Avcorp Announces 2017 Third Quarter Financial Results

November 15, 2017

VANCOUVER, Nov. 14, 2017 - Avcorp Industries Inc. (TSX: AVP) (the "Company", "Avcorp" or the "Avcorp Group") today announced its financial results for the quarter ended September 30, 2017. All amounts are in Canadian currency unless otherwise stated.

2017 Highlights

  • On April 4, 2017, the Company collected the final amount of consideration receivable from SGL Carbon SE ("SGL") for the acquisition of the US-based composite Aerostructures division of Hitco, a subsidiary of Frankfurt-listed SGL ("Hitco"), amounting to USD$9.2 million.
  • On May 26, 2017, the Company signed a loan agreement to replace the current agreement with a Canadian Chartered Bank, supported by a major customer, to access a USD$58 million operating line of credit (converted as approximately CAD$72.4 million as at September 30, 2017). The Company has utilized $51,481,000 of the operating line of credit, with $7,510,000 cash on hand, as at September 30, 2017.
  • Effective July 6, 2017 the Company and Panta Canada B.V. ("Panta") amended a term loan held by Panta to provide for an extended maturity date. Panta is Avcorp's majority shareholder owning approximately 68.6% of the issued and outstanding common shares on September 30, 2017. Panta is wholly owned by Panta Holdings B.V. Both companies are incorporated in The Netherlands and Mr. Jaap Rosen Jacobson, a director of the Company, is the sole shareholder of Panta Holdings B.V.
  • On July 31, 2017 the Company repaid a principal amount of USD$2.5 million plus interest accrued in the amount of USD$285,000 of the Panta term loan.
  • On August 3, 2017 Panta exercised 12,105,327 warrants expiring August 17, 2017 at $0.07 whose aggregate price of $847,000 was deemed to be made by way of set-off against the Panta loan obligation.
  • On August 25, 2017 Panta exercised 6,052,664 warrants expiring September 9, 2017 at $0.07 whose aggregate price of $424,000 was deemed to be made by way of set-off against the Panta loan obligation.
  • On September 8, 2017 Panta exercised 12,105,327 warrants expiring September 23, 2017 at $0.07 whose aggregate price of $847,000 was deemed to be made by way of set-off against the Panta loan obligation.
  • 2017 third quarter operating losses were reduced by $5.4 million relative to the same quarter in 2016; cost reduction initiatives and operational process changes are underway and commencing to have a positive financial impact.
  • New program start-up revenues total $2.8 million in 2017 in commencement of 2016 order backlog growth for new and legacy aircraft programs.
  • $2.9 million defense aerostructure contract awarded to ASI during the third quarter 2017.
  • During the third quarter 2017 customer contract renewals having an estimated $39 million value for commercial aerostructures were secured by ASI.
  • Six new customer production programs launched at ASI during 2017.
  • Effective July 1, 2017, the Company changed its functional currency from Canadian dollars ("CAD") to United States ("US") dollars ("USD") for Avcorp Industries Inc. and Comtek Advanced Structures Limited resulting in the entire company and all its subsidiaries having a USD functional currency.

Review of 2017 Third Quarter Financial Results

For the quarter ending September 30, 2017, the Avcorp Group recorded losses from operations totalling $6,644,000 from $36,267,000 revenue, which include costs incurred on start-up of new programs, as compared to $12,060,000 operating losses from $47,349,000 revenue for the same quarter in the previous year. During the third quarter 2017 the Company was successful in significantly reducing operating losses by $5,416,000 relative to the third quarter 2016. Turn around activities focused on cost reduction initiatives as well as operational process flow improvements contributing to the financial improvement.

During the quarter ended September 30, 2017, cash flows from operating activities, excluding the impact of changes in non-cash working capital, utilized $8,114,000 of cash as compared with utilization of $16,720,000 of cash during the quarter ended September 30, 2016 (utilization for nine months ended September 30, 2017: $29,902,000; utilization for nine months ended September 30, 2016: $49,069,000).  Cash flows from operating activities were most significantly impacted as a result of operating losses incurred from the integration and production costs expended for the acquired Hitco operations; losses arising from unfavourable customer contracts assumed; operational, administrative, and legal expenditures incurred in support of Avcorp's Gardena facility; as well as new program introduction and start-up costs at the Delta facility.

As at September 30, 2017, the Company had $7,510,000 cash on hand (December 31, 2016: $3,960,000) and had utilized $51,481,000 of its operating line of credit (December 31, 2016: $17,111,000). The Company has a USD$58 million operating line of credit (converted as approximately CAD$72.4 million as at September 30, 2017). The Company has a working capital deficit of $36,331,000 as at September 30, 2017 which has increased from the December 31, 2016 $5,439,000 deficit.  Working capital surplus/deficit is defined as the difference between current assets and current liabilities. However, the Company's accounts receivable and inventories net of accounts payable, amount to $45,917,000 as at September 30, 2017 (December 31, 2016: $38,399,000). The Company's accumulated deficit as at September 30, 2017 is $121,683,000 (December 31, 2016: $93,791,000).

The Company's complete financial statements and management's discussion and analysis for the year ended December 31, 2016 and quarter ended September 30, 2017 can be found at www.avcorp.com or at www.sedar.com.

About Avcorp

The Avcorp Group designs and builds major airframe structures for some of the world's leading aircraft companies, including BAE Systems, Boeing, Bombardier, Lockheed Martin and Subaru Corporation (formerly Fuji Heavy Industries Inc.).  The Avcorp Group has more than 50 years of experience, over 740 skilled employees and 636,000 square feet of facilities. Avcorp Structures & Integration located in Delta British Columbia, Canada is dedicated to metallic and composite aerostructures assembly and integration; Avcorp Engineered Composites located in Burlington Ontario, Canada is dedicated to design and manufacture of composite aerostructures, and Avcorp Composite Fabrication located in Gardena California, USA has advanced composite aerostructures fabrication capabilities for composite aerostructures. The Avcorp Group offers integrated composite and metallic aircraft structures to aircraft manufacturers, a distinct advantage in the pursuit of contracts for new aircraft designs, which require lower-cost, light‑weight, strong, reliable structures.  Comtek Advanced Structures Ltd., at our Burlington, Ontario, Canada location also provides aircraft operators with aircraft structural component repair services for commercial aircraft. 

Avcorp Composite Fabrication Inc. is wholly owned by Avcorp US Holdings Inc.  Both companies are incorporated in The State of Delaware, USA, and are wholly owned subsidiaries of Avcorp Industries Inc.

Comtek Advanced Structures Ltd., incorporated in the Province of Ontario, Canada, is a wholly owned subsidiary of Avcorp Industries Inc.

Avcorp Industries Inc. is a federally incorporated reporting company in Canada and traded on the Toronto Stock Exchange (TSX:AVP).

PETER GEORGE
CHIEF EXECUTIVE OFFICER
AVCORP GROUP

Forward-Looking Statements

This release should be read in conjunction with the Company's unaudited financial statements contained in the Company's Annual Report and with the quarterly financial statements and accompanying notes filed with Sedar (www.sedar.com).

Certain statements in this release and other oral and written statements made by the Company from time to time are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or projected revenues, income, returns or other financial measures.  These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following:  (a) changes in worldwide economic and political conditions that impact interest and foreign exchange rates; (b) the occurrence of work stoppages and strikes at key facilities of the Corporation or the Corporation's customers or suppliers; (c) government funding and program approvals affecting products being developed or sold under government programs; (d) cost and delivery performance under various program and development contracts; (e) the adequacy of cost estimates for various customer care programs including servicing warranties; (f) the ability to control costs and successful implementation of various cost reduction programs; (g) the timing of certifications of new aircraft products; (h) the occurrence of downturns in customer markets to which the Corporation products are sold or supplied or where the Corporation offers financing; (i) changes in aircraft delivery schedules or cancellation of orders; (j) the Corporation's ability to offset, through cost reductions, raw material price increases and pricing pressure brought by original equipment manufacturer customers; (k) the availability and cost of insurance; (l) the Corporation's ability to maintain portfolio credit quality; (m) the Corporation's access to debt financing at competitive rates; (n) uncertainty in estimating contingent liabilities and establishing reserves tailored to address such contingencies; and (o) integration of newly acquired operations and associated expenses may adversely affect profitability.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited, expressed in thousands of Canadian dollars)


September 30, 2017

December 31, 2016

ASSETS



Current assets



Cash

$7,510

$3,960

Accounts receivable

21,700

26,262

Consideration receivable

-

12,251

Inventories

46,966

44,259

Prepayments and other assets

4,543

4,144


80,719

90,876

Non-current assets



Prepaid rent and security

146

146

Development costs

6,857

5,200

Property, plant and equipment

28,218

31,930

Intangibles

4,583

4,887

Total assets

120,523

133,039




LIABILITIES AND EQUITY



Current liabilities



Bank indebtedness

51,481

17,111

Accounts payable and accrued liabilities

22,749

32,122

Current portion of term debt

1,249

6,283

Customer advance

7,468

8,034

Deferred program revenues

17,287

13,861

Unfavourable contracts liability

16,816

18,904


117,050

96,315

Non-current liabilities



Deferred gain and lease inducement

132

246

Term debt

1,919

1,646

Customer advance

580

3,539

Unfavourable contracts liability

29,314

38,065

Deferred program revenues

2,069

111


151,064

139,922

(Deficiency) Equity



Capital stock

82,420

80,302

Contributed surplus

7,319

6,744

Accumulated other comprehensive gain (loss)

1,403

(138)

Accumulated deficit

(121,683)

(93,791)


(30,541)

(6,883)

Total liabilities and (deficiency) equity

120,523

133,039

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(unaudited, expressed in thousands of Canadian dollars, except number of shares and per share amounts)


Three months ended
September 30

Nine months ended
September 30


2017

2016
restated

2017

2016
restated

Revenues

$36,267

$47,349

$111,521

$137,524






Cost of sales

38,244

53,061

122,175

146,305






Gross (loss) profit

(1,977)

(5,712)

(10,654)

(8,781)






Administrative and general expenses

4,589

6,263

15,561

16,465

Office equipment depreciation

78

85

216

392






Operating Loss

(6,644)

(12,060)

(26,431)

(25,638)






Finance costs – net

664

99

2,094

131

Foreign exchange loss (gain)

78

(873)

(648)

(993)

Net loss (gain) on sale of equipment

-

-

15

(50)






Loss before income tax

(7,386)

(11,286)

(27,892)

(24,726)






Income tax expense

-

-

-

-






Net loss for the period

(7,386)

(11,286)

(27,892)

(24,726)






Other comprehensive income (loss)

1,030

(126)

1,541

303






Net loss and total comprehensive loss for the period

(6,356)

(11,412)

(26,351)

(24,423)






Loss per share:





Basic and diluted loss per common share

(0.02)

(0.04)

(0.09)

(0.08)






Basic and diluted weighted average number of shares outstanding (000's)

320,036

307,141

311,487

306,428

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, expressed in thousands of Canadian dollars)


Three months ended
September 30

Nine months ended
September 30


2017

2016
restated

2017

2016
restated

Cash flows (used in) from operating activities





Net loss for the period

$(7,386)

$(11,286)

$(27,892)

$(24,726)


Adjustment for items not affecting cash:







Interest expense

668

23

1,506

61



Depreciation

980

888

3,009

2,616



Development cost amortization

235

243

1,127

530



Intangible assets amortization

306

319

980

990



Non-cash financing cost accretion

-

20

588

20



Loss (Gain) on disposal of equipment                                                 

-

-

15

(50)



Provision for unfavourable contracts

(2,693)

(8,587)

(7,127)

(25,280)



Provision for obsolete inventory

(366)

75

(281)

1,071



Stock based compensation

178

374

575

839



Unrealized foreign exchange

-

1,243

(2,302)

(5,044)



Other items

(36)

(32)

(100)

(96)

Cash flows (used in) operating activities before changes in non-cash working capital

(8,114)

(16,720)

(29,902)

(49,069)

Changes in non-cash working capital







Accounts receivable

1,021

(287)

3,604

(1,619)



Inventories

(3,808)

7,095

(4,952)

6,650



Prepayments and other assets

(1,783)

(1,324)

(670)

(1,344)



Accounts payable and accrued liabilities

418

(719)

(5,966)

6,925



Customer advance payable

(961)

(2,071)

(3,169)

(5,034)



Deferred program revenues

875

1,985

6,145

410

Net cash (used in) operating activities

(12,352)

(12,041)

(34,910)

(43,081)






Cash flows (used in) from investing activities





Proceeds from consideration receivable

-

6,490

12,378

25,429

Proceeds from sale of equipment

-

10

20

60

Purchase of equipment

(463)

(1,469)

(1,144)

(4,097)

Addition of developed software

(485)

-

(1,022)

-

Payments relating to development costs and tooling

(1,053)

(429)

(3,025)

(2,144)

Net cash (used in) from investing activities

(2,001)

4,602

7,207

19,248






Cash flows from (used in) financing activities





Increase in bank indebtedness

24,485

5,972

35,150

7,483

Payment of interest

(60)

(7)

(633)

(21)

Proceeds from term debt

260

2,623

1,473

2,682

Proceeds from issuance of common shares

-

-

-

113

Repayment of term debt

(3,668)

(38)

(4,961)

(201)

Net cash from financing activities

21,017

8,550

31,029

10,056

Net increase (decrease) in cash

6,664

1,111

3,326

(13,777)

Net foreign exchange difference

(2,504)

(821)

224

4,635

Cash - Beginning of the period

3,350

5,052

3,960

14,484

Cash - End of the period

7,510

5,342

7,510

5,342

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited, expressed in thousands of Canadian dollars, except number of shares)


Capital Stock






Number of
Shares

Amount

Contributed
Surplus

Deficit

Accumulated
Other
Comprehensive 
Income

Total
Deficiency

Balance December 31, 2015

305,555,184

80,158

4,453

(77,827)

-

6,784








Issue of Common Shares

1,586,000

113

-

-

-

1,586,113








Stock-based compensation expense

-

-

1,259

-

-

1,259








Forfeiture of issued stock options

-

-

(420)

-

-

(420)








Transfer to share capital on exercise of stock options

-

31

(31)

-

-

-








Fair value of warrants issued

-

-

501

-

-

501








Unrealized currency gain on translation for the period

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