226 34,992 264,218 The license purchased from Bombardier allowing FLYHT access to technical documents for their CRJ aircraft was derecognized in 2022, with consideration given to the usefulness of the data in future FLYHT applications and recent changes in Bombardier’s business. Customer relationships and tradenames were acquired in 2022 as part of CrossConsense business combination (note 5). The remaining amortization period for customer relationships and tradenames is 9 years. Intellectual property includes the value of the FLYHT WVSS-II intellectual property obtained in 2021. Intangible assets are pledged as security for the bank loan (note 15). 51- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 12. Trade payables and accrued liabilities Trade payables Compensation and statutory deductions Accrued liabilities Balance, December 31 December 31, 2022 $ 2,161,822 323,685 250,762 2,736,269 December 31, 2021 $ 990,053 309,082 404,174 1,703,309 Compensation and statutory deductions include accrued vacation pay, variable compensation, accrued compensation, and statutory payroll deductions. 13. Customer deposits Opening balance Payments received Recognized as revenue Balance, December 31 December 31, 2022 $ 609,555 2,376,293 (2,609,180) 376,668 December 31, 2021 $ 492,679 2,029,607 (1,912,731) 609,555 Customer deposits are recognized for non-refundable deposits received prior to hardware and technical services being delivered to a customer. Customer deposits are recognized into revenue when hardware is shipped, or technical services are provided to the customer. 14. Contract liabilities Opening balance Acquired (CrossConsense business combination) Cumulative translation adjustment Payments received Recognized as revenue Balance, December 31 December 31, 2022 $ - 807,082 29,370 1,027,392 (940,892) 922,952 December 31, 2021 $ - - - - - - Contract liabilities are recognized for consideration received prior to SaaS services being provided to a customer. This balance relates to CrossConsense customer contracts that require upfront payment for services delivered over the subsequent twelve-month period. Contract liabilities are recognized into revenue when services have been provided to the customer. 15. Loans and Borrowings Bank loan The Company has an operating demand loan available through a Canadian chartered bank for up to a maximum of $2.0 million, 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 accounts receivable, cash collateral in the form of a Guaranteed Investment Certificate, 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 at both December 31, 2021 and 2022. Government loans In November 2016, the Company signed a contribution agreement with Western Economic Diversification Canada for a 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 was received. The amount is repayable over five years commencing January 1, 2020. Amendments in 2020 adjusted the payment dates due to COVID-19, so that there were no payments scheduled from April through December 2020 and the final payment date was pushed back to September 2025. Repayments in 2022 totaled $468,000 (2021: $468,000). The carrying value of the amount owing under this program at December 31, 2022 is $1,132,345 (December 31, 2021: $1,472,209). 52- In November 2018, the Company signed a second contribution agreement with Western Economic Diversification Canada for a 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 this 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 was received, repayable over five years commencing October 1, 2021. Amendments in 2021 extended the timeframe for eligible project cost submission to September 30, 2023 and adjusted the repayment start date to October 1, 2023 with a final payment date of September 1, 2028. The carrying value of the amount owing under this program at December 31, 2022 is $2,202,931 (December 31, 2021: $1,455,540). Both WINN loans are interest free. Under SADI, the Company received a loan of $1,967,507 which 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 January 31, 2029 (adjusted from April 30, 2028 in response to the COVID-19 pandemic) when the final payment will be 24.5% of the total contribution received. Repayment of $181,493 was made in 2022 (2021: $157,820). The carrying value of the amount owing under this program at December 31, 2022 is $1,331,720 (December 31, 2021: $1,306,656). In May 2021, the Company received funding of $250,000 through the BDC’s HASCAP loan program, designed to support small and medium sized businesses affected by COVID-19. This loan carries interest of 4% per annum over a 10-year term commencing May 10, 2021. Payments in the first year following funding are comprised of interest only, with the principal and accrued interest payable over the remaining 9 years. Principal repayments in 2022 totaled $16,204 (2021: nil). The carrying value of the amount owing under this program at December 31, 2022 is $210,777 (December 31, 2021: $221,881). A summary of the carrying value of the government loans as at December 31, 2022 and changes during the year and comparative year are presented below. Balance January 1 Contributions received Grant portion Interest accretion Gain on loan modification Repayment Balance December 31 Less current portion Non-current portion 16. Lease liability 2022 Total 4,456,286 947,368 (324,926) 474,580 - (675,535) 4,877,773 (828,345) 4,049,428 2021 Total 3,732,670 1,275,370 (277,169) 442,036 (84,938) (631,683) 4,456,286 (664,470) 3,791,816 On March 1, 2020 the leasing arrangement for the new corporate head office of FLYHT commenced. At inception in Q1 2020, the Company recognized a right of use asset of $2,257,457 in Property and Equipment and a lease liability for the same amount. The amount was determined using a discount rate of 3.95%, based on the incremental borrowing rate of the Company, and a lease term of 136 months. A reduction to the asset and associated lease liability of $120,524 occurred in 2021 with the completion of all initial contract terms. Amortization of the asset and accretion of the associated lease liability commenced on March 1, 2020. On October 20, 2021 FLYHT entered into a lease expansion agreement, acquiring additional space co-located with the corporate head office. The terms of the lease include a 7-month period, followed by an 8.5-year contract term, to align with the terms on the initial lease. Annual payment amounts begin at $48,172 for the first 1.5 years, escalate by approximately 6% for the next 3 years, an additional 6% for the following 3 years, and an additional 6% for the final year. At inception, the Company recognized a right of use asset of $231,833 and a lease liability for the same amount. The value was determined using a discount rate based on the incremental borrowing rate of the Company, over the lease term of 110 months. Amortization of the asset and accretion of the associated lease liability commenced on November 1, 2021. In conjunction with the CrossConsense business combination that occurred on March 17, 2022 FLYHT inherited the leasing arrangement for CrossConsense’s head office. Under German GAAP no lease liability was calculated previously. The remaining term of the lease upon acquisition is 3.5 years, with an annual payment amount of €64,296 EUR ($89,936 CAD) in 2022 and consecutive annual amounts to be adjusted based on Germany’s annual CPI. At acquisition, the Company recognized a right of use asset of €199,077 EUR ($278,466 CAD) and a lease liability for the same amount. The value was determined using a discount rate based on the incremental borrowing rate of the Company, over the remaining lease term of 42 months. 53- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 On April 16, 2022, a lease agreement was entered into for server equipment at the FLYHT corporate head office. The terms of the lease include a 5-year contract term with monthly payments. At inception, the Company recognized a right of use asset of $147,407 and a lease liability for the same amount. The value was determined using the discount rate implicit in the lease, over the lease term of 60 months. Amortization of the asset and accretion of the associated lease liability commenced on September 1, 2022. Opening balance Additions Finance costs (note 24) Lease payments Disposals Cumulative translation adjustment Balance, December 31 Less current portion Non-current portion 17. Provisions Product warranty Balance January 1 Provision made during the period Provision extinguished Provision re-evaluation Provision used during the period Balance, December 31 2022 $ 2,502,675 482,209 110,426 (395,725) (10,234) 20,571 2,709,922 (436,581) 2,273,341 2022 $ 13,850 5,744 (3,162) 1,494 (6,839) 11,087 2021 $ 2,837,142 112,628 105,293 (549,435) - (2,953) 2,502,675 (373,756) 2,128,919 2021 $ 24,103 5,959 (1,928) (3,761) (10,523) 13,850 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 the value of the provision for warranties expiring throughout each respective year. 18. 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, 2021 Exercise of employee options Common shares issued Share issue costs Balance December 31, 2021 Exercise of employee options Common shares issued Balance December 31, 2022 Number of Shares 27,279,024 59,034 9,078,818 - 36,416,876 487,598 1,900,000 38,804,474 Value $ 63,995,030 53,662 6,786,614 (55,712) 70,779,594 412,508 1,235,000 72,427,102 Option exercises during 2022 have resulted in the Company issuing a total of 487,598 shares for total proceeds of $319,989. 54- Stock option plan • • The Company grants stock options to its directors, officers, employees and consultants. The following stock options were granted in 2022: 518,715 stock options to employees, officers and directors under the stock option plan with an exercise price of $0.74. The options will vest in equal tranches on May 4, 2023, 2024 and 2025 and will expire on May 4, 2026. 300,000 stock options to certain employees under the stock option plan with an exercise price of $0.64. The options vested immediately on June 30, 2022 and were fully exercised on July 14, 2022. 55,000 stock options to certain officers and consultants under the stock option plan with an exercise price of $0.82. The options will vest in equal tranches on August 10, 2023, 2024 and 2025 and will expire on August 10, 2026. 120,000 stock options to a consultant with an exercise price of $0.82. The options will vest in equal tranches on November 10, 2022, February 10, May 10, and August 10, 2023. These options are set to expire on August 10, 2026. • • All outstanding options 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, 2022, there were 3,880,447 (2021: 3,641,688) common shares reserved for this purpose. A summary of the Company’s outstanding stock options as at December 31, 2022 and 2021 and changes during these years is presented below. 2022 2021 Outstanding, January 1 Options granted Options exercised Options expired Outstanding December 31 Unvested options Outstanding and exercisable, December 31 Number of options 1,803,481 993,715 (487,598) (574,388) 1,735,210 1,034,263 700,947 Weighted average exercise price $ 0.83 0.72 0.66 1.03 0.75 0.67 0.81 Number of options 1,373,333 608,315 (59,034) (119,133) 1,803,481 1,002,939 800,542 Weighted average exercise price $ 0.93 0.63 0.59 1.17 0.83 0.66 1.03 The exercise prices for options outstanding at December 31, 2022 were as follows: Exercise price: Number All options Weighted average remaining contractual life (years) Number Exercisable options Weighted average remaining contractual life (years) $0.49 $0.52 $0.57 $0.59 $0.69 $0.74 $0.82 $0.93 $1.50 Total 160,000 6,240 301,876 373,679 30,000 468,880 160,000 43,760 190,775 1,735,210 0.6 1.8 2.3 1.5 1.8 3.3 3.6 2.6 0.4 2.2 160,000 4,160 86,736 244,276 15,000 - - - 190,775 700,947 0.6 1.8 2.3 1.5 1.8 - - - 0.4 1.1 The weighted average fair value of the options granted during the year that were valued using the Black-Scholes option pricing model was $0.26 (2021: $0.26). 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 2022 2.93% 1.76 64% 0.00% 2021 0.63% 1.86 84% 0.00% 55- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 Warrants Number of warrants Outstanding January 1, 2021 Warrants expired Outstanding December 31, 2021 Warrants expired Outstanding December 31, 2022 3,036,237 (368,627) 2,667,610 (2,667,610) - Weighted average exercise price $ 1.69 0.25 1.25 1.25 - Value $ 1,195,396 (240,861) 954,535 (954,535) - In November 2021 the outstanding warrants were modified and extended. This amendment included an extension of the expiry date from November 15, 2021 to June 15, 2022 as well as a re-price of the warrants to 1.25. 19. Earnings per share The calculation of basic and diluted earnings per share for the year ended December 31, 2022 was based on a weighted average number of common shares outstanding of 38,151,602 (basic & diluted) (December 31, 2021: 31,415,175 basic and diluted). Both calculations of diluted earnings per share did not include outstanding stock options (nor warrants for the 2021 calculation) because they would be anti-dilutive. 20. Disaggregation of revenue The Company has one operating segment. The following revenue is based on the geographical location of customers. All non-current assets reside in Canada, except for: • • Property and equipment valued at $5,018 (Denver CO, USA) and $6,087 (Frankfurt, Germany) Leased premises valued at $226,758 (Frankfurt, Germany) United States & Mexico Asia China Middle East Canada Australia Africa Europe South/Central America Total For the year ended December 31 2021 2022 $ 12,224,340 975,081 1,963,049 607,445 2,900,423 472,278 495,874 4,069,501 171,169 23,879,160 $ 4,428,683 602,743 2,051,290 1,006,363 1,976,939 267,700 549,019 359,306 76,646 11,318,689 The following shows revenue per major product and service categories. SaaS Hardware Licensing Technical Services Total For the year ended December 31 2022 $ 8,157,886 4,720,204 9,101,130 1,899,940 23,879,160 2021 $ 5,993,521 3,394,228 1,551,000 379,940 11,318,689 SaaS is the recurring revenue from the Company’s products that allow 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 fees are recognized as the service is provided 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. 56- Technical Services includes services offered by the Company, including repairs and other expertise. The Company has not disclosed the transaction price allocated to remaining performance obligations for SaaS and Technical Services, as revenue for these performance obligations is recognized using the practical expedient to recognize revenue at the amount to which the Company has a right to invoice. The undelivered amount of revenue related to contracted yet undelivered hardware and licenses for which a purchase order has been received was $3,106,383 CAD as of December 31, 2022. Major customers Revenues from the two largest customers represent approximately 46.1% of the Company’s total revenues for the year ended December 31, 2022 (2021: 28.3%). 21. Distribution expenses Salaries and benefits Stock based compensation Contract labour Office Travel Equipment and maintenance Depreciation and amortization Marketing Other government grants Other Total For the year ended December 31 2022 $ 4,136,208 57,674 880,600 219,720 266,070 177,730 204,962 158,281 (222,108) 32,530 5,911,667 2021 $ 3,294,529 47,058 661,853 231,233 107,017 39,147 365,120 40,737 (455,987) (460,965) 3,869,742 Other government grants relate to amounts received from the United States government under the Employee Retention Tax Credit (“ERTC”), the Canadian government under the Scientific Research and Experimental Development (“SRED”) tax refund program and the Alberta government under the Alberta Innovates PDP program of $422,603, $148,637 and $112,500 respectively. These government grants are included in Distribution, Administration and Research, development and certification engineering. 22. Administration expenses For the year ended December 31 Salaries and benefits Stock based compensation Contract labour Office Legal fees Audit and accounting Investor relations Travel Equipment and maintenance Depreciation and amortization Other government grants Other Total 2022 $ 1,712,234 101,355 1,179,042 672,276 173,751 350,840 145,091 153,295 348,842 273,445 (48,258) 20,379 5,082,292 2021 $ 1,197,969 126,601 720,439 570,779 289,829 242,939 126,500 58,011 307,012 101,533 (368,392) 10,489 3,383,709 57- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 23. Research, development and certification engineering expenses For the year ended December 31 Salaries and benefits Stock based compensation Contract labour Office Travel Equipment and maintenance Components Depreciation and amortization Grant WINN loan (note 15) Other government grants Other Total 2022 $ 4,359,273 19,870 441,551 138,624 54,035 118,477 45,186 181,632 (324,926) (413,374) 139 4,620,487 2021 $ 4,247,751 20,432 319,409 206,066 24,638 44,842 17,368 226,236 (246,153) (419,292) 5,904 4,447,201 24. Finance income and finance costs For the year ended December 31 Interest income on bank deposits Gain on modification of government loans Net foreign exchange gain Finance income Bank service charges Interest on lease liability Interest on BDC loan Government grant interest accretion Debenture interest expense and accretion Finance costs 25. Income tax expense Current Tax Expense Current income tax expense Deferred income tax expense Deferred Tax Expense Deferred tax liabilities Recognized deferred tax assets (liabilities) are attributable to the following: PP&E Reserves Non-capital loss carry-forwards Total 2022 $ 26,576 - 13,741 40,317 39,217 110,426 14,938 459,642 - 624,223 2022 $ 10,541 - 10,541 2022 $ (25,929) - 25,929 - 2021 $ 17,581 84,938 1,980 104,499 32,797 105,293 8,760 433,274 152,248 732,372 2021 $ 252 - 252 2021 $ (110,366) (55,098) 165,464 - 58- Unrecognized deferred tax assets Deferred tax assets have not been recognized in respect of the following deductible temporary differences: Intangible assets Lease liabilities Reserves and FX Non-capital loss carry-forwards Share issue costs Scientific research and experimental development expenditures Total 2022 $ 60,550 2,477,337 929,784 45,488,281 193,705 24,649,934 73,799,591 2021 $ - 2,502,308 9,804 45,166,302 398,552 24,277,407 72,354,373 The Company has non-capital losses for income tax purposes of approximately $45,600,688 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. Of these losses, $472,587 were incurred in the US and $37,185 were incurred in Germany, both of which can be carried forward indefinitely. The remaining losses of $45,090,896 were incurred in Canada and will begin to expire in 2027. Reconciliation of effective tax rate Income (loss) before tax Tax Rate Expected income tax recovery Change in rate Non-deductible (taxable) amounts Stock based compensation Change in unrecognized temporary differences 26. Financial risk management 2022 $ (992,492) 23% (228,273) - 46,245 41,147 151,422 10,541 2021 $ (5,858,954) 23% (1,347,560) - 6,187 44,641 1,296,984 252 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 39% (2021: 30%) of the Company’s 2022 revenue is attributable to transactions with a single customer. Historically there has not been a significant geographic concentration of outstanding balances, which typically has a minimizing impact on the Company’s credit risk, however 63% of the receivables balances outstanding as of December 31, 2022 were concentrated within the USA, which would attribute more geographic risk than FLYHT’s receivables profile usually contains. 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 reduce 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 expected losses. 59- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 The aging of receivables at the reporting date was: December 31, 2022 Accounts receivable Impairment Net receivable December 31, 2021 Accounts receivable Impairment Net receivable 0-30 days $ 5,006,405 (9,450) 4,996,955 0-30 days $ 1,112,773 (407) 1,112,366 31-60 days $ 106,223 - 106,223 31-60 days $ 73,709 (814) 72,895 61-90 days $ 24,026 - 24,026 61-90 days $ 36,583 (1,298) 35,285 91+ days $ 183,179 (183,045) 134 91+ days $ 628,353 (258,426) 369,927 Total $ 5,319,833 (192,495) 5,127,338 Total $ 1,851,418 (260,945) 1,590,473 The Company believes that the unimpaired amounts that are past due by more than 30 days are still collectible, based on historic payment behavior. The movement in the allowance for impairment in respect of trade and other receivables for the years ended December 31, 2022 and 2021 was: Balance, January 1 Provision Recovered Amounts written off Balance, December 31 Liquidity risk 2022 $ 260,945 177,977 (146,244) (100,183) 192,495 2021 $ 1,003,574 (233,811) (246,195) (262,623) 260,945 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, 2022 Accounts payable Compensation and statutory deductions Accrued liabilities Lease payments Loans and borrowings Total Less than 1 year $ 2,161,822 323,685 250,762 436,581 851,387 4,024,237 1-2 years $ - - 2-5 years $ - - - 455,774 1,295,757 1,751,531 - 1,165,601 3,075,971 4,241,572 - 1,103,715 1,418,268 2,521,983 > 5 years Total $ - - $ 2,161,822 323,685 250,762 3,161,671 6,641,383 12,359,323 Refer to note 2(d) for additional details relating to the effects of COVID-19. Currency risk A significant portion of the Company’s revenues and a portion of its expenses are denominated in U.S. dollars. Management estimates that a 1% weakening of the Canadian dollar relative to the U.S. dollar would increase net earnings by approximately $165,821 (2021: $112,535) and a strengthening of the Canadian dollar would decrease net earnings by approximately $165,821 (2021: $112,535). With the 2022 acquisition of CrossConsense, a portion of the Company’s 2022 revenues and expenses were denominated in euros. Management estimates that a 1% weakening of the Canadian dollar relative to the euro would increase net earnings by approximately $15,650 and a strengthening of the Canadian dollar would decrease net earnings by approximately $15,650. 60- The Company mitigates its currency exposures by the international nature of the business where a portion of its costs 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, 2022, working capital denominated in U.S. dollars was approximately positive $3,092,158 (2021: positive $1,767,876). As a result, a 1% weakening of the Canadian dollar would increase net earnings by approximately $30,922 (2021: $17,679) and a strengthening of the Canadian dollar would decrease net earnings by approximately $30,922 (2021: $17,679). 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. The Company has exposure to foreign exchange risk for working capital items denominated in euros. At December 31, 2022, working capital denominated in euros was approximately positive $555,026. As a result, a 1% weakening of the Canadian dollar would increase net earnings by approximately $5,550 and a strengthening of the Canadian dollar would decrease net earnings by approximately $5,550. In respect of other monetary assets and liabilities denominated in foreign currencies, the Company ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. Interest rate risk Borrowings issued at variable rates result in exposure to interest rate risk, which would affect future cash flows if interest rates were to rise. Fluctuations in the prime interest rate could result in exposure for the Company with regards to the bank credit facility, which bears interest at Canadian chartered bank prime plus 1.5%. The Company’s exposure to interest rate risk as at December 31, 2022 and 2021 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 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 15). 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. 27. Government grants Contributions of $947,368 were received from WINN for the year ended December 31, 2022 (2021: $1,025,370). In the year ended December 31, 2022, the Company recognized $422,603 in government financial relief related to COVID-19 (2021: $1,243,671). $222,108, $48,258 and $152,237 have been applied to offset associated expenses in Distribution, Administration, and Research & Development expenses respectively. The $324,926 grant portion of the contributions received from WINN for the year ended December 31, 2022 (2021: $246,153) was offset against associated expenses in Research & Development expense. 61- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022 28. Related parties Since 2020, a company related to an officer of FLYHT has provided marketing services to the Company. A company related to a director of FLYHT provided financial consulting services from Q3 2021 to Q2 2022. All of the transactions with both related parties were at terms equivalent to those that prevail in arm’s length transactions. Amounts included in: Contract labour Accounts payable For the year ended December 31 2022 $ 153,271 26,885 2021 $ 185,970 32,972 Transactions with key management personnel Key management personnel include all persons with direct or indirect authority and responsibility for planning, directing and controlling the activities of the Company, and includes directors and the FLYHT executive team. In addition to salary and variable compensation, the Company also provides non-cash benefits to key management personnel. Compensation for this group comprised: Salary Director fees Variable compensation Share-based payments Short-term employee benefits Total 2022 $ 1,669,448 173,085 57,578 93,935 156,439 2,150,485 2021 $ 1,453,932 176,233 98,500 114,066 134,620 1,977,351 Directors of the Company control 2.7% (2021: 2.9%) of the voting shares of the Company. Subsidiaries FLYHT Inc. AeroMechanical Services USA Inc. FLYHT Corp. FLYHT India Corp. FLYHT Germany GmbH CrossConsense GmbH & Co. KG CrossConsense Services GmbH 29. Contractual Arrangement Country of Incorporation United States United States Canada Canada Germany Germany Germany Ownership interest 100% 100% 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 network, the Company may be required to repurchase, at discounted rates, certain AFIRS units. The Chinese government has continued with a process of issuing waivers for the use of the Iridium frequency to aircraft needed for usage in China. This is the same process that they have used for many years, but more recently they moved to issuing three-year grants to Iridium Satellite LLC. versus a yearly grant that they had in the past. Given the prevalent use of Iridium services in China and the extensions of waivers reported by Iridium Satellite LLC, the likelihood of a liability under these contracts is considered to be remote. 62- CORPORATE INFORMATION Registrar and Transfer Agent Odyssey Trust Company 1.587.885.0960 https://odysseytrust.com/ Share Listing Shares are traded on the TSX Venture Exchange (TSX.V: FLY) and the OTCQX Marketplace (OTCQX: FLYLF) Investor Relations investors@flyht.com 1.403.250.9956 www.flyht.com FNK IR LLC flyht@fnkir.com 1.646.809.2183 Satichi Consulting Inc. dkim@flyht.com 1.416.728.5630 Directors Nina Jonsson Brent Rosenthal Doug Marlin Jack Olcott Mary McMillan Mike Brown Paul Takalo Officers Kent Jacobs Alana Forbes Darrel Deane Scott Chambers Gurjot Bhullar Auditor KPMG LLP Legal Counsel Chris Croteau Head Office Chairman, FLYHT Aerospace Solutions Ltd. Mountain Hawk Capital Partners, LLC President, Marlin Ventures Ltd. President, General Aero Company Director Partner, Nanaimo Law Director President and Interim Chief Executive Officer Chief Financial Officer Vice President Solutions Vice President Sales and Marketing Vice President Operations Calgary, Alberta Tingle Merrett LLP, Calgary, Alberta #500, 1212 - 31 Avenue NE Calgary, Alberta T2E 7S8 63- FLYHT AEROSPACE SOLUTIONS LTD. ANNUAL REPORT 2022