NORSAT INTERNATIONAL INC.
Interim Consolidated Financial Statements
For the Nine Months Ended September 30, 2009
(Unaudited and expressed in US dollars)
Norsat International Inc.
Consolidated Balance Sheets
(Unaudited – Expressed in US Dollars)
September 30, | December 31, | |||
2009 | 2008 | |||
ASSETS | ||||
Current assets (note 8): | ||||
Cash and cash equivalents (note 3) | $ 7,171,152 | $ 983,062 | ||
Short term investments | 36,252 | 31,391 | ||
Accounts receivable, net (notes 7 & 17) | 2,507,659 | 6,807,386 | ||
Inventories | 4,115,548 | 4,497,415 | ||
Prepaid expenses and other | 417,990 | 271,735 | ||
Total current assets | 14,248,601 | 12,590,989 | ||
Long-termprepaid expenses and other (note 8) | 9,340 | 8,210 | ||
Property and equipment, net (note 8) | 705,091 | 727,786 | ||
Intangible (note 4 & 19) | 2,134,074 | - | ||
Total assets | $ 17,097,106 | $ 13,326,985 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
Current liabilities: | ||||
Accounts payable | $ 726,622 | $ 1,843,878 | ||
Accrued liabilities | 1,566,114 | 1,799,113 | ||
Deferred revenue | 970,853 | 457,007 | ||
Total current liabilities | 3,263,589 | 4,099,998 | ||
Long-termdeferred revenue | 692,291 | 622,552 | ||
Future income taxes (note 19) | 245,830 | - | ||
Total liabilities | 4,201,710 | 4,722,550 | ||
Shareholders' equity: | ||||
Share capital (note 10) | 39,716,766 | 37,825,476 | ||
Contributed surplus (note 10) | 3,583,790 | 3,522,738 | ||
Accumulated other comprehensive | 399,537 | (229,210) | ||
income (loss) (note 9) | ||||
Deficit | (30,804,697) | (32,514,569) | ||
Total shareholders' equity | 12,895,396 | 8,604,435 | ||
Total liabilities and shareholders' equity | $ 17,097,106 | $ 13,326,985 |
Commitments (note 16 &17)
See accompanying notes to unaudited interim consolidated financial statements.
2
Norsat International Inc.
Consolidated Statements of Earnings, Deficit and Comprehensive Income
(Unaudited – Expressed in US Dollars)
Three months ended Sep 30, | Nine months ended Sep 30, | ||||||||
2009 | 2008 | 2009 | 2008 | ||||||
Sales (note 13) | $ 5,141,130 | $ 4,888,547 | $ 15,032,201 | $ 11,777,097 | |||||
Cost of sales | 2,685,842 | 2,563,421 | 7,667,135 | 5,994,895 | |||||
2,455,288 | 2,325,126 | 7,365,066 | 5,782,202 | ||||||
Expenses: | |||||||||
Selling, general and administrative | 1,428,881 | 1,468,344 | 4,235,475 | 4,298,715 | |||||
Product development, net (note 17) | 170,836 | 82,968 | 638,970 | 493,572 | |||||
Amortization | 195,796 | 97,591 | 503,175 | 278,922 | |||||
1,795,513 | 1,648,903 | 5,377,620 | 5,071,209 | ||||||
Income for the period before | |||||||||
other income | 659,775 | 676,223 | 1,987,446 | 710,993 | |||||
Other (income) expense (note 11) | 16,976 | (65,858) | 277,574 | (171,025) | |||||
Income before income taxes | 642,799 | 742,081 | 1,709,872 | 882,018 | |||||
Income tax expense | - | - | 8 | ||||||
Net earnings for the period | 642,799 | 742,081 | 1,709,872 | 882,010 | |||||
Deficit, beginning of period | (31,447,496) | (34,574,401) | (32,514,569) | (34,999,726) | |||||
Transitional adjustment on | |||||||||
adoption of accounting policy | - | - | - | 285,396 | |||||
Deficit, end of period | $ (30,804,697) | $ (33,832,320) | $ (30,804,697) | $ (33,832,320) | |||||
Net earnings for the period | $ 642,799 | $ 742,081 | $ 1,709,872 | $ 882,010 | |||||
Other comprehensive income (loss): | |||||||||
Currency translation adjustment | - | (332,012) | 628,747 | (533,164) | |||||
Comprehensive income for the | $ 642,799 | $ 410,069 | $ 2,338,619 | $ 348,846 | |||||
period | |||||||||
Net earnings per common share - basic | $ 0.01 | $ 0.01 | $ 0.03 | $ 0.02 | |||||
and diluted (note 12) | |||||||||
Weighted number of shares outstanding | |||||||||
Basic | 59,331,843 | 53,698,078 | 58,097,757 | 53,094,526 | |||||
Diluted | 59,913,348 | 57,140,306 | 58,673,054 | 56,538,397 | |||||
See accompanying notes to unaudited interim consolidated financial statements. |
3
Norsat International Inc.
Consolidated Statements of Cash Flows
(Unaudited – Expressed in US Dollars)
Three months ended Sep 30, | Nine months ended Sep 30, | |||||||
2009 | 2008 | 2009 | 2008 | |||||
Cash and cash equivalents provided by (used in) | ||||||||
OPERATING ACTIVITIES: | ||||||||
Net earnings for the period | $ 642,799 |
| $ 742,081 | $ 1,709,872 |
| $ 882,010 | ||
Items not involving cash: |
|
|
|
|
|
|
| |
Amortization | 195,796 |
| 97,591 |
| 503,175 |
| 278,922 | |
Foreign exchange (gain) loss | 14,868 |
| 14,648 |
| 12,114 |
| (13,554) | |
Stock-based compensation (note 10c) | 43,267 |
| 42,097 |
| 103,823 |
| 108,895 | |
Government contribution (note 17) | 336,240 |
| (389,538) |
| 843,819 |
| (578,111) | |
Changes in inventory estimate | - |
| - |
| - |
| (88,589) | |
Changes in non-cash working capital (note 14) | 594,755 |
| (865,945) |
| 2,138,214 |
| (1,789,161) | |
Cash provided by (used in) operations | 1,827,725 |
| (359,066) |
| 5,311,017 |
| (1,199,588) | |
INVESTINGACTIVITIES: |
|
|
|
|
|
|
| |
Purchase of property and equipment | (153,732) |
| (70,529) |
| (245,012) |
| (294,498) | |
Redemption of short term investments | - |
| (14,788) |
| - |
| 46,264 | |
Cash used in investment activities | (153,732) |
| (85,317) |
| (245,012) |
| (248,234) | |
FINANCINGACTIVITIES: |
|
|
|
|
|
|
| |
Payment on the operating line of credit | - |
| - |
| - |
| (500,000) | |
Repurchase of common shares (note 10b) | (84,776) |
| - |
| (84,776) |
| - | |
Proceeds from exercise of warrants | 2,640 |
| 4,698 |
| 52,901 |
| 1,453,968 | |
and options (note 10b) |
|
|
|
|
|
|
| |
Proceeds from government contributions (note 17) | 591,104 |
| 85,184 |
| 1,218,077 |
| 219,085 | |
Cash provided by financing activities | 508,968 |
| 89,882 |
| 1,186,202 |
| 1,173,053 | |
Effect of foreign currency translation on | 7,211 |
| (41,305) |
| (64,117) |
| (38,872) | |
cash and cash equivalents |
|
|
|
|
|
|
| |
Increase (decrease) in cash and cash equivalents | 2,190,172 |
| (395,806) |
| 6,188,090 |
| (313,641) | |
Cash and cash equivalents, beginning of period | 4,980,980 |
| 768,673 |
| 983,062 |
| 686,508 | |
Cash and cash equivalents, end of period | $ 7,171,152 |
| $ 372,867 | $ 7,171,152 |
| $ 372,867 | ||
Supplemental cash flow and other disclosures (note 14) | ||||||||
See accompanying notes to unaudited interim consolidated financial statements. |
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
Norsat International Inc.
1. Nature of Business
The Company is incorporated under the laws 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’s business operates primarily through two business segments – Microwave Products and Satellite Systems. The Company has entered into two new business segments – Maritime Products and Wireless Networks, but the Company is still in the early stages in both these segments.
2. Basis of Presentation
These financial statements have been prepared by management 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 except for those included in note 4. 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 2008 annual consolidated financial statements included in the Company's 2008 Annual Report.
The results for the three and nine months ended September 30, 2009 may not be indicative of the results that may be expected for the full year or any other period.
Change in Functional Currency
On July 14, 2009, the Company completed a structural reorganization that transferred a significant portion of assets including customer relationships, patents and goodwill to a wholly owned subsidiary of the Company. Under the reorganized structure, Norsat International Inc., the parent entity, will only have limited activity and almost all of its revenues will be denominated in United States dollars. As a result of this change in circumstances, Norsat undertook a review of the functional currency exposures of all of its business units according to CICA Section 1651 Foreign Currency Translation and concluded that the currency exposures of its Canadian and foreign operations are now predominately in United States dollars. Prior to July 1, 2009, the Company’s functional currency was the Canadian dollar and the reporting currency the United States dollar. Effective July 1, 2009 the Company’s functional and reporting currency is the United States dollar. This results in all foreign currency impacts of holding non-US dollar denominated financial assets and liabilities being recorded through the statement of earnings rather than included in translation gains and losses deferred in accumulated other comprehensive income (“AOCI”). The Company accounted for this change prospectively and any amounts that had been previously deferred in AOCI continue to be included in AOCI unless there is a realized reduction in net investment in its operations. The translated amounts on June 30, 2009 become the historical basis for all balance sheet items as at July 1, 2009, except for shareholders’ equity at historical cost.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short term, highly liquid interest bearing term deposits that are readily convertible to known amounts of cash. The cash and cash equivalents act as the Company’s primary source of cash and fluctuate directly as a result of its cash flows from operating, investing and financing activities.
4. Changes in Accounting Policies
CICA 3064 – “Goodwill and Intangible Assets”
On January 1, 2009, the Company adopted CICA Section 3064 – “Goodwill and Intangible Assets”, which replaces Section 3062 – “Goodwill and Other Intangible Assets” and Section 3450 – “Research and
4
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
Development Costs”. The new section provides guidance on the recognition of assets based on asset recognition criteria rather than matching of revenues and expenses. As a result of adopting this section, there is no material impact on the Company’s consolidated financial statements. The Company has recognized an intangible asset during the first quarter ended March 31, 2009 that is subject to amortization. The intangible asset will be tested for impairment in accordance with the provisions of Impairment of Long Lived Assets, section 3064.
Intangible Asset
The Company follows the recommendations of CICA section 3064 “Goodwill and Intangible Assets” for recognition, measurement, presentation and disclosure of intangible assets. An intangible asset meets the identification criterion when it is separable or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable. The Company recognizes an intangible if and only if (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the Company; and (b) the cost of the asset can be measured reliably. Intangible assets are initially measured at cost which comprises of its purchase price, including duties, taxes, legal costs, professional fees and any directly attributable cost of preparing the asset for its intended use. A recognized intangible asset is amortized over its estimated useful life on a straight line basis unless the life is determined to be indefinite. The estim ate of the useful life of an intangible asset is based on an analysis of all facts, in particular, the expected use of the asset by the Company and any legal or contractual provisions that may limit the useful life.
The amortization method and estimate of useful life of an intangible asset is reviewed annually. An intangible asset that is subject to amortization is tested for impairment according to section 3063 “Impairment of Long-Lived Assets” which states that an impairment loss is recognized when the carrying amount of the long lived asset is not recoverable and exceeds its fair value. The test for recoverability is performed whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Intangible assets which have indefinite lives are not amortized, but are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment loss is the amount by which the carrying amount exceeds the fair value. If the fair value subsequently increases, the impairment loss for an intangible asset is not reversed.
5. Recent Accounting Pronouncements
International Financial Reporting Standards (“IFRS”)
The Canadian Accounting Standards Board has confirmed that publicly accountable, profit oriented enterprises will be required to adopt IFRS for fiscal years beginning on or after January 1, 2011. Early conversion to IFRS for fiscal years beginning on or after January 1, 2009 is permitted. The Company will be required to begin reporting under IFRS for its first quarter ending March 31, 2011 with restatement of comparative information presented. The conversion to IFRS will impact the Company’s accounting policies, information technology systems, taxes, contractual commitments involving GAAP based clauses, long-term employee compensation plans and performance metrics.
Accordingly when the Company develops its IFRS plan, it will have to include measures to provide extensive training to key finance personnel to review contracts and agreements and to increase the level of awareness and knowledge amongst management, the Board of Directors and the Audit Committee. Additional resources will be engaged to ensure the timely conversion to IFRS. As at September 30, 2009, the Company has completed an IFRS diagnostic and is working to develop an IFRS implementation plan that will address the accounting policies and procedures, IT and data systems, internal control environment over financial reporting and training of its employees impacted in the IFRS conversion. The Company has identified the internal resources responsible for spearheading the IFRS conversion process and has charged the team with preparing a detailed project plan and budget for approval. The budget will be submitted for approval by the end of November 30, 2009.
5
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
6. Capital Disclosures
The Company's objectives and policies for managing capital are to maintain a strong capital base so as to maintain investor, creditor and market confidence, sustain future development of the business and to safeguard the entity’s ability to support the Company’s normal operating requirements on an ongoing basis.
The capital of the Company consists of the items included in the consolidated balance sheet in the shareholders’ equity section. The Company manages its capital structure and makes changes based on economic conditions and the risk characteristics of the Company’s assets. As at September 30, 2009 shareholder’s equity was $12,895,396.
To manage the Company’s capital requirements the Company has in place a planning and budgeting process which help determine funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives. The Company plans to continue to fund its short-term cash requirements through operations, and if required the Company has an operating line of credit in place that can be drawn upon.
While there is a possibility of increased risk due to the current global credit crisis and recessionary trends, the exposure to the Company was minimal at the end of September 30, 2009. The Company’s accounts receivable are made up of approximately 25% government receivables and the balance of the outstanding accounts receivable are spread over a large number of customers. During September 2008, the Company was awarded a US Department of Defense Contract to deliver satellite systems and services of approximately $5.5 million that has been completed during the quarter ended September 30, 2009. During September 2008, the Company also entered into an agreement with the Canadian Federal Minister of Industry (the Minister) through the Strategic Aerospace & Defense Initiative (SADI) whereby the Minister will provide funding of 35% of eligible spending related to the research and development of Aerospace & Defense (A&D) technology development projects to a maximum funding amount of Cdn$5,975,200 for eligible costs starting from September 21, 2007 up to and including December 31, 2011.
For the nine months ended September 30, 2009, there were no changes in the Company's approach to capital management.
The Company has externally imposed capital requirements. Under its operating line of credit agreements, the Company’s working capital ratio (current assets divided by current liabilities) cannot be less than 1.15:1 and debt to tangible net worth ratio (total liabilities divided by the sum of total assets minus total liabilities) cannot exceed 2.5:1. As at September 30, 2009, the Company’s working capital ratio was 4.37:1 and the debt to tangible net worth ratio was 0.33:1. For the nine months ended September 30, 2009, the Company has met all of its externally imposed capital requirements. As at September 30, 2009, the Company did not access its operating line of credit.
7. Financial Instruments
(a)
Financial assets and liabilities
Financial assets are cash and cash equivalents, short-term investments, and accounts receivable. Financial liabilities include operating line of credit, accounts payable and accrued liabilities.
The Company has classified its cash and cash equivalents and short term investments as held-for-trading financial assets, measured at fair value. Accounts receivable are classified as loans and receivables, measured at amortized cost. Accounts payable, accrued liabilities, and operating line of credit are classified as other liabilities held for trading, measured at amortized cost. The carrying value of the Company’s financial assets and liabilities is considered to be reasonable approximation of fair value due to the short-term nature of these instruments.
The carrying values and fair values of financial assets and liabilities as at September 30, 2009 and December 31, 2008 are summarized as follows:
6
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
(in thousands of dollars) | September 30, 2009 |
| December 31, 2008 | ||
| Carrying Value | Fair Value |
| Carrying Value | Fair Value |
Held-for-trading | $ 7,207 | $ 7,207 |
| $ 1,014 | $ 1,014 |
Loans and receivables | $ 2,508 | $ 2,508 |
| $ 6,807 | $ 6,807 |
Held-to-maturity investments | - | - |
| - | - |
Other liabilities | $ 2,293 | $ 2,293 |
| $ 3,643 | $ 3,643 |
Credit Risk
Credit risk is the risk of a financial loss if a customer or counterparty to a financial instrument fails to meet its obligations under a contract. This risk primarily arises from the Company’s receivables from customers.
The Company’s exposure to credit risk is dependent upon the characteristics of each customer. Each customer is assessed for credit worthiness. The credit worthiness of customers is assessed using third party credit scores and through direct monitoring of their financial well being on a continual basis. In some cases, where customers fail to meet the Company's credit worthiness benchmark, the Company may choose to transact with the customer on a prepayment basis.
The Company does not have credit insurance or other financial instruments to mitigate its credit risk as the exposure is minimal due to the make up of its customer base.
The Company regularly reviews the collectability of its accounts receivable and establishes an allowance for doubtful accounts based on its best estimates of any potentially uncollectible accounts. As at September 30, 2009, the balance of the allowance for doubtful accounts was $69,386 (2008 – $37,194). Pursuant to their respective terms, accounts receivable was aged as follows as at September 30, 2009 and December 31, 2008:
(in thousands of dollars) |
| September 30, 2009 | December 31, 2008 |
Current |
| 1,642 | 3,359 |
0-30 days overdue |
| 389 | 1,641 |
31-60 days overdue |
| 275 | 238 |
61-90 days overdue |
| 217 | 1,271 |
Over 90 days overdue |
| (15) | 298 |
Total accounts receivable |
| 2,508 | 6,807 |
While there is a possibility of increased customer credit risk due to the current global credit crisis, the exposure is minimal due to the make up of the Company’s customer base. As at September 30, 2009, 25% of the outstanding accounts receivable consists of government departments and the balance of the outstanding accounts receivable are spread over a very large number of customers.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company has in place a planning and budgeting process which helps determine funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives.
To manage this risk the Company maintains an operating line of credit which provides access to borrow in Canadian and /or US dollars to meet short-term financing obligations.
As at September 30, 2009, the Company had cash and cash equivalents of $7,171,152, short term investments of $36,252 and accounts receivable of $2,507,659 for a total of $9,715,063 which will cover its short-term financial obligations from its accounts payable of $726,622 and accrued liabilities of $1,566,114 for a total of $2,292,736.
7
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
Currency risk
Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.
Subsequent to the change in functional currency from the Canadian dollar to the United States dollar effective July 1, 2009, the Company is exposed to foreign currency exchange risk as a result of components of cost being denominated in currencies other than the United States dollar, primarily the Canadian dollar. The total exposure in Canadian dollars is approximately Cdn$8 million in expenses per year. To a lesser extent, the Company is also exposed to foreign exchange fluctuations in the British pound (GBP) and Euros. The total exposure in GBP is approximately GBP 200,000 in expenses per year. The total exposure in Euros is approximately Euro 800,000 in expenses per year.
To manage the exposure to foreign exchange risk the company enters into short term forward contracts as part of its cash management strategy. The Company does not designate the forward contracts as a hedge for accounting purposes. As at September 30, 2009, the Company did not have any forward contracts outstanding.
8. Operating Line of Credit
During the quarter ended September 30, 2009, the Company increased its operating line of credit with HSBC to Cdn$1,000,000 or US$800,000 from Cdn$500,000 or US$400,000. All terms and conditions of the operating line remain the same as outlined under note 6 - Capital Disclosures, except for:
·
The requirement for securitization under Export Development Canada’s (EDC) Master Receivable Guarantee (MARG) program was lifted.
·
Interest at the rate of the Bank’s Prime Rate plus 1.35% per annum.
Total assets, not including intangible assets, pledged as collateral for the line of credit is $14,693,032 as at September 30, 2009
As at September 30, 2009, the Company had no borrowings outstanding with respect to the line of credit.
9. Accumulated Other Comprehensive Income (Loss)
September 30, 2009 | December 31, 2008 | |||
Balance, beginning of period | $ (229,210) | $ 1,306,800 | ||
Unrealized (gains) losses on translating financial | ||||
statements from functional currency to | ||||
reporting currency | 628,747 | (1,536,010) | ||
Balance, end of period | $ 399,537 | $ (229,210) |
8
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
10. Share Capital
(a)
Authorized
75,000,000 common shares without par value
(b) Issued
Shares issued and outstanding |
| |
| Number # | Amount $ |
Balance, December 31, 2008 | 54,313,305 | 37,825,476 |
Stock options exercised | 75,000 | 50,261 |
Reclassification of contributed surplus upon exercise of stock options and warrants |
| 38,407 |
Shares issued upon exercise of warrants | 5,500 | 2,640 |
Shares repurchased and retired | (120,000) | (80,412) |
Shares issued relating to Bluemoon acquisition | 5,000,000 | 1,886,864 |
Share issuance costs relating to Bluemoon (note 19) |
| (6,470) |
Balance, September 30,2009 | 59,273,805 | 39,716,766 |
The Company obtained regulatory approval to commence a normal course issuer bid to purchase up to a
maximum of $5,183,949 of its common shares, representing approximately 10% of the public float as of June 30, 2009, through the facilities of the Toronto Stock Exchange ("TSX"). Norsat’s total issued and outstanding common shares were 59,273,805 at September 30, 2009.
The normal course issuer bid commenced on July 6, 2009 and will terminate on the earlier of the date on which Norsat completes its purchases pursuant to the normal course issuer bid and July 5, 2010. Pursuant to the rules of the TSX, Norsat may purchase up to 4,069 common shares during any trading day. In addition, Norsat may also make one block purchase per calendar week which exceeds the daily repurchase restriction pursuant to block purchase exemptions. The purchases will be made in accordance with the policies and rules of the TSX. The price paid for any common shares acquired will be the market price at the time of purchase and all common shares purchased under the normal course issuer bid will be cancelled.
Norsat intends to enter into a pre-defined automatic share purchase plan with its designated broker to allow for the repurchase of common shares at times when Norsat ordinarily would not be active in the market due to its own internal trading blackout periods, insider trading rules or otherwise. Norsat believes that the market price of its common shares are such that their purchase may be an attractive and appropriate use of corporate funds in light of potential benefits to remaining shareholders.
As at September 30, 2009, the Company redeemed and retired 120,000 common shares at a weighted average price of $0.71 (Cdn$0.77) per share pursuant to the normal issuer bid in effect since July 6, 2009. The Company follows CICA Section 3240 Share Capital to account for the shares repurchased and cancelled. The cost of such shares are allocated to share capital in the amount equal to the assigned value of the shares and the difference between the assigned value and the cost of shares repurchased to contributed surplus. The assigned value is calculated by dividing Share Capital balance by the number of common shares outstanding at the month the transaction took place, multiplied by the number of shares bought back. The effects of the shares repurchased at September 30, 2009 are reflected in a decrease in share capital of $80,412 a decrease in contributed surplus of $4,364 and a decrease in cash and cash equivalents of $84,776.
(c) Share purchase option plan
The Company has reserved 6,306,505 common shares under its 1999 (amended)incentive share option plan. The plan provides for the granting of stock options at the fair market value of the Company at the grant date, with terms to a maximum of ten years and vesting provisions to be determined by the Board of Directors.
9
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
| Number of options | Weighted average exercise price Cdn$ |
Balance, December 31, 2008 | 1,518,000 | $ 1.34 |
Granted | 364,800 | 0.80 |
Exercised | (75,000) | 0.83 |
Expired | (20,000) | 0.75 |
Forfeited | (63,500) | 0.85 |
Balance, September 30, 2009 | 1,724,300 | 1.28 |
Share purchase options outstanding at September 30, 2009 include:
| Options outstanding |
| Options exercisable | |||
Range of exercise prices Cdn$ | Number of options outstanding | Weighted average remaining contractual life(years) | Weighted average exercise price Cdn$ |
| Number of options exercisable | Weighted average exercise price Cdn$ |
$0.45 to $0.99 | 918,800 | 2.99 | 0.73 |
| 427,000 | 0.68 |
$1.00 to $1.99 | 626,000 | 2.06 | 1.24 |
| 376,600 | 1.22 |
$2.00 to $6.19 | 179,500 | 2.01 | 4.14 |
| 179,500 | 4.14 |
$0.45 to $6.19 | 1,724,300 | 2.55 | 1.28 |
| 983,100 | 1.52 |
The exercise price of all share purchase options granted during the period are equal to the closing market price at the grant date. Using an option pricing model with assumptions noted below, the estimate fair value of all options granted during 2009 and 2008 have been reflected in the statements of operations as follows:
| Three months ended September 30, |
| Nine months ended September 30, | ||
| 2009 | 2008 |
| 2009 | 2008 |
Total compensation (increase in contributed surplus and stock based compensation) | $ 43,267 | $42,097 |
| $103,823 | $108,895 |
The weighted average assumptions used to estimate the fair value of options during the period were:
| Three months ended September 30, |
| Nine months ended September 30, | ||
| 2009 | 2008 |
| 2009 | 2008 |
Risk free interest rate | 2.33% | 3.21% |
| 1.84% | 3.26% |
Expected life | 3.50 | 3.50 |
| 3.50 | 3.50 |
Vesting period | 2 to 10 years | 2 to 10 years |
| 2 to 10 years | 2 to 10 years |
Expected volatility | 83.87% | 75.06% |
| 83.89% | 74.19% |
Expected dividends | Nil | nil |
| nil | nil |
364,800 stock purchase options were granted with a weighted average fair market value of $0.80 for the nine months ended September 30, 2009.
Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair 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.
10
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
(d) Warrants
The continuity of share purchase warrants is as follows:
Expiry date Exercise price | April 28, 2009 Cdn$1.09 | January 12, 2011 US$0.48 | Total number of warrants outstanding |
Balance, December 31, 2008 | 1,206,811 | 366,690 | 1,573,501 |
Warrants exercised | - | (5,500) | (5,500) |
Warrants expired | (1,206,811) | - | (1,206,811) |
Balance, September 30, 2009 | - | 361,190 | 361,190 |
During the three months ended September 30, 2009, 5,500 warrants with an exercise price of US$0.48 were exercised.
(e) Contributed surplus
Balance, December 31, 2008 | $ 3,522,738 |
Changes during 2009 |
|
Stock-based compensation expense | 103,823 |
Shares repurchased and retired | (4,364) |
Reclassification to Share Capital for options and warrants exercised | (38,407) |
Balance, September 30, 2009 | $ 3,583,790 |
11. Other (Income) Expense
| Three months ended September 30, |
| Nine months ended September 30, | ||
| 2009 | 2008 |
| 2009 | 2008 |
Bank charges and net interest expense | $ 46,101 | $ 10,509 |
| $ 64,559 | $39,448 |
Foreign currency (gain) loss | (29,125) | (76,367) |
| 213,015 | (210,473) |
| $ 16,976 | $ (65,858) |
| $ 277,574 | $ (171,025) |
12. Earnings per Share
Basic earnings per share for the three months ended September 30, 2009 is $0.01 (2008 - $0.01) and the weighted average number of shares used in calculating basic net earnings per share is 59,331,843 (2008 – 53,698,078). Basic earnings per share for the nine months ended September 30, 2009 is $0.03 (2008 - $0.02) and the weighted average number of shares used in calculating basic net earnings per share is 58,097,757 (2008 – 53,094,526).
As the exercise of in-the-money warrants or options are dilutive, the diluted earnings per share for the three months ended September 30, 2009 is $0.01 (2008 - $0.01) and the weighted average number shares used in calculating diluted net earnings per share is 59,913,348 (2008 – 57,140,306). The diluted earnings per share for the six months ended September 30, 2009 is $0.03 (2008 - $0.02) and the weighted average number shares used in calculating diluted net earnings per share is 58,673,054 (2008 – 56,538,397).
13. Segmented Information
The Company’s business operates primarily through two business segments – Microwave Products and Satellite Systems. The Company has entered into two new business segments – Maritime Products and Wireless Networks, but the Company is still in the early stages in both these segments.
11
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
The Microwave Products segment designs, develops and markets receivers, transmitters and power amplifiers. The Satellite Systems segment designs, develops and markets portable satellite systems, related accessories and services. These Microwave Products and Satellite Systems are designed to interoperate with geostationary satellites orbiting the earth. The products permit users to establish a broadband communications link (up to 10 Mbps) between any two points on earth. This broadband communications link is capable of transporting a broad range of content including voice, data and moving video.
The Maritime Products segment develops and markets satellite systems, related accessories and services for the marine environment. Similar to Microwave Products and Satellite Systems, these products establish broadband communications links interoperating with geostationary satellites, but have the additional challenge of needing to accommodate a vessel’s motion and movement,.
The Wireless Networks segment develops markets and deploys wireless communications systems that would address a customer’s need to solve connectivity challenges covering an area larger than Wi-Fi solutions. These solutions are specific technology agnostic and can be based on different protocols such as WiMAX, LTE and/or 4G.
The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business is in a different stage in its life cycle and they require different marketing strategies.
The following tables set forth information by operating segments from continuing operations for the three and six months ended September 30, 2009 and 2008 respectively. For the three and nine months ended September 30, 2009, the Wireless Networks segment did not generate any revenues.
| Three months ended September 30, |
| Nine months ended September 30, | ||
| 2009 | 2008 |
| 2009 | 2008 |
Sales |
|
|
|
|
|
Microwave products | $ 2,336,495 | $ 2,262,680 |
| $ 5,448,408 | $ 6,339,625 |
Satellite systems | 2,704,223 | 2,625,867 |
| 9,299,369 | 5,437,472 |
Maritime systems | 100,412 | - |
| 284,424 | - |
| $ 5,141,130 | $ 4,888,547 |
| $ 15,032,201 | $ 11,777,097 |
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
Microwave products | $ 973,042 | $ 826,505 |
| $ 2,265,388 | $ 2,489,458 |
Satellite systems | 1,460,083 | 1,498,621 |
| 5,044,922 | 3,292,744 |
Maritime systems | 22,163 | - |
| 54,756 | - |
| $ 2,455,288 | $ 2,325,126 |
| $ 7,365,066 | 5,782,202 |
As at September 30, 2009 | Microwave Products | Satellite Systems | Maritime Systems | Wireless Network | Consolidated |
Total assets related to operations | $ 5,423,338 | $ 9,256,579 | $ 283,115 | $2,134,074 | $ 17,097,106 |
Property and equipment, net | $ 255,560 | $ 436,190 | $ 13,341 | $ - | $ 705,091 |
|
|
|
|
|
|
As at December 31, 2008 |
|
|
|
|
|
Total assets related to operations | $ 6,299,750 | $ 7,027,235 | $ - | $ - | $ 13,326,985 |
Property and equipment, net | $ 344,029 | $ 383,757 | $ - | $ - | $ 727,786 |
12
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
Substantially all property and equipment are located in Canada.
14. Supplemental cash flow and other disclosures
| Three months ended September 30, | Nine months ended September 30, | ||
| 2009 | 2008 | 2009 | 2008 |
Changes in non-cash operating working capital: |
|
|
|
|
Accounts receivable | $ 118,171 | $(1,519,521) | $ 2,679,444 | $ (1,137,883) |
Inventories | 921,978 | 41,824 | 231,553 | (856,427) |
Prepaid expenses and other | (98,943) | (19,924) | (161,908) | (62,557) |
Accounts payable | 60,110 | 57,944 | (1,060,025) | 223,116 |
Accrued liabilities | (342,470) | 504,698 | (177,392) | (108,158) |
Deferred revenue | 17,580 | (44,842) | 533,356 | (46,723) |
Long term deferred revenue | (81,671) | 113,876 | 93,186 | 199,471 |
| $ 594,755 | $ (865,945) | $ 2,138,214 | $ (1,789,161) |
|
|
|
|
|
Supplementary information: |
|
|
|
|
Interest paid (received) | $ (2,685) | $ 1,252 | $ (3,570) | $ 13,635 |
Income taxes paid | nil | nil | nil | 8 |
15. Comparative Figures
Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in 2009.
16. Commitments
Future minimum payments at September 30, 2009 under various purchasing commitments, loan commitments and operating lease agreements for each of the next five years are approximately as follows:
| 2009 | 2010 | 2011 | 2012 | 2013 |
Inventory purchase obligation | $1,965,310 | - | - | - | - |
Operating lease obligations | $ 250,849 | $ 488,642 | $ 446,475 | $ 50,647 | $ 50,647 |
Total | $2,216,159 | $ 488,642 | $ 446,475 | $ 50,647 | $ 50,647 |
In the normal course of operations the Company enters into purchase commitments. Included in 2009 commitments are inventory and material purchase obligations of $1,965,310.
17. Government Contributions
Strategic Aerospace & Defense Initiative (SADI)
In September 2008, the Company entered into an agreement with the Canadian Federal Minister of Industry (the Minister) through the Strategic Aerospace & Defense Initiative (SADI) whereby the Minister will
13
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
provide funding of 35% of eligible spending related to the research and development of Aerospace & Defense (A&D) technology development projects to a maximum funding amount of Cdn$5,975,200 for eligible costs starting from September 21, 2007 up to and including December 31, 2011.
Repayment is contingent on performance benchmarks established at the end of Norsat’s fiscal 2011 year end and is capped at 1.5 times the contribution (actual amounts disbursed by the Minister) over a period of 15 years starting in 2012. Annual repayment amounts are calculated based on a percentage of gross business revenue as defined in the agreement multiplied by the adjustment rate (based on the growth of gross business revenue over the previous year). For the nine months ended September 30, 2009, the Company did not accrue any liability for repayment as the amount can not be determined.
For the three and nine months ended September 30, 2009, the Company accrued SADI funding receivable of $336,240 (Cdn$360,000) and $843,819 (Cdn$965,000) respectively and charged the amount as a reduction to product development expense in the consolidated statement of operations.
For the three and nine months ended September 30, 2009, $591,104 (Cdn$632,874) and $ 1,218,077 (Cdn$1,394,984) cash was received. $104,504 (Cdn$169,747) remains in accounts receivable at September 30, 2009.
18. Related Party Transactions
On December 23, 2008, $94,185 (Cdn$114,720) was transferred to a member of the board’s bank account as share capital for Norsat SA. The board member held this cash for Norsat SA until January 27, 2009 when Norsat SA opened a bank account and the funds were deposited into this bank account.
19. Acquisition of Bluemoon 4G Ltd.
On March 9, 2009, the Company acquired 100% ownership of Bluemoon 4G Ltd., a WiMAX products and services provider to accelerate the Company’s entry into the WiMAX market, from unrelated third parties for 5,000,000 shares of the Company’s common stock. Bluemoon 4G Ltd. is a pre-revenue company that has a customer relationship that will allow it to supply and deliver equipment for WiMAX installations. In acquiring Bluemoon, the Company has acquired the relationship and is in the process of negotiating a contract to formalize the customer relationship. This transaction closed on April 20, 2009.
Bluemoon 4G Ltd. is a pre-revenue company without any employees and did not have any commercial activities. Accordingly, the acquisition was recorded as an asset acquisition and not a business combination.
Given the timing to perform a proper valuation exercise, management has recorded the transaction at an initial estimated value of $1,946,324 (Cdn$2,455,000) to intangible asset which represents the customer relationship acquired. The Company has received the final valuation report on June 30, 2009, which is in line with management’s initial estimate. The Company has adjusted the purchase price to $2,120,770 (Cdn$2,466,586) to adjust initial estimates for the Ireland stamp duties and legal fees. The purchase value was based on the market value of the shares given up less liquidity and escrow discounts calculated using the Black-Scholes model. The liquidity discount has been determined on the basis that the Company’s shares are not widely traded. The escrow discount has been determined on the basis that the counterparty will not be able to access the shares until certain performance milestones have been met. As per terms of the contract, shares are held in escrow u ntil December 31, 2009 and the counterparty has to meet certain performance milestones. In the event that the milestones are not met, the counterparty has to pay a minimum order fee equal to the value of 5,000,000 Norsat common shares at the effective date of March 9, 2009 less twenty percent of any equipment supply orders up to $12,000,000 received by Norsat prior to December 31, 2009. The escrow agreement has been put in place to protect the Company’s financial interest in securing the minimum order fee.
Management has allocated the entire purchase price of $2,120,770 (Cdn$2,466,586) to intangible assets, $1,880,394 (Cdn$2,371,840) as common shares which includes share issuance costs of $6,470 (Cdn$ 8,160). The intangible asset as reported consists of the following:
14
Norsat International Inc.
Notes to the Consolidated Financial Statements
Nine months ended September 30, 2009
(Unaudited - Expressed in US dollars)
Purchase value
$2,046,324
Ireland stamp duties
27,808
Legal costs
25,143
Valuation costs
21,495
Accumulated amortization
(246,566)
Temporary tax difference effect 259,870
Total
$2,134,074
The intangible asset is estimated to have a useful life until December 31, 2013. Amortization of the intangible was calculated on a straight line based on the estimated useful life. For the nine months ended September 30, 2009, amortization expense was $246,566 (Cdn$286,771).
A total future income tax liability of $245,830 (Cdn$288,278) was recognized on the transaction to reflect the income tax effect of temporary differences arising from the Company’s asset acquisition of Bluemoon 4G Ltd. The income tax liability was calculated based on Ireland’s effective tax rate of 12.5% and is the difference between the tax adjusted final book value and actual purchase price of the transaction.
15