_____________________________________________________________
Financial Statements (Unaudited)
Six Months Ended as at June 30, 2006
Page 1
Norsat International Inc.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
(Unaudited)
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 548,591 | $ | 1,789,857 | |||
Cash Held in Trust | - | 668,281 | |||||
Short-term investments | 37,000 | 37,000 | |||||
Accounts receivable | 2,272,545 | 2,954,785 | |||||
Inventories | 5,342,546 | 3,973,806 | |||||
Prepaid expenses and other | 446,582 | 369,789 | |||||
8,647,264 | 9,793,518 | ||||||
Property and equipment | 884,774 | 713,500 | |||||
Deferred finance costs | 9,821 | 17,054 | |||||
$ | 9,541,859 | $ | 10,524,072 | ||||
Liabilities and Shareholders' Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 2,747,042 | $ | 2,641,129 | |||
Accrued liabilities | 783,520 | 1,870,211 | |||||
Deferred revenue | 70,930 | 398,337 | |||||
Convertible debt | 2,031,837 | - | |||||
Current liabilities from discontinued operations | 52,112 | 52,112 | |||||
5,685,441 | 4,961,789 | ||||||
Obligations (note 9) | |||||||
Long-term debt | - | 2,007,942 | |||||
Shareholders' equity: | |||||||
Share capital (note 3) | 43,845,701 | 41,415,794 | |||||
Contributed surplus ( note 3) | 2,493,947 | 1,771,473 | |||||
Equity component of convertible debt | 2,190,779 | 2,190,779 | |||||
Deficit | (44,674,009 | ) | (41,823,705 | ) | |||
3,856,418 | 3,554,341 | ||||||
$ | 9,541,859 | $ | 10,524,072 | ||||
See accompanying notes to consolidated financial statements. |
Page 2
Norsat International Inc.
Consolidated Statements of Operations and Deficit
(Unaudited - Expressed in Canadian Dollars)
Three months ended June 30, | Six months ended June 30, | ||||||||||||
2006 | 2005 (Restated) (Note 8) | 2006 | 2005 (Restated) (Note 8) | ||||||||||
Sales | $ | 3,763,822 | $ | 6,155,243 | $ | 6,683,276 | $ | 8,674,362 | |||||
Cost of sales | 2,010,703 | 3,056,543 | 3,794,790 | 4,616,865 | |||||||||
1,753,119 | 3,098,700 | 2,888,486 | 4,057,497 | ||||||||||
Expenses: | |||||||||||||
Selling, general and administrative | 2,289,450 | 3,025,784 | 4,222,012 | 4,503,943 | |||||||||
Product development | 242,871 | 505,592 | 1,060,481 | 914,441 | |||||||||
Amortization | 160,229 | 174,523 | 284,255 | 333,789 | |||||||||
2,692,550 | 3,705,899 | 5,566,748 | 5,752,173 | ||||||||||
Earnings (loss) from continuing operations before other expenses and income taxes | (939,431 | ) | (607,199 | ) | (2,678,262 | ) | (1,694,676 | ) | |||||
Other expenses (note 4) | 128,807 | 638,821 | 170,220 | 731,779 | |||||||||
Earnings (loss) from continuing operations before income taxes before other expenses | (1,068,238 | ) | (1,246,020 | ) | (2,848,482 | ) | (2,426,455 | ) | |||||
Income tax expense | 8 | (4,814 | ) | 1,822 | 1,879 | ||||||||
Earnings (loss) continuing operations | (1,068,246 | ) | (1,241,206 | ) | (2,850,304 | ) | (2,428,334 | ) | |||||
Recovery (loss) from discontinued operations | - | - | - | (512 | ) | ||||||||
Net earnings (loss) | (1,068,246 | ) | (1,241,206 | ) | (2,850,304 | ) | (2,428,846 | ) | |||||
Deficit, beginning of period | (43,605,763 | ) | (37,122,046 | ) | (41,823,705 | ) | (35,934,407 | ) | |||||
Deficit, end of period | $ | (44,674,009 | ) | $ | (38,363,253 | ) | $ | (44,674,009 | ) | $ | (38,363,253 | ) | |
Net (loss) earnings per common share - basic and diluted (note 5) | |||||||||||||
Continuing operations | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.06 | ) | |
Discontinued operations | $ | - | $ | - | $ | - | $ | - | |||||
Net earnings (loss) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.06 | ) | |
See accompanying notes to consolidated financial statements. |
Page 3
Norsat International Inc.
Consolidated Statements of Cash Flows
(Unaudited - Expressed in Canadian Dollars)
Three months ended June 30, | Six months ended June 30, | ||||||||||||
2006 | 2005 (Restated) | 2006 | 2005 (Restated) | ||||||||||
Cash provided by (used in): | |||||||||||||
Operations: | |||||||||||||
Loss from continuing operations | $ | (1,068,246 | ) | $ | (1,241,206 | ) | $ | (2,850,304 | ) | $ | (2,428,334 | ) | |
Items not involving cash: | |||||||||||||
Amortization | 160,229 | 174,523 | 284,255 | 333,789 | |||||||||
Modification of Conversion price of the Convertible debt | - | 374,818 | - | 374,818 | |||||||||
Interest accreted on long-term debt and deferred finance cost amortization | 51,946 | 126,862 | 112,534 | 214,906 | |||||||||
Foreign exchange loss (gain) | (226,269 | ) | 20,110 | (191,241 | ) | 10,926 | |||||||
Stock-based compensation | 41,722 | 673,055 | 66,509 | 709,286 | |||||||||
Changes in non-cash working capital (note 7) | 619,581 | (1,982,519 | ) | (1,930,913 | ) | (2,181,485 | ) | ||||||
Cash used in continuing operations | (421,037 | ) | (1,854,357 | ) | (4,509,160 | ) | (2,966,094 | ) | |||||
Recovery from discontinuedoperations | - | - | - | (512 | ) | ||||||||
Changes in non-cash working capital | 137 | - | 464 | ||||||||||
(421,037 | ) | (1,854,220 | ) | (4,509,160 | ) | (2,966,142 | ) | ||||||
Investments: | |||||||||||||
Net purchase of property and equipment | (241,014 | ) | (71,074 | ) | (455,529 | ) | (204,425 | ) | |||||
Sale (purchase) of short-term investments | - | - | - | 35,000 | |||||||||
(241,014 | ) | (71,074 | ) | (455,529 | ) | (169,425 | ) | ||||||
Financing: | |||||||||||||
Proceeds on exercise of stock options | - | - | 132,062 | - | |||||||||
Proceeds on exercise of warrants | - | 473,488 | - | 473,488 | |||||||||
Proceeds on private placement | (22,133 | ) | - | 3,622,091 | |||||||||
(22,133 | ) | 473,488 | 3,754,153 | 473,488 | |||||||||
Effect of change in exchange rates on cash | 4,297 | 7,120 | (30,730 | ) | 24,136 | ||||||||
Increase (decrease) in cash and cash equivalents | (679,887 | ) | (1,444,686 | ) | (1,241,266 | ) | (2,637,943 | ) | |||||
Cash and cash equivalents, beginning of period | 1,228,478 | 3,784,953 | 1,789,857 | 4,978,210 | |||||||||
Cash and cash equivalents, end of period | $ | 548,591 | $ | 2,340,267 | $ | 548,591 | $ | 2,340,267 | |||||
Supplemental cash flow and other disclosures (note 7). | ||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||
Page 4
Norsat International Inc.
Notes to the Consolidated Financial Statements
Six months ended June 30, 2006
(Unaudited - Expressed in Canadian dollars)
1. Organization and going concern
The Company is incorporated under the law of British Columbia and its principal business activities include the marketing, design and sales of microwave products and portable satellite products that provide rapidly deployable broadband satellite data and video continuity in areas where traditional communication infrastructure is insufficient, damaged or non-existent.
The Company has incurred recurring operating losses that raise substantial doubt about its ability to continue as a going concern. Management has been able, thus far, to finance the operations through a series of equity financings. In 2006, the Company received net proceeds of $2,975,943 in connection with the issuance of equity financing and received $132,063 on the exercise of outstanding options. Management plans to continue to seek other sources of financing on favorable terms; however, there are no assurances that any such financing can be obtained on favorable terms, if at all. Management plans to keep its operating costs to a minimum until cash is available through financing or operating activities. There are no assurance that the Company will be successful in achieving these goals.
In view of these conditions, the ability of the Company to continue as a going concern is dependent upon achieving profitable operations and on the ability of the Company to obtain additional financing. The outcome of these matters can not be predicted at this time. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue in business.
2. Basis of Presentation
These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial reporting, and the accounting polices used, are consistent with the most recent audited annual financial statements. There were no significant changes in accounting policies or estimates since the fiscal year ended December 31, 2005. These financial statements do not contain all disclosures required by Canadian GAAP for annual financial statements, and accordingly, should be read together with the audited annual consolidated financial statements, accompanying notes and management discussion and analysis included in the Company's 2005 Annual Report.
The Company has recently became aware that certain disclosures designed to reconcile Canadian GAAP to United States GAAP in Note 22 “Reconciliation to United States accounting principles” to the 2005 Consolidated Financial Statements may be misstated. The effects, if any, arising from this matter are currently undergoing an in-depth review by management. Depending on the results of management’s procedures, the 2005 Consolidated Financial Statements may be restated. The outcomes of these procedures cannot be predicted at this time.
The results for the three months ended June 30, 2006 may not be indicative of the results that may be expected for the full year or any other period.
The interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, which presume the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
3. Share Capital
(a)
Authorized
75,000,000 common shares without par value
Page 5
Norsat International Inc.
Notes to the Consolidated Financial Statements
Six months ended June 30, 2006
(Unaudited - Expressed in Canadian dollars)
(b) Issued
Shares issued and outstanding | ||
Number # | Amount $ | |
Balance, December 31, 2005 | 42,708,082 | 41,415,794 |
Private placement, net of costs, March 6, 2006 (i) | 4,086,976 | 2,205,892 |
Share purchase options exercised | 267,500 | 132,062 |
Credit to share capital due to options exercised | 91,953 | |
Balance, June 30, 2006 | 47,062,558 | 43,845,701 |
(i)
Private Placement:
On March 6, 2006 the Company closed a private placement for the sale of 1,021,744 units at US$3.00 per unit for gross proceeds of US$3,065,232. Each unit consisted of 4 common shares and 3 common share warrants each convertible into one common share at an exercise price of US$0.75 and a term to maturity of two years. The Company paid a placement fee of 10% of the gross proceeds. The net proceeds of the private placement of $2,953,810 is being used for working capital in connection with the commercialization, production and sale of the Norsat GLOBETrekker portable satellite system and other similar systems.
Under Canadian GAAP, we have bifurcated the proceeds between the shares and the warrants based on their relative fair values. The assigned fair value of the common shares ($3,719,148) was calculated by using the TSX share price on the date of issuance ($0.91), and the fair value of the warrants ($1,248,469) was determined using the Black-Scholes valuation model. Net proceeds of $2,953,810 were then allocated based on the percentage of these relative fair values. The amount allocated to common shares ($2,205,892) is accounted for as common shares and the amount allocated to the warrants ($747,918) is accounted for as contributed surplus.
(c) Share purchase option plan
The Company has reserved 6,306,505 common shares under its 1999 (amended)incentive share option plan. The plan provides for the granting of stock options at the fair market value of the Company at the grant date, with terms to a maximum of ten years and vesting provisions to be determined by the board of directors.
The continuing schedule of share purchase option is as follows:
Share purchase option outstanding | Number of options | Weighted average exercise price |
Balance, December 31, 2005 | 2,530,150 | $ 1.59 |
Granted | 165,000 | 0.89 |
Exercised | (267,500) | 0.49 |
Expired/canceled | (433,250) | 1.21 |
Balance, June 30, 2006 | 1,994,400 | $ 1.61 |
Page 6
Norsat International Inc.
Notes to the Consolidated Financial Statements
Six months ended June 30, 2006
(Unaudited - Expressed in Canadian dollars)
The following table summarizes information pertaining to the Company’s share purchase options outstanding at June 30, 2006:
Options outstanding | Options exercisable | |||||
Range of exercise prices | Number of options outstanding | Weighted average remaining contractual life(years) | Weighted average exercise price | Number of options exercisable | Weighted average exercise price | |
$0.50 to $2.39 | 1,644,400 | 4.04 | $1.06 | 1,081,400 | $1.00 | |
$2.40 to $4.29 | 175,000 | 4.28 | $2.95 | 175,000 | $2.95 | |
$4.30 to $6.19 | 175,000 | 4.28 | $5.33 | 175,000 | $5.33 | |
$0.50 to $6.19 | 1,994,400 | 4.09 | $1.60 | 1,431,400 | $1.77 |
The exercise price of all share purchase options granted during the period are equal to the market price at the grant date. Using an option pricing model with assumptions noted below, the estimate fair value of all options granted to during 2006 and 2005 have been reflected in the statements of operations as follows:
Three months ended June 30 | Six months ended June 30 | ||||
2006 | 2005 | 2006 | 2005 | ||
Stock-based compensation recognized in operations | 41,722 | 673,055 | 66,509 | 709,206 | |
Total compensation credited to contributed surplus | 41,722 | 673,055 | 66,509 | 709,286 |
The weighted average assumptions used to estimate the fair value of options during the period were:
Three months ended June 30 | Six months ended June 30 | ||||
2006 | 2005 | 2006 | 2005 | ||
Risk free interest rate | 4.110 | 3.480 | 3.988 | 3.436 | |
Expected life | 4.085 | 4.565 | 4.085 | 4.565 | |
Vesting period | 2 to 10 years | 2 to 10 years | 2 to 10 years | 2 to 10 years | |
Expected volatility | 86.38% | 99.09% | 88.07% | 93.16% | |
Expected dividends | nil | nil | nil | nil |
Option price models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the faire value estimate, and therefore the existing models may not necessarily provide a reliable measure of the fair value of the Company’s share purchase options.
Page 7
Norsat International Inc.
Notes to the Consolidated Financial Statements
Six months ended June 30, 2006
(Unaudited - Expressed in Canadian dollars)
(d) Warrants
The continuity of share purchase warrants is as follows:
Expiry date | 28-Apr-06 | 8-Apr-09 | 6-Mar-08 | Total |
Exercise price | US$0.42 | $1.09 | US$0.75 | Number of warrants outstanding |
Balance, December 31, 2005 | 1,330,000 | 1,206,811 | - | 2,536,811 |
Upon issue for private placement (note 3 (b) [i]) | - | - | 3,065,232 | 3,065,232 |
Upon expiration | (1,330,000) | - | - | (1,330,000) |
Balance, June 30, 2006 | - | 1,206,811 | 3,065,232 | 4,272,043 |
(e) Contributed surplus
Balance, December 31, 2005 | $ 1,771,473 |
Change during 2006 | |
Non-cash stock-based compensations | 66,509 |
Credit to share capital due to options exercised | (91,953) |
Allocation of proceeds from private placement to warrants | 747,918 |
Balance, June 30, 2006 | $ 2,493,947 |
4. Other Expenses
Three months ended June 30, | Six months ended June 30, | ||||||||||||
2006 | 2005 (Restated) | 2006 | 2005 (Restated) | ||||||||||
Net interest - cash | $ | (5 | ) | $ | 43,429 | $ | 44,433 | $ | 83,218 | ||||
Interest - non-cash | 102,567 | 79,529 | 156,591 | 167,573 | |||||||||
Foreign currency loss (gain) | 26,245 | 141,045 | (30,804 | ) | 106,170 | ||||||||
Modification of conversion price of conversion debt | - | 374,818 | - | 374,818 | |||||||||
$ | 128,807 | $ | 638,821 | $ | 170,220 | $ | 731,779 |
5. Earnings Per Share
As the Company has a net loss from continuing operations in the period presented in the current year, basic and diluted net loss per share are the same, as the exercise of in the money warrants or options would be anti-dilutive. The weighted average number of shares used in calculating basic net loss per share for the three months ended June 30, 2006 was 47,062,558 (2005 – 39,879,755).
Page 8
Norsat International Inc.
Notes to the Consolidated Financial Statements
Six months ended June 30, 2006
(Unaudited - Expressed in Canadian dollars)
6. Segmented Information
The following tables set forth information by operating segments from continuing operations for the three months and six months ended June 30, 2006, 2005 and December 31, 2005 respectively.
Three months ended June 30 | Six months ended June 30 | ||||
2006 | 2005 | 2006 | 2005 | ||
Sales | $ | $ | $ | $ | |
Microwave | 2,316,741 | 1,937,923 | 4,229,287 | 3,883,107 | |
Satellite system | 1,447,108 | 4,217,320 | 2,453,989 | 4,791,255 | |
3,763,849 | 6,155,243 | 6,683,276 | 8,674,362 | ||
Profit | |||||
Microwave | 1,096,856 | 831,377 | 1,925,292 | 1,528,860 | |
Satellite system | 656,292 | 2,267,324 | 963,194 | 2,528,638 | |
1,753,148 | 3,098,701 | 2,888,486 | 4,057,498 |
Microwave | Satellite System | Consolidated | ||
As at June 30, 2006 | $ | $ | $ | |
Total assets related to continuing operations | 6,038,245 | 3,503,614 | 9,541,859 | |
Property and equipment | 559,900 | 324,874 | 884,774 | |
As at December 31, 2005 | ||||
Total assets related to continuing operations | 3,050,148 | 7,473,924 | 10,524,072 | |
Property and equipment | 61,195 | 652,305 | 713,500 |
7. Supplemental cash flow and other disclosures
Three months ended June 30, | Six months ended June 30, | ||||||||||||
2006 | 2005 (Restated) | 2006 | 2005 (Restated) | ||||||||||
Changes in non-cash operating working capital: | |||||||||||||
Accounts receivable | $ | 317,253 | $ | (3,479,350 | ) | $ | 721,102 | $ | (3,383,395 | ) | |||
Inventories | (931,684 | ) | 961,698 | (1,368,740 | ) | 451,308 | |||||||
Prepaid expenses and other | 46,429 | (32,066 | ) | (69,560 | ) | 38,411 | |||||||
Accounts payable and accrued liabilities | 1,273,206 | 292,077 | (879,681 | ) | 442,741 | ||||||||
Deferred financial costs | (9,979 | ) | - | (6,627 | ) | - | |||||||
Deferred revenue | (75,644 | ) | 275,122 | (327,407 | ) | 269,450 | |||||||
$ | 619,581 | $ | (1,982,519 | ) | $ | (1,930,913 | ) | $ | (2,181,485 | ) | |||
Supplementary information: | |||||||||||||
Interest paid | $ | nil | $ | nil | $ | 90,930 | $ | 96,936 | |||||
Income taxes paid | $ | nil | $ | nil | $ | nil | $ | nil |
Page 9
Norsat International Inc.
Notes to the Consolidated Financial Statements
Six months ended June 30, 2006
(Unaudited - Expressed in Canadian dollars)
8. Comparative Figures
Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in 2006.
9. Commitments
Future minimum payments at June 30, 2006 under various purchasing commitments, loan commitments and operating lease agreements for each of the next five years are approximately as follows:
2006 | $ 5,285,613 |
2007 | 2,682,773 |
2008 | 442,892 |
2009 | 420,692 |
2010 | 420,692 |
In the normal course of operations the Company enters into purchase commitments. The Company has accrued for estimated losses, if any, when determinable, including losses on disputed purchase commitments with suppliers. Included in 2006 commitment are the new office renovation contracts of $400,000 and inventory and material purchase of $4,595,000. Included in 2007 is the scheduled repayment on March 31, 2007 of the $US 2,000,000 convertible note.
10. Subsequent Events
Subsequent to June 30, 2006, 26,750 stock purchase options were canceled.
Page 10