AMA Q2 2010 Report


Published on

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

AMA Q2 2010 Report

  1. 1. 2010 Second Quarter ReportTSX.V: AMA
  2. 2. Letter to the ShareholdersTo Our Shareholders,While we are not at proud of our Q2 financial results, we are pleased to report on a number ofdevelopments that will reward us and you for staying the course with our strategy.While the global economic recovery is delayed and will apparently take time to return to previouslevels, recovery in parts of the aviation industry has begun, which will unlock funds for purchases ofafirsTM UpTimeTM over the next 6-24 months. I just returned from the Farnborough International AirShow where we exhibited with our partner L-3 Communications. At the show, there were many signsof market improvement with new airplane orders, aftermarket product and services up ticks, and arenewed optimism. Major airlines are reporting profits, air cargo traffic is picking up again, andbusiness aircraft utilization is recovering. Therefore, financial footing is being established in theindustry for an acceleration of our growth.During the period that the industry has been slowly regaining its financial health, we have beenactively building the foundation for our future – in the marketplace, in our technology development,and in our staff and processes. For example, the AerCap relationship announced in February,although delayed by events in Europe, will, when consummated, engage us with a major lessor andAirbus, as well as providing a launch of our afirs 228 product that is fully compliant with Europe’s newregulations. Also in Europe in Q2, we successfully completed the in-service-evaluation of afirsUpTime on an aircraft owned by the world’s largest fleet operator of business aircraft, demonstratingan impressive array of financial and operational benefits that establish a solid business case forequipping that fleet.Our team, in cooperation with CMC Electronics, has successfully completed upgrades of several C-130 Hercules aircraft and the military end customer formally accepted the first 2 (of 20) upgradedaircraft in July, establishing the credibility of afirs UpTime and AMA in that market space. Finally,moving half way around the globe, the long-awaited approval to use Iridium for commercial aviation inChina has occurred and we are now receiving orders as operators in China start to train installationteams. In the last 6 weeks, we have received orders for 4 kits from 2 airlines, have received paymentfor and shipped 3. We also recently made a trip to China to demonstrate the fully functional systems.FLYHTStreamTM and FIRSTTM are of keen interest to both our end users and the government. Theplan is for each airline to build out by fleet type until all of their planes have afirs installed. We arecautiously optimistic that the full roll out in China has commenced.Our sales strategy is being revised to target specific industry segments with tailored solutions. TheBombardier Dash-8 Operators Conference in June was the first industry event where we rolled outthis new approach, and it has already produced results with a contract for 34 aircraft signed July 28with one of the largest and most active airlines in Scandinavia. An important Middle East customerinstalled its first 3 (of 10) systems after a year of bureaucratic delay and will increase its order as itsP. 2
  3. 3. fleet expands. In Nigeria, the stage is set for success with our hard-fought win to provide the first-everflight tracking center for Nigerian airspace. Also in Africa in July we signed a second airline contractthat was driven by flight tracking requirements.On the technology side, our unique data streaming technology, FLYHTStreamTM has been validatedby two independent working groups in Europe, the Oceanic Position Tracking ImprovementManagement Initiative (OPTIMI) for improved tracking of aircraft, and the French Bureau d’ Enqueteset d’ Analyses (BEA) team investigating the tragic accident of Air France 447. We receivedconsiderable attention from the industry during and after the Farnborough Air Show as a result of thepositive reports from these independent evaluations.On the operations front, we have strengthened our software development and program managementcompetencies and team which will allow us to better meet the growing demands of our customerbase. Our cash invested includes programmed one-time development expenditures on the new afirs228 which are necessary to get this critical product to market in a timely manner. As the order bookrebuilds, shipments ramp up, and our major product development project gets completed, thepressure on financial resources will be reversed accordingly.We want to thank our shareholders for their confidence and patience, and our staff and industrypartners for their superb and steady efforts during these challenging times for aviation. We are doingour best to reward your commitment to our team and company.Yours truly,Richard E. HaydenPresident P. 3
  4. 4. Management Discussion & AnalysisThis management discussion and analysis (“MD&A”) is as of August 12, 2010 and should be read inconjunction with the unaudited interim consolidated financial statements of AeroMechanical ServicesLtd. (“AMA” or the “Company”) for the six months ended June 30, 2010 and the accompanying notes.Additional information with respect to AMA can be found on SEDAR at which issupplemental to the unaudited interim consolidated financial statements and notes for the six monthperiod ended June 30, 2010.OverviewAMA is a designer, developer and service provider of patented innovative solutions to the globalaerospace business. The Company’s solutions are designed to improve the productivity andprofitability of our customers’ assets.The major products and services of the Company are:afirs UpTime: afirs stands for Automated Flight Information Reporting System (afirs™) and is a flightdata recorder that automatically records aircraft operational parameters, compiles and interprets thedata, and sends summary information to UpTime™, the server on the ground anywhere, anytime, inreal-time.FLYHT Fuel Management System: a tool that allows key decision makers to efficiently manage andunderstand fuel usage within their airline operation.FIRST: the Fuel initiative Reporting System Tracker (FIRST™) can work as part of or separately fromthe FLYHT Fuel Management System to help airlines measure and manage fuel usage.FLYHTStream™: an emergency data streaming mode that streams real-time data to the ground tobe analyzed immediately.aeroQ™: a cabin cleaning system that is designed to reduce the risk of infection from surfaces inpassenger aircraft due to biofilm infestations.Underfloor Stowage Unit: offers the flight crew additional stowage space in the cockpit for manualsand safety equipment that they can reach throughout the flight.These products and services are marketed and supported globally by a team of several employeesand agents based in Canada (Calgary and Ottawa), United States (Boston, Atlanta and Portland),United Kingdom, Ireland, France, Switzerland, India, United Arab Emirates and Argentina. One of theCalgary staff is currently spending 95% of his time in China working on opportunities there.Non-GAAP Financial MeasuresThe Company reports its financial results in accordance with generally accepted accounting principles(GAAP). It also occasionally uses certain non-GAAP financial measures, such as working capital,modified working capital and cash revenue. AMA defines working capital as current assets lessP. 4
  5. 5. current liabilities. The Company defines modified working capital as current assets less currentliabilities not including customer deposits or the current portion of unearned revenue. AMA definescash revenue as financial statement revenue plus arrangement consideration received during theperiod that has not yet been recognized as revenue in the period due to the required revenuerecognition criteria not yet being satisfied. These non-GAAP financial measures are always clearlyindicated. The Company believes that these non-GAAP financial measures provide investors andanalysts with useful information so they can better understand the financial results and perform abetter analysis of the Company’s growth and profitability potential. Since non-GAAP financialmeasures do not have a standardized definition, they may differ from the non-GAAP financialmeasures used by other companies. The Company strongly encourages investors to review itsfinancial statements and other publicly filed reports in their entirety and not rely on a single non-GAAPmeasure.Looking ForwardThe Company continues to improve and expand its products and services, develop its sales networkaround the world, and improve its delivery capacity and productivity.During the second quarter, the Company witnessed signs of a modest increase in capitalexpenditures across the international aviation industry which resulted in customer payment orshipment for 10 kits. On the shipment side there appears to be long awaited movement on the Chinaagreement with the payment or shipment for 3 kits in the quarter. During the second quarter theCompany continued to negotiate with potential customers but given the complex nature of the serviceoffering no new contracts were executed. Since the end of the quarter two agreements have beenexecuted for an aggregate of 36 aircraft with a total estimated potential revenue of USD $4,558,360over the five year terms of the agreements if AMA is able to install on all contracted aircraft andprovide recurring services for the full term of the agreements.In addition, the Company continues to meet the needs of the aviation industry through theintroduction of value-added information products and specialty services that can build customer valueand AMA revenues from existing installations as well as new ones. Three areas of concentrationcontinue to be the essential flight data recorder data streaming, fuel management program andrelated product enhancements, and fee-for-service consulting services. The Company views theseinitiatives as enhancing the value added to the industry and as strengthening the monthly recurringrevenue base.Various strategic relationships with leading organizations leverage our marketing capability worldwide. The teaming and seller agreement with L-3 Communications (“L-3”) gives AMA access to thesales network of the industry-leading manufacturer of flight data recorders (black boxes). The L-3agreement will allow AMA and L-3 to market and sell a bundled solution to the airline industry andAMA will be the exclusive provider to L-3 of Iridium based real-time solutions. The partnershipagreement with GuestLogix Inc. (TSX: GXI) allows for the joint marketing and selling of their real-timecredit and debit card transaction processing to the airline industry. The license and manufacturingagreement with Sierra Nevada Corporation (“SNC”) gives SNC the right to manufacture theCompany’s afirs product and market the afirs UpTime technology and products to the global militarymarket. AMA’s strategic relationship with Meggitt plc (MGGT:L) is to jointly market both companies’ P. 5
  6. 6. solutions to airlines and the military. These agreements provide AMA with a higher standard ofcredibility within the global aviation community and with access to prime contracts and airframemanufacturers.Results of Operations – Three Months Ended June 30, 2010RevenueAs shown in the Summary of Quarterly Results Table (on page 9), afirs and UpTime revenue as wellas other revenue consisting of consulting services, license fees, and interest revenue are producingthe expected results. The Company’s long term investment in marketing and relationship building hasgiven the Company a strong pipeline of prospective clients around the world. The ongoing revenuestreams from our existing client base is expected to continue to expand throughout this and futureyears. The installation delays associated with customers’ decisions to install afirs during heavymaintenance continue to delay revenue recognition, but they represent captive long-term recurringrevenue.The Company has two types of revenue streams relating to afirs equipment depending on the type ofservice agreement: (1) rental and (2) sales. In accordance with the Company’s revenue recognitionpolicy for rental type agreements, the arrangement consideration is deferred as unearned revenueand revenue is recognized over the initial term of the contracts. In the early stages of the Company’sgrowth, this will result in less recognized revenue than cash received. For sales type agreements,afirs fees are deferred as unearned revenue and corresponding expenses are recorded as work inprogress. When the system is fully functional and the customer has accepted the system, thedeferred amount is fully recognized in revenue along with the work in progress as cost of sales.Under both forms of agreement, UpTime usage fees are recognized as the service is provided basedon actual customer usage each month. For the Sierra Nevada Corporation (“SNC”) license fee, theamount received is deferred as unearned revenue and revenue is recognized over the initial 5 yearterm of the agreement.AMA received $1,704,791 in cash revenues in the quarter with $1,281,147 reported as revenue and$423,643 being included in unearned revenue, which compares to $2,783,947 in cash revenue in thesecond quarter of 2009 with $1,324,004 reported as revenue and $1,459,943 being included inunearned revenue. The decrease in cash revenue was primarily due to the lower level of paid for kitsor shipments.Revenue decreased $42,857 in the second quarter compared to the second quarter of last year. afirsUpTime revenues increased by $8,004 over the second quarter of 2009 as the result of increasedmonthly recurring revenue, recognition of sales type agreements, and the addition of monthlyrevenues from former Wingspeed customers. Product sales revenue decreased by $70,057 as theresult of decreased sales of Under Floor Stowage Units when compared to the second quarter of2009 as a result of a decreased emphasis on the sales and marketing of the product and theconcentration of efforts on AMA’s core afirs UpTime product line. Services revenue and interestincreased $19,196 over the second quarter of 2009 as the result of increased requirements forconsulting and engineering services by existing customers and interest earned on cash balances.P. 6
  7. 7. Revenue is expected to grow at a higher rate than costs because the Company has the infrastructure,sales people, and support organization in place to support revenue growth. The industry recognitionof the afirs UpTime product innovation has allowed AMA to continue to be active at several leadingindustry events. This shows that AMA’s products and services are being recognized as leading edgein this industry. In addition, the Company continues to grow its service offerings such as fuelmanagement which has the potential to increase both monthly recurring and one-time servicesrevenue.Cost of Sales and Gross MarginsAMA’s cost of product sales includes the direct cost of the afirs kit, installation, and training supportlabour as well as associated travel and shipping expenses. Installations on aircraft are performed bythird parties at the customer’s expense. Fuel management consulting costs are primarily-labour andtravel-related. The percentage cost of sales in the second quarter of 2010 is 41.7% compared to34.2% in 2009. This increase is due to the fluctuation between quarters in the mix of revenue coupledwith the change to sales type agreements. As well, decreased recurring revenue as a percentage oftotal revenue during the quarter will increase cost of sales as a percentage of total revenue since thecost of sales for recurring revenue is lower than that for afirs shipments and its corresponding non-routable supplies and support.The gross margin comparison for the past eight quarters is 58.3% for Q2 2010 compared to 59.3% forQ1 2010, 64.6% for Q4 2009, 45.6% for Q3 2009, 65.8% for Q2 2009, 51.5% for Q1 2009, 38.1% forQ4 2008, and 67.0% for Q3 2008.Net Loss, General Administrative and Marketing ExpensesThe net loss in the quarter ending June 30, 2010 was $2,548,584 compared to a loss of $1,333,969in the same quarter of 2009, which is an increase of $1,214,615. This increase is primarily due todecreased gross margin of $124,700 coupled with increased salaries and benefits of $157,330,increased general and administrative expenses of $16,844, increased research and development of$947,174, increased marketing of $116,082, decreased bad debt expense of $35,524, increasedamortization of $13,957, decreased stock based compensation of $76,235, and decreased foreignexchange loss of $54,377. If the direct costs associated with research and development, includingthe extensive development of the next generation afirs 228, were adjusted for the loss for the secondquarter of 2010 would be $1,370,475 or an increase of $267,441 compared to the second quarter of2009.Marketing expenses increased by $116,082 to $200,413 over the second quarter in 2009. Thesefigures do not include salaries, and are indicative of the focus of the sales and marketing team ondeveloping new business opportunities using both face to face communications and technology tomeet the needs of potential customers while minimizing the costs associated with marketing to theglobal aviation industry. We expect that expenses in marketing will remain the same or increase intothe future as the Company’s focus is on generating new customers. The promotion of the product lineto potential customers benefits from face to face meetings to build confidence of, and relationshipswith, future customers which creates the need for travel for senior staff to close the agreement. As P. 7
  8. 8. the aviation industry rebounds and the demand for the Company’s products and services increases,there is an anticipation that marketing costs will increase.Salaries continue to be the main cost of doing business for AMA. We provide sophisticated technicalproducts and services that our customers rely on for timely support of their fleets. A highly-qualifiedand motivated staff, scaled to the size of the customer base, is essential in meeting theseexpectations and achieving a reputation of dependability in the industry to facilitate our growth. TheCompany maintains staffing levels to meet these objectives. As a result of corporate objectives,opportunities and the development of the afirs 228, salaries and benefits increased by $157,330 from$1,026,055 in the second quarter of 2009 to $1,183,385 in the second quarter of 2010.Stock based compensation in the second quarter of 2010 was $231,115 versus $307,350 in thecorresponding period of 2009 due to 955,000 stock options being granted at a fair value of $0.24versus 1,500,000 at a fair value of $0.21 in the same quarter of 2009.Bad debt expense decreased $35,524 from the second quarter of 2009 as the result ofmanagement’s assessment of the collectability of accounts.General and administrative expenses increased by $16,844 to $431,601 compared to $414,757 in thefirst quarter of 2009 due mainly to increased legal costs of $47,724 related to the ongoing actionwhich was offset by a reduction in general office expenses of $21,448 and occupancy expenses of$8,211.Research and DevelopmentResearch and development costs for the second quarter of 2010 were $1,178,109 as compared to$230,935 in 2009, an increase of $947,174. The increase during the quarter is the result of the fullscale commencement of the development of the next generation afirs product (“afirs 228”) incollaboration with SNC. It is anticipated that this level of development will continue throughout 2010and 2011 as the afirs 228 and other products are brought to market. If the direct costs associated withresearch and development initiatives were removed from the calculation of net loss and cash flow theCompany’s net loss for the second quarter would be $1,370,475 and the cash outflow fromoperations would be $910,827. The majority of these costs are consulting, testing, certification, andother expenses and do not include internal labour costs.Foreign ExchangeThe Company is susceptible to foreign exchange fluctuations resulting from the significant portion ofits revenues being generated in U.S. dollars. The downward fluctuation of the Canadian dollar, andthe fact that a majority of the Company’s accounts receivable are denominated in United Statesdollars, would have resulted in foreign exchange losses but purchases of U.S. dollar denominatedservices and supplies offsets these losses creating an overall foreign exchange loss of $9,426 in thesecond quarter of 2010 as compared to foreign exchange loss of $63,803 for the same period in2009.P. 8
  9. 9. Summary of Quarterly Results Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10Revenue (cash) $ 1,498,481 $ 1,934,462 $ 2,828,469 $ 2,783,947 $ 1,133,796 $ 725,565 $ 1,338,670 $ 1,704,791Revenue (GAAP) 789,994 1,392,671 1,253,932 1,324,004 1,521,894 1,006,664 1,112,876 1,281,147Loss 1,814,010 1,912,469 1,299,036 1,333,969 717,268 1,189,445 2,068,591 2,548,584Loss/Share $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.01 $ 0.01 $ 0.02 $ 0.02Results of Operations – Six Months Ended June 30, 2010RevenueRevenues decreased by $183,913 in the first six months compared to the same period of 2009. afirsUptime revenues increased by $106,684 over the same six month period of 2009. Product salesrevenues decreased by $215,564 and license fees and interest decreased by $75,033 compared tothe corresponding six month period of 2009. Cash revenue for the first six months of 2010 was$3,403,461 compared to $5,612,416 in the same period of 2009, a decrease of $2,208,955.Cost of Sales and Gross MarginsPercentage Cost of Sales in the first six months of 2010 is 41.2% of sales compared to 41.1% in thesame period of 2009. This consistent cost of sales is due to a consistent level of afirs Uptimerevenue during the six month period and the ability of AMA to keep costs relatively constant. This hasresulted in a gross margin in the first six months of 2010 of 58.8% versus 58.9% in the same period of2009.Net Loss, General Administrative and Marketing ExpensesThe net loss in the six month period ending June 30, 2010 was $4,617,175 compared to a loss of$2,633,005 in the same six month period of 2009, which is an increased loss of $1,984,170. Thisincrease is primarily due to the decreased revenue in 2010 of $183,913 coupled with increasedresearch and development of $1,556,181, increased salaries and benefits of $339,278, increasedmarketing expenses of $142,556, decreased stock-based compensation of $65,016, decreasedgeneral and administration expenses of $146,332, increased bad debts of $93,513, and decreasedforeign exchange currency loss of $78,663. The overall increase in expenses during the first sixmonths ended June 30, 2010 versus the corresponding six month period of 2009 is primarily theresult of initiatives related to the development of the afirs 228 which if the direct costs associated withthose initiatives plus other research and development were removed the net loss for the first six P. 9
  10. 10. months of 2010 would be $3,060,994 versus $2,202,474 for the same period of 2009, an increase of$858,518. Stock based compensation decreased due to a decreased number of options beinggranted at reduced average fair market values. The increase in bad debts is the result of thereceivership of two airline customers.Research and DevelopmentResearch and development costs for 2010 were $1,986,712 as compared to $430,531 in 2009, anincrease of $1,556,181, which is primarily the result of the initiatives related to the development of theafirs 228. There is also ongoing design, testing, and certification of afirs and UpTime to add aircrafttypes to its approved installation list and the addition of service offerings such as FIRST, FLYHT FuelManagement System and FLYHTStream.Liquidity and Capital ResourcesAs of June 30, 2010 the Company had working capital of $2,777,722 compared to negative workingcapital of $35,718 in the same period of 2009 an increase of $2,813,440. The increase in the workingcapital is attributed primarily to an increase in cash of $2,816,304, increased accounts receivable of$197,376, increased prepaid and deposits of $5,333, increased inventory of $411,661, increasedaccounts payable of $287,971, an increase in the current portion of unearned revenue of $241,210,an increase in the current portion of loans payable of $46,733 and an increase in the current portionof obligation under capital leases of $41,320.The payables at June 30, 2010 include customer deposits totaling $692,741 compared to $1,253,516in the same period of 2009, a decrease of $560,775. As well, the current portion of unearned revenueincreased $241,210 to $1,664,263 at June 30, 2010. Neither the customer deposits nor currentportion of unearned revenue are refundable and if they were not included in the working capitalcalculation, the resulting modified working capital at June 30, 2010 would be $5,134,726 compared to$2,640,851 in the same period of 2009, an increase of $2,493,875.The Company’s ability to continue is dependent upon attaining and sustaining profitable operationsand obtaining additional financing in order to fund its working capital requirements and on-goingoperations. The Company’s ability to attain profitable operations and positive cash flow in the future isdependent upon various factors, including its ability to acquire new customer contracts, the successof management’s continued cost controls and general economic conditions.The Company currently has no bank debt and has an operating line of $250,000 which as of June 30,2010 was at a nil balance. The operating line bears interest at Canadian chartered bank prime plus1.5%, and is secured by assignment of cash collateral and a general security agreement.ContingenciesThe Company is defending itself in an action for which the Company believes the amount of liability isundeterminable at this time. No liability has been accrued for claims on this action.In September 2007, the Company, among others, was served with a counterclaim alleging that theCompany induced a breach of contract and interfered with economic relationships. The CompanyP. 10
  11. 11. maintains that the claims are without merit and no liability has been included in these consolidatedinterim financial statements, as management intends to vigorously defend the matter and believes theoutcome will be in its favour. On November 7, 2007 the Company filed a Statement of Defense and acounterclaim against three parties for their interference with legally binding contracts, disruptedbusiness, attacks on the Company’s reputation, and costs. Any amounts awarded as a result of theseactions will be reflected in the year the amounts become reasonably estimable. The Company’s legalcounsel has commenced the discovery process.CommitmentsThe Company has entered into various leases for its operating premises and equipment. Futureminimum annual payments under these operating leases are as follows: Year Premises Equipment Total 2010 210,896 58,102 268,998 2011 432,652 90,328 522,980 2012 445,685 32,319 478,004 2013 458,718 458,718 2014 76,815 76,815 $ 1,624,766 $ 180,749 $ 1,805,515IFRS Changeover PlansInternational Financial Reporting Standards (“IFRS”) are to be implemented by the Company onJanuary 1st, 2011 and CSA Notice 52-320 requires that progress on IFRS changeover plans bedisclosed. AMA has completed a formal gap analysis of the differences between IFRS and CanadianGAAP. This analysis was reviewed by both the Audit Committee and external advisors. The Companyhas prepared white papers on areas of significant difference based on the detailed review that hasbeen completed and these are being reviewed by the IFRS implementation team. To date, AMA hasidentified the following areas where differences may occur but has not yet determined the potentialimpact on its financial statements. These areas are:1. Property Plant & Equipment The decision to adopt the cost model instead of revaluation will likely be made. Current depreciation rates have been reviewed and will most likely be deemed appropriate for all property, plant and equipment. First time adopters may use an optional exemption to use fair value as deemed cost upon date of transition. When this exemption is used, the deemed cost becomes the new IFRS cost basis and any accumulated depreciation recognized under Canadian P. 11
  12. 12. GAAP prior to transition is set to zero. The Company is continuing to assess whether the optional exemption will be used.2. Impairment IFRS results in increased exposure to impairment write downs. The movement from the existing afirs 220 to afirs 228 may result in impairment depending on the demand level for the afirs 220 at the time of transition. The Company has determined that it likely has two cash generating units (“CGU”). At each reporting date, the Company will assess whether there is an indication that an asset or CGU is impaired. If an indication exits, the asset’s or CGU’s recoverable amount will be estimated and compared to the carrying amount. An impairment loss maybe recognized if an asset’s (CGU’s) carrying amount exceeds its recoverable amount. At each reporting date, the Company will assess whether there is an indication that a previously recognized impairment loss has reversed. It is unlikely that there will be any impairment recognition in the Company’s financial statements at the transition date.3. Leases Based on analysis to date, the Company has determined that it is unlikely there will be changes in the classification of capital versus operating leases. Under IFRS, the capital leases will be renamed as finance leases. Initial direct costs for operating leases can be recognized as an asset and expensed over the lease term or expensed immediately by the lessee. It is likely the Company will opt to expense initial direct costs for operating leases immediately.Forward-Looking StatementsThis discussion includes certain statements that may be deemed “forward-looking statements” thatare subject to risks and uncertainty. All statements, other than statements of historical facts includedin this discussion, including, without limitation, those regarding the Company’s financial position,business strategy, projected costs, future plans, projected revenues, objectives of management forfuture operations, the Company’s ability to meet any repayment obligations, the use of non-GAAPfinancial measures, trends in the airline industry, the global financial outlook, expanding markets,research and development of next generation products and any government assistance in financingsuch developments, foreign exchange rate outlooks, new revenue streams and sales projections,cost increases as related to marketing, research and development, administration expenses, andlitigation matters, may be or include forward-looking statements. Although the Company believes theexpectations expressed in such forward-looking statements are based on a number of reasonableassumptions regarding the Canadian, U.S., and global economic environments, local and foreigngovernment policies/regulations and actions and assumptions made based upon discussions to datewith the Company’s customers and advisers, such statements are not guarantees of futureperformance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in theforward-looking statements include production rates, timing for product deliveries and installations,Canadian, U.S., and foreign government activities, volatility of the aviation market for the Company’sproducts and services, factors that result in significant and prolonged disruption of air travelworldwide, U.S. military activity, market prices, foreign exchange rates, continued availability ofP. 12
  13. 13. capital and financing and general economic, market, or business conditions in the aviation industry,worldwide political stability or any effect those may have on our customer base. Investors arecautioned that any such statements are not guarantees of future performance and that actual resultsor developments may differ materially from those projected in the forward-looking statements.Although the Company believes that the expectations reflected in such forward-looking statementsare 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-lookingstatements; accordingly, readers should not place undue reliance on forward-looking statements. Theforward-looking statements contained herein are current only as of the date of this document. TheCompany disclaims any intentions or obligation to update or revise any forward-looking statements orcomments as a result of any new information, future event or otherwise, unless such disclosure isrequired by law. P. 13
  14. 14. Auditors’ InvolvementNational Instrument 51-102, Part 4, subsection 4.3 (3) (a), requires that if an auditor has notperformed a review of the interim financial statements there must be an accompanying notice to theinterim statements indicating that the interim financial statements have not been reviewed by anauditor.The auditors of AeroMechanical Services Ltd. have not performed a review of the unaudited interimfinancial statements for the three and six month periods ended June 30, 2010 and June 30, 2009.P. 14
  15. 15. Consolidated Balance Sheet (UNAUDITED) June 30, 2010 December 31 2009ASSETSCURRENTCash and cash equivalents $ 3,592,119 $ 7,161,427Restricted cash 250,000 250,000Accounts receivable 730,763 529,869Deposits and prepaid expenses 147,108 288,177Inventory 2,288,834 2,418,375 7,008,824 10,647,848PROPERTY AND EQUIPMENT 467,729 478,968RENTAL ASSETS 166,252 143,539INTANGIBLE ASSETS 409,106 478,403 $ 8,051,911 $ 11,748,758LIABILITIESCURRENTAccounts payable and accrued liabilities $ 2,345,549 $ 1,270,748Current portion unearned revenue - Note 3 1,664,263 1,589,313Current portion of loans payable 123,222 109,536Current portion of obligation under capital lease 98,068 105,804 4,231,102 3,075,401UNEARNED REVENUE – Note 3 1,130,750 1,534,529LOANS PAYABLE 146,572 202,896OBLIGATION UNDER CAPITAL LEASE 72,820 118,147 5,581,244 4,930,973SHAREHOLDERS EQUITYSHARE CAPITAL – Note 4 35,595,442 35,550,028WARRANTS – Note 4 2,729,314 4,181,685CONTRIBUTED SURPLUS – Note 4 3,620,958 1,943,917ACCUMULATED OTHER COMPREHENSIVE INCOME (27) -DEFICIT (39,475,020) (34,857,845)Going concern (note 2) 2,470,667 6,817,785Contingencies (note 7) $ 8,051,911 $ 11,748,758 P. 15
  16. 16. Consolidated Statement of Loss and Deficit (UNAUDITED) For the three For the three For the six For the six months ended months ended months ended months ended June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009 REVENUE afirs UpTime revenue $ 1,159,627 $ 1,151,623 $ 2,163,110 $ 2,056,426 Product sales revenue 12,625 82,682 39,722 255,286 Services revenue 108,895 89,699 191,191 266,224 1,281,147 1,324,004 2,394,023 2,577,936 COST OF SALES 534,039 452,196 987,476 1,060,671 GROSS MARGIN 747,108 871,808 1,406,547 1,517,265 EXPENSES Salaries and benefits 1,183,385 1,026,055 2,455,467 2,116,189 General and administrative 431,601 414,757 767,014 913,346 Research and development 1,178,109 230,935 1,986,712 430,531 Marketing 200,413 84,331 338,309 195,753 Bad debt (1,657) 33,867 127,380 33,867 Amortization 49,852 35,895 94,631 66,343 Stock based compensation 231,115 307,350 242,334 307,350 Interest and bank charges 9,097 8,784 19,667 18,239 Foreign exchange currency (loss) gain 9,426 63,803 (12,143) 66,520 3,291,341 2,205,777 6,019,371 4,148,138 NET LOSS FOR THE PERIOD BEFORE INCOME TAXES (2,544,233) (1,333,969) (4,612,824) (2,630,873) Current income taxes 4,351 - 4,351 2,132 NET LOSS FOR THE PERIOD $ (2,548,584) $ (1,333,969) $ (4,617,175) $ (2,633,005) DEFICIT – Beginning of the period $ (36,926,436) $ (31,617,163) $ (34,857,845) $ (30,318,127) NET LOSS (2,548,584) (1,333,969) (4,617,175) (2,633,005) DEFICIT- END OF THE PERIOD $ (39,475,020) $ (32,951,132) $ (39,475,020) $ (32,951,132) NET LOSS PER SHARE – Basic and Diluted – Note 4 $ (0.02) $ (0.02) $ (0.04) $ (0.03)P. 16
  17. 17. Consolidated Statement of Comprehensive Income and Accumulated Other Comprehensive Income (UNAUDITED) For the three For the three For the six For the six months ended months ended months ended months ended June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009Net loss $ (2,548,584) $ (1,333,969) $ (4,617,175) $ (2,633,005)Unrealized loss on translation of US subsidiary (35) (146) (27) (377)Comprehensive loss $ (2,548,619) $ (1,334,115) $ (4,617,202) $ (2,633,382)Accumulated other comprehensive income, Beginning $ 8 $ (231) $ - $ -of periodUnrealized loss on translation of US subsidiary (35) (146) (27) (377)Accumulated other comprehensive income, June 30,2010 $ (27) $ (377) $ (27) $ (377) P. 17
  18. 18. Consolidated Statement of Cash Flows (UNAUDITED) For the three For the three For the six For the six CASH PROVIDED BY (USED IN): months ended months ended months ended months ended June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009 OPERATING ACTIVITIES Net loss $ (2,548,584) $ (1,333,969) $ (4,617,175) $ (2,633,005) Add items not affecting cash Amortization 49,852 35,895 94,631 66,343 Amortization of rental assets 9,089 28,399 18,155 58,891 Amortization of intangibles 34,648 - 69,297 - Write down of rental assets - - - 7,200 Stock based compensation 231,115 307,350 242,334 307,350 Unrealized foreign exchange (gain) loss 2,258 66,629 (14,878) 126,743 (2,221,622) (895,696) (4,207,636) (2,066,478) Net change in non-cash working capital balances – Note 5 132,686 1,154,968 833,007 2,213,903 (2,088,936) 259,272 (3,374,629) 147,425 FINANCING ACTIVITIES Issuance of common shares and warrants 5,400 - 27,750 - Repayment of capital leases (26,752) (12,548) (53,063) (21,107) Loan repayment (31,466) (33,031) (42,639) (48,489) (52,818) (45,579) (67,952) (69,596) INVESTMENT ACTIVITIES Purchase of property and equipment (75,289) - (83,392) (119,097) Purchase of rental assets (43,335) (193,498) (43,335) (220,858) Proceeds on sale of rental assets - 190,028 - 236,537 (118,624) (3,470) (126,727) (103,418) Change in cash and cash equivalents (2,260,378) 210,223 (3,569,308) (25,589) Cash and cash equivalents - beginning of period 5,852,497 565,592 7,161,427 801,404 Cash and cash equivalents - end of period $ 3,592,119 $ 775,815 $ 3,592,119 $ 775,815 SUPPLEMENTAL INFORMATION Taxes paid $ 4,351 $ - $ 4,351 $ 2,132 Interest earned 4,537 270 270 11,150 Cash and Cash Equivalents Cash in bank $ 3,592,119 $ 775,815 $ 3,592,119 $ 775,815 $ 3,592,119 $ 775,815 $ 3,592,119 $ 775,815P. 18
  19. 19. Notes to Consolidated Financial StatementsFor the Three and Six Month Periods Ended June 30, 2010 and 2009 (UNAUDITED)1. Significant accounting policies: These unaudited interim consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) on a basis consistent with those followed in the most recent audited annual financial statements for the year ended December 31, 2009. These unaudited interim consolidated financial statements do not include all note disclosures required by GAAP for annual consolidated financial statements. Accordingly, these statements should be read in conjunction with the Company’s annual audited financial statements for the year ended December 31, 2009.2. Going concern: At June 30, 2010, the Company had working capital of $2,777,722 (2009 - deficit $35,718) a deficit of $39,475,020 (2009 - $32,951,132), a loss from operations of $4,617,175 (2009 - $2,633,005) and negative cash flow from operations of $ 3,374,629 (2009 – positive $147,425). The Company’s ability to continue as a going concern is dependent upon attaining and sustaining profitable operations and/or obtaining additional financing in order to fund its ongoing operations. The Company’s ability to attain profitable operations and positive cash flow in the future is dependent upon various factors including its ability to acquire new customer contracts, the success of management’s continued cost containments and general economic conditions. There is no assurance that the Company will be successful in attaining and sustaining profitable operations and cash flows or raising additional capital to meet its working capital requirements. If the Company is unable to satisfy its working capital requirements from these sources, the Company’s ability to continue as a going concern and to achieve its intended business objectives could be adversely affected. These interim 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 balance sheet items. P. 19
  20. 20. 3. Unearned revenue: Balance December 31, 2009 $ 3,123,842 Installation access fees 720,004 License fees (128,760) Earned revenues (920,073) Balance June 30, 2010 2,795,013 Less current portion (1,664,263) $ 1,130,7504. Share capital: Authorized: Unlimited number of: Common shares Class A, B, and C preferred shares, issuable in series. The preferred shares may be issued in one or more series and 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 of each series. ISSUED: a) Common shares Number of Shares Value Balance December 31, 2009 103,498,386 $ 35,550,028 Exercise of employee options 104,000 27,750 Contributed surplus from the exercise of employee options 17,664 Balance June 30, 2010 103,602,386 $ 35,595,442 b) Stock Option Plan Weighted Average Number of Shares Exercise Price Outstanding December 31, 2009 2,784,496 $ 0.42 Options granted 975,000 0.41 Options exercised (104,000) 0.27 Outstanding June 30, 2010 3,655,496 $ 0.43 Exercisable June 30, 2010 3,430,496 $ 0.45P. 20
  21. 21. c) Contributed Surplus Balance December 31, 2009 $ 1,943,917 Stock based compensation 242,334 Employee stock options exercised (17,664) Warrants expired 1,452,371 Balance June 30, 2010 $ 3,620,958 The weighted average fair market value of the options granted was $0.28 per option. The fair value of the options granted was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 2.15%, expected life of 3.44 years, volatility of 112% and dividend yield rate of nil. d) Warrants Weighted Average Number of Warrants Exercise Price Outstanding December 31, 2009 11,527,499 $ 0.84 Warrants expired (2,407,500) 1.30 Outstanding June 30, 2010 9,119,999 $ 0.75The calculation of basic loss per share is based on the weighted-average number of commonshares outstanding during the three and six month periods ending June 30, 2010 of103,596,672 and 103,525,425 respectively (2009 – 82,500,219 and 82,500,219 respectively). P. 21
  22. 22. 5. Supplemental cash flow information: Change in Non-Cash Working Capital For the three For the three For the six For the six months ended months ended months ended months ended June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009 Accounts receivable $ (212,579) $ 510,338 $ (191,290) $ 502,696 Deposits and prepaid expenses 19,681 145,737 146,300 169,791 Inventory 109,799 208,043 132,002 (89,362) Accounts payable and accrued liabilities 377,040 421,981 1,074,824 500,013 Deferred lease inducement - - - (2,281) Unearned revenue (161,255) (131,131) (328,829) 1,133,046 $ 132,686 $ 1,154,968 $ 833,007 $ 2,213,9036. Financial instruments and financial risk management: The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short periods to maturity of these instruments. The fair value of the loans payable could not be determined as the timing of the repayment is difficult to estimate as it is dependent on future revenues. The nature of these instruments and the Company’s operations expose the Company to the following risks: Credit Risk Credit risk reflects the risk that the Company may be unable to collect amounts due to the Company from customers for its services, products, or other transactions that may be entered into by the Company. The extent of the risk depends on the credit quality of the party from which the amount is due. The Company employs established credit approval and monitoring practices to mitigate this risk, including evaluating the creditworthiness of new customers and monitoring customer payment performance. The Company also includes the ability to receive payments in advance for both services and product in its contracts with customers as well as the ability to suspend services and ongoing support. The Company establishes an allowance for doubtful accounts that corresponds to the credit risk of its customers, historical trends and economic circumstances.P. 22
  23. 23. During the six month period ended June 30, 2010, the Company recorded a bad debt expense of $127,380 to reflect accounts that the Company has determined may not be collectible and has a total reserve against receivables totaling nil. The aging of the accounts receivable as at June 30, 2010 is as follows: Current , 1 – 30 days $ 465,109 31 – 60 days 132,953 61 – 90 days 70,269 Greater than 90 days 62,432 $ 730,7637. Contingencies: In September 2007, the Company, among others, was served with a counterclaim alleging that the Company induced a breach of contract and interfered with economic relationships. The Company maintains that the claims are without merit. Management intends to vigorously defend the matter and believes the outcome will be in its favour. On November 7, 2007, the Company filed a statement of defense and a counterclaim against three parties for interference with legally binding contracts, disrupted business, attacks on the Company’s reputation, and costs. Any amounts awarded as a result of these actions will be reflected in the year the amounts become reasonably estimable. P. 23