OMB Number: 3235-0288 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
NORSAT INTERNATIONAL INC.
British Columbia, Canada
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR | |
X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 December 31st, 2009
|
OR | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report |
Commission file number: 0-12600
Norsat International Inc.
(Exact name of Registrant as specified in its charter)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
110– 4020 Viking Way, Richmond, British Columbia, Canada V6V 2N2
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class |
| Name of each exchange on which registered |
N/A |
| N/A |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
N/A |
Title of Class |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Common Shares |
Title of Class |
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 53,634,305 common shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes___
No_X_
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes___
No_X_
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934 from their obligation under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
X Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer___
Accelerated filer___
Non-accelerated filer_X_
Indicate by check mark which financial statement item the registrant has elected to follow.
X Item 17☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes X No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐Yes☐No
2
Table Of Contents
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
CAPITALIZATION AND INDEBTEDNESS
REASONS FOR THE OFFER AND USE OF PROCEEDS
HISTORY AND DEVELOPMENT OF THE COMPANY
PROPERTY, PLANTS AND EQUIPMENT
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
GOODWILL AND INTANGIBLE ASSETS
FINANCIAL INSTRUMENTS – DISCLOSURES
ARRANGEMENTS WITH MULTIPLE DELIVERABLES
RECENT ACCOUNTING PRONOUNCEMENTS
FINANCIAL INSTRUMENTS – RECOGNITION AND MEASUREMENT
CREDIT RISK AND THE FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
CONVERGENCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS
RECENT U.S. GAAP PRONOUNCEMENTS
TRANSFERS OF FINANCIAL ASSETS AND VARIABLE INTEREST ENTITY REPORTING
RECENTLY ADOPTED U.S. GAAP POLICIES
B. LIQUIDITY AND CAPITAL RESOURCES
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
OFF-BALANCE SHEET ARRANGEMENTS
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
3
INTERESTS OF EXPERTS AND COUNSEL
CONSOLIDATED FINANCIAL STATEMENTS
MEMORANDUM AND ARTICLES OF ASSOCIATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
RISKS ASSOCIATED WITH CURRENT MARKET CONDITIONS
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
AUDIT COMMITTEE FINANCIAL EXPERT
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER
Note:
All dollar amounts presented in the Annual Report on Form 20-F are presented in United States dollars unless otherwise indicated. Reference should be made to Item 3A for information on exchange rates between the Canadian dollar and the United States dollar.
4
PART I
1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS
Not applicable.
2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
3.
KEY INFORMATION
A.
Selected financial data
Table 1 below summarizes selected consolidated financial data for Norsat International Inc. (“the Company”, or “Norsat”) for the last five fiscal years ended December 31, 2009, 2008, 2007, 2006, and 2005 prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Table 2 below summarizes certain corresponding information calculated in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The information for the last three fiscal years ended December 31, 2009, 2008, and 2007 have been extracted from the Company’s audited consolidated financial statements and related notes included herein and should be read in conjunction with such financial statements appearing under the heading “Item 8 - Financial Information” and with the information appearing under the heading “Item 5 - Operating and Financial Review and Pr ospects”. Information for the year ended December 31, 2006 and 2005 have been extracted from audited consolidated financial statements not disclosed elsewhere and presented below.
In this Form 20-F Annual Report, unless otherwise specified, all monetary amounts are expressed in United States dollars.
Reference is made to Note 25 of the consolidated financial statements included herein for a discussion of the material differences between Canadian GAAP and U.S. GAAP, and their effect on the Company’s financial statements.
Table 1: Selected Financial Information according to Canadian GAAP
5
As at December 31 |
|
|
|
|
|
Total assets ($000s) | 18,684 | 13,327 | 9,528 | 8,427 | 9,049 |
Net assets ($000s) | 13,605 | 8,604 | 5,797 | 3,074 | 3,056 |
Long-term debt (excluding current portion) ($000s) | - | - | - | - | 1,726 |
Capital Stock ($000s) | 37,402 | 37,825 | 35,343 | 35,009 | 31,983 |
Table 2: Selected Financial Information according to US GAAP.
Year Ended December 31 | 2009 | 2008 | 2007 | 2006 | 2005 |
Sales ($000’s) | 21,165 | 18,057 | 16,398 | 13,448 | 14,953 |
Income (loss) from operations ($000’s) | 4,643 | 2,427 | 1,479 | (3,514) | (4,266) |
Net Income (loss) ($000’s) | 4,643 | 2,427 | 1,479 | (3,468) | (4,267) |
Earnings (loss) per share from operations – basic and diluted ($) | 0.08 | 0.05 | 0.03 | (0.07) | (0.10) |
Earnings (loss) per share – basic and diluted ($) | 0.08 | 0.05 | 0.03 | (0.07) | (0.10) |
Weighted average number of shares – basic (000s) | 58,341 | 53,352 | 50,599 | 46,681 | 42,518 |
Weighted average number of shares – diluted (000s) | 58,511 | 53,352 | 55,806 | 46,681 | 42,518 |
Dividends per share | - | - | - | - | - |
As at December 31 |
|
|
|
|
|
Total assets ($000s) | 18,684 | 13,297 | 9,528 | 8,424 | 9,034 |
Net assets ($000s) | 13,605 | 8,574 | 5,797 | 3,007 | 2,772 |
Long-term debt (excluding current portion ($000s) | - | - | - | - | - |
Capital Stock ($000s) | 94,887 | 95,310 | 92,828 | 92,494 | 89,549 |
B.
Capitalization and indebtedness
Not applicable.
C.
Reasons for the offer and use of proceeds
Not applicable.
D.
Risk factors
Investors should carefully consider the risks and uncertainties described below before making an investment decision. If any of the following risks actually occur, our business, financial condition or operating results could be materially harmed. This could cause the trading price of our common shares to decline, and you may lose all or part of your investment.
6
RISKS ASSOCIATED WITH FINANCIAL RESULTS
The Company’s inability to generate sufficient cash flows from its operations Management believes that as a result of the recent turnaround, the Company has sufficient resources to met operating requirements for the next year. Should the Company fail to generate sufficient cash flows from operations, it will require additional financing. At December 31, 2009, the Company has accumulated a deficit of $27,889,983. The Company started to generate net profit from its continued operations through the fourth quarter of 2006 to the fourth quarter of 2009. However, it cannot be used as an indication of the Company’s future performance.
The Company has no debt obligations at the end of December 31, 2009. The profitable results earned in the last three fiscal years have provided the Company with some impetus towards a strong financial foundation. Based on the current financial results, management is confident in the ability of the Company to continue as a going concern. However, the Company still has challenges with respect to unevenness of sales patterns attributable to military transactions. This pattern combined with the current upheaval in the global economies makes it difficult to have absolute certainty about future cash flows.
The Company’s inability to accurately forecast its results from quarter to quarter may affect its cash resources and result in wide fluctuations in the market price of the Company's stock. The operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are described below. Due to these and other factors, most of which are outside of the Company’s control, the quarterly revenues and operating results are difficult to forecast. As a result, the Company may not be able to accurately predict its necessary cash expenditures during each quarter or obtain financing in a timely manner to cover any shortfalls. The Company also believes that period-to-period comparisons of its operating results may not be meaningful and reliance should not be placed on any such comparisons as an indication of future performance.
RISKS ASSOCIATED WITH BUSINESS AND OPERATIONS
The Company recognizes the threats posed by the current credit crisis and global recession, but cannot guarantee that it will be able to successfully navigate through the current downturn.The current global economic deterioration has impacted companies across a wide spectrum of industries, and the satellite communications industry is not immune to the recessionary trends. To succeed, the Company must be able to control spending and prudently allocate financial resources to optimize value. To drive sales, the satellite products must meet the needs of the Company’s existing and potential customers and be competitively priced, additional judgement will need to be exercised if the granting of credit to customers is required to close the transaction. In view of the current difficulty, both in obtaining credit and accessing the capital markets, stewardship of cash continues to be critical to the success of the Company.
The Company cannot be sure it will be able to identify emerging technology and market trends, enhance its existing technologies or develop new technologies in order to effectively compete in the satellite communications industry. The satellite communications industry is characterized by rapid technological changes, short technology and product life cycles, pressure to provide improved solutions at increasingly lower prices and frequent introduction of new technologies and products. To succeed, the Company must be able to identify emerging trends and enhance its existing technologies and develop new technologies and products to meet market requirements. To drive sales, the satellite products must meet the needs of the Company’s existing and potential customers and be competitively priced. Additionally, there must be sufficient interest in and demand for the Company’s products. If the Company does not develop these new t echnologies and products in a timely and cost effective manner, or if others develop new technologies ahead of the Company, the Company will not achieve profitability in the satellite communications industry and it may not be able to participate in selling these new technologies or products. While the Company is able to continue to develop products with funding contributions from the Canadian Federal Government through the SADI program; without the SADI program contribution, the Company’s product development costs would not be sustainable, thereby jeopardizing the Company’s ability to maintain product innovation and leadership.
7
The Company has customer concentration. A significant portion of the Company’s revenues have been recognized from a limited number of customers. While the Company has been diversifying its customer base, the efforts to date may be insufficient to offset the effects of the quarterly variance of sales and delays associated with selling to the Government sector. The Company expects that a majority of the Satellite Systems revenues will continue tobe dependent on sales to a small number of customers. The Company also expect that customers will vary from period-to-period as existing customers are under no obligation to continue buying from Norsat.
If the Company fails to sell the products to one or more targeted customers in any particular period, or are unable to diversify the customer base and segments, its ability to generate revenues, achieve profitability, and invest in growth opportunities will be adversely affected. While the Company has been diversifying its customer base, the efforts to date may be insufficient to offset the effects of uneven sales and delays associated with selling to the Government sector. There are additional risks associated with non-US companies such as Norsat directly supplying to the US military.
The Company cannot be sure that it will be able to compete effectively with the current competitors. The satellite communications industry is intensely competitive. Some competitors have technologies and products that may be more advantageous and compete directly with the Company. Some of these competitors are large, established companies which have significantly greater resources than those of the Company.
The Company’s ability to compete effectively will depend on its ability to increase sales; attract new customers in a timely and cost effective manner and sell these products at competitive prices. The Company is dependent on others for the supply and manufacture of components and products it sells. The Company has outsourced substantially all of the manufacturing of the microwave products it sells; and for some of its portable satellite systems, the Company relies on its suppliers to provide components for the production of these satellite systems. If either the manufacturers or suppliers cannot deliver products to the Company on time, its revenues and profits will be adversely affected.
The Company has limited intellectual property protection. The Company’s success and ability to compete are dependent, in part, upon its proprietary technology, brand and reputation in the marketplace, and customer relationships. While the Company currently holds three patents (US Patents # 6,931,245 and 7,218,289; European Patent #1 184 930) and has applied for patent protection on certain other parts of its technology, it relies primarily on trade secrets and does not have adequate trademark and patent protection on all of its technology. The Company also enters into confidentiality, and non-compete agreements with its employees and limits the access to and distribution of the product design documentation and other proprietary information. The Company cannot be sure that these efforts will deter misappropriation or prevent an unauthorized third party, including former associates and former employees, from obtaining o r using information, which it deems to be proprietary. Although the Company believes that its technology does not currently infringe upon patents or trademarks held by others, the Company cannot be sure that such infringements do not exist or will not exist in the future, particularly as the number of products and competitors in its industry segment grows.
If the Company experiences rapid growth and does not manage it effectively, profitability may be affected. If its technologies and products achieve widespread acceptance the Company may experience rapid growth. This growth may require the Company to hire more employees, recruit additional management, improve the Company’s financial control systems, and expand and manage the technical, sales and support service operations. The Company would need increased revenues and additional funding to operate these increased activities. If the Company does not manage its growth effectively, its profitability may be impacted.
8
The Company has had high employee turnover.In 2008, thirteen employees departed and were replaced. In 2009, twelve employees departed and were replaced. In addition, the Company added four employees to increase capacity in order to meet customer demand. High employee turnover affects knowledge retention, the effectiveness of processes, the value of existing intellectual property, and the ability to hire qualified candidates and maintain the healthy relationships with outside parties. The Company continues to evolve its hiring practices and is actively working on improving the work culture and its image in the community. The Company cannot be sure that these efforts will be successful in reducing employee turnover.
The Company depends on its key employees and it cannot be sure that it will be able to keep these employees or hire and train replacements. Our success depends on the skills, experience and performance of the senior management and other key personnel. While it offers competitive compensation packages and stock options to attract key employees, the Company does not carry key person insurance on these employees. Highly skilled technical employees and management in the satellite communications industry are in demand and the market for such persons is highly competitive. The Company cannot be sure that it will be able to retain these employees or hire replacements. If the Company does not successfully retain the key personnel or hire and train replacements it will be unable to develop the new products and technologies necessary to compete in its markets or to effectively manage its business.
The Company intends to expand its international operations, and thus faces a number of risks including tariffs, export controls and other trade barriers; political and economic instability in foreign markets; and fluctuations in foreign currencies.These external risks may not be under the Company’s control. Additional human and financial resources may be required for this expansion which the Company may not be able to attract or afford. Failure to expand internationally may impact the Company’s prospects for revenue growth and profitability.
The Company sells products which may, in certain instances, be subject to export and/or re-export restrictions.The export laws of the governments of Canada and United States apply to products that the Company sells.The United States Department of Commerce, through its Export Administration Regulations (EAR), and the Government of Canada, through its Export Controls Division,regulate exports and re-exports of "dual-use" items, i.e., goods, software and technologies with commercial and proliferation/ military applications. In ascertaining whether such items may be subject to export control restrictions, the Company is sometime forced to rely on information in the specifications of certain components from the manufacturers and vendors. Should this information later prove to be incorrect, the Company may be subjected to penalti es and fines. It may also be subjected to penalties and fines should there be a breach in the processes.
The Company buys components and products which may, in certain instances, be subject to contractual obligations to purchase minimum quantities during a given period, maintain resale records and abide by certain resale restrictions. Failure to fulfil any or all of these may negatively impact liquidity should the Company be forced to take ownership of any un-purchased units. It may also affect the Company’s ability to continue supplying products as originally specified and thus affect obligations to fulfil orders.
Some of the Company’s contracts require the Company to guarantee certain forms of price protection over an extended period of time. Failure to contain costs during the terms of these contracts may affect the Company’s profitability and liquidity. Failure to fulfil contractual obligations in this respect may result in penalties or the cancellation of such contracts.
9
The Company may be subject to product liability claims, which are not fully covered by insurance. The manufacture, sale and marketing of the Company’s satellite products expose us to the risk of product liability claims. Given the complex nature of our products, the products may contain undetected errors or performance problems may arise. Although the Company’s products undergo testing prior to release into the market, it is possible that such products may yet still contain errors and performance problems, which are discovered only after commercial introduction. If these defects and errors are discovered after shipment, they could result in a loss of sales revenues, delay in market acceptance, product returns, warranty claims and the loss of a potential market. In addition, components and other products manufactured and distributed by others, which are incorporated into the Company’s products, may also contain suc h defects and errors, which could substantially reduce the performance of the products. The Company is also at risk of exposure to potential product liability claims from distributors and end-users for damages resulting from defects in products that it distributes. Although product defects have not been a significant factor, the Company maintains comprehensive general liability insurance which provides limited coverage against claims originating in product failure. We cannot be sure that this insurance will be adequate to cover all claims brought against us or that this insurance will continue to be available to us on acceptable terms. If these claims are not fully covered by the Company’s product liability insurance, they could severely and negatively impact the business liability insurance coverage and the available cash resources. A product liability claim, even one without merit or for which the Company has substantial coverage, could result in significant legal defence costs, thereby increasing the expenses, lowering the earnings and, depending on revenues, potentially resulting in additional losses.
The Company’s operations may be disrupted by natural disasters and extreme weather conditions. The Company’s headquarters is located in the Greater Vancouver region which has, in recent times, been subjected to high winds and extreme weather conditions. While the Company has managed to continue operating through some of these conditions, employee productivity during these periods is negatively impacted. Experts are also expecting a major earthquake in this region; a significant natural disaster may have the effect of paralysing the Company’s operations for an indefinite period.
RISKS ASSOCIATED WITH THE VALUE OF NORSAT SHARES
The exercise of the existing outstanding options, warrants, warrants to be issued, and the number of shares available for future issuance may substantially dilute the value of the Company’s common shares. The Company has 75,000,000 Common Shares authorized, of which 53,634,305 were outstanding at December 31, 2009 and an additional 2,149,490 Common Shares have been reserved for issuance upon the exercise of outstanding options, warrants and warrants to be issued. Although the Board of Directors has no present intention to do so, it has the authority, within parameters set by the Toronto Stock Exchange (the “TSX”), without action by the shareholders, to issue authorized and unissued Common Shares. Any series of Preferred Stock, if and when established and issued, could also have rights superior to the Company’s Common Shares, particularly in regard to voting, the payment of dividends and upon liquidation of Norsat. C onvertible debt, if issued to raise additional working capital for the Company could also have dilutive effect on the shareholders.
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
The Company’s operations are heavily exposed to fluctuations in foreign currencies. Most of the Company’s international sales are denominated primarily in US dollars, Euros and UK pounds. While the Company expects its international revenues and expenses will continue to be denominated primarily in US dollars, a portion of its international revenues and expenses may be denominated in other foreign currencies in the future. As the functional currency is the United States dollar, the Company could experience and has experienced the risks of fluctuating currencies. A stronger Canadian dollar increases operating expenses on conversion to the U.S. dollar. From time to time the Company may choose to engage in currency hedging activities, which may be unsuccessful and expensive.
10
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
1.
The Company was incorporated in British Columbia, Canada on October 15, 1982 pursuant to theCompany Act (British Columbia). Effective September 27, 1989, the Company changed its name to NII Norsat International, Inc. At the Company’s Annual General Meeting held on June 9, 1999, shareholders passed a special resolution to change the Company’s name back to Norsat International Inc. Since July 2, 1999, the Company has operated under the name Norsat International Inc. (herein “Norsat” or the “Company”).
2.
Norsat was incorporated under and continues to operate under the laws of the Province of British Columbia, Canada. The Company is administered from British Columbia. The corporate laws pertinent to Norsat are those of the Province of British Columbia, although it is also subject to the securities legislation of British Columbia, Ontario and the United States.
3.
The Company’s principal business is located at the following address:
110- 4020 Viking Way
Richmond, British Columbia
Canada V6V 2L4
Telephone: 604-821-2800
Fax: 604-821-2801
Email: investor@norsat.com
www.norsat.com
4.
The principal business events in Norsat’s 26 year history are (in chronological order):
1982
The Company developed the first commercial-grade satellite receivers.
1983
In March 1983, the Company, based in Surrey, British Columbia, completed its initial public offering on the Vancouver Stock Exchange.
The Company broke with industry norm and introduced a gallium arsenide low noise amplifier (LNA) instead of a silicon based LNA.
1984
The Company developed a new series of low noise blocker (LNB) compatible satellite receivers featuring synthesized video, audio, and infrared remote control.
1985
The Company introduced synthesized receivers (JR Series) that enable internal melding of phase and frequency for a very high degree of accuracy; these receivers gain significant traction with private networks.
1987
The Company became a leading provider of Ku band private networks for business television and won a landmark deal to supply GTE Spacenet.
The Company also introduced the Microsat, an IBM PC compatible satellite communications expansion card for broadcast data networks, with optional audio/video capability. The Company later applied for a patent on key elements of this technology; the patent was eventually awarded in 1991.
11
1988
The Companyintroduced external reference receivers that provide a stable reference source, by minimizing temperature drift, for very low data rate applications. It also introduced a broadcast satellite data multiplexing network control system and a satellite delivered personal computer bulletin board service.
1989
In September 1989, the Company changed its name to NII Norsat International, Inc.
1990
In August 1990, the Company graduated to the Toronto Stock Exchange.
1991
The Company was issued United States Patent No. 5,019,910 entitled “Apparatus for Adapting Computer for Satellite Communications.”
1992
The Company introduces C-band and Ku-band receivers with noise figures of less than 1.5 dB.
1993
The Company introduced the first digital LNB optimized for low data rate applications.
1994
The Company introduced the Microsat 150 Multimedia PC receiver that enables a personal computer or laptop to capture real time satellite video, listen to and edit directly from the computer keyboard selections of audio programs, and monitor real time data broadcasts.
1995
The European Space Agency extends a grant to the Company to develop portable terminals.
1996
The Company introduced video scrambling technology (N-Code II) for cable distribution networks so authorized cable subscribers may receive telecasts.
1997
The Federal Court of Appeal rules that the use of U.S. based DTH systems in Canada contravened the Radio communication Act. Aurora Distributing, a division of Diamond Pacific Inc., the Company’s consumer products subsidiary, withdrew from the U.S. based DTH receiving market after Norsat settled a lawsuit in which it was a distributor for those systems.
1998
The Company acquired IMT Comsys, a private company and originally the Satellite Communications Division of MPR Teltech. IMT Comsys’ products included Ka-band VSATs, solid state power amplifiers and low noise block downconverters (LNBs). The acquiree also had development contracts with the European and Canadian Space Agencies for Ka-band subscriber terminals.
The Company’s US Subsidiary, Diamond Pacific, was named the Master Systems Operator by the US Satellite Broadcasting Company, a major supplier of premium movie channels, to support its Multiple Dwelling Unit (MDU) market.
1999
Norsat introduced a line of C-band and Ku-band TNBs (Two-way Norsat block converters), a critical component for the proliferation of wireless broadband media.
Norsat released the NCS-300 Subscriber Management System to enable cable system operators to easily deliver pay-per-view television.
12
2000
In April, Norsat acquired Winnipeg-based SpectraWorks, a leading developer of systems and software for broadcasting multimedia broadband content across satellite, terrestrial and digital cable networks. Through this acquisition, Norsat added digital video broadcast (DVB) hubs to manage the flow of content into and out of the Internet backbone and between subscriber terminals; and a 100 Mbps IP encapsulator to enable end-to-end multimedia broadcast solutions.
In August, the Company formally exited the consumer satellite DBS. The Company discontinued the operations of Norsat America, a distribution business geared towards consumer-oriented, Direct Broadcasting Systems.
Norsat also became a leading provider of Ka-band satellite terminals for various consumer Internet applications through its relationship with SES Astra and Koreasat.
In October 2000, the Company began trading on NASDAQ. It was later de-listed in 2003.
2001
In June 2001, the Company received a $9.4 million Technology Partnerships Canada investment for the development of satellite interactive terminals.
In December 2001, the Company signed a contract for its pico-terminals with an Asian military. This was completed in October 2002.
The Company introduced a compact IP encapsulator that enables the transport of Internet content at very high speeds (i.e. 200 Mbps) for both the satellite and cable markets.
2002
The Company built on its portable terminal experience by introducing a commercial grade flyaway terminal for news gathering organizations. It sold its first NewsLink system to CBS News.
2003
In May 2003, Norsat appointed SEG a master reseller for some if its microwave components.
The OmniLink family of portable satellite terminals which includes the NewsLink and SecureLink systems were launched, providing rapidly deployable broadband satellite data and video connectivity for a wide range of applications.
2004
The Company became a key supplier of newsgathering equipment to the US Army.
2005
The Company launched the GLOBETrekker, a backpack able satellite terminal initially capable of transmitting and receiving IP-based video and data content.
The Company was issued United States Patent No. 6,931,245 entitled “Downconverter for the Combined Reception of Linear and Circular Polarization Signal from Collocated Satellites.”
2006
In May 2006, the Company was awarded a GSA schedule, facilitating the purchase of its systems by various government agencies. In September 2006, the Company relocated its international headquarters to Richmond, British Columbia.
2007
The Company launched a line of Low Noise Amplifiers, the GlobeTrekker X-band and the Rapid Application Development Environment variant of the GlobeTrekker, which includes an environmentally-controlled baseband enclosure that is compatible with most commercial and specialized modems.
13
In addition, the Company introduced the Extended Ku-Band Transmitter and unveiled the Norsat Rover, a single backpack portable satellite terminal.
The Company received a United States patent for the GLOBETrekkerTM design and a European patent for its frequency selective surface waveguide filter design.
2008
The Company announced entry into the marine satellite industry and the Worldwide Interoperability for Microwave Access (WiMAX) network business in 2008.
The Company received a repayable contribution from the Canadian government to assist in research and development activities. The funding program was made through the Ministry of Industry’s Strategic and Aerospace Defence Initiative (“SADI”). The total contribution will be a maximum of Canadian $5.97 million through to the year 2011.
In September 2008, the Company was awarded a $5.5 million contract from the U.S. Department of Defense for the delivery of portable satellite systems.
2009
The Company was awarded a contract to manage a Vessel Monitoring System (“VMS”) in Europe.
In July, 2009, the Company initiated a Normal Course Issuer Bid.
In December 2009, the Company signed an agreement to invest in an internet service provider in Malawi, Africa.
5.
Capital Expenditures -
During 2009, the Company made net purchases of property and equipment in the amounts of $377,029 primarily relating to the purchase of equipment for product development and test equipment. There are currently no major capital projects or divestitures in progress.
B.
Business overview
1. Norsat Business and Principal Activities
Norsat designs, develops and markets satellite ground equipment, which enables high speed transmission of data, audio and video over commercial and military satellites. The Company’s equipment is located on earth and thus falls under the broad category of “satellite ground equipment.” Norsat concentrates on ground equipment that is central to the transmission and reception of content for commercial and military applications, as opposed to consumer applications such as direct-to-home broadcasting.
While Norsat’s products have traditionally addressed the US government and broadcast television markets, there is growing interest from other NATO militaries; high-end commercial enterprise customers benefiting from the growth in commodity prices and the transportation companies who serve them; and commercial enterprise and government customers seeking to implement business continuity programs. Currently, approximately 40% of sales continue to be earned from the US military sector. As a result, sales can have significant swings from quarter to quarter due to the timing of orders from the US government.
14
The Company operates primarily through several business segments including Microwave Products, Satellite Systems, Wireless Networks and Maritime Products. The majority of revenues were derived from the Microwave Products and Satellite Systems businesses, while the other segments are new businesses for the Company.
Geographic Split
The Company generated revenues from external customers located in the following geographic locations:
2009 | 2008 | 2007 | ||||
Canada | $ | 400,180 | $ | 597,728 | $ | 545,410 |
United States | 15,420,071 | 12,577,704 | 10,894,516 | |||
Europe and other | 5,344,271 | 4,881,404 | 5,011,095 | |||
$ | 21,164,522 | $ | 18,056,836 | $ | 16,450,661 | |
Business Segments
Norsat currently operates two primary strategic business segments: Microwave Products and Satellite Systems. While both business segments provide core elements of the satellite ground infrastructure, the characteristics and dynamics of the markets in which the two business segments operate are unique. In 2009, the Company launched two new business units that serve as the platform for growth and diversification. These two business segments are in Wireless Networks and Maritime satellite communications.
(a) Microwave Products Business Segment
Products
Microwave components enable the transmission, reception and amplification of signals to and from satellites. The Company’s product portfolio of microwave components includes a comprehensive range of satellite receivers (LNBs), transmitters (BUCs), solid-state power amplifiers (SSPAs) and other customized products.
Low Noise Block down converters (“LNBs”), are required by every satellite antenna (or “dish”) irrespective of aperture or location. The LNB is mounted at the focal point of the dish to convert incoming microwave signals into electrical signals that are routed to the remote receiver or indoor unit. Reliability is critical for these products as they are used in remote areas around the world.
Satellite transmitters or Block Up Converters (“BUCs”) convert electrical signals into microwave signals that can be transmitted to an orbiting satellite.
Market Profile
The Company’s primary customers include resellers, system integrators, antenna manufacturers and service providers located in North America, Europe and Asia. These customers integrate Norsat’s components into a complete satellite solution for end user customers located all over the world. On the microwave components side of the business, the Company will be focusing on the solid-state amplifier line and on military satellite components.
15
Competition
The primary competition for this business unit comes from New Japan Radio Corporation and to a lesser extent from the Company’s own suppliers.
(b) Satellite Systems Business Segment
Products
Portable satellite systems provide rapidly deployable broadband connectivity over satellite where traditional communications infrastructure is insufficient, unreliable, damaged or non-existent. The Company’s product portfolio of portable satellite systems includes the Norsat GLOBETrekker and OmniLink satellite systems.
The GLOBETrekkerTM is an intelligent, ultra-portable satellite system that enables users to establish a reliable broadband connection on short notice. It is designed to be carried in a backpack, is airline checkable, and fits in small vehicles. The GLOBETrekkerTM is ideal for users who are highly mobile. Examples of such users include Special Forces, first responders, business continuity managers, Search and Rescue personnel and journalists.
The Norsat Rover is a complete satellite terminal that fits into a single extended-mission backpack. The Norsat Rover offers a complete terminal that is capable of data transfer rates of approximately 1.0 Mbps and is still compact enough to fit into a single backpack.
The OmniLink™ product family also addresses the demanding needs of users seeking to establish broadband connectivity on a temporary basis but for longer periods of time. This product line is ideal for use by government and peacekeeping agencies, broadcasters, resource exploration companies, distance education institutions, financial institutions, and large corporations.
Market Profile
The market for portable satellite communications comprises users that need to establish broadband connectivity on short notice or redeploy their telecommunications infrastructure following an engagement. The primary markets for portable satellite systems are defense, emergency services (first responders, homeland security), and broadcasters. There has been growing interest from Fortune 1000 companies to employ such systems as part of a business continuity program wherein such systems would be used as a “backup measure” should their primary means of communications fail in the event of a natural disaster, an outage or a terrorist attack.
The overall market is going through a significant transformation due to the growth in the government sector. This change in demand is attributable to measures being taken by governments and corporations to counter the threat of terrorism.
The improved demand for portable satellite communications equipment stems from an initiative to “transform” the armed forces. With the onset of Operation Iraqi Freedom in 2003, the need to accelerate the “transformation” has become a top priority. Under this initiative, field units are being equipped with communications gear that will give them real-time access to the same information available at command and control centers.
Most programs within the government and broadcast sectors tend follow a formal competitive tendering process. From time to time, the government may indicate a preference for certain classes of vendors in the interest of social policy or national security objectives. As a result, it is critical that a vendor such as Norsat align themselves with such pre-qualified contractors.
16
The formality of the procurement process in the commercial sector tends to vary with the size of the company’s operations; larger companies tend to involve a lengthier sales cycle.
Competition
The competitive pressures in the United States Government market for portable satellite systems are markedly different from the broadcast and commercial markets. While there are some pricing pressures, they are less pronounced; system reliability, performance records and relationships with program offices are significantly more important. In this sector, the Company faces competition from GSC, a subsidiary of L3 (NYSE: LLL), TCS (NASDAQ:TSYS), Globecomm Systems (NASDAQ: GCOM) and privately held Gigasat. From time to time, the Company also faces competition from Swe-Dish, a subsidiary of Datapath, a privately held company. At times, the Company also faces competition from systems integrators who construct systems on a custom basis for the military including Thales, Finmecchanica, EADS, Lockheed Martin and Raytheon.
In the broadcast and commercial markets, the Company faces competition from terrestrial alternatives such as microwave radio vendors and the traditional providers of portable satellite systems including: Swe-Dish, VisLink PLC’s Advent business unit, Gigasat and Holkirk Communications. The Company also faces competition from service providers such as Caprock (www.caprock.com) and Spacenet, a subsidiary of Gilat.
(c) Wireless Networks Segment
Market Profile
Norsat announced its entry into the wireless networking industry in 2008. The Wireless Networks segment develops, markets and deploys wireless communications systems that 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 Worldwide Interoperability for Microwave Access (WiMAX), LTE and/or 4G. These technologies can enable the delivery of “last mile” wireless broadband access as an alternative to cable or DSL and in some instances mobile communications. A typical wireless network presents as a hybrid of cellular and cable/DSL networks with radio towers (BTS) broadcasting the wireless signal to modem devices (CPE) at customer locations. When combined with satellite communications as a backhaul connection, WiMAX allows operators to deploy a cost effective broadband offe ring into the under serviced regions of the world. The Company is exploring the different alternatives available to leverage its technology into this area. As at December 31, 2009, the Company has not recognized any revenues from wireless networks.
Competition
The sector is quite fractured and extremely competitive. The Company faces competition from Redline Communications Group Ltd. (TSX:RDL); Alvarion Ltd. (NASDAQ: ALVR) and Wi-LAN Inc. (TSX:WIN)
(d) Maritime Communications Segment
Market Profile
Norsat also announced its entry into the marine satellite business in 2008. Maritime systems provide broadband connectivity over satellite for industries that operate in a marine environment. Examples of the industries that utilize satellites for communications and connectivity include fishing, recreational boating, and oil and gas. The Company is exploring the different alternatives available to leverage its technology into this area.
17
Competition
The sector is well established and very competitive. The dominant player in this segment is SeaTel Maritime Communications, a division of Cobham PLC (LSE: COB). In addition to SeaTel, other companies that have established a presence in this space include Orbit Communications Systems and KVH Industries (NASDAQ:KVHI).
2. Marketing
The Company sells most of its microwave components and portable satellite system, other than those bound for the US Government, through resellers. Almost all of the portable satellite systems sold to the US Government have been through the Company’s direct sales force.
The Company’s primary value proposition is rooted in its longevity and reputation for quality. Customers with critical applications tend to place significant value in the quality of Norsat products and the after-sales support infrastructure.
The Company continues to evolve its business model by (i) adding a recurring component through a
range of services, to its revenue stream, (ii) undertaking the turnkey responsibility to deliver a comprehensive solution instead of selling point products, and (iii) diversifying its base of customers to include non-defence customers.
3. Research and Development
Research and development activities and projects were focused on developing new products in the different business segments the Company is involved in. The Company spent approximately 3.7% of its annual revenues net of any government contributions and allocated 20% of its staff towards research and development activities.
4. Intellectual Property
The Company relies on patent, trademark, trade secret and copyright laws to protect our proprietary technology and to protect us against claims from others. The Company believes it has direct intellectual property rights covering substantially all of our material technologies. However, there can be no assurance that claims of infringement will not be asserted against the Company or against its customers in connection with their use of our systems and products, nor can there be any assurance as to the outcome of any such claims, given the technological complexity of our systems and products.
The Company has renewed interest in employing patent protection due to competition in its markets. The Company has a patent portfolio of 3 patents. Five patent applications were filed in 2007, three are pending. The Company does not believe that any single patent is material to our business as a whole.
C.
Organizational structure
As of December 31, 2009, the Company has seven wholly-owned and active subsidiaries. These are: Norsat International (UK) Ltd. incorporated and located in Lincolnshire, England: Norsat International (America) Inc. incorporated and located in Annapolis, MD, United States of America; Norsat Korea Ltd. incorporated and located in Daejeon, South Korea; Norsat SA, incorporated in Lausanne, Switzerland; Norsat Italia, Srl incorporated and located in Rome, Italy; Bluemoon 4G Ltd. incorporated in Dublin, Ireland; and Norsat Capital Ltd, incorporated and located in Richmond, BC, Canada.
18
The mandate of Norsat International (UK) Ltd. is to market and support microwave component products sold into the Europe Middle East and Africa region.
The mandate of Norsat International (America) Inc. is to market and support satellite systems into certain government markets.
The mandate of Norsat Korea Ltd. is to perform supply chain management for vendors in Asia as well as perform sales and marketing functions in the Asian market.
On September 11, 2008 Norsat Italia, Srl was incorporated in Rome, Italy to support the Company’s thrust into the marine satellite business.
Norsat SA’s mandate is to concentrate on the Company’s sales and supply chain activities as well as provide a regional centre for the Company’s expanding level of activity in the European, Middle East and African markets.
Norsat established Norsat Capital in 2009, a financial arm to enable customers and potential clients the option of leasing or renting Norsat’s equipment as well as making select strategic investments. The creation of Norsat Capital was a direct result of the improved capital structure which can now afford the Company to offer more financing options on its products as well as select investments to benefit shareholder value. As at December 31, 2009, no transactions have been effected by Norsat Capital.
D.
Property, plants and equipment
Description of Property
Our Company's head office and principal place of business has been located in Richmond, British Columbia, Canada since September 2006. The Company leases its head office premises.
The lease is for approximately 23,400 square feet of space. This location houses the Company's corporate office, engineering and production department and includes warehouse space. Most of the products are produced and shipped out of this location.
The monthly rent for this space is approximately $35,000 and is for a term of five years. The Company has the option for a further five-year term at the end of this lease, with a new rate to be negotiated.
In addition to the minimum rent, the Company is responsible to pay maintenance, utilities and taxes.
Norsat also operates out of leased premises in Lincoln, England, Maryland, USA, Daejeon, South Korea and Rome, Italy.
There are no known environmental issues that may affect the Company’s utilization of its assets at any of the above locations.
4A.
UNRESOLVED STAFF COMMENTS
Not applicable
5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
19
A.
Operating results
The following information should be read in conjunction with the Company’s 2009 consolidated financial statements and related notes included therein, which are prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP). These principles differ in certain respects from United States generally accepted accounting principles (U.S. GAAP). The differences as they affect the financial statements of the Company are described in Note 25 to the Company’s audited consolidated financial statements. All amounts following are expressed in United States Dollars unless otherwise indicated.
The Company currently generates revenue from two business segments, Microwave Products and Satellite Systems as described herein. The Company’s annual and quarterly operating results are primarily affected by the level of its sales and costs of operations over these two business segments. Economic factors such as foreign exchange fluctuations, market prices of similar products and worldwide political environment may also play an important roll to affect the Company’s operating performance and volatility of its share price. To management’s knowledge, there are no known economic, political, foreign exchange fluctuations and inflation that have materially affected, directly or indirectly the Company’s operations.
Fiscal 2009 Compared to Fiscal 2008
| 2009 | 2008 |
| $ | $ |
Sales | 21,165 | 18,057 |
Income(Loss) from operations before income taxes | 2,986 | 2,200 |
Net Income (loss) | 4,632 | 2,200 |
Earnings (loss) per share from operations – basic and diluted | .05 | 0.04 |
Earnings (loss) per share, – basic and diluted | .08 | 0.04 |
Total Assets | 18,684 | 13,327 |
Long-term debt | nil | nil |
Quarterly Financial Data (unaudited) (Expressed in thousands of dollars, except per share amounts) | ||||
| Three Months Ended (unaudited) | |||
| Mar 31 | Jun 30 | Sep 30 | Dec 31 |
2009 | $ | $ | $ | $ |
Sales | 4,995 | 4,839 | 5,141 | 6,279 |
Income from operations before income taxes | 829 | 238 | 643 | 1,276 |
Net Income | 829 | 238 | 643 | 2,922 |
Earnings per share from operations – basic and diluted | 0.02 | 0.00 | 0.01 | 0.02 |
Earnings per share – basic and diluted | 0.02 | 0.00 | 0.01 | 0.02 |
Weighted average common shares outstanding | # | # | # | # |
Basic | 54,313 | 59,384 | 59,332 | 59,062 |
Diluted | 56,112 | 59,963 | 59,913 | 59,233 |
|
|
|
|
|
2008 | $ | $ | $ | $ |
20
Sales | 2,929 | 3,960 | 4,888 | 6,280 |
Income from continuing operations | 5 | 135 | 742 | 1,318 |
Net Income | 5 | 135 | 742 | 1,318 |
Earnings per share from operations - Basic and diluted | 0.00 | 0.00 | 0.01 | 0.02 |
Earnings per share – Basic and diluted | 0.00 | 0.00 | 0.01 | 0.02 |
Weighted average common shares outstanding | # | # | # | # |
Basic | 51,911 | 53,668 | 53,698 | 54,117 |
Diluted | 55,659 | 57,335 | 57,140 | 54,117 |
Results of Operations
Sales ($000’s) | Three Months Ended (2009) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2009 | 2008 | |
| $ | $ | $ | $ | $ | $ |
Microwave Products | 1,512 | 1,600 | 2,337 | 2,136 | 7,585 | 8,668 |
Satellite Systems | 3,422 | 3,173 | 2,558 | 3,978 | 13,131 | 9,389 |
Maritime Systems | 61 | 123 | 100 | 164 | 448 | - |
Total | 4,995 | 4,896 | 4,995 | 6,278 | 21,164 | 18,057 |
Total sales for 2009 were $21.2 million, up from the $18.1 million sold in 2008. Fiscal 2009 saw sales grow by 17% over fiscal 2008. The sales performance for the current year is the result of significantly improved satellite systems sales over the previous year. Sales to a number of new European militaries as well as from the backlog of satellite systems orders carried over from the end of 2008 resulted in the overall improvement in sales.
The current nature of the Company’s business is still expected to result in uneven sales results quarter on quarter. This is due to the fact that Norsat has a relatively small base of customers, who often place orders that represent a significant share of sales for a given quarter, and the timing of those orders is unpredictable. Management is addressing this by cultivating revenue streams that are more evenly distributed throughout the year.
Sales from Microwave Products were $7.6 million, down 13% from the $8.7 million in sales recorded in 2008. On an YTD basis, Microwave product revenues were weak during the first half of the year as projects were deferred or postponed until the economic situation improves. Towards the latter part of 2008, a number of the Company’s resellers reported a softening of the market as end customers had elected to postpone or defer orders for microwave components due to market conditions. Sales in the first half of 2009 continued to be impacted by the global recessionary trends. The Company continues to be a prominent player in the Low Noise Blockdown Converter (LNB) market and will continue to maintain its market leadership position.
Sales of Satellite systems were $13.1 million, up 39%, compared to $9.4 million last year. The improvement is a continuation from last year’s efforts to increase penetration of the market and generate higher sales from the Company’s reseller channels. Sales to a number of new European militaries and completion of shipments against the $5.5 Million US Department of Defense order entered into in 2008 also provided a boost to current year sales.
Gross Margin | Three Months Ended (2009) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2009 | 2008 | |
Microwave | 41% | 42% | 42% | 46% | 43% | 43% |
Satellite systems | 53% | 55% | 54% | 50% | 53% | 59% |
Maritime systems | 22% | 22% | 22% | 114% | 54% | - |
Combined | 49% | 50% | 48% | 50% | 50% | 51% |
21
The Company’s overall gross margin for 2009 was 50% compared to 51% in 2008. Gross margins were down slightly from 2008, primarily due to product mix in the Satellite systems business unit. These are primarily the result of sales of lower margin products to Asia and some European customers.
The gross margin for Microwave Products remained constant at 43% in 2009 and 2008. While the global recessionary trends put some downward pressure on margins of the more commoditized items in the product portfolio; the Company continues to maintain market leadership through continually improving Microwave product offerings.
The gross profit margin for Satellite Systems decreased to 53% in 2009 compared to 59% in 2008 primarily due to the introduction of products at lower price points to penetrate more cost sensitive markets and capture market share from competitors.
Operating Costs ($000’s) | Three Months Ended (2009) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2009 | 2008 | |
| $ | $ | $ | $ | $ | $ |
S G & A | 1,407 | 1,400 | 1,429 | 1,830 | 6,065 | 6,254 |
Product development | 305 | 162 | 171 | 136 | 775 | 800 |
Amortization | 126 | 182 | 196 | (173) | 330 | 346 |
Other (Income) Expenses | 214 | 474 | 17 | 79 | 357 | (331) |
Total Operating Costs | 1,624 | 2,218 | 1,813 | 1,872 | 7,527 | 7,069 |
The Company’s commitment to cost control has not wavered and this philosophy continues to be reflected in the cost structure. However, when necessary, staff levels have gradually been increased to ensure that commitments to research and development projects are met and product innovation and product leadership are not compromised.
For the year ended December 31, 2009, total operating expenses were $7.5 million up from the $7.1 million in 2008.
Selling, general and administrative (SG&A) expenses decreased to $6.1 million in 2009 from $6.3 million in 2008. Selling, General and Administrative expenses in 2009 were lower as the Company continues to fine tune operating costs to maintain its competitive position. Throughout the year, the Company’s management team continues to focus on meeting customers’ needs and developing strong partnerships with resellers in key markets, while still maintaining tight cost controls. The Company incurred additional costs related to the initiation of a more active corporate communications program, but these costs were offset by curtailments in other administrative areas.
Product development expenses remained constant at $0.8 million in 2009 compared to 2008. Product development costs continue to be a core focus for the Company and are reflected through development programs in both the Microwave business segment and the Satellite systems segment. This consistency in cost is a function of contributions from the SADI program. Without the SADI program contribution, the Company’s product development costs would not be sustainable, thereby jeopardizing the Company’s ability to maintain product innovation and leadership.
22
The expenses reported are net of government contributions of $1.3 million. These contributions were from the Strategic Aerospace and Defense Initiative (SADI) program. The Company’s reported product development expenses without these reductions would have been $2.1 million. The Company continues to pursue a strategy of offloading non-core development expenses to strategic suppliers and partners. The Company will continue to take responsibility for its core R&D activities, and plans to continue to lead the market with introductions of innovative new products.
Amortization expense in 2009 remained constant at $0.3 million compared to same period last year.
Other expenses in 2009 increased to $0.4 million compared to income of $0.3 million in 2008. The most significant item was the strengthening of the Canadian Dollar relative to the United States Dollar in the first six months of 2009 before the Company changed its functional currency from the Canadian Dollar to the United States Dollar effective July 1, 2009. In 2009, foreign exchange losses were $0.3 compared to a gain of $0.4 million in 2008, resulting in a net reduction of $0.7 million.
Earnings (loss) (in 000’s) except earnings per share | Three Months Ended (2009) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2009 | 2008 | |
Earnings from operations before taxes | $829 | $238 | $643 | $1,276 | $2,986 | $2,200 |
Net earnings per share, basic | $0.02 | $0.00 | $0.01 | $0.02 | $0.05 | $0.04 |
and diluted before income taxes | $0.02 | $0.00 | $0.01 | $0.02 | $0.05 | $0.04 |
Income from operations before taxes and other expenses were $3.0 million in 2009, compared to the $2.2 million profit in 2008. The improvement was mainly due to increased sales, while keeping tight controls over operating expenses.
Critical Accounting Estimates
The Company prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles, and makes estimates and assumptions that affect its reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent liabilities. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable in the circumstances. Actual results may differ from these estimates.
Management has discussed the development and selection of the Company’s critical accounting estimates with the Audit Committee of the Company’s Board of Directors, and the Audit Committee has reviewed the following disclosures.
The following critical accounting policies reflect the Company’s more significant estimates and assumptions used in preparing its consolidated financial statements:
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management provides for bad debts by setting aside a percentage of sales towards the allowance account. The percentage is based
on the Company’s historical default experience and is reviewed periodically to ensure consistency with default experience. In addition, at the end of each fiscal year, management specifically analyzes the age of outstanding customer balances, historical bad debt experience, customer credit-worthiness and changes in customer payment terms to evaluate estimates of collectability of the Company’s accounts receivable balance. The allowance set aside is then adjusted to align with the specific analysis performed. Throughout the year, if the Company determines that the financial condition of any of its customers has deteriorated; increases in the allowance may be made.
23
Inventories
The Company values its finished goods and work-in-process inventories at the lower of weighted average cost and net realizable value. Net realizable value reflects the current estimated net selling price or value in use of the item in inventory in a non-forced sale. The Company assesses the need for inventory write-downs based on its assessment of estimated net realizable value using assumptions about future demand and market conditions. When the results of these assumptions differ from the Company’s projections, an additional inventory write-down may be required. In addition, changes in the underlying factors used in the Company’s projections may necessitate additional write-downs in the future. Market factors are generally outside of the Company’s control.
Revenue recognition
Revenues consist of sales of hardware, software, consulting, installation, training, extended warranty and post contract services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of services. For those contracts where the services are not essential to the functionality of any other element of the transaction, the Company determines vendor-specific objective evidence (“VSOE”) of fair value for these services based upon normal pricing and discounting practices for these services when sold separately.
The Company’s multiple-element sales arrangements include arrangements where software licenses and the associated post contract customer support (“PCS”) are sold together. The Company has established VSOE of the fair value of the undelivered PCS element based on the contracted price for renewal PCS included in the original multiple-element sales arrangement. The Company’s multiple-element sales arrangements generally include rights for the customer to renew PCS after the bundled term ends. These rights are irrevocable to the customer’s benefit, are for specified prices, are consistent with the initial price in the original multiple-element sales arrangement, and the customer is not subject to any economic or other penalty for failure to renew. Further, the renewal PCS options are for services comparable to the bundled PCS and cover similar terms and periods.
PCS revenue associated with software licenses is recognized ratably over the term of the PCS period, which typically is one year. PCS revenue includes support levels that provide customers with access to telephone support for trouble-shooting, diagnosis and extends to on-site repair of products.
VSOE is established on multi-element arrangements on extended warranty. Extended warranty of 1 to 3 years can be purchased separately by the customer. Warranty revenue is recognized over the term of the warranty period subsequent to the expiry of the one year manufacturer’s warranty.
Revenue is recognized on installation, training, and consulting when services have been performed.
24
The Company recognizes revenue from the sales of hardware products upon the later of transfer of title or upon shipment of the hardware product to the customer so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
Revenue that has been paid but does not yet qualify for recognition under the Company’s policies is reflected as either deferred revenue (revenue that can be recognized in less than one year) or long-term deferred revenue (revenue that can be recognized in more than one year).
The Company early adopted the provisions of EIC 175 “Arrangements with Multiple Deliverables” as at January 1, 2009. These changes are addressed under U.S. GAAP through Accounting Standards Update (ASU) 2009-13 “Multiple-Deliverable Revenue Arrangements. For revenue recognition on multi-element contracts entered into or materially modified on or after January 1, 2009, please refer to section 9.0 – “Changes in Accounting Policies including Initial Adoption”.
Government contribution
The Company entered into a $5.97 million repayable investment with the Canadian Federal Ministry of Industry (the Minister) through the Strategic Aerospace and Defense Initiative (SADI). This funding represents a portion of the company’s eligible R&D expenses from September 21, 2007 up to and including December 31, 2011. The Company determines eligible expenditures and will submit quarterly to the Ministry for reimbursement. The final determination for eligibility rests with the Ministry and could go through the process of substantiating the expenditure claims. Based on these discussions, it will be necessary to alter or defer the amounts claimed for reimbursement. 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 a mounts are calculated based on a percentage of gross business revenue as defined in the agreement multiplied by the adjustment rate (based on growth of the gross business revenue over the previous year).
Acquisition of Intangible Asset
On March 9, 2009, the Company acquired 100% ownership of Bluemoon 4G Ltd. from unrelated third parties for 5,000,000 shares of the Company’s common stock. Bluemoon 4G Ltd. is a pre-revenue company that had a customer relationship to supply and deliver equipment for WiMAX installations. In acquiring Bluemoon, the Company acquired the customer relationship.
As per terms of the contract, the 5,000,000 shares were held in escrow until December 31, 2009. The counterparty had to meet certain performance milestones to receive the common shares. In the event that the milestones were not met, the counterparty had to pay a minimum order fee or the shares in escrow could be returned to Norsat to satisfy the minimum order fee.
As at December 31, 2009, Norsat had not received any purchase orders from the third party. The escrowed shares were returned to the Company on January 27, 2010.
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 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 was no material impact on the Company’s consolidated financial statements, except for reclassification of software to intangible assets.
25
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 the Canadian Institute of Chartered Accountants (“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 dolla r. 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 being 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 the net investment in its operations. The translated amounts on June 30, 2009 became the historical basis for all balance sheet items as at July 1, 2009, except for shareholders’ equity which continues to be carried at historical cost.
Stock Based Compensation
Effective January 1, 2005, the Company adopted the new provision of the CICA Handbook Section 3870, “Stock-Based Compensation and Other Stock-Based Payments’, which requires companies to adopt the fair value based method for all stock-based awards. In accordance with the provisions of this section, the Company has accounted for all directors, officer and employee (“employee”) stock options granted, settled, or modified since September 1, 2002 using the fair value method. The fair value method requires the Company to expense the fair value of the employee options granted and vested, or modified during the period. The Company reverses stock based compensation when options are forfeited before they vest. The Black-Scholes Option Pricing Model was used to determine fair value.
Prior to the adoption of the new standard, no compensation expense was recognized when stock options were issued to employees at the market value of the shares at the date of the grant. Consideration paid by employees on the purchase of shares under the employee share purchase plan and exercise of stock options was recorded as share capital.
Financial Instruments – Disclosures
In June 2009, the Canadian Accounting Standards Board issued an amendment to CICA Section 3862, “Financial Instruments – Disclosures” in order to harmonize Section 3862 with International Financial Reporting Standards Section 7 – Disclosures (“IFRS 7”). The purpose was to establish a framework for measuring fair value and expand disclosures about fair value measurements. According to Section 3862, an entity shall classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level3). These standards apply to interim and annual consolidated financial statements relating to fiscal years ending after September 30, 2009.
26
The adoption of the new standard does not impact the Company’s approach in fair value measurement as the Company doesn’t hold financial derivatives. The carrying value of the Company’s cash and cash equivalents is considered to be reasonable approximation of fair value due to the short-term nature of these instruments and are considered level 1 financial instruments according to section 3862.
Income Tax
The Company follows the asset and liability method of accounting for income taxes. Under this method, the Company recognizes and measures its assets and liabilities, income taxes currently payable or recoverable as well as future taxes, which will arise from the realization of assets or settlement of liabilities at carrying amounts which differ from their tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be recovered or settled. Future tax assets and liabilities are presented net by current and non-current classifications except to the extent that they cannot be offset due to different tax jurisdictions.
Previously, all FIT assets for all entities were subject to a valuation allowance, as it was believed that it was not more likely than not that the FIT would be able to be utilized. In the current year, it has been determined that certain FIT assets of the parent company, Norsat International Inc., are more likely than not to be utilized.
Arrangements with Multiple Deliverables
EIC-175, “Arrangements with Multiple Deliverables”, was issued as on 24 December 2009 as a result of the release of EITF 08-1, “Revenue Arrangements with Multiple Deliverables”. EIC-175 is an amendment of EIC-142, “Arrangements with Multiple Deliverables”, such that the Canadian guidance will remain converged with the US guidance for multi-element arrangements. The revised guidance changes the determination of separate units of account and the allocation of the consideration to the deliverables. Additional disclosure requirements will be required not only for the transition adjustments but also thereafter for all significant multiple-element arrangements.
The criteria for identifying all deliverables in a multiple-element arrangement that represent separate units of accounting have been simplified. Entities are no longer required to have objective and reliable evidence of fair value of the undelivered item for a deliverable to qualify as a separate unit of accounting. The two criterion that remain are (1) the delivered item(s) has standalone value and (2) when a general right of return exists for the delivered item, the delivery or performance of undelivered item is probable and substantially in the control of the seller.
Previously, if objective and reliable evidence of fair value existed for all units of accounting, the arrangement consideration was allocated based on their relative fair values. In situations where there was objective and reliable evidence of fair value of the undelivered item but no such evidence for the delivered item the residual was assigned to the delivered item. The reverse was not permitted (i.e. assigning the residual to the undelivered item). Subsequent to the adoption of EIC-175, the arrangement consideration is allocated to all deliverables based on their relative fair values.
Previously the relative allocation of arrangement consideration was based on fair value; the allocation arrangement consideration will now be based on a hierarchy of selling process:
Vendor specific objective evidence (VSOE) of selling price
If VSOE does not exist then third party evidence of selling price (TPE) is used
If neither VSOE nor TPE exist, then the seller’s best estimate of selling price for the deliverable is used. In all cases selling prices is an entity specific measure that also considers market conditions.
27
The Company decided to early adopt EIC 175 in the fourth quarter of 2009. Since the period of adoption is not the first reporting period in the Company’s fiscal year, EIC 175 is applied retroactively from January 1, 2009.
Adopting EIC 175 retroactively did not have any impact on the amount, pattern and timing of revenue recognized during 2009. There were no changes in the units of accounting. Prior to adopting EIC 175, the Company relied on the residual method to determine the selling price of its delivered hardware products. However, since the residual method is not allowed under EIC 175, the Company establishes selling price using the relative selling price method on hardware products. The adoption of the provisions is expected to have no material effect on the Company’s financial statements in future periods.
The following describes the Company’s accounting policy on revenue recognition for contracts entered into or materially modified subsequent to January 1, 2009:
The Company’s revenues consist of sales of hardware, software, consulting, bandwidth, installation, training, extended warranty and post contract customer support. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of services. Under EIC-175, “Arrangements with Multiple Deliverables”, which the Company early adopted effective January 1, 2009, multiple deliverable revenue arrangements are to be divided into more than one unit of accounting and the criteria for revenue recognition are considered separately for each accounting unit if the following criteria are met:
the delivered item(s) has standalone value and
when a general right of return exists for the delivered item, the delivery or performance of undelivered item is probable and substantially in the control of the Company.
For those contracts where the services are not essential to the functionality of any other element of transaction, the Company determines selling price for these services based upon vendor specific objective evidence (“VSOE”), third party evidence or management’s best estimate, as appropriate.
Where previously there was objective and reliable evidence of fair value of the undelivered item, but no such evidence for the delivered item, the residual was assigned to the delivered item. In the Company’s case the delivered item was hardware. Subsequent to the adoption of EIC 175, the arrangement consideration is allocated to all deliverables based on their relative selling prices. As a result of the hierarchy of selling prices, the Company is required to determine the selling price for each deliverable provided the conditions for separation have been met.
Hardware is considered a separate unit of accounting because (1) the delivered item has standalone value to customers as it is sold separately by the Company and (2) there is no general right of return on satellite products and the delivery or performance of the undelivered item is probable and substantially in the control of the Company. In establishing selling price for hardware, the Company relies on third party evidence based on stand alone sales of largely interchangeable products. The Company’s hardware components are customized in nature and specific to a customer’s order requirements. As a result, establishing VSOE would be nearly impossible.
The Company recognizes revenue from the sale of hardware products upon the later of transfer of title or upon shipment of the hardware product to the customer; so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
The Company’s multiple-element sales arrangements include arrangements where hardware with embedded software licenses and the associated post contract customer support (“PCS”) are sold together. The hardware and software function together to deliver the tangible products’ essential functionality and are therefore scoped out of the software revenue recognition guidance. The Company uses VSOE to determine selling price of the undelivered PCS elements based on fair value labour rates and consistent renewal rates.
28
The Company’s multiple-element sales arrangements include rights for the customer to renew PCS after the bundled term ends. These rights are irrevocable to the customer’s benefit, are for specified prices, are consistent with the initial price in the original multiple-element sales arrangement, and the customer is not subject to any economic or other penalty for failure to renew. Further, the renewal PCS options are for services comparable to the bundled PCS and cover similar terms and periods.
PCS revenue associated with hardware is recognized ratably over the term of the PCS period, which typically is one year. PCS revenue includes support levels that provide customers with access to telephone support for trouble-shooting, diagnosis and extends to on-site repair of products. PCS is considered a separate unit of accounting because (1) the delivered item has standalone value to customers as it is sold separately by the Company and (2) there is no general right of return and the delivery or performance of the undelivered item is probable and substantially in the control of the Company.
Extended warranty of 1 to 3 years can be purchased separately by customers. The Company follows EIC 143, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts”, to record revenue on multi-element arrangements on extended warranty. Revenue on extended warranty are deferred and recognized in income on a straight line basis over the contracted period. Extended warranty revenue is recognized after the Company’s one year manufacturer’s warranty expires.
Revenue is recognized on installation, training, and consulting services when these services have been performed. Selling price on these items is determined by reference to third party evidence of comparable services. Installation, training and consulting services are separate units of accounting because (1) the delivered item has standalone value to customers as it is sold separately by the Company and (2) there is no general right of return and the delivery or performance of the undelivered item is probable and substantially in the control of the Company.
Revenue that has been paid but does not yet qualify for recognition under the Company’s policies is reflected as either deferred revenue (revenue that can be recognized in less than one year) or long-term deferred revenue (revenue that can be recognized in more than one year).
For reseller arrangements, fees are fixed or determinable on delivery to the reseller because the Company’s agreements with customers and resellers do not contain product return rights.
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.
During 2007, the Company entered into the following related party transactions:
(i) On March 28, 2007 the Company received a bridge loan of Cdn$150,000 from an officer of the Company subjected to certain terms and conditions as follows:
•
Interest at the rate of 8% per annum over the balance of the loan, payable at the end of the term, or on the day of loan retirement,
•
60 day term maturing May 31, 2007,
• Payment in full May 31, 2007, or partial payments within the 60 day term at discretion of the Company.
29
The loan was fully repaid on May 31, 2007.
(ii) On April 24, and June 12, 2007 the Company received bridge loans of Cdn$250,000, and Cdn$200,000 respectively from the same officer of the Company subjected to certain terms and conditions as follows:
•
Interest at the rate of 8% per annum over the balance of the loan, payable at the end of the term, or on the day of loan retirement,
•
9 day terms, with an option to renew
•
Payment in full on or partial payments within the 9 day term at discretion of the Company.
The loans were fully repaid on May 2, and June 20, 2007.
(iii) On November 14, 2007 the Company received a bridge loan of Cdn$450,000 from the same officer of the Company subjected to certain terms and conditions as follows:
•
Interest at the rate of 8% per annum over the balance of the loan, payable at the end of the term, or on the day of loan retirement,
•
9 day terms, with an option to renew
•
Payment in full on or partial payments within the 9 day term at discretion of the Company.
On November 22, 2007, the Company renewed this bridge loan with the same interest rate, but maturing on November 27, 2007. The loan was fully repaid on November 27, 2007
(refer to 5.B “Liquidity and capital resources”).
Recent Accounting Pronouncements
Financial Instruments – Recognition and Measurement
In April 2009, the CICA amended Section 3855, “Financial Instruments – Recognition and Measurement”, adding and amending paragraphs regarding the application of the effective interest method to previously impaired financial assets and embedded prepayment options. The amendments are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, with early adoption permitted. The Company will adopt the amendments to Section 3855 in its 2011 fiscal year. The amendments are not expected to have a significant impact on the Company’s accounting for its financial instruments.
In August 2009, the CICA made amendments to Section 3855, “Financial Instruments – Recognition and Measurement”, adding and amending paragraphs regarding financial asset measurement categories and impairment as well as providing specific transitional guidance. The Company is currently assessing the impact of the amendments but does not expect them to have a significant impact on the Company’s accounting for its financial instruments.
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
In January 2009, the Emerging Issues Committee issued a new abstract concerning the measurement of financial assets and financial liabilities, EIC-173 “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”. There had been diversity in practice as to whether an entity’s own credit risk and the credit risk of the counterparty are taken into account in determining the fair value of financial instruments. The EIC reached a consensus that these risks should be taken into account in the measurement of financial assets and financial liabilities. EIC-173 was effective for all financial assets and financial liabilities measured at fair value in interim and annual financial statements issued for periods ending on or after the date of issuance of EIC-173 with retrospective application without restatement of prior periods. The Company adopted EIC-173 at the beginning of its current fiscal year. The implementation did not have a significant impact on the Company’s results of operations, financial position or disclosures.
30
Convergence with International Financial Reporting Standards
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.
The Company commenced its IFRS conversion project in 2008. The conversion project consists of 3 phases: (1) awareness and assessment; (2) design and (3) implementation. The Company completed its initial awareness and assessment phase during the third quarter of 2008, which involved a high level review of the major differences between Canadian GAAP and IFRS. During the initial assessment, it was determined that the areas of accounting differences with the highest potential impact to the Company are accounting for property, plant and equipment, revenue recognition, as well as initial adoption of IFRS under the provisions of IFRS 1, First-Time Adoption of IFRS.
The Company is currently in the design phase of the project, and is nearing completion thereof. The design phase involves establishing issue-specific documentation in each of the identified risk areas. This task will be performed by key finance personnel in consultation with the Company’s external auditors and recommendations will be submitted to the Audit Committee for review and approval. The recommendations will include an analysis of the financial system and internal control impacts and development of significant accounting policies. As at December 31, 2009, the Company is in the process of finalizing the elections under IFRS 1 “First Time Adoption to IFRS” and expects to have IFRS compliant opening balance sheets in place shortly after the first quarter of 2010.
The implementation phase will involve the roll-out of the designed changes to be developed in the design phase. The implementation phase will result in the development of new accounting policies and procedures related to the changes, associated training for the staff and testing the effectiveness of the changes made to systems. As part of the implementation phase, the Company is planning to run a parallel system in 2010 outside the main accounting system to facilitate compilation of comparative IFRS data for fiscal year 2010.
Recent U.S. GAAP Pronouncements
Transfers of Financial Assets and Variable Interest Entity Reporting
In June 2009, the FASB amended the guidance included in ASC 810 on transfers of financial assets in order to address practice issues highlighted most recently by events related to the economic downturn. The amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. The new guidance will be effective January 1, 2010 for calendar year-end companies. The Company does not expect the adoption of this amendment to have a material impact on the Company’s consolidated financial statements.
31
In June 2009, the FASB amended the consolidation guidance for variable-interest entities included in ASC 810. The amendment was issued in response to perceived shortcomings in the consolidation model that were highlighted by recent market events, including concerns about the ability to structure transactions under the current guidance to avoid consolidation, balanced with the need for more relevant, timely, and reliable information about an enterprise’s involvement in a variable-interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. The new guidance will be effective January 1, 2010 for calendar year-end companies. The Company does not expect the adoption of this amendment to have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, which amends the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU also amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not expect the adoption of this amendment to have a material impact on the Company’s consolidated financial statements.
Recently Adopted U.S. GAAP Policies
On September 30, 2009 the FASB issued ASU 2009-12 to provide guidance on measuring the fair value of certain alternative investments. The ASU amends ASC 820 to offer investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share (NAV). The ASU is effective for the first reporting period ending after December 15, 2009; however, early adoption is permitted. The adoption of ASU 2009-12 did not have a material effect on the Company’s consolidated financial statements.
Effective July 1, 2009, the Company adopted the FASB Accounting Standards Codification™ (“Codification”). The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The content of the Codification carries the same level of authority, thereby modifying the previous GAAP hierarchy to include only two levels of GAAP: authoritative and nonauthoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of the Codification did not result in a change in current accounting practice.
Effective January 1, 2009, the company adopted the amendments to FASB ASC 815 regarding disclosures about derivative instruments and hedging activities, which revised and expanded the disclosure requirements to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under U.S. GAAP, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The new requirements apply to derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under FASB ASC 815 and are effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of the amendments to FASB ASC 815 did not have a material impact on the Company’s consolidated financial statements.
32
Effective January 1, 2009, the Company adopted the amended provisions of FASB ASC 810 related to noncontrolling interests in consolidated financial statements, which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amendment clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The amended provisions are effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and have been applied prospectively as of January 1, 2009, except for the presentation and disclosure requirements, which have been applied retrospectively for all periods presented. The adoption of the amendments to FASB ASC 810 did not have a material impact on the Company’s consolidated f inancial statements.
Effective January 1, 2009, the Company adopted the revised provisions of FASB ASC 805 related to business combinations. The amended guidance establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. Information is required to be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The amendment applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued an update to ASC 805 to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination. Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value can not be determined, companies should typically account for the acquired contingencies using existing guidance. The guidance is effective for business combinations whose acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the revised provisions of FASB ASC 805 effective January 1, 2009. The adoption of this amendment did not have a material impact on the Company 6;s consolidated financial statements.
Effective January 1, 2009, the Company adopted the updated provisions of FASB ASC 808 related to accounting for collaborative arrangements. The guidance defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The updated guidance is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted the updated provisions of FASB ASC 260 related to the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance was issued in order to address whether instruments granted in share-based payment transactions are considered participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The updated guidance is effective for fiscal years beginning after December 15, 2008 and for interim periods within such years. The adoption of this amendment did not have a material impact on the Company‘s consolidated financial statements.
33
In November 2008, the FASB updated ASC 323 to address certain matters associated with the accounting for equity method investments including initial recognition and measurement and subsequent measurement considerations. The guidance indicates, among other things, that transaction costs for an investment should be included in the cost of the equity method investment, and shares subsequently issued by the equity method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. The amendments are effective, on a prospective basis, for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The implementation of this guidance did not have a material impact on the Company’s consolidated results of operations or financial condition.
In April 2009, the FASB updated ASC 820 to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased; including guidance on identifying circumstances that indicate a transaction is not orderly. The updated guidance emphasizes that the objective of a fair value measurement remains the same even if there has been a significant decrease in the volume and level of activity for the asset or liability and amends certain reporting requirements for interim and annual periods related to disclosure of major security types and the inputs and valuation techniques used in determining fair value. The amendment is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05 which amends ASC 820-10-35 to provide further guidance concerning the measurement of a liability at fair value when there is a lack of observable market information, particularly in relation to a liability whose transfer is contractually restricted. The amendment provides additional guidance on the use of an appropriate valuation technique that reflects the quoted price of an identical or similar liability when traded as an asset and clarifies the circumstances under which adjustments to such price may be required in estimating the fair value of the liability. The guidance provided in this update is effective for the first reporting period beginning after issuance, with early application permitted. The amendment was adopted for the annual reporting period ended December 31, 2009; however, it did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued ASU No. 2009-02 which updated ASC 320 to amend the existing other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The new guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The amendment shifts the focus from an entity’s intent to hold a debt security until recovery to its intent to sell and changes the amount of an other-than-temporary impairment loss recognized in earnings when the impairment is recorded because of a credit loss. It also expands disclosure requirements related to the types of securities held, the reasons that a portion of an other-than-temporary impairment of a debt security was not recognized in earnings, and the methodology and significant inputs used to calculate the portion of the total other-than-temporary impairment that was recognized in earnings. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued an update to ASC 825, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements, including significant assumptions used to estimate the fair value of financial instruments and changes in methods and significant assumptions, if any, during the period. The new guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
34
In May 2009, the FASB issued ASC 855 related to subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Although there is new terminology, the guidance is based on the same principles as those that currently exist in the auditing standards. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements. In accordance with ASC 855, we have evaluated subsequent events through March 11, 2010, the date of issuance of the consolidated financial statements. All material subsequent events up to this date have been included in the financial stat ements.
In October 2009, the FASB issued ASU 200-13 related to Multiple-Deliverable Revenue Arrangements, which provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early Adoption is permitted. The adoption of this amendment is expected to have no material effect on the Company’s financial statements in future periods.
In October 2009, the FASB issued ASU 200-14 related to Certain Revenue Arrangements that include Software Elements, which changes the accounting model for revenue arrangements that include both tangible products and software elements. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early Adoption is permitted. The adoption of this amendment is expected to have no material effect on the Company’s financial statements in future periods.
Fiscal 2008 Compared to Fiscal 2007
Sales ($000’s) | Three Months Ended (2008) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2008 | 2007 | |
| $ | $ | $ | $ | $ | $ |
Microwave Products | 1,974 | 2,103 | 2,263 | 2,329 | 8,668 | 9,111 |
Satellite Systems | 955 | 1,857 | 2,626 | 3,951 | 9,389 | 7,340 |
Total | 2,929 | 3,960 | 4,889 | 6,280 | 18,057 | 16,451 |
Total sales for 2008 were $18.1 million, up from the $16.5 million sold in 2007. Fiscal 2008 saw sales grow by 9.8% over fiscal 2007. This sales growth continues the pattern set in 2007. Management is committed to continually growing the revenue line by entering new geographic markets, broadening its customer base, and/or expanding into new market verticals.
The current nature of the Company’s business is still expected to result in uneven sales results quarter on quarter. This is due to the fact that Norsat has a relatively small base of customers, who often place orders that represent a significant share of sales for a given quarter, and the timing of those orders is unpredictable. Management is addressing this by cultivating revenue streams that are more evenly distributed throughout the year.
Sales from Microwave Products were $8.7 million, down 5% from the $9.1 million in sales recorded in 2007. Sales in the previous year were atypical as there was a large backlog of orders from 2006 that was filled in fiscal 2007. Towards the latter part of 2008, a number of the Company’s resellers reported a softening of the market as end customers have elected to postpone or defer orders for microwave components due to market conditions. The Company continues to be a prominent player in the Low Noise Blockdown Converter (LNB) market and will continue to maintain its market leadership position.
35
Sales of Satellite systems were $9.4 million, up 28%, compared to $7.3 million last year. The improvement is a continuation from last year’s efforts to increase penetration of the market and generate higher sales from the Company’s reseller channels. Partial shipments against the $5.5 Million US Department of Defense order also provided a boost to current year sales.
Gross Margin | Three Months Ended (2008) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2008 | 2007 | |
Microwave | 43% | 39% | 37% | 53% | 43% | 48% |
Satellite systems | 67% | 62% | 57% | 57% | 59% | 57% |
Combined | 51% | 50% | 48% | 56% | 51% | 52% |
The Company’s overall gross margin for 2008 was 51% compared to 52% in 2007. Gross margins were down slightly from 2007, primarily due to the softening of margins in the Microwave business as a result of the global economic slowdown. This weakening was offset by an increase, in the Satellite System gross margins.
The gross margin for Microwave Products was 43% in 2008 compared to 48% in 2007. A number of new microwave product introductions in 2007 resulted in higher margins for that year. The global recessionary trends also put downward pressure on margins on the more commoditized items of the product portfolio. The Company is committed to maintaining market leadership through continually improving Microwave product offerings, but may be unable to sustain a high rate of refresh due to the maturity of the market segment.
The gross profit margin for Satellite Systems increased marginally to 59% in 2008 compared to 57% in 2007. Although the Company saw increased raw material and subcomponent prices, these increases were offset by production efficiency gains attributable to higher volume production runs.
Operating Costs ($000’s) | Three Months Ended (2008) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2008 | 2007 | |
| $ | $ | $ | $ | $ | $ |
S G & A | 1,303 | 1,527 | 1,468 | 1,955 | 6,253 | 5,331 |
Product development | 185 | 225 | 83 | 306 | 799 | 726 |
Amortization | 90 | 92 | 97 | 68 | 347 | 333 |
Other (Income) Expenses | (93) | (12) | (66) | (159) | (330) | 767 |
Total Operating Costs | 1,485 | 1,832 | 1,582 | 2,170 | 7,069 | 7,157 |
For the year ended December 31, 2008, the total operating expenses were $7.1 million down slightly from the $7.2 million in 2007.
Selling, general and administrative (SG&A) expenses increased to $6.3 million in 2008 from $5.3 million in 2007. Selling, General and Administrative expenses in 2007 were significantly lower as the Company operated with some vacancies and other cash conservation initiatives initiated to preserve the Company. In 2008, the vacancies were filled and the Company operationally shifted towards a sustainable and frugal operating level. The current year expenses also included corporate expansion and development costs. Throughout the year, the Company’s management team continues to focus on meeting customers’ needs and developing strong partnerships with resellers in key markets, while still maintaining tight cost controls.
36
The increases are due to a number of factors, most significantly among them were: i) Corporate development initiatives undertaken throughout the year cost $0.5 million, these initiatives included exploration of growth opportunities through potential mergers and acquisitions; ii) Senior executive changes the Company implemented in October of 2008. The one time expenses related to these changes accounted for $0.3 million.
Product development expenses increased to $0.8 million in 2008 from $0.7 million in 2007. The increase in product development spending represents a renewed commitment to scientific research and development and customer service excellence. The expenses reported are net of government contributions of $0.7 million. These contributions were from two different government programs – Industrial Research Assistance Program (IRAP) and Strategic Aerospace and Defense Initiative (SADI). The Company’s reported product development expenses without these reductions would have been $1.5 million. The Company continues to pursue a strategy off offloading non-core development expenses to strategic suppliers and partners. The Company will continue to take responsibility for its core R&D activities, and plans to continue to lead the market with introductions of innovative new products.
Amortization expense in 2008 was $0.3 million compared to $0.3 million for the year ended December 31, 2007.
Other expenses in 2008 improved significantly to a gain of $0.3 million from an expense of $0.8 million in 2007. The most significant item was the weakening of the Canadian Dollar relative to the United States Dollar in 2008. In 2008, foreign exchange gains were $0.4 million compared to an exchange loss of $0.5 million in 2007, resulting in a net improvement of $0.9 million.
Earnings (loss) (in 000’s) except earnings per share | Three Months Ended (2008) (unaudited) | Year Ended (audited) | ||||
Mar 31 | Jun 30 | Sep 30 | Dec 31 | 2008 | 2007 | |
Earnings from operations before taxes | $5 | $135 | $742 | $1,318 | $2,200 | $1,385 |
Net earnings per share, basic | $0.00 | $0.00 | $0.01 | $0.02 | $0.04 | $0.03 |
and diluted before income taxes | $0.00 | $0.00 | $0.01 | $0.02 | $0.04 | $0.02 |
Earnings from operations before taxes and other expenses were $2.2 million in 2008, compared to the $1.4 million profit in 2007. The improvement was mainly due to increased sales in both business segments, while maintaining operating expenses constant year on year
B. Liquidity and capital resources
The Company’s consolidated financial statements have been prepared on a going concern basis, which presumes the realization of assets and the settlement of liabilities in the normal course of operations. The application of the going concern basis is dependent upon the Company having sufficient available cash resources and achieving profitable operations to generate sufficient cash flows to fund continued operations. Should the Company fail to generate sufficient cash flows from operations, it will require additional financing to remain a going concern.
The Company’s principal cash requirements are for working capital and capital expenditures.
The Company's cash and cash equivalent balance as at December 31, 2009 was $4.7 million, an increase of $3.7 million from $1.0 million as at December 31, 2008. The cash and cash equivalent balances are broken down as follows: $1.7 million in operating accounts and $3.0 million in a short term interest bearing deposit instrument with the Company’s banking institution. During 2009, cash generated by operations was $3.3 million. Financing activities generated net proceeds of $0.7 million during 2009 while investing activities consumed $0.4 million during the period.
37
The Company’s working capital requirements are mainly for production materials, productions and selling, operations and general administrative expenses. The Company’s working capital may be improved by increasing sales, shortening collection cycles and enhancing of inventory controls.
As at December 31, 2009, working capital* increased to $12.0 million as compared to $8.5 million at the end of 2008. The Company’s commitment to achieving a more effective structure that began in October, 2006 is starting to pay off in today’s results.
Accounts receivable, was at $6.0 million as at December 31, 2009, down from the balance of $6.8 million as at December 31, 2008.
Accounts payable and accrued liabilities were $2.9 million, a decrease of $0.7 million, compared to $3.6 million as at December 31, 2008.
Inventory as at December 31, 2009 was $4.1 million, a decrease of $0.4 million, compared to $4.5 million as at December 31, 2008. The decrease in inventory resulted from improved sales in both the Microwave and Satellite Products segments. The Company continues to actively manage inventory levels and adjust for the sudden demand fluctuations due to the global recessionary patterns.
Shareholders’ equity, before income tax recovery of 1.6 million, increased to $12.0 million compared to $8.6 million at December 31, 2008.
At December 31, 2009, the Company has accumulated a deficit of $27,889,983. This includes income tax recovery of $1,646,373. The Company has successfully generated net earnings from continued operations from the fourth quarter of 2006 through to the fourth quarter of 2009. However, these past successes cannot be used as an indication of the Company’s future performance.
Management believes that the Company’s strategy remains sound and can deliver steady performance despite continuing uncertainty in the global economic environment.
The Company may also deploy its cash for any suitable investments consistent with the company’s long term strategy of long-term objectives include entering new geographic markets, broadening its customer base, and expanding into new market verticals.
In addition to utilizing some or all of the current cash resources, the Company may also raise additional capital from the equity markets or utilize debt to complete investment transactions that would accelerate the company’s growth in the areas outlined above.
* - The company uses working capital changes as a supplemental financial measure in its evaluation of liquidity. Management believes monitoring working capital items assists in assessing the efficiency of allocation of short term financial resource. Working Capital is calculated by subtracting current liabilities from current assets
The Company’s capital resources as at December 31, 2009, included cash. Cash flows are funded primarily through operations and, where necessary, liquidity requirements may be funded through the use of a standby line of credit, issuance of debt, and/or equity.
On December 12, 2007 the Company obtained a C$500,000 or U$400,000 unsecured operating line of credit with HSBC Bank Canada (the “Bank”).Interest on the line of credit is set at the Bank’s prime rate plus 0.85% per annum. During the fiscal year 2009, the Company increased its secured operating line of credit from a financial institution to Cdn$1,000,000 or US$800,000 from Cdn$500,000 or US$400,000. As of December 31, 2009, the Company did not access its secured operating line of credit.
As at December 31, 2009, the Company did not have any material commitments for capital expenditures.
38
C.
Research and development, patents and licenses, etc.
During 2007, the Company did not have any major research and development costs as the focus was a return to profitability and creating a sustainable and viable business operation.
Norsat plans to continue to invest in research and development to maintain its status as “best in class.” R&D efforts will be directed toward enhancing existing product lines and introducing new products. The Company recently began to give key suppliers a broader mandate to perform R&D activities related to the elements of the products for which they are responsible. This strategy serves to take better advantage of expertise in the Company’s supply chain, while reducing direct R&D costs. Furthermore, it allows Norsat to focus its development resources on the most critical functions, including the overall setting of product direction.
In 2008, the Company’s receipt of an award by the Canadian Ministry of Industry is an external validation of the Company’s excellence in research & development activities. The Cdn$5.97MM repayable contribution through the Ministry’s Strategic Aerospace and Defense Initiative (SADI) program provides the Company with a significant contribution towards assisting R&D efforts and provides for continued investment in technological innovation.
In 2009, the Company continues to develop products in all business lines and did not file any new patents. The Company’s product development efforts continue to be performed through the support of the Canadian Federal Government through the SADI grant awarded in 2008.
D.
Trend information
The Company believes that overall demand will continue to grow in most of its market segments. The Satellite Systems and Wireless network segments are more likely to offer more attractive growth rates for the foreseeable future, given that the markets the Company is targeting are relatively new or even untapped. The Microwave Products and Maritime segments are more mature markets. Upon the global economy’s recovery from the current recessionary patterns, these market segments will still offer returns for a leading participant like Norsat.
While results will fluctuate from quarter to quarter, Management believes that recent efforts to rationalize the cost structure enable the Company to maintain and grow profitability over the long-term. The Company plans to execute a balanced growth strategy which incorporates new product introductions, continued enhancement of existing product lines, diversification by region and by industry vertical, and a broadening of the solution provided to customers.
Management believes that there is minimal impact on the Company from the current global credit crisis. The majority of the Company’s trade accounts receivables is generated from various military customers and is not believed to be at risk of default. The balance of the amounts owing are spread over a fairly large range of customers. While the risk of default from commercial customers is higher than government accounts, management feels that the likelihood of default is very low. Management is cognizant of the extent of the current credit crisis and will remain vigilant in the Company’s credit granting practices.
The current recessionary trends coupled with the Company’s strong financial position represent an opportunity for accelerating growth through strategic acquisitions that may be immediately accretive to shareholders. In addition, management continues to seek ways to grow the Company organically in a controlled and steady manner.
39
E.
Off-balance sheet arrangements
Not applicable.
F.
Tabular disclosure of contractual obligations
The following table presents the aggregate amount of future cash outflows for contractual obligations as of December 31, 2007 under various purchasing commitments, loan commitments and operating lease agreements for each of the next five years:
CONTRACTUAL OBLIGATIONS | Less than 1 year | 1 to 3 years | 3 to 5 years | Over 5 years |
| $ | $ | $ | $ |
Inventory purchase obligation | 3,112,142 | | | |
Operating lease obligations | 492,584 | 535,034 | 32,113 | |
Total | 3,604,726 | 535,034 | 32,113 | |
Rent expense for the Company was approximately $502,000 (2007 - $447,000; 2007 - $411,000).
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 2009 commitments are inventory and material purchases of $3.1 million.
G.
Safe harbor
Statements in this report relating to matters that are not historical fact are forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, general economic conditions, changes in technology, reliance on third party manufacturing, managing rapid growth, global sales risks, limited intellectual property protection and other risks and uncertainties described in Norsat’s public filings with securities regulatory authorities.
6.
Directors, Senior Management and Employees
A.
Directors and Senior Management
Directors
The following section sets forth the information on our directors:
40
Ugo A. Doninelli
Director and Chairman of the Board
Mr. Ugo A. Doninelli became a director of Norsat in May 1988. He is the General Manager and President and CEO of Prismafin S.A., an international investment organization with offices in Chiasso and Zurich, Switzerland. He exercises direction over the 2,135,903 Norsat common shares held by Prismafin S.A. He also serves as a Director and Chairman of the Board for Lifeware SA Lugano, Chiasso, Zurich/Switzerland and Frankfurt A.M. in Germany as third Party Administrator for Life Insurance Companies.
James Sharpe
Director, Vice Chairman of the Board, and Chairman of the Audit Committee
Mr. Sharpe became a director of Norsat in May 2005. James Sharpe has over twenty-five years of senior-level management experience in the public and private sectors as a chief executive officer and as a chief financial officer for small to large complex organizations. Heis currently thePresident of Sharpe Associates, a Washington State firm that provides a wide spectrum of financial management services to small and medium-sized private firms, and public entities. Mr. Sharpe holds a BA in accounting from the University of Washington, an MBA from Pepperdine University and a MS in International Business from the University of Strathclyde, Scotland.
Joseph Caprio
Director
Mr. Caprio became a director of Norsat on April 30, 2005. Mr. Caprio is a former Dean at Colgate University, Hamilton, NY and has served as a management consultant and as an operating officer of several businesses. Mr. Caprio holds a BS degree in management from the University of Rhode Island, and a MA degree from Colgate University, Hamilton, NY.
Dr. Amiee Chan
Director, President and Chief Executive Officer
Dr. Amiee Chanbecame a director of Norsat on August 5, 2009. This appointment was in addition to her responsibilities as President and Chief Executive Officer of the Company.
Christopher Hoyle
Former Director
Mr. Hoyle became a director of Norsat in May 2005 and resigned on October 15, 2008. Chris Hoyle has over twenty years experience of practising as a telecommunications and IT lawyer including service as an in-house legal counsel for IBM (UK) and as a partner at KLegal, the then legal arm of KPMG. Mr. Hoyle holds a Masters degree in Law from Cambridge University, a LLB (Hons) degree from the University Of Canterbury, New Zealand and a Diploma in Intellectual Property Law from the University of London.
Senior Management
Dr. Amiee Chan, Executive Officer
President and Chief Executive Officer
Dr. Amiee Chanwas appointed as the President and CEO, on September 8, 2006. Amiee Chan was Product Manager at CREO from October 2002 to March 2004 and Director of Research and Development at Norsat from April 1998 to May 2002. Dr. Chan has been with the Company for fifteen years. She rejoined the Company in April 2004 as VP of Operations. Dr. Chan holds an MBA, PhD in Electrical Engineering and a BASc in Electrical Engineering. Dr. Chan is an innovator and leading authority in her field with a number of credited publications and patents. She also has extensive experience in strategic planning and budgeting, product development, technology commercialization and product portfolio management.
41
William R. Witten, Executive Officer
Former Vice President, Sales
Mr. Witten was appointed as Vice President, Sales on September 8, 2006 and left the Company on October 15, 2008. Mr. Witten’s mandate included global sales management for the Company and the overseeing the Company’s Virginia subsidiary, Norsat International (America). Mr. Witten has held progressively senior positions with AT&T, MCI, Loral Skynet, Newpoint Technologies and Telecommunications Systems Inc. Mr. Witten joined Norsat as Director of Sales in 2004. Mr. Witten holds a Bachelor of Computer Science degree from American University. Mr. Witten has over thirty years of telecommunications and satellite communications experience. His experience spans tactical deployable systems, distance learning, wireless broadband, voice over IP and microwave systems. Mr. Witten reported to Dr. Chan.
Pervez Siddiqui, Executive Officer
Former Vice President, Marketing
Mr. Siddiqui was appointed as Vice President, Marketing September 8, 2006 and left the Company on October 15, 2008. Prior to joining Norsat, Mr. Siddiqui worked in the international marketing department of the Microwave Communications Division at Harris Corporation (NYSE: HRS); and in general management at Inzigo, Inc., a New York-based speech recognition company and at Succeed Corporation, a software company focused on consumer applications. Mr. Siddiqui was previously the Director, Marketing at Norsat and is responsible for product management, channel management, marketing communications and investor relations. Mr. Siddiqui holds a Bachelor of Commerce degree from McGill University, and serves on the Board of Directors of the Canadian Mental Health Association (Vancouver/Burnaby). Mr. Siddiqui reported to Dr. Chan.
Eugene Syho, Executive Officer
Chief Financial officer and Corporate Secretary
Mr. Syho was appointed as Chief Financial Officer on January 21, 2008. Prior to joining Norsat, Mr. Syho was the Director of Finance and CFO of Stylus Limited Partnership, one of six businesses included in TSX-listed Terravest Income Fund’s portfolio of companies; and in controllership roles at Specialty Building Products, a subsidiary of Masonite, Inc. and at International Forest Products. Mr. Syho has a Certified Management Accountant designation, holds an Executive Masters in Business Administration and a Bachelor of Science. Mr. Syho reports to Dr. Chan.
B.
Compensation
Compensation of Directors
All compensation paid to the Board of Directors is in Canadian Dollars and reported below in Canadian Dollars.
The following table is the directors’ fee structure for the fiscal year ended December 31, 2009:
|
| 2009 |
Chairman of Board of Directors |
| $30,000 |
Chairman of Audit Committee |
| $25,000 |
Other Board Members |
| $20,000 |
An additional fee of $500 is paid to each director for each directors meeting attended.
During the Company’s fiscal year ended December 31, 2009, the aggregate cash compensation paid or payable by the Company or its subsidiaries to its directors, all of whose financial statements are consolidated with those of the Company, was Canadian $66,125.
42
All compensation paid to the Board of Directors is reported below in Canadian Dollars.
The following table sets forth all annual and long-term compensation earned from the Company and its subsidiaries for the year ended December 31, 2009 by each director:
Name | Total Compensation ($) | Directors Fees ($) | Benefits | Securities under Options Granted |
Ugo Doninelli | 27,625 | 27,625 | Nil | 335,000 |
Joseph Caprio | 17,625 | 17,625 | Nil | 140,000 |
James Sharpe | 20,875 | 20,875 | Nil | 140,000 |
NOTES
Compensation of Officers
Compensation paid to the Company’s officers is in Canadian Dollars with the exception of Mr. Randy Witten, who was paid in United States Dollars.
During the Company’s fiscal year ended December 31, 2009, the aggregate cash compensation paid or payable by the Company or its subsidiaries to its executive officers, all of whose financial statements are consolidated with those of the Company, was $517,762.
The following table sets forth all annual and long term compensation granted by the Company and its subsidiaries for the year ended December 31, 2009, 2008 and 2007 to each member of senior management:
|
| Annual Compensation | Long Term Compensation |
| ||||
|
|
|
|
| Awards | Payouts |
| |
Name and Principal Position (a) | Year (b) | Salary ($) (c) | Bonus ($) (d) | Other Annual Compensation ($) (1) (e) | Securities Under Options/ SARs Granted (#) (f) | Restricted Shares or Restricted Share Units ($) (g) | LTIP Payouts ($) (h) | All Other Compensation ($) (i) |
Dr. Amiee Chan President and Chief Executive Officer (Former Chief Operating Officer) | 2009 | 160,000 | 126,656 | 6,000 | 40,000 | N/A | N/A | 20,975 |
2008 | 160,000 | 152,310 | 6,000 | 40,000 | N/A | N/A | 15,616 | |
2007 | 160,000 | N/A | 6,000 | N/A | N/A | N/A | 8,000 | |
Eugene Syho (4) Chief Financial Officer and Corporate Secretary | 2009 | 135,000 | 47,496 | 6,000 | 20,000 | N/A | N/A | 15,635 |
2008 | 112,365 | N/A | 6,000 | 100,000 | N/A | N/A | 5,618 | |
William R. Witten (2),(5) Vice President, Sales | 2009 | N/A | N/A | N/A | N/A | N/A | N/A | 165,395 (7) |
2008 | 165,230 | 88,881 | 5,064(6) | 15,000 | N/A | N/A | 68,500 | |
2007 | 166,889 | N/A | 6,460 | N/A | N/A | N/A | 62,730 | |
Pervez Siddiqui Vice President, Marketing (5) | 2009 | N/A | N/A | N/A | N/A | N/A | N/A | 78,125 (6) |
2008 | 125,000 | 52,357 | 4,750(6) | 15,000 | N/A | N/A | 7,566 | |
2007 | 110,000 | N/A | 6,000 | N/A | N/A | N/A | 5,500 | |
Cathy Zhai (3) Former Chief Financial Officer and Corporate Secretary | 2007 | 61,385 | N/A | 3,095 | 100,000 | N/A | N/A | 3.092 |
NOTES:
(1)
Car allowance unless otherwise stated
(2)
Included in Mr. William Witten’s other compensation was commission paid out through the year.
(3)
Ms. Zhai resigned on June 27, 2007.
(4)
Mr. Eugene Syho joined the company on January 21, 2008.
(5)
Messrs. Witten and Siddiqui were terminated from the Company on October 15, 2008. These amounts reflect payments up to the date of termination.
(6)
The Other Compensation amounts reflect severance payments.
(7)
The Other Compensation amounts reflect severance payments and commissions
43
The bonus amounts were paid pursuant to the Company’s Employee Compensation Plan. The plan remunerates employees based on successful completion of both personal and corporate objectives and each employee is tiered to a level to match their responsibilities within the Company.
Reference is also made to item C immediately below – specifically “Board practices - Change in Responsibilities and Employment Contracts”.
C.
Board practices
Mandate of the Board
The Board of Directors is responsible for the stewardship of the Company and endorses a system of corporate governance designed to effectively manage and supervise the management of the business and the affairs of the Company. The Board also provides considerable guidance to Management in pursuit of the Company’s objectives.
The Board acknowledges that good corporate governance is important to the effective performance of the Company and plays a key role in protecting the interests of shareholders.
The Board continues to review the existing or proposed amendments to governance guidelines and practices in order to implement the most effective corporate governance policies and practices for the Company. The Board has adopted, and will continue to adopt changes to their governance guidelines and practices as necessary to comply with the United States Sarbanes-Oxley Act of 2002 and any new rules issued by the United States Securities and Exchange Commission, the Ontario Securities Commission, the Toronto Stock Exchange, and other applicable securities regulatory authorities.
Decisions Requiring Board Approval
In general, the Company’s management operates the business on a day-to-day basis. The Board approves the annual budget and strategic plans and reviews the performance of senior management against those standards. In addition, the Board approves all major acquisitions, dispositions, financings, both debt and equity, and changes in the structure of the Company. The Board also determines the responsibility and compensation of the Chief Executive Officer. The Board appoints the officers of the Company. The Directors also determine the directors’ compensation and consider the declaration of dividends.
Composition of the Board
The Board is currently composed of three directors, all of whom are considered “independent” to the Company. An “independent” director is a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to materially interfere with the director’s ability to act with a view to the best interests of the Company, other than interests and relationships arising from shareholdings.
44
Recruiting of New Directors
If vacancies occur on the Board, the Board as a group considers replacements and reviews the qualifications of prospective members and determines their relevance, taking into consideration the current Board composition and the skills required to round out the capabilities of the Board and makes recommendation to the board for approval.
The Board meets at least quarterly to carry out its duties and meets on an informal basis throughout the year to discuss the Company’s progress and management.
Measures for Receiving Shareholder Feedback
Management has been asked to make the Board aware on an ongoing basis of any significant shareholder concerns communicated to management. Currently the CEO & CFO respond to shareholder inquiries and direct appropriate matters to senior management. Senior management will meet with shareholders to discuss their concerns where appropriate.
The Board’s Expectation of Management
The Board expects management to operate the Company in accordance with good, prudent business practices. Management is expected to report to the Board on financial and operating matters and to make the Board aware of all important issues and major business developments. The Board also expects management to find new business opportunities for business acquisitions and expansion and to make the appropriate reports to the Board regarding those opportunities.
Directors’ and Officers’ Liability Insurance
Directors’ and Officers’ liability insurance coverage in 2006 was Canadian $5,000,000 which was reduced to Canadian $3,000,000 effective on May 1, 2007. Total premiums paid in Canadian dollars amounted to $52,200 in 2008 and $58,580 in 2007. On May 1, 2009, Directors’ and Officers’ liability insurance coverage was changed to US$3,000,000. Total premiums paid amounted to US$43,943
Director’s Service Contracts
The term of office for each of the present directors expires at the Annual General Meeting. The current directors have served as such as follows: Mr. Doninelli since May 1988; Messrs. Sharpe, Caprio and Hoyle since May 2005; Dr. Chan since August 2009. Mr. Hoyle subsequently resigned on October 15, 2008.
The Company does not provide benefits for its non-executive directors.
Board Committees
The Board currently has one standing committees being the Audit Committee.
Audit Committee
The Company’s Audit Committee is comprised of all members of the Board namely: Messrs. Sharpe (Chair), Caprio, and Doninelli, (each of whom is independent and an “unrelated” director) and Dr. Chan. Each member of the Audit Committee considers himself/herself financially literate and capable of reading and understanding financial statements, and Mr. Sharpe has an accounting degree and related financial expertise. The board has adopted a formal written charter for the Audit Committee under which the committee is responsible for, among other things, reviewing the Company’s annual and quarterly financial statements, financial reporting procedures, internal controls and performance and independence of the Company’s external auditors. The Audit Committee is directly responsible for the appointment, compensation and oversight of the auditors including pre-approving all non-audit services provided by the audit firm.
45
During fiscal 2009, the Audit Committee met four times to carry out its responsibilities.
As part of its oversight of the Company’s financial statements, the committee reviewed and discussed with both management and the Company’s external auditors the annual financial statements, and with management the quarterly financial statements, prior to their issuance. Management advised the Audit Committee in each case that all financial statements were prepared in accordance with generally accepted accounting principles, and reviewed significant accounting issues with the committee.
On September 22, 2005, Ernst & Young LLP was appointed as the auditor of the Company for the fiscal year ending December 31, 2005. Ernst & Young continued as the Company’s auditor for the fiscal years ended December 31, 2006, 2007, 2008 and 2009.
The Audit Committee discussed with the external auditors matters relating to its independence, including a review of audit and non-audit fees and the disclosures made to the Committee pursuant to Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).
The Audit Committee reviewed and approved audit fees, audit related fees, tax fees and other services fees imposed by Ernst & Young LLP.
Taking all of these reviews and discussions into account, the Audit Committee recommended to the Board of Directors that the Board approve the inclusion of the Company’s audited financial statements in the Company’s annual report for the fiscal year ended December 31, 2009.
Compensation Objectives
In January 2004, the Company introduced a “results oriented” compensation plan creating a significant variable component to compensation that is linked to key operating metrics. The Company’s compensation plan is comprised of a combination of base salary and benefits, an annual incentive compensation and long term equity participation through its Stock Option Plan. To ensure competitiveness, the Company participates in annual compensation surveys, conducted by independent consultants, of salaries, benefits and other incentive programs in the high technology industry in Canada.
Base Salary and Benefits
Base salaries for the executives are targeted, on average at the 75th percentile of the comparator group (see above) and other relevant external market data as well as the individual’s skill performance, and experience. The Company’s benefit package is designed to be competitive with its peer group in the industry in terms of revenues and number of employees.
Performance Bonus
In January 2004, an annual incentive compensation plan (“2004 Bonus Plan”) was introduced to all employees based on the objectives previously discussed. Payments under this plan are determined based on the Company’s performance and success in achieving specific operating targets together with the performance of the employee relative to key individual performance objectives. The significant considerations in determining bonuses for the executive officers include revenue and income objectives as well as personal achievements that contribute to the Company’s success. Seventy percent of senior management’s bonus is determined by corporate results and thirty percent is based on individual performance.
46
On October 5, 2006, as a result of the executive compensation review, the Company’s Board of Directors passed a resolution to amend the executives’ bonus evaluation criteria establish in 2004 Bonus Plan. The new plan is designed to measure executives’ bonuses one hundred percent based on the Company’s performance. Furthermore, no bonus shall be paid to executives if the Company is not profitable.
As a result of profits in 2007, corporate bonuses of $293,548 for executives that was accrued for in 2007 and were paid out on February 28, 2008
As a result of profits in 2008, corporate bonuses of $174,152 for executives that was accrued for in 2008 and were paid out on February 27, 2009
As a result of profits in 2009, corporate bonuses of $273,119 for executives that was accrued for in 2009 and were paid out on February 26, 2010
Equity Participation
The Board believes that all employees should have a stake in Norsat’s future and that their interests should be aligned with the interests of the shareholders. To this end, the Board determines the overall amount of the stock option grant and allocates such grants to directors, officers and employees, primarily based on whose decisions and actions are expected to have the greatest impact on the Company’s performance.
Options are issued at the market price of the stock at the date of the grant. The options typically have a five year term and vest after 2 years.
On December 6th, 2006, the Board of Directors of Norsat (“Board”) approved the Amended Employee Share Ownership Plan (“ESOP”), which allows up to 1,998,750 Norsat common shares to be reserved for issuance to eligible employees.
Compensation of the Executive Officers
The compensation of the Chief Executive Officer is reviewed annually and approved by the Board of Directors. On October 5, 2006, the Board of Directors reviewed and approved the newly appointed executives’ compensation packages for 2007. On December 9, 2007, the Board of Directors reviewed and approved changes that were made to the executives’ compensation packages for 2008. On November 8, 2008, the Board of Directors reviewed and approved changes that were made to the executives’ compensation packages for 2009.
D.
Employees
The Company continued to focus on improving employee productivity by streamlining internal processes. An Employee Share Ownership Program (ESOP) was introduced in December 2006 to allow employees to share in the wealth they help create. The Company believes that the ESOP improves competitiveness in that it increases productivity and that it maximizes human potential by instilling a sense of ownership.
In 2007, the number of employees increased as a result of five temporary contract employees being hired on permanently. It was important for the company to create stability after the 24% workforce reduction in 2006.
47
In 2008, the Company increased resources in the key areas that provide the most opportunity for growth. The research and development team was augmented to increase product development and reduce the time to get products to market. The production team increased to meet demand in satellite systems and ensure timely delivery of orders.
In 2009, the Company continued to increase resources in two key areas – Research and Development and Production. These additions enabled the Company to continue to meet customer demand on a timely basis.
The chart below provides a breakdown of the number of employees (including full time equivalents) by function:
| December 31, 2009 | December 31, 2008 | December 31, 2007 |
Senior Management | 2 | 2 | 3 |
Research and Development | 14 | 13 | 9 |
Sales and Marketing | 11 | 11 | 9 |
Finance | 5 | 5 | 5 |
Other Administration | 2 | 2 | 4 |
Production and Logistics | 21 | 18 | 15 |
Total | 55 | 51 | 45 |
The following table shows the number of employees by geographical location at the end of each period:
| Canada | United States | Other | Total |
2009 | 45 | 3 | 7 | 55 |
2008 | 42 | 2 | 7 | 51 |
2007 | 40 | 3 | 2 | 45 |
The Company believes that its work force is reasonably skilled, capable and motivated and that the relations with the Company’s employees are good. The Company’s work force is not unionized or part of any collective labour agreement.
E.
Share ownership
The following table sets forth securities owned or controlled by Directors and Officers of the Company as at December 31, 2009:
Name, Position, Country of residence | Number of common shares owned(1) and (3) | As a % of outstanding common shares | Number of common share purchase warrants owned |
Ugo A. Doninelli(2) (Chairman) Switzerland | 2,135,903(2) | 3.98% | 75,164 |
James Sharpe USA | 36,663 | 0.07% | 18,331 |
Joseph Caprio (Director) USA | 61,250 | 0.11% | 25,000 |
Amiee Chan (President and CEO) Canada | 300,000 | 0.60% | 112,500 |
Eugene Syho (Chief Financial Officer) Canada | nil | nil | nil |
(1)
The information as to common shares beneficially owned or over which a director or nominee exercises control or direction, not being within the knowledge of the Company, has been furnished by the respective directors or nominees individually.
(2)
Mr. Doninelli, by virtue of his position as General Manager and Chief Executive Officer of Prismafin S.A., exercises direction over 1,985,575 common shares of the Company held by Prismafin S.A.
(3) On January 12, 2007, the Company issued 1,065,968 common shares and 532,984 non transferable share purchase warrants to its employees and directors under the ESOP for consideration of
$479,686. Of which 618,991 were issued to executive officers and directors included hereto.
48
On March 11, 2009, the Board of Directors approved additional stock options for award to all employees and board members. The additional options were awarded to individuals that were part of the Company in 2008 and still currently at Norsat with the strike price to be April 1, 2009. The additional awards are 20% of the initial option awards per the compensation policy of the Company. The following table sets forth details of the stock option awards to the Directors and Executive Officers of the Company.
Name | Options Awarded |
Ugo Doninelli | 30,000 |
James Sharpe | 20,000 |
Joseph Caprio | 20,000 |
Amiee Chan | 40,000 |
Eugene Syho | 20,000 |
The following table sets forth details of all exercises of stock options during the year ended December 31, 2009 by the Directors and Executive Officers of the Company and the fiscal year-end value of in-the-money unexercised options on an aggregated basis:
Name | Securities Acquired on Exercise (#)(1) | Aggregate Value Realized ($)(2) | Unexercised Options at Fiscal Year-End (#) Exercisable/ Unexercisable | Value of Unexercised In-the-Money Options at Fiscal Year-End ($)(3) Exercisable/ Unexercisable |
Ugo Doninelli | Nil | Nil | 275,000 / 60,000 | Nil / Nil |
James Sharpe | Nil | Nil | 100,000 / 40,000 | Nil / Nil |
Joseph Caprio | Nil | Nil | 100,000 / 40,000 | Nil / Nil |
Amiee Chan | 75,000 | $3,750 | 215,000/80,000 | Nil / Nil |
Eugene Syho | Nil | Nil | Nil/120,000 | Nil / Nil |
Christopher Hoyle (4) | Nil | Nil | Nil / Nil | Nil / Nil |
William R. Witten (4) | Nil | Nil | Nil / Nil | Nil / Nil |
Pervez Siddiqui (4) | Nil | Nil | Nil / Nil | Nil / Nil |
NOTES:
(1)
Number of common shares of the Company acquired on the exercise of stock options.
(2)
Calculated using the closing price of common shares of the Company on the Toronto Stock Exchange
on the date(s) of exercise, less the exercise price of the stock option(s).
(3)
Value of unexercised in-the-money options calculated using the closing price of common shares of the Company on the Toronto Stock Exchange on December 31, 2009, less the exercise price of in-the-money stock options.
(4)
Messrs. Hoyle, Witten and Siddiqui left the company on October 15, 2008, the provisions of the Stock Option Plan allow individuals who leave the Company to exercise vested options within 30 days. Any options not exercised will expire.
49
7.
Major Shareholders and Related Party Transactions
A.
Major shareholders
The Company's authorized capital consists of 75,000,000 common shares without par value, of which 53,634,305 common shares were issued and outstanding as at December 31, 2009. There were 108 holders in the U.S. with holdings of 9,849,566 common shares as at February 28, 2010.
To the knowledge of the directors and senior officers of the Company, there are no persons or companies who beneficially own, directly or indirectly, or exercise control or direction over shares carrying 5% or more of the voting rights attached to all outstanding common shares of the Company.
B.
Related party transactions
Reference is made under “Item 8 Financial Information”, specifically note 23.
C.
Interests of experts and counsel
Not Applicable.
50
8. FINANCIAL INFORMATION
A.
Consolidated Financial Statements
NORSAT INTERNATIONAL INC.
Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
(Expressed in US dollars)
51
STATEMENT OF MANAGEMENT’S RESPONSIBILITY
The management of Norsat International Inc. is responsible for the preparation of the accompanying consolidated financial statements and the preparation and presentation of all information in the Annual Report. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and are considered by management to present fairly the financial position and operating results of the Company.
The Company maintains various systems of internal control to provide reasonable assurance that transactions are appropriately authorized and recorded, that assets are safeguarded, and that financial records are properly maintained to provide accurate and reliable financial statements.
The Company’s audit committee is composed of three non-management directors who are appointed by the Board of Directors annually. The committee meets periodically with the Company’s management and independent auditors to review financial reporting matters and internal controls and to review the consolidated financial statements and the independent auditors’ report. The audit committee reported its findings to the Board of Directors who have approved the consolidated financial statements.
The Company’s independent auditors, Ernst & Young LLP, have audited the consolidated financial statements and their report follows.
|
|
Amiee Chan | Eugene G. Syho |
President and Chief Executive Officer | Chief Financial Officer |
52
53
Norsat International Inc.
Consolidated Balance Sheets
(Expressed in US Dollars)
“Ugo A. Doninelli” “James Sharpe”
Ugo A. Doninelli
James Sharpe
54
Norsat International Inc.
Consolidated Statements of Earnings, Deficit and Comprehensive Income
(Expressed in US Dollars)
55
Norsat International Inc.
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
56
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. Significant Accounting Policies
These financial statements have been prepared in accordance with Canadian generally accepted accounting principles, which materially conform to those established in the United States, except as explained in note 25.
a)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Norsat International America Inc., Norsat International (United Kingdom) Ltd., Norsat Korea Ltd., Norsat Capital (formerly 0841954 BC Ltd.), Bluemoon 4G Ltd., Norsat S.A. and its wholly owned subsidiary Norsat Italia SRL. All material inter-company balances and transactions have been eliminated.
b)
Use of Estimates
The preparation of consolidated financial statements requires the Company’s management to make estimates and assumptions that affect amounts reported in the financial statements and notes thereto. Significant areas requiring the use of management estimates relate to the determination of the net recoverable value of assets, including inventory obsolescence provisions, allowance for doubtful accounts, asset impairment, valuation of future income tax assets, useful lives for depreciation and amortization, stock based compensation, selling prices, fair value of revenues and provisions for warranties. Actual amounts may ultimately differ from these estimates.
c)
Foreign Currency Translation
The functional currency of the Company and its subsidiaries is the United States dollar. Foreign currency transactions entered into directly by the Company, and the accounts of the integrated foreign subsidiary operations, are translated using the temporal method. Under this method, monetary assets and liabilities are translated at year-end exchange rates and other balance sheet items are translated at historical exchange rates. Income statement items are translated at the rate in effect at the time of the transaction and for the subsidiaries, are translated using weighted average exchange rates.
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 the Canadian Institute of Chartered Accountants (“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.
57
Prior to July 1, 2009, the Company’s functional currency was the Canadian dollar and the reporting currency the United States dollar. Foreign currency transactions entered into directly by the Company, and the accounts of the integrated foreign subsidiary operations, were translated using the temporal method. Under this method, monetary assets and liabilities are translated at year-end exchange rates and other balance sheet items are translated at historical exchange rates. Income statement items are translated at the rate in effect at the time of the transaction and for the subsidiaries, are translated using weighted average exchange rates.
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 being 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 the net investment in its operations. The translated amounts on June 30, 2009 became the historical basis for all balance sheet items as at July 1, 2009, except for shareholders’ equity which continues to be carried at historical cost.
d)
Stock-Based Compensation
The Company follows the recommendations of CICA section 3870, “Stock-Based Compensation and Other Stock-Based Payments”, for stock options granted to employees, directors and consultants pursuant to an incentive share option plan described in note 13(c).
Under this method, the Company recognizes compensation expense for stock options awarded based on the fair value of the options at the grant date using the Black-Scholes option pricing model. The fair value of the options is amortized over the vesting period and is included in selling, general and administrative expense. The Company reverses stock based compensation when options are being forfeited before they vest.
e)
Cash Equivalents
Cash equivalents consist of short term, highly liquid interest bearing term deposits that are readily convertible to known amounts of cash. All highly liquid investments with a maturity of 90 days or less when acquired are classified as cash equivalents.
f)
Short-Term Investments
Included in short-term investments are restricted securities typically with terms of maturity of three months or more, but one year or less when acquired. See note 6.
g)
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management provides for bad debts by setting aside a percentage of sales towards the allowance account. The percentage is based on the Company’s historical default experience and is reviewed periodically to ensure consistency with default experience. In addition, at the end of each fiscal year, management specifically analyzes the age of outstanding customer balances, historical bad debt experience, customer credit-worthiness and changes in customer payment terms to evaluate estimates of collectability of the Company’s accounts receivable balance. The allowance set aside is then adjusted to align with the specific analysis performed. Throughout the year, if the Company determines that the financial condition of any of its customers has deteriorated; increases in the allowance may be made. See note 7.
h)
Prepaid Expenses and Other
Included in prepaid expenses and other are prepayments related to materials, insurance premiums and other deposits required in the normal course of business which are less than one year.
58
i)
Long-Term Prepaid Expenses and Other
Included in long-term prepaid expenses and other are other deposits of greater than one year.
j)
Inventory
Prior to January 1, 2008, parts and supplies inventory were stated at the lower of weighted average cost and replacement cost. Finished goods and work-in-process inventory include materials, labour and manufacturing overhead and are stated at the lower of weighted average cost and net realizable value. Inventory is recorded net of any obsolescence provisions.
Subsequent to the adoption of CICA 3031 on January 1, 2008, parts and supplies inventory is stated at the lower of weighted average cost and net realizable value. Finished goods and work-in-process inventory include materials, labour and manufacturing overhead and are stated at the lower of weighted average cost and net realizable value. Inventory is recorded net of any obsolescence provisions. When there is a significant change in economic circumstances, inventory that had been previously written down below cost may be written back up provided the reversal does not exceed the original write down.
k)
Property and Equipment
Property and equipment are stated at cost less applicable tax credits and government assistance. Amortization of property and equipment is recorded on a straight-line basis at the following annual rates, which approximate the useful lives of the assets:
Assets |
| Period |
|
|
|
Equipment |
| 3 to 5 years |
Furniture and Fixtures |
| 5 to 10 years |
Leasehold improvements are amortized over the shorter of the term of the lease or their estimated useful lives.
Property and equipment are assessed for future recoverability when events or circumstances indicate that they might be impaired. When the net carrying amount of a capital asset exceeds its estimated net recoverable amount determined using undiscounted cash flows, the asset is written down to its fair value with a charge to income.
l)
Intangible Assets
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 in definite. The estimate 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. Acquired software licenses are amortized over 1 to 3 years on a straight line basis.
59
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.
m)
Deferred Revenue
Revenue that has been paid for by customers but will not qualify for recognition within the next year under the Company’s policies is reflected as deferred revenue (revenue that can be recognized in one year or less). Included in deferred revenue are amounts related to installation, training, extended warranty, and post contract support associated with the sale of the Company’s products.
n)
Long-term Deferred Revenue
Revenue that has been paid for by customers but will not qualify for recognition within the next year under the Company’s policies is reflected as long-term deferred revenue (revenue that can be recognized in more than one year). Included in long-term revenue are extended warranty and other services provided by the Company to its customers.
o)
Comprehensive Income
Comprehensive income is comprised of net income for the period and currency translation adjustment until July 1, 2009. Included in accumulated other comprehensive income are unrealized foreign exchange amounts on the translation of the Company’s functional currency to its reporting currency until July 1, 2009. See note 12.
p)
Equity
The Company has presented separately the equity components and changes in equity arising from: (i) net income; (ii) other comprehensive income; (iii) other changes in retained earnings; (iv) changes in share capital; and, (v) changes in contributed surplus.
q)
Financial Instruments
The Company's financial instruments include cash and cash equivalents, short-term investments, accounts receivable, operating line of credit (when used), accounts payable and accrued liabilities. Cash and cash equivalents and short-term investments are classified as held for trading. Accounts receivable and government receivable are classified as loans and receivables. Accounts payable and accrued liabilities are classified as other liabilities. The carrying value of these instruments approximates their fair value due to their immediate or short-term to maturity or their ability for liquidation at comparable amounts. The Company recognizes all transaction costs immediately in net income for all financial assets and liabilities. See note 5.
r)
Revenue Recognition
Revenues consist of sales of hardware, software, consulting, installation, training, extended warranty and post contract services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of services. For those contracts where the services are not essential to the functionality of any other element of the transaction, the Company determines vendor-specific objective evidence (“VSOE”) of fair value for these services based upon normal pricing and discounting practices for these services when sold separately.
60
The Company’s multiple-element sales arrangements include arrangements where software licenses and the associated post contract customer support (“PCS”) are sold together. The Company has established VSOE of the fair value of the undelivered PCS element based on the contracted price for renewal PCS included in the original multiple-element sales arrangement. The Company’s multiple-element sales arrangements generally include rights for the customer to renew PCS after the bundled term ends. These rights are irrevocable to the customer’s benefit, are for specified prices, are consistent with the initial price in the original multiple-element sales arrangement, and the customer is not subject to any economic or other penalty for failure to renew. Further, the renewal PCS options are for services comparable to the bundled PCS and cover similar terms and periods.
PCS revenue associated with software licenses is recognized ratably over the term of the PCS period, which typically is one year. PCS revenue includes support levels that provide customers with access to telephone support for trouble-shooting, diagnosis and extends to on-site repair of products.
VSOE is established on multi-element arrangements on extended warranty. Extended warranty of 1 to 3 years can be purchased separately by the customer. Warranty revenue is recognized over the term of the warranty period subsequent to the expiry of the one year manufacturer’s warranty.
Revenue is recognized on installation, training, and consulting when services have been performed.
The Company recognizes revenue from the sales of hardware products upon the later of transfer of title or upon shipment of the hardware product to the customer so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
Revenue that has been paid but does not yet qualify for recognition under the Company’s policies is reflected as either deferred revenue (revenue that can be recognized in less than one year) or long-term deferred revenue (revenue that can be recognized in more than one year).
The Company early adopted the provisions of EIC 175 “Arrangements with Multiple Deliverables” as at January 1, 2009. For revenue recognition on multi-element contracts entered into or materially modified on or after January 1, 2009, please refer to note 3 – “Changes in Accounting Policies”.
s)
Research and Development Costs
Research costs are expensed as incurred. Development costs are deferred if the product or process and its market or usefulness is clearly defined, the product or process has reached technical feasibility, adequate resources exist or are expected to exist to complete the project and management intends to market or use the product or process. If these criteria are not met, the development costs are expensed as incurred. For fiscal 2009, 2008 and 2007, all development costs have been expensed.
t)
Government Contributions
Government funding of eligible research and development expenditures are credited when earned against product development expenses or the cost of property and equipment, to which the funding relate. The Company amortizes the cost of the related property and equipment over its useful life according to the Company’s accounting policy relating to property and equipment.
u)
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, the Company recognizes and measures its assets and liabilities, income taxes currently payable or recoverable as well as future taxes, which will arise from the realization of assets or settlement of liabilities at carrying amounts which differ from their tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be recovered or settled. Future tax assets and liabilities are presented net by current and non-current classifications except to the extent that they cannot be offset due to different tax jurisdictions.
61
Previously, all FIT assets for all entities were subject to a valuation allowance, as it was believed that it was not more likely than not that the FIT would be able to be utilized. In the current year, it has been determined that certain FIT assets of the parent company, Norsat International Inc., are more likely than not to be utilized.
v)
Net Earnings Per Share
Basic net earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.
Diluted net earnings per share is computed using the treasury stock method, which assumes that all dilutive options and warrants were exercised at the beginning of the period and the proceeds to be received were applied to repurchase common shares at the average market price for the period. Stock options and warrants are dilutive when the market price of the common shares at the end of the period exceeds the exercise price of the options and warrants and when the Company generates income from operations.
w)
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 the Company is in the process of putting measures into place 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 December 31, 2009, the Company has completed an IFRS diagnostic, is in the process of finalizing the elections under IFRS 1 “First Time Adoption to IFRS”, is in the process of determining accounting policies choices and procedures, IT and data systems, internal control over financial reporting, and training of its employees impacted in the IFRS conversion. The Company is planning to have an IFRS compliant opening balance sheet in place shortly after the first quarter of 2010. In order to compile comparative IFRS data for fiscal year 2010, the Company is planning to run a parallel sy stem in 2010 outside the main accounting system.
CICA 3855 - “Financial Instruments – Recognition and Measurement”
In April 2009, the CICA amended Section 3855, “Financial Instruments – Recognition and Measurement”, adding and amending paragraphs regarding the application of the effective interest method to previously impaired financial assets and embedded prepayment options. The amendments are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, with early adoption permitted. The Company will adopt the amendments to Section 3855 in its 2011 fiscal year. The amendments are not expected to have a significant impact on the Company’s accounting for its financial instruments.
62
In August 2009, the CICA made amendments to Section 3855, “Financial Instruments – Recognition and Measurement”, adding and amending paragraphs regarding financial asset measurement categories and impairment as well as providing specific transitional guidance. The Company is currently assessing the impact of the amendments but does not expect them to have a significant impact on the Company’s accounting for its financial instruments.
EIC-173 - “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”
In January 2009, the Emerging Issues Committee issued a new abstract concerning the measurement of financial assets and financial liabilities, EIC-173 “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”. There had been diversity in practice as to whether an entity’s own credit risk and the credit risk of the counterparty are taken into account in determining the fair value of financial instruments. The EIC reached a consensus that these risks should be taken into account in the measurement of financial assets and financial liabilities. EIC-173 was effective for all financial assets and financial liabilities measured at fair value in interim and annual financial statements issued for periods ending on or after the date of issuance of EIC-173 with retrospective application without restatement of prior periods. The Company adopted EIC-173 at the beginning of its current fiscal year. The implementation did not have a significant impact on the Company’s results of operations, financial position or disclosures.
3. 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 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 was no material impact on the Company’s consolidated financial statements, except for reclassification of software to intangible assets.
CICA 3862 – “Financial Instruments – Disclosures”
In June 2009, the Canadian Accounting Standards Board issued an amendment to CICA Section 3862, “Financial Instruments – Disclosures” in order to harmonize Section 3862 with International Financial Reporting Standards Section 7 – Disclosures (“IFRS 7”). The purpose was to establish a framework for measuring fair value and expand disclosures about fair value measurements. According to Section 3862, an entity shall classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). These standards apply to interim and annual consolidated financial statements relating to fiscal years ending after September 30, 2009. The adoption of these amendments did not impact the Company’s approach in fair value measurement. 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 and are considered level 3 financial instruments according to section 3862.
CICA 3031 – “Inventories”
On January 1, 2008, the Company adopted CICA Handbook Section 3031, “Inventories”, which replaces Section 3030, of the same name. The new section provides guidance on the basis and method of measurement of inventories and allows for reversal of previous write-downs. The section also establishes new standards on disclosure of accounting policies used, carrying amounts, amounts recognized as an expense, write-downs and the amount of any reversal of any write-downs.
63
Due to circumstances that previously caused the inventories to be written down below cost no longer existed, and the net realizable value of the inventories had increased as a result of the Company’s change in economic conditions, the amount of the write down of inventories had been reversed. As a result of adopting CICA Section 3031, a reversal of previous write-downs of $285,396 was recorded as an increase to inventory and a decrease in opening deficit as at January 1, 2008.
Prior to the adoption of CICA 3031, parts and supplies inventory were stated at the lower of weighted average cost and replacement cost. Subsequent to the adoption of CICA 3031, parts and supplies inventory are stated at the lower of weighted average cost and net realizable value.
EIC-175 - “Arrangements with Multiple Deliverables”
EIC-175, “Arrangements with Multiple Deliverables”, was issued on 24 December 2009 as a result of the release of EITF 08-1, “Revenue Arrangements with Multiple Deliverables”. EIC-175 is an amendment of EIC-142, “Arrangements with Multiple Deliverables”, such that the Canadian guidance will remain converged with the US guidance for multi-element arrangements. The revised guidance changes the determination of separate units of account and the allocation of the consideration to the deliverables. Additional disclosure requirements will be required not only for the transition adjustments but also thereafter for all significant multiple-element arrangements.
The criteria for identifying all deliverables in a multiple-element arrangement that represent separate units of accounting have been simplified. Entities are no longer required to have objective and reliable evidence of fair value of the undelivered item for a deliverable to qualify as a separate unit of accounting. The two criterion that remain are (1) the delivered item(s) has standalone value and (2) when a general right of return exists for the delivered item, the delivery or performance of undelivered item is probable and substantially in the control of the seller.
Previously, if objective and reliable evidence of fair value existed for all units of accounting, the arrangement consideration was allocated based on their relative fair values. In situations where there was objective and reliable evidence of fair value of the undelivered item but no such evidence for the delivered item the residual was assigned to the delivered item. The reverse was not permitted (i.e. assigning the residual to the undelivered item). Subsequent to the adoption of EIC-175, the arrangement consideration is allocated to all deliverables based on their relative fair values.
Previously the relative allocation of arrangement consideration was based on fair value; the allocation arrangement consideration will now be based on a hierarchy of selling process:
Ø
Vendor specific objective evidence (“VSOE”) of selling price
Ø
If VSOE does not exist then third party evidence of selling price (“TPE”) is used
Ø
If neither VSOE nor TPE exist, then the seller’s best estimate of selling price for the deliverable is used. In all cases selling prices is an entity specific measure that also considers market conditions.
The Company decided to early adopt EIC 175 in the fourth quarter of 2009. Since the period of adoption is not the first reporting period in the Company’s fiscal year, EIC 175 is applied retroactively from January 1, 2009.
Prior to adopting EIC 175, the Company relied on the residual method to determine the fair value of its delivered hardware products. However, since the residual method is not allowed under EIC 175, the Company now establishes selling price using the relative selling price method. Adopting EIC 175 did not have any impact on the amount, pattern and timing of revenue recognized during 2009 as the Company does not offer a discount on bundled elements within multi-element arrangements. Further, there were no changes in the units of accounting due to the adoption of EIC 175. For all previously reported interim periods in 2009, there was no impact on revenue, income before income taxes, net income and earnings per share The adoption of the provisions of EIC 175 is not expected to have a material effect on the Company’s financial statements in future periods.
64
The following describes the Company’s accounting policy on revenue recognition for contracts entered into or materially modified subsequent to January 1, 2009:
The Company’s revenues consist of sales of hardware, software, consulting, bandwidth, installation, training, extended warranty and post contract customer support. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of services. Under EIC-175, “Arrangements with Multiple Deliverables”, which the Company early adopted effective January 1, 2009, multiple deliverable revenue arrangements are to be divided into more than one unit of accounting and the criteria for revenue recognition are considered separately for each accounting unit if the following criteria are met:
Ø
the delivered item(s) has standalone value and
Ø
when a general right of return exists for the delivered item, the delivery or performance of undelivered item is probable and substantially in the control of the Company.
For those contracts where the services are not essential to the functionality of any other element of transaction, the Company determines selling price for these services based upon vendor specific objective evidence (“VSOE”), third party evidence or management’s best estimate, as appropriate.
Where previously there was objective and reliable evidence of fair value of the undelivered item, but no such evidence for the delivered item, the residual was assigned to the delivered item. In the Company’s case the delivered item was hardware. Subsequent to the adoption of EIC 175, the arrangement consideration is allocated to all deliverables based on their relative selling prices. As a result of the hierarchy of selling prices, the Company is required to determine the selling price for each deliverable provided the conditions for separation have been met.
Hardware is considered a separate unit of accounting because (1) the delivered item has standalone value to customers as it is sold separately by the Company and (2) there is no general right of return on satellite products and the delivery or performance of the undelivered item is probable and substantially in the control of the Company. In establishing selling price for hardware, the Company relies on third party evidence based on stand alone sales of largely interchangeable products. The Company’s hardware components are customized in nature and specific to a customer’s order requirements. As a result, establishing VSOE would be nearly impossible.
The Company recognizes revenue from the sale of hardware products upon the later of transfer of title or upon shipment of the hardware product to the customer; so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
The Company’s multiple-element sales arrangements include arrangements where hardware with embedded software licenses and the associated post contract customer support (“PCS”) are sold together. The hardware and software function together to deliver the tangible products’ essential functionality and are therefore scoped out of the software revenue recognition guidance. The Company uses VSOE to determine selling price of the undelivered PCS elements based on fair value labour rates and consistent renewal rates.
The Company’s multiple-element sales arrangements include rights for the customer to renew PCS after the bundled term ends. These rights are irrevocable to the customer’s benefit, are for specified prices, are consistent with the initial price in the original multiple-element sales arrangement, and the customer is not subject to any economic or other penalty for failure to renew. Further, the renewal PCS options are for services comparable to the bundled PCS and cover similar terms and periods.
PCS revenue associated with hardware is recognized ratably over the term of the PCS period, which typically is one year. PCS revenue includes support levels that provide customers with access to telephone support for trouble-shooting, diagnosis and extends to on-site repair of products. PCS is considered a separate unit of accounting because (1) the delivered item has standalone value to customers as it is sold separately by the Company and (2) there is no general right of return and the delivery or performance of the undelivered item is probable and substantially in the control of the Company.
65
Extended warranty of 1 to 3 years can be purchased separately by customers. The Company follows EIC 143, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts”, to record revenue on multi-element arrangements on extended warranty. Revenue on extended warranty are deferred and recognized in income on a straight line basis over the contracted period. Extended warranty revenue is recognized after the Company’s one year manufacturer’s warranty expires.
Revenue is recognized on installation, training, and consulting services when these services have been performed. Selling price on these items is determined by reference to third party evidence of comparable services. Installation, training and consulting services are separate units of accounting because (1) the delivered item has standalone value to customers as it is sold separately by the Company and (2) there is no general right of return and the delivery or performance of the undelivered item is probable and substantially in the control of the Company.
Revenue that has been paid but does not yet qualify for recognition under the Company’s policies is reflected as either deferred revenue (revenue that can be recognized in less than one year) or long-term deferred revenue (revenue that can be recognized in more than one year).
For reseller arrangements, fees are fixed or determinable on delivery to the reseller because the Company’s agreements with customers and resellers do not contain product return rights.
4.
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 and the operating line (if drawn). The Company manages its capital structure and makes changes based on economic conditions and the risk characteristics of the Company’s assets. As at December 31, 2009 shareholder’s equity was $13,605,042.
To manage the Company’s capital requirements the Company has in place a planning and budgeting process which helps determine the 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 (note 11).
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 twelve months ended December 31, 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 December 31, 2009, the Company’s working capital ratio was 3.92:1 and the debt to tangible net worth ratio was 0.37:1. For the year ended December 31, 2009, the Company has met all of its externally imposed capital requirements. As at December 31, 2009, there were no amounts drawn.
66
5.
Financial Instruments
Financial assets and liabilities
Under Canadian GAAP, financial instruments are classified into one of the following five categories: held-for-trading, held-to-maturity investments, loans & receivables, available-for-sale financial assets and other financial liabilities.
Financial assets are cash and cash equivalents, short-term investments, and accounts receivable. Financial liabilities include 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, measured at amortized cost.
Fair value measurement
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. Cash and cash equivalents and short term investments are considered level 1 financial assets whose fair values are determined by reference to quoted prices in active markets for identical assets and liabilities.
The carrying values and fair values of financial assets and liabilities as at December 31, 2009 and December 31, 2008 are summarized as follows:
In thousands of dollars | December 31, 2009 |
| December 31, 2008 | ||
| Carrying Value | Fair Value |
| Carrying Value | Fair Value |
Held-for-trading | $ 4,752 | $ 4,752 |
| $ 1,014 | $ 1,014 |
Loans and receivables | $ 5,970 | $ 5,970 |
| $ 6,807 | $ 6,807 |
Held-to-maturity investments | $ - | $ - |
| $ - | $ - |
Other liabilities | $ 2,947 | $ 2,947 |
| $ 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, 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 management has determined that the exposure is minimal due to the composition 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 estimate of any potentially uncollectible accounts. As at December 31, 2009, the balance of the allowance for doubtful accounts was $52,236 (2008 - $37,963). Pursuant to their respective terms, accounts receivable was aged as follows as at December 31, 2009 and December 31, 2008:
(in thousands of dollars) |
| December 31, 2009 |
| December 31, 2008 |
Current |
| $ 4,053 |
| $ 3,359 |
0-30 days overdue |
| 956 |
| 1,641 |
31-60 days overdue |
| 480 |
| 238 |
61-90 days overdue |
| 255 |
| 1,271 |
Over 90 days overdue |
| 226 |
| 298 |
Total accounts receivable |
| $ 5,970 |
| $ 6,807 |
67
While there is a possibility of increased customer credit risk due to the current global credit crisis and recessionary trends, the exposure to the Company was minimal at the end of December 31, 2009 due to the composition of the Company’s customer base. As at December 31, 2009, the Company’s trade accounts receivable are made up of approximately 58% government receivables and the balance of the outstanding accounts receivable are spread over a large number of customers.
The Company may also have credit risk relating to cash and cash equivalents, which it manages by dealing with large chartered banks in Canada and the United States and investing in highly liquid investments. The Company’s objective is to minimize its exposure to credit risk in order to prevent losses on financial assets by placing its investments in highly liquid investments such as guaranteed investment funds. The Company’s cash and cash equivalents carrying value is $4,714,644, representing the maximum exposure to credit risk of these financial assets. Approximately 91% of the Company’s cash and cash equivalents at December 31, 2009 were held by one financial institution.
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 the 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 funds in Canadian and /or United States dollars to meet short-term financing obligations.
As at December 31, 2009, the Company had cash and cash equivalents of $4,714,644, short term investments of $36,932 and accounts receivable of $5,970,127 for a total of $10,721,703 which will cover its short-term financial obligations from its accounts payable of $1,396,106 and accrued liabilities of $1,551,339 for a total of $2,947,445.
Currency risk
Currency risk is arises because of fluctuations in 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 the Euro. 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.
The Company manages foreign currency risk by holding cash in foreign currencies to support forecasted foreign currency denominated accounts payable and accrued liabilities.
6.
Short-term Investments
As at December 31, 2009, included in short-term investments is a 1 year $36,392 (Cdn$38,814) (2008 – $31,391 (Cdn$38,235) Guaranteed Investment Certificate (GIC) maturing on February 10, 2010.
68
7.
Allowance for Doubtful Accounts
|
| 2009 |
| 2008 |
Gross accounts receivable, beginning of year | $ | 6,845,349 | $ | 3,476,736 |
Increase (decrease) in accounts receivable |
| (822,986) |
| 3,368,613 |
Gross accounts receivable balance, end of year (a) | $ | 6,022,363 | $ | 6,845,349 |
As at December 31, 2009 total accounts receivable is $5,970,127. The amount consists of trade accounts receivable is $5,085,680, VAT and GST, $224,005; government contributions, $599,445; and other accounts receivable, $60,997.
As at December 31, 2008 total accounts receivable was $6,807,386. The amount consists of trade accounts of $6,105,370; VAT and GST receivable, $197,242; government contributions, $492,600; and other accounts receivable, $12,174.
Accounts receivable are disclosed net of allowance for doubtful accounts (“allowance”). Changes in the allowance for each of the periods presented are as follows:
|
| 2009 |
| 2008 |
Allowance balance, beginning of year | $ | 37,963 | $ | 44,686 |
Bad debt write off |
| 32,377 |
| 15,301 |
Recovery |
| (18,104) |
| (22,024) |
Allowance balance, end of year (b) | $ | 52,236 | $ | 37,963 |
|
|
|
|
|
Net accounts receivable balance, end of year (a-b) | $ | 5,970,127 | $ | 6,807,386 |
8.
Inventory
|
| 2009 |
| 2008 |
Parts and supplies | $ | 1,926,583 | $ | 2,205,666 |
Work in process |
| 485,881 |
| 400,675 |
Finished Goods |
| 2,214,728 |
| 2,615,079 |
Gross inventory balance, end of year (a) | $ | 4,627,192 | $ | 5,221,420 |
Parts and supplies, finished goods and work-in-progress inventory are stated at the lower of weighted average cost (purchase price, plus applicable import duties, and other taxes and transportation and handling) and net realizable value. Inventory is disclosed on the consolidated balance sheets net of obsolescence provision. Change in estimate and recoveries are reflected as a decrease of cost of sales in the Company’s consolidated statements of earnings.
Changes in the obsolescence provision of the periods presented are as follows:
|
| 2009 |
| 2008 |
Obsolescence balance, beginning of year | $ | 724,005 | $ | 1,268,969 |
Transitional adjustment on adoption of CICA3031 |
| - |
| (285,396) |
Change in estimate |
| - |
| (88,589) |
Recovery |
| (174,711) |
| (170,979) |
Obsolescence balance, end of year (b) | $ | 549,294 | $ | 724,005 |
Net inventory balance, end of year (a-b) | $ | 4,077,898 | $ | 4,497,415 |
|
|
|
|
|
69
9. Property and Equipment
2009 |
| Cost |
| Accumulated Amortization |
| Net Book Value |
Equipment | $ | 536,589 | $ | 196,420 | $ | 340,169 |
Furniture and Fixtures |
| 119,366 |
| 23,979 |
| 95,387 |
Leasehold Improvements |
| 589,369 |
| 365,144 |
| 224,225 |
Total | $ | 1,245,324 | $ | 585,543 | $ | 659,781 |
2008 |
| Cost |
| Accumulated Amortization |
| Net Book Value |
Equipment | $ | 333,561 | $ | 139,461 | $ | 194,100 |
Furniture and Fixtures |
| 75,639 |
| 18,513 |
| 57,126 |
Leasehold Improvements |
| 533,337 |
| 238,800 |
| 294,537 |
Total | $ | 942,537 | $ | 396,774 | $ | 545,763 |
|
| 2009 |
| 2008 |
| 2007 |
Total amortization | $ | 178,486 | $ | 187,374 | $ | 272,383 |
10.
Intangible Asset
2009 |
| Cost |
| Accumulated Amortization |
| Net Book Value |
Software | $ | 477,504 | $ | 383,328 | $ | 94,176 |
|
|
|
|
|
|
|
2008 |
| Cost |
| Accumulated Amortization |
| Net Book Value |
Software | $ | 413,674 | $ | 231,651 | $ | 182,023 |
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| 2007 |
Total amortization | $ | 151,677 | $ | 159,247 | $ | 60,152 |
11. Operating Line of Credit
During the quarter ended September 30, 2009, the Company increased its operating line of credit with HSBC (“the Bank”) to Cdn$1,000,000 (US$951,500) or US$800,000 from Cdn$500,000 (US$475,750) or US$400,000 with terms and conditions as follows:
·
interest at the rate of the Bank’s prime rate plus 1.35% per annum.
·
all amounts under the loan shall be repaid on demand by the Bank
·
general security agreement given by the Company creating a first fixed and floating charge and security interest over all present and after acquired assets of the Company
·
general assignment of book debts creating a first priority assignment of the debts and accounts receivable of the Company
·
the Working Capital ratio (current assets divided by current liabilities) shall not at any time to be less than 1.15:1
the Debt to Tangible Net Worth ratio (total liabilities divided by the sum of total assets minus total liabilities) shall not at any time exceed 2.5:1
As at December 31, 2009, the Company had no borrowings outstanding with respect to the operating line of credit.
70
12. Accumulated Other Comprehensive Income (Loss)
|
| 2009 |
| 2008 |
Balance, beginning of period | $ | (229,210) | $ | 1,306,800 |
Cumulative translation adjustment |
| 628,747 |
| (1,536,010) |
Balance, end of period | $ | 399,537 | $ | (229,210) |
13. Share Capital
(a)
Authorized
75,000,000 common shares without par value
(b) Issued
Shares issued and outstanding |
| Number of shares |
| Amount |
Balance, December 31, 2007 |
| 50,646,026 | $ | 35,342,663 |
Shares issued, March 08 warrants exercised |
| 2,915,235 |
| 1,384,737 |
Reclassification of contributed surplus upon exercise of March 08 warrants (note 13d and 13e) |
| - |
| 624,039 |
Shares issued, ESOP warrants exercised |
| 160,794 |
| 77,181 |
Reclassification of contributed surplus upon exercise of ESOPwarrants (note 13e) |
| - |
| 24,555 |
Shares issued, October 08 warrants exercised |
| 487,500 |
| 219,375 |
Reclassification of contributed surplus upon exercise of October 08 warrants (note 13e) |
| - |
| 75,754 |
Shares issued, options exercised (note 13c) |
| 103,750 |
| 47,011 |
Reclassification of contributed surplus upon exercise of options (note 13e) |
| - |
| 30,161 |
Balance, December 31, 2008 |
| 54,313,305 | $ | 37,825,476 |
Stock options exercised (note 13b(i)) |
| 75,000 |
| 50,261 |
Reclassification of contributed surplus upon exercise of stock options (note 13(e)) |
| - |
| 37,567 |
Shares issued, ESOP warrants exercised (note 13(b)(i)) |
| 5,500 |
| 2,640 |
Reclassification of contributed surplus upon exercise of ESOP warrants (note 13(e)) |
| - |
| 840 |
Treasury shares (13b(i)) |
| (759,500) |
| (508,675) |
In escrow relating to Bluemoon transaction (note 13b(ii)) |
|
|
|
|
net of shares receivable from escrow and share issue costs |
| - |
| (6,470) |
Balance, December 31, 2009 |
| 53,634,305 | $ | 37,401,639 |
(b)(i)
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 59,388,305 at June 30, 2009.
71
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 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.
As at December 31, 2009, the Company repurchased 759,500 common shares at a weighted average price of Cdn$0.72 ($0.68) per share pursuant to the normal issuer bid. The Company follows CICA Section 3240 Share Capital to account for the shares repurchased. 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 retained earnings. The effects of the shares repurchased at December 31, 2009 are reflected in a decrease in Share Capital of $508,675, a decrease in retained earnings of $8,121.
During 2009, 75,000 stock options were exercised at a weighted average strike price of Cdn$0.83 ($0.67). Proceeds of $50,261 were credited to share capital and $37,567 was reclassified from contributed surplus to share capital.
During 2009, the Company extended the term of 366,690 outstanding common shares purchase warrants that were issued as part of an offering under the Company’s Employee Share Ownership Plan which closed on January 12, 2007. Each warrant is exercisable for one common share in the capital of Norsat, at an exercise price of US$0.48, until January 12, 2009. At the end of December 2008, the Company applied to and received TSX approval to extend the expiry date of the warrants a further 2 years, until January 12, 2011. The effective date of the extension will be from the current expiry date of January 12, 2009. As a result of the extension, the Company recognized a fair value increment of $56,761 of its outstanding warrants on January 12, 2009, increasing stock based compensation expense and contributed surplus.
During 2009, 5,500 ESOP warrants were exercised at the strike price of $0.48. Proceeds of $2,640 were credited to share capital and $840 was reclassified from contributed surplus to share capital.
During 2009, 1,206,811 warrants at the strike price of Cdn$1.09 expired.
(b)(ii)
On March 9, 2009, the Company entered into a transaction whereby it would issue 5,000,000 shares to escrow to acquire a customer contract provided certain milestones were met by December 31, 2009. The milestones were not met and the shares were receivable from escrow at December 31, 2009 (note 24).
(c)
Share purchase option plan
The Company has reserved 6,306,505 common shares under its 1999 (amended)incentive share option plan of which 1,930,505 common shares have been previously issued. The plan provides for the granting of stock options at the fair market value of the Company at the grant date, with terms to a maximum of ten years and vesting provisions to be determined by the Board of Directors.
72
Share purchase options outstanding | Number of options | Weighted average exercise price Cdn$ |
Balance, December 31, 2006 | 1,948,150 | $ 1.57 |
Granted | 272,000 | 0.74 |
Exercised | (12,000) | 0.60 |
Expired | (175,000) | 2.63 |
Cancelled | (295,700) | 1.38 |
Forfeited | (203,000) | 0.70 |
Balance, December 31, 2007 | 1,534,450 | $ 1.24 |
Granted | 449,800 | 1.13 |
Exercised | (103,750) | 0.54 |
Expired | (81,500) | 0.55 |
Forfeited | (281,000) | 0.98 |
Balance, December 31, 2008 | 1,518,000 | $ 1.34 |
Granted | 464,800 | 0.79 |
Exercised | (75,000) | 0.83 |
Expired | (56,500) | 0.82 |
Forfeited | (63,000) | 0.86 |
Balance, December 31, 2009 | 1,788,300 | $ 1.28 |
Share purchase options outstanding at December 31, 2009, 2008 and 2007 include:
The following table summarizes information pertaining to the Company’s share purchase options outstanding at December 31, 2009:
| 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$ |
$0.00 to $0.49 | 5,000 | 3.98 | $ 0.47 |
| - | $ - |
$0.50 to $0.99 | 982,800 | 2.92 | 0.74 |
| 426,000 | 0.68 |
$1.00 to $1.49 | 539,400 | 1.65 | 1.20 |
| 315,000 | 1.16 |
$1.50 to $1.99 | 81,600 | 2.72 | 1.51 |
| 61,600 | 1.51 |
$2.50 | 44,875 | 1.76 | 2.50 |
| 44,875 | 2.50 |
$3.40 | 44,875 | 1.76 | 3.40 |
| 44,875 | 3.40 |
$4.50 | 44,875 | 1.76 | 4.50 |
| 44,875 | 4.50 |
$6.15 | 44,875 | 1.76 | 6.15 |
| 44,875 | 6.15 |
$0.00 to $6.50 | 1,788,300 | 2.42 | $ 1.25 |
| 982,100 | $ 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 the Black Scholes option pricing model with assumptions noted below, the estimate fair value of all options granted during 2009, 2008 and 2007 was:
|
| 2009 |
| 2008 |
| 2007 |
Total compensation (increase in contributed surplus and stock based compensation) | $ | 209,518 | $ | 129,814 | $ | 78,629 |
73
The weighted average assumptions used to estimate the fair value of options granted during the period were:
|
|
| 2009 | 2008 | 2007 |
Risk free interest rate |
|
| 1.96% | 3.21% | 4.07% |
Expected life |
|
| 3.50 | 3.50 | 3.50 |
Vesting period |
|
| 2 to 10 years | 2 to 10 years | 2 to 10 years |
Expected volatility |
|
| 84.01% | 75.24% | 80.65% |
Expected dividends |
|
| nil | nil | nil |
In 2009, 464,800 stock purchase options were granted with a strike price of Cdn$0.79 and weighted average fair value of Cdn$0.46. Of the 464,800 options granted, 193,800 were granted on April 1, 2009 at the strike price of Cdn$ 0.90 and weighted average fair value of Cdn$0.53 to all full time permanent employees and Board of Directors present as at March 31, 2009.
In 2008, 449,800 stock purchase options were granted with a weighted average fair value of Cdn$0.62. Of the 449,800, 206,800 stock options were granted to 40 employees at a strike price of Cdn$1.37 and a weighted average fair market value of Cdn$0.74 on April 1, 2008. The stock options have a vesting period of 2 years and an expiry of 5 years. The stock option grant was awarded to all full time permanent employees and Board of Directors present as at December 31, 2007.
In 2007, 272,000 stock purchase options were granted with a weighted average fair value of Cdn$0.43.
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.
(d) Warrants
The continuity of share purchase warrants is as follows:
Expiry date Exercise price | March 3, 2008 US$0.475 | October 28, 2008 US$0.45 | April 28, 2009 Cdn$1.09 | January 12, 2011 US$0.48 | Total number of warrants outstanding |
Balance, Dec 31, 2006 | 3,065,232 | 1,250,000 | 1,206,811 | - | 5,522,043 |
Warrants issued | - | - | - | 532,984 | 532,984 |
Warrants exercised | - | - | - | (5,500) | (5,500) |
Balance, Dec 31, 2007 | 3,065,232 | 1,250,000 | 1,206,811 | 527,484 | 6,049,527 |
Warrants exercised | (2,915,235) | (487,500) | - | (160,794) | (3,563,529) |
Warrants expired | (149,997) | (762,500) | - | - | (912,497) |
Balance, Dec 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, Dec 31, 2009 | - | - | - | 361,190 | 361,190 |
(e) Contributed surplus
Balance, December 31, 2006 | $ | 2,235,017 |
Stock-based compensation expense |
| 78,629 |
Options exercised |
| (4,825) |
Proceeds from private placement to warrants |
| 81,392 |
Proceeds from ESOP January 2007 warrants |
| 68,404 |
ESOP warrants exercised |
| (932) |
Equity component of long term debt | $ | 1,689,748 |
Balance, December 31, 2007 | $ | 4,147,433 |
74
Stock-based compensation expense |
| 129,814 |
Warrants exercised |
| (724,348) |
Options exercised |
| (30,161) |
Balance, December 31, 2008 | $ | 3,522,738 |
Changes during 2009 |
|
|
Stock-based compensation expense (note 13c) |
| 152,757 |
Extension of warrants (note 13b(i)) |
| 56,761 |
Options exercised (note 13c) |
| (37,567) |
Warrants exercised (note 13d) |
| (840) |
Balance, December 31, 2009 | $ | 3,693,849 |
14. Other (Income) Expense
|
| 2009 | 2008 |
| 2007 |
Bank charges | $ | $ 80,133 | $ 40,577 | $ | 86,714 |
Interest income |
| (2,153) | - |
| - |
Interest expense |
| 1,376 | 12,242 |
| 16,213 |
Interest accreted on convertible debt and deferred finance cost amortization |
| - | - |
| 80,557 |
Loss (gain) on disposal of property and equipment |
| - | 114 |
| 105,307 |
Foreign currency (gain) loss |
| 278,049 | (383,741) |
| 478,322 |
Total | $ | $357,405 | $(330,808) | $ | 767,113 |
15. Earnings per Share
The reconciliation of the numerators and denominators of the basic and diluted EPS calculations was as follows for the following fiscal years ended December 31:
| 2009 | 2008 | 2007 |
Numerator: |
|
|
|
Net income | $ 4,632,707 | $ 2,199,761 | $ 1,385,354 |
|
|
|
|
Denominator: |
|
|
|
Weighted average number of shares outstanding used to compute basic EPS | 58,340,900 | 53,351,652 | 50,599,449 |
Effect of dilutive securities: |
|
|
|
Dilution from exercise of stock options | 62,444 | - | 381,113 |
Dilution from exercise of warrants | 108,123 | - | 4,825,374 |
Weighted average number of shares outstanding used to compute diluted EPS | 58,511,467 | 53,351,652 | 55,805,936 |
|
|
|
|
Net earnings per share: |
|
|
|
Basic | $0.08 | $0.04 | $0.03 |
Diluted | $0.08 | $0.04 | $0.02 |
The calculation of assumed exercise of stock options and warrants includes the effect of the dilutive options and warrants. Where their effect was anti-dilutive because their exercise prices were higher than the market price of the Company’s common share at the end of the periods shown in the table, assumed exercise of those particular stock options and warrants were not included.
75
Excluding the effect of income tax recovery, basic earnings per share for the year ended December 31, 2009 is $0.05 compared to $0.04 in 2008.
Excluding the effect of income tax recovery, diluted earnings per share for the year ended December 31, 2009 is $0.05 compared to $0.04 in 2008.
16.
Income Taxes
a)
Income Tax Expense
The income tax expense differs from the expected expense if the Canadian federal and provincial statutory income tax rates were applied to earnings (loss) from operations before income taxes. The principal factors causing these differences are shown below:
|
| 2009 |
| 2008 |
| 2007 |
Income (loss) before income tax recovery | $ | 2,986,334 | $ | 2,199,761 | $ | 1,385,354 |
Statutory tax rate |
| 30.00% |
| 31.00% |
| 34.12% |
Expected income tax payable (recovery) |
| 895,900 |
| 681,926 |
| 472,683 |
Increase (decrease) resulting from: |
|
|
|
|
|
|
Foreign tax rate differences |
| (223,402) |
| (320,717) |
| 10,035 |
Effect of statutory rate change |
| 1,315,299 |
| 783,537 |
| 606,042 |
Non allowable (non-taxable) expenses (income) |
| 2,068,667 |
| 54,476 |
| (1,321,160) |
Change in valuation allowance |
| (3,599,513) |
| (4,151,266) |
| (94,695) |
Change in foreign exchange |
| (1,951,127) |
| 2,907,791 |
| (268,604) |
Expiry of operating losses |
| - |
| 109,381 |
| 933,741 |
Other |
| (152,197) |
| (65,128) |
| (338,042) |
Income tax expense (recovery) | $ | (1,646,373) | $ | - | $ | - |
b)
Future Income Tax Assets
The tax effect of the temporary differences that give rise to future tax assets are presented below:
|
| 2009 |
| 2008 |
| 2007 |
Future income tax assets: |
|
|
|
|
|
|
Non-capital loss carry forwards | $ | 2,526,203 | $ | 4,633,960 | $ | 6,588,918 |
Scientific Research and experimental Development pool |
| 2,715,059 |
| 2,101,390 |
| 2,717,972 |
Scientific Research and experimental Development tax credit |
| 1,846,649 |
| 1,653,494 |
| 2,031,723 |
Tax value of capital asset expenditure in excess of book value |
| 2,540,920 |
| 2,450,324 |
| 3,052,756 |
Net capital loss carry forwards |
| 800,003 |
| 1,320,860 |
| 1,708,422 |
Temporary differences in working capital |
| 495,626 |
| 429,251 |
| 640,753 |
Total gross future income tax assets |
| 10,924,460 |
| 12,589,279 |
| 16,740,544 |
Future income tax liabilities |
| (327,295) |
| - |
| - |
Valuation allowance |
| (8,950,792) |
| (12,589,279) |
| (16,740,544) |
Total net future income tax asset (liability) | $ | 1,646,373 | $ | - | $ | - |
c)
Loss Carry Forwards and Investment Tax Credits
At December 31, 2009, the Company has approximately Cdn$4,518,000 of non-capital loss carry forwards available until 2026 to reduce future years' income for income tax purposes relating to Norsat International Inc.
76
Also, the Company has provincial and federal investment tax credits of approximately Cdn$902,000 (provincial) and Cdn$1,614,000 (federal) available to reduce Canadian federal and provincial taxes payable. The amounts expire as follows:
|
| Non-capital loss carry forwards Cdn$ |
| Provincial investment tax credit Cdn$ |
| Federal investment tax credits Cdn$ |
2010 | $ | - | $ | - | $ | - |
2011 |
| - |
| 56,000 |
| 192,000 |
2012 |
| - |
| 194,000 |
| 350,000 |
2013 |
| - |
| 128,000 |
| 300,000 |
2014 |
| - |
| 14,000 |
| 26,000 |
2015 |
| 3,595,000 |
| - |
| - |
2026 |
| 923,000 |
| 139,000 |
| 247,000 |
2027 |
| - |
| 147,000 |
| 263,000 |
2028 |
| - |
| 224,000 |
| 236,000 |
| $ | 4,518,000 | $ | 902,000 | $ | 1,614,000 |
The Company also has available Cdn$6,760,000 (2008 - Cdn$11,290,000, 2007 – Cdn$11,290,000) of net capital losses to be applied against future capital gains. The tax effect of these carry forwards has not been recorded in the financial statements. In addition, the Company has accumulated a Scientific Research and Development Expenditures pool that is available for an indefinite carry forward period with discretionary deductions of approximately Cdn$11,415,000 (2008 - Cdn$8,980,875, 2007 – Cdn$8,980,875).
As at December 31, 2009, the Company has approximately $3,330,000 of net operating losses relating to Norsat International (America) Inc. The amount consists of losses accumulated from 2006 to 2009.
As at December 31, 2009, the Company has approximately £380,000 of losses carry forward relating to Norsat International (United Kingdom) Ltd. The amount consists of losses accumulated from 2004 to 2009.
As at December 31, 2009 the Company has approximately KRW315,000,000 of losses carry forward relating to Norsat Korea Ltd.
17. 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.
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.
77
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 accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The following tables set forth information by operating segments for the years ended December 31, 2009, 2008 and 2007 respectively. In 2009, the Wireless Networks segment did not generate any revenues.
| Microwave Products | Satellite Systems | Maritime Systems | Consolidated |
As at December 31, 2009 |
|
|
|
|
Total assets related to operations | $ 6,696,356 | $11,591,542 | $ 395,827 | $18,683,725 |
Property and equipment and intangible assets, net | $ 270,223 | $ 467,761 | $ 15,973 | $ 753,957 |
|
|
|
|
|
As at December 31, 2008 |
|
|
|
|
Total assets related to operations | $ 6,299,750 | $ 7,027,235 | $ - | $13,326,985 |
Property and equipment and intangible assets, net | $ 344,029 | $ 383,757 | $ - | $ 727,786 |
|
|
|
|
|
As at December 31, 2007 |
|
|
|
|
Total assets related to operations | $ 5,307,744 | $ 4,219,920 | $ - | $ 9,527,664 |
Property and equipment and intangible assets, net | $ 552,622 | $ 439,363 | $ - | $ 991,985 |
Total assets, property and equipment, and intangible assets are calculated based on the total sales to external customers of each segment (Microwave, Satellite systems and Maritime systems) over total consolidated sales.
Substantially all property and equipment and intangible assets are located in Canada.
78
The Company generated revenues from external customers located in the following geographic locations:
|
|
| 2009 |
| 2008 |
| 2007 | ||
|
|
|
|
|
|
|
| ||
Canada |
|
| 400,180 | $ | 597,728 | $ | $545,410 | ||
United States |
|
| 15,420,071 |
| 12,577,704 |
| 10,894,156 | ||
Europe and other |
|
| 5,344,271 |
| 4,881,404 |
| 5,011,095 | ||
|
|
| 21,164,522 | $ | 18,056,836 | $ | 16,450,661 |
18. Supplemental cash flow and other disclosures
|
| 2009 |
| 2008 |
| 2007 |
Changes in non-cash operating working capital: |
|
|
|
|
|
|
Accounts receivable | $ | 1,150,837 | $ | (3,716,906) | $ | (686,660) |
Inventories |
| 612,381 |
| (1,019,016) |
| (724,188) |
Changes in inventory estimate |
| - |
| 88,589 |
| - |
Prepaid expenses and other |
| (838,407) |
| (187,958) |
| 292,937 |
Deferred financing costs in relation to the January 2007 ESOP |
| - |
| - |
| 10,334 |
Long-term prepaid expenses and other |
| (742) |
| - |
| (10,187) |
Accounts payable |
| (502,011) |
| 837,592 |
| (284,698) |
Accrued liabilities |
| (302,468) |
| 495,440 |
| (232,121) |
Deferred revenue |
| 680,445 |
| 183,434 |
| (112,386) |
Long term deferred revenue |
| (37,309) |
| 609,715 |
| 57,191 |
| $ | 762,726 | $ | (2,709,110) | $ | (1,689,778) |
Supplementary information: |
|
|
|
|
|
|
Interest paid | $ | 1,376 | $ | 16,516 | $ | 121,733 |
Income taxes paid |
| - |
| - |
| - |
Income from minimum order fee | $ | 1,886,864 |
| - |
| - |
Share receivable from escrow |
| (1,886,864) |
| - |
| - |
|
|
|
|
|
|
|
19. Comparative Figures
Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in 2009. In the 2008 cash flow statement, $88,589 was reclassified from changes in inventory estimate to foreign exchange (gain) loss under the operating section. In the 2008 balance sheet, $182,023 was reclassified from property and equipment to intangible assets.
20. Commitments and Contingencies
Future minimum payments at December 31, 2009 under various purchasing commitments, loan commitments and operating lease agreements for each of the next five years are approximately as follows:
| 2010 | 2011 | 2012 | 2013 | 2014 | Total |
Inventory purchase obligation | $3,112,142 | - | - | - | - | $3,112,142 |
Operating lease obligations | $ 492,584 | $ 449,398 | $ 42,818 | $ 42,818 | $ 32,113 | $1,059,731 |
Total | $3,604,726 | $ 449,398 | $ 42,818 | $ 42,818 | $ 32,113 | $4,171,873 |
In the normal course of operations the Company enters into purchase commitments. Included in 2010 commitments are inventory and material purchase obligations of $3,112,142.
79
21. Economic Dependence
The Company purchases substantially all of its microwave products from four suppliers.
During 2009, the Satellite Systems segment generated approximately 65% of its sales from the United States government. This represents approximately 40% of total sales. No other customer exceeds 10% of total sales.
During 2008, the Satellite Systems segment generated approximately 76% of its sales from the United States government. This represents approximately 39% of total sales. No other customer exceeds 10% of total sales.
During 2007, the Satellite Systems segment generated approximately 52% of its sales from the United States government. This represents approximately 23% of total sales. No other customer exceeds 10% of total sales.
22. 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 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 the Company’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 year ended December 31, 2009, the Company did not accrue any liability for repayment as the amount can not be determined.
The Company recorded $1,324,922 as a reduction to product development expense in the consolidated statement of earnings and $12,151 as a reduction to property and equipment on the consolidated balance sheet. As at December 31, 2009, total cash received was $1,218,077. As at December 31, 2009, $599,445 remains in accounts receivable (2008 - $492,600).
Industrial Research Assistance Program (IRAP)
In October 2007, Norsat was awarded a non-repayable Cdn$235,555 government contribution through Canada’s National Research Council – Industrial Research Assistance Program (NRC-IRAP). The program provides contributions to Canadian small to medium sized businesses that are interested in using technology to commercialize services, products and processes to grow their presence in Canadian and international markets. Norsat intends to use the proceeds for research and development initiatives targeted at expanding its portable satellite systems suite of offerings.
For the year ended December 31, 2008, Cdn$235,555 was claimed and included as a reduction to product development expense in the consolidated statements of operations. As at December 31, 2008, the Company had received Cdn$235,555 and the IRAP program had completed.
80
Technology Partnerships Canada Funding
On October 17, 2000, the Company entered into an agreement with Technology Partnerships Canada (“TPC”) which was subsequently amended on February 8, 2001 and September 28, 2004 (“TPC Agreements”). Under the TPC Agreements, the Company received funding of one third of eligible spending related to the research and development of a communications Satellite Interactive Terminal (“SIT”) technology development project totaling Cdn$9,999,700 up to the end of 2004, including additional funding of Cdn$620,000 obtained in 2004.
In return for funding, the Company was obligated to issue TPC Cdn$1,000,000 in value of share purchase warrants prior to March 31, 2004. The warrants were to have a life of five years and were to be priced at the market price on the date of issue with the number of warrants issued to be determined using the Black-Scholes option pricing model.
In addition, the Company is also obligated to pay royalty payments to TPC based on the following terms:
Ø
1.88% on sales of legacy products
Ø
1.28% before and 1.03% after issuance of warrants on sales of new SIT technology products
Ø
The royalty payment period was amended to commence on January 1, 2004 and end on the earliest of the following dates;
o
the date before December 31, 2007, for which cumulative royalties accrued reach Cdn$15 million;
o
on December 31, 2007, or the date after, if by that date the cumulative royalties accrued equal or exceed Cdn$13,171,300; and otherwise on December 31, 2011.
On April 28, 2004, the Company issued 1,206,811 share purchase warrants to TPC under the terms described above with an exercise price of Cdn$1.09 per share. The Black-Scholes valuation model was applied using assumptions of an average option life of five years, no dividends, expected annual volatility of 100%, and risk-free interest rates of 3.8%. During 2009, the issued 1,206,811 warrants to TPC with an exercise price of Cdn$1.09 expired.
As at December 31, 2009, the Company accrued royalty payments in the amount of $265,074 (2008 - $108,228, 2007 - $159,794). The royalties were recorded and expensed as the related sales occurred. The royalty is payable annually within 60 days of the year end. The total amount of royalties accrued and paid to date are $1,036,011.
23. 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.
During 2007, the Company entered into the following related party transactions:
(i) On March 28, 2007 the Company received a bridge loan of Cdn$150,000 from an officer of the Company subjected to certain terms and conditions as follows:
·
Interest at the rate of 8% per annum over the balance of the loan, payable at the end of the term, or on the day of loan retirement,
·
60 day term maturing May 31, 2007,
·
Payment in full May 31, 2007, or partial payments within the 60 day term at discretion of the Company.
The loan was fully repaid on May 31, 2007.
(ii) On April 24, and June 12, 2007 the Company received bridge loans of Cdn$250,000, and Cdn$200,000 respectively from the same officer of the Company subjected to certain terms and conditions as follows:
·
Interest at the rate of 8% per annum over the balance of the loan, payable at the end of the term, or on the day of loan retirement,
9 day terms, with an option to renew
·
Payment in full on or partial payments within the 9 day term at discretion of the Company.
The loans were fully repaid on May 2, and June 20, 2007.
81
(iii) On November 14, 2007 the Company received a bridge loan of Cdn$450,000 from the same officer of the Company subjected to certain terms and conditions as follows:
·
Interest at the rate of 8% per annum over the balance of the loan, payable at the end of the term, or on the day of loan retirement,
·
9 day terms, with an option to renew
·
Payment in full on or partial payments within the 9 day term at discretion of the Company.
On November 22, 2007, the Company renewed this bridge loan with the same interest rate, but maturing on November 27, 2007. The loan was fully repaid on November 27, 2007
24. Acquisition of Bluemoon 4G Ltd.
On March 9, 2009, the Company acquired 100% ownership of Bluemoon 4G Ltd. from unrelated third parties for 5,000,000 shares of the Company’s common stock. Bluemoon 4G Ltd. is a pre-revenue company that had a customer relationship to supply and deliver equipment for WiMAX installations. In acquiring Bluemoon, the Company has acquired the customer relationship.
As per terms of the contract, the 5,000,000 shares were held in escrow until December 31, 2009. The counterparty had to meet certain performance milestones to receive the common shares. In the event that the milestones were not met, the counterparty had to pay a minimum order fee or the shares held in escrow would be returned to Norsat.
As at December 31, 2009, Norsat had not received any purchase orders from the third party. The escrowed shares were returned to the Company on January 27, 2010.
25. Reconciliation to United States Accounting Principles
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) which differ in certain respects from those principles and practices that the Company would have followed had its consolidated financial statements been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”).
|
| 2009 |
| 2008 |
| 2007 |
Net income(loss) from operations under Canadian GAAP | $ | 4,632,707 | $ | 2,199,761 | $ | 1,385,354 |
Deferred financing costs (c) |
| - |
| - |
| 3,179 |
Convertible debt (d) |
| - |
| - |
| 70,282 |
Employee stock-based compensation (b) |
| (19,731) |
| (3,975) |
| 16,689 |
Cost of sales (e) |
| 30,138 |
| 231,215 |
| - |
Net income (loss) according to US GAAP | $ | 4,643,114 | $ | 2,427,001 | $ | 1,478,504 |
Basic and diluted earnings (los) per shares according to US GAAP | $ | 0.08 | $ | 0.05 | $ | 0.03 |
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| 2007 |
Net income (loss) for the year | $ | 4,643,114 | $ | 2,427,001 | $ | 1,478,504 |
Other comprehensive (loss) gain: |
|
|
|
|
|
|
Cumulative translation adjustment (note (3(a)) |
| - |
| (1,511,896) |
| 775,504 |
Comprehensive income (loss) for the year | $ | 4,643,114 | $ | 915,105 | $ | 2,254,134 |
82
The amounts in the consolidated balance sheets that differ significantly from those reported under Canadian GAAP are as follows:
| December 31, 2009 |
| December 31, 2008 | ||
| Canadian GAAP $ | US GAAP $ |
| Canadian GAAP $ | US GAAP $ |
|
|
|
|
|
|
Inventory (e) | 4,077,898 | 4,077,898 |
| 4,497,415 | 4,467,277 |
Share capital (d) | 37,401,639 | 94,886,647 |
| 37,825,476 | 95,310,484 |
Contributed surplus (a - d) | 3,693,849 | 1,604,316 |
| 3,522,737 | 1,413,473 |
Accumulated other comprehensive income (loss) (c) | 399,537 | 376,357 |
| (229,209) | (252,389) |
Deficit (a - f) | (27,889,983) | (83,262,277) |
| (32,514,569) | (87,897,272) |
|
|
|
|
|
|
The following are the material measurement variations in accounting principles, practices and methods used in preparing these financial statements from those generally accepted in the United States (US):
(a)
Income Taxes
Under Canadian GAAP, future tax assets and liabilities are recorded at substantially enacted tax rates. Under US GAAP, deferred tax assets and liabilities are recorded at enacted tax rates. Recording Canadian future tax assets and liabilities at enacted tax rates would not change recorded net assets or shareholders’ equity under US GAAP.
(b)
Stock-based Compensation
Under Canadian GAAP, when options are forfeited before vesting, all the previous period charges are to be reversed in the period that the options are cancelled using either the estimation or actual method. The Company has chosen to reverse such forfeited options using the actual method. However, US GAAP requires those forfeited options to be reversed using an estimation method based on estimated forfeitures. As a result, $19,731 (2008 – $3,975, 2007 – $19,689) was debited to operations under US GAAP and contributed surplus was reduced by the same amount.
(c)
US$2 Million Convertible Debt
Under Canadian GAAP, the proceeds of the financing allocated to the estimated fair value of the conversion feature of the debt are recorded as an equity component of the debt. Under US GAAP, a value is assigned to the conversion feature only if the conversion rate is less than the market price of the common stock at the date of issuance. Accordingly, no value would be assigned under US GAAP to the conversion feature on the promissory note issued in 2002. In addition, under Canadian GAAP a portion of the deferred finance costs has been allocated to equity and not amortized, while under US GAAP all costs would be identified as deferred finance costs and amortized over the term of the debt. Furthermore, under Canadian GAAP, interest on long-term debt required to be paid through the issuance of common shares is recorded at fair value as an equity component and accreted as a charge to retained earnings. For US GAAP purposes, all intere st is expensed as accrued.
83
As at December 31, 2007, the convertible debt on the income statement in the amount of $70,282 consisted of adding back the accretion of $70,383 recorded as interest expense under Canadian GAAP, the reduction foreign exchange gain of $20,195 recorded as foreign exchange gain under Canadian GAAP and an addition of foreign exchange gain of $20,094 under US GAAP.
(d)
Elimination of Deficit
In prior years, the Company reduced its paid-up capital by $51,161,976 to eliminate the deficit from preceding years. In order to effect these reductions under Canadian GAAP, it was not necessary to revalue the assets of the Company. As a consequence, all conditions necessary under the US GAAP quasi-reorganization rules were not met and the recapitalization of the deficit is not recorded.
(e)
Inventory
On January 1, 2008, the Company adopted CICA Handbook Section 3031 – “Inventories” which provides guidance on the basis and method of measurement of inventories and allows for the reversal of previous write-downs. Subsequent to the adoption of CICA 3031, inventory is stated at the lower of weighted average cost and net realizable value. On January 1, 2008, pursuant to CICA 3031 a reversal of previous write-downs of $285,396 was recorded as an increase to inventory and a decrease in opening deficit. In addition during the year ended December 31, 2008, additional inventory write-downs of $201,771 were also reversed.
Under US GAAP, inventory is also carried at the lower of cost and net realizable value. However, pursuant to Accounting Standards Codification (ASC) 330 - “Inventory” the write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently cannot be marked up based on changes in underlying facts and circumstances. The reversal of previous write-downs of inventory are not recorded under US GAAP and as a result, at December 31, 2008, inventory decreased by $30,138, opening deficit increased by $285,396 and cost of sales increased by $231,215. During the year ended December 31, 2009, the remaining inventory was sold by the Company. As a result the $30,138 difference in inventory at December 31, 2008 was reversed and cost of sales decreased by the same amount.
(f)
Recently Issued Accounting Pronouncements
In June 2009, the FASB amended the guidance included in ASC 810 on transfers of financial assets in order to address practice issues highlighted most recently by events related to the economic downturn. The amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. The new guidance will be effective January 1, 2010 for calendar year-end companies. The Company does not expect the adoption of this amendment to have a material impact on the Company’s consolidated financial statements.
In June 2009, the FASB amended the consolidation guidance for variable-interest entities included in ASC 810. The amendment was issued in response to perceived shortcomings in the consolidation model that were highlighted by recent market events, including concerns about the ability to structure transactions under the current guidance to avoid consolidation, balanced with the need for more relevant, timely, and reliable information about an enterprise’s involvement in a variable-interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. The new guidance will be effective January 1, 2010 for calendar year-end companies. The Company does not expect the adoption of this amendment to have a material impact on the Company’s consolidated financial statements.
84
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, which amends the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU also amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not expect the adoption of this amendment to have a material impact on the Company’s consolidated financial statements.
(g)
Recently Adopted Accounting Policies
On September 30, 2009 the FASB issued ASU 2009-12 to provide guidance on measuring the fair value of certain alternative investments. The ASU amends ASC 820 to offer investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share (NAV). The ASU is effective for the first reporting period ending after December 15, 2009; however, early adoption is permitted. The adoption of ASU 2009-12 did not have a material effect on the Company’s consolidated financial statements.
Effective July 1, 2009, the Company adopted the FASB Accounting Standards Codification™ (“Codification”). The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The content of the Codification carries the same level of authority, thereby modifying the previous GAAP hierarchy to include only two levels of GAAP: authoritative and nonauthoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of the Codification did not result in a change in current accounting practice.
Effective January 1, 2009, the company adopted the amendments to FASB ASC 815 regarding disclosures about derivative instruments and hedging activities, which revised and expanded the disclosure requirements to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under U.S. GAAP, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The new requirements apply to derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under FASB ASC 815 and are effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of the amendments to FASB ASC 815 did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted the amended provisions of FASB ASC 810 related to noncontrolling interests in consolidated financial statements, which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amendment clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The amended provisions are effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and have been applied prospectively as of January 1, 2009, except for the presentation and disclosure requirements, which have been applied retrospectively for all periods presented. The adoption of the amendments to FASB ASC 810 did not have a material impact on the Company’s consolidated financial statements .
Effective January 1, 2009, the Company adopted the revised provisions of FASB ASC 805 related to business combinations. The amended guidance establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. Information is required to be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The amendment applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
85
In April 2009, the FASB issued an update to ASC 805 to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination. Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value can not be determined, companies should typically account for the acquired contingencies using existing guidance. The guidance is effective for business combinations whose acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the revised provisions of FASB ASC 805 effective January 1, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated fi nancial statements.
Effective January 1, 2009, the Company adopted the updated provisions of FASB ASC 808 related to accounting for collaborative arrangements. The guidance defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The updated guidance is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted the updated provisions of FASB ASC 260 related to the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance was issued in order to address whether instruments granted in share-based payment transactions are considered participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The updated guidance is effective for fiscal years beginning after December 15, 2008 and for interim periods within such years. The adoption of this amendment did not have a material impact on the Company‘s consolidated financial statements.
In November 2008, the FASB updated ASC 323 to address certain matters associated with the accounting for equity method investments including initial recognition and measurement and subsequent measurement considerations. The guidance indicates, among other things, that transaction costs for an investment should be included in the cost of the equity method investment, and shares subsequently issued by the equity method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. The amendments are effective, on a prospective basis, for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The implementation of this guidance did not have a material impact on the Company’s consolidated results of operations or financial condition.
In April 2009, the FASB updated ASC 820 to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased, including guidance on identifying circumstances that indicate a transaction is not orderly. The updated guidance emphasizes that the objective of a fair value measurement remains the same even if there has been a significant decrease in the volume and level of activity for the asset or liability and amends certain reporting requirements for interim and annual periods related to disclosure of major security types and the inputs and valuation techniques used in determining fair value. The amendment is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
86
In August 2009, the FASB issued ASU No. 2009-05 which amends ASC 820-10-35 to provide further guidance concerning the measurement of a liability at fair value when there is a lack of observable market information, particularly in relation to a liability whose transfer is contractually restricted. The amendment provides additional guidance on the use of an appropriate valuation technique that reflects the quoted price of an identical or similar liability when traded as an asset and clarifies the circumstances under which adjustments to such price may be required in estimating the fair value of the liability. The guidance provided in this update is effective for the first reporting period beginning after issuance, with early application permitted. The amendment was adopted for the annual reporting period ended December 31, 2009; however, it did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued ASU No. 2009-02 which updated ASC 320 to amend the existing other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The new guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The amendment shifts the focus from an entity’s intent to hold a debt security until recovery to its intent to sell and changes the amount of an other-than-temporary impairment loss recognized in earnings when the impairment is recorded because of a credit loss. It also expands disclosure requirements related to the types of securities held, the reasons that a portion of an other-than-temporary impairment of a debt security was not recognized in earnings, and the methodology and sig nificant inputs used to calculate the portion of the total other-than-temporary impairment that was recognized in earnings. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued an update to ASC 825, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements, including significant assumptions used to estimate the fair value of financial instruments and changes in methods and significant assumptions, if any, during the period. The new guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
In May 2009, the FASB issued ASC 855 related to subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Although there is new terminology, the guidance is based on the same principles as those that currently exist in the auditing standards. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements. In accordance with ASC 855, we have evaluated subsequent events through March 11, 2010, the date of issuance of the consolidated financial statements. All material subsequent events up to this date have been included in the financial statements.
26.
Subsequent Events
On January 18, 2010, the Company announced that it will offer common shares for purchase through an Employee Share Ownership Plan (“ESOP”) under theEmployee Investment Act(British Columbia). The share ownership plan will enable employees, full-time contractors and directors to purchase up to 1,000,000 common shares of the Company at a price of US$0.555 per common share for total gross proceeds of up to US$555,000. The Company’s ESOP offering is expected to be open to eligible persons until February 15, 2010. Each eligible employee, full-time contractor and director will be offered an equal number of common shares to purchase. The Company's offering under its ESOP will be conducted in accordance with the requirements of the Toronto Stock Exchange and the Employee Investment Act.
87
On January 27, 2010, the 5,000,000 common shares held in escrow related to the acquisition of Bluemoon 4G Ltd. were returned to the Company (note 24).
On February 9, 2010, the Company cancelled 759,500 common shares that it repurchased under the Normal Course Issuer Bid as outlined under note 13b(i) for a total of $508,675. This has reduced the issued and outstanding common shares to 53,643,305.
88
9. The Offer and Listing
Our common shares trade on the TSX under the symbol NII and on the OTC Bulletin Board under the symbol NSATF.
The high and low sales prices (in Canadian dollars) for the Company’s common shares on the Toronto Stock Exchange and the OTC Bulletin Board for a) the five most recent full financial years. b) the two most recent financial years by quarter and any subsequent full quarter, c) the most recent six months are listed below:
89
10.
Additional Information
A.
Share capital
Reference is made to Item 8: Financial Information and specifically A. Consolidated Financial Statements, Note 17. Share Capital.
B.
Memorandum and Articles of Association
Incorporation
The Company was incorporated on October 15, 1982 under theCompany Act (the “Act”) of the Province of British Columbia under the name Norsat International Inc. Effective September 27, 1989, the name of the Company was changed to NII Norsat International Inc., and on July 2, 1999 was further amended to its present name, Norsat International Inc. Our incorporation number is 255727. Our memorandum of incorporation (the “Memorandum”) and our articles (the “Articles”) were included as exhibits in Item 3.1 and 3.2 with our Annual Report filed in June 2000. Effective March 28, 2006, Norsat was registered under the BCBusiness Corporation Act.
Powers and Functions of the Directors
Our Articles state that it is the duty of any of our directors who are directly or indirectly interested in a contract or proposed contract with us to declare the nature of their interest in accordance with the provisions of the Act. Our Articles also state that a director shall not vote in respect of the approval of any contract or transaction with our Company in which he is interested and if he shall do so his vote shall not be counted, but shall be counted in the quorum present at the meeting at which the vote is taken.
Directors Power to Vote on Compensation for Themselves
Subject to the Act, our Articles provide that the directors may determine to be paid out of our funds or capital as remuneration for their service. The directors may also determine the proportions and manner that the remuneration will be divided among them.
Directors Borrowing Powers
Our Articles provide that the directors, on our behalf, may:
a)
borrow money in any manner or amounts, on any security from any source and upon any terms and conditions;
b)
issue bonds, debentures and other debt obligations as security for any liability or obligation of the Company or any other persons; and
c)
mortgage, charge, whether by way of specific or floating charge, or give other security on the whole or any part of the assets of the Company
Retirement of Directors Under an Age Limit Requirement
Our Articles do not require directors to retire pursuant to an age limit.
90
Number of Shares Required for a Director’s Qualification
Our Articles do not provide for a requirement of shares for a director’s qualification.
Share Capital
The authorized share capital of our Company consists of 75,000,000 Common Shares.
Common Shares
The Holders of our Common Shares are entitled to dividends if, as and when declared by the Board of Directors, to one vote per Common Share and, upon dissolution of the Company, to receive the remaining property and the assets of the Company available for distribution.
Dividend Record
Our Company has not paid any dividends during the past eight years. The Company has no fixed dividend policy. Payment of dividends in the future will depend upon, among other factors, the Company’s earnings, capital requirements and financial condition. The Company does not anticipate that dividends will be paid in the foreseeable future.
Alteration of Share Rights
A special resolution is required to effect a change in the rights of shareholders. A special resolution is a resolution passed by a three-quarters majority of the vote cast by shareholders of the Company who being entitled to do so, vote in person or by proxy at a meeting of the shareholders of the Company, or a resolution in writing signed by every shareholder of the Company who would have been entitled to vote at a meeting of the shareholders of the Company.
Meetings of Shareholders: Annual Meetings
The annual general meeting of our shareholders is held at such time and on such day in each year as the directors of the Company may, from time to time, determine for the purpose of receiving the reports and statements required by the Act to be presented to the annual meeting, electing directors, appointing auditors and for the transaction of such other business as may properly be brought before the meeting. Annual general meetings are required to be held once in every calendar year at a time, not being more than 13 months after the holding of the last preceding annual general meeting.
General or Extraordinary Meetings
The directors of the Company may, at any time, call a general or extraordinary meeting of the shareholders of the Company, for the transaction of any business, which may properly be brought before such a meeting of shareholders.
Place of Meetings
Meetings of shareholders of the Company are to be held at such place within Canada as the directors of the Company, from time to time, determine.
91
Notice of Meetings
Notice of the time and place of each meeting of shareholders of the Company is required to be sent to our shareholders not less than 21 days before the date of the meeting.
A shareholder of the Company and any other person entitled to attend a meeting of shareholders of the Company may, in any manner and at any time, waive notice of or otherwise consent to a meeting of shareholders of the Company.
Quorum
No business will be transacted at any general meeting unless the requisite quorum is present at the commencement of the business. Subject to the Act, if we have two or more shareholders, a quorum for the transaction of business at a general meeting shall be two persons present in person, or by proxy, and holding or representing by proxy, not less than five percent (5%) of the shares entitled to vote at the general meeting.
Foreign Ownership Limitations
Neither the Act nor the incorporation documents of the Company impose limitations on the rights, including the right of non-resident or foreign shareholders, to hold or exercise voting rights attached to the Common Shares.
Change of Control
No provisions of the Company’s Articles exist that would have the effect of delaying, deferring or preventing a change in control of the Company or that would operate with respect to any proposed merger, acquisition or corporate restructuring of the Company.
Share Ownership Reporting Obligations
No provision of the Company’s Articles imposes any requirements on shareholders requiring share ownership to be disclosed. The securities laws of the Company’s home jurisdiction require disclosure of shareholdings by: (a) persons who are directors or senior officers of the Company; and (b) a person who has direct or indirect beneficial ownership of, control or direction over, or a combination of direct or indirect beneficial ownership of and control over securities of the Company carrying more than 10% of the voting rights attached to all of the Company’s outstanding voting securities.
Securities legislation in Canada requires that shareholder ownership must be disclosed once a person owns beneficially or has control or direction over greater than 10% of the issued shares of the Company. This threshold is higher than the 5% threshold under U.S. securities legislation at which shareholders must report their share ownership.
C.
Material Contracts
The only material contracts entered into by the Corporation, other than contracts entered into in the normal course of business, are as follows:
On January 21, 2008, an employment contract was entered into between Norsat International and Eugene Syho, the Company’s newly appointed Chief Financial Officer. (contract appended as exhibit).
92
On September 4, 2008, the Company entered into a contract with the Government of Canada as represented by the Minister of Industry for a repayable contribution to Norsat through the Strategic Aerospace & Defence Initiative (“SADI”) program. The contract is for contribution from the Ministry of Industry towards a research and development project undertaken by Norsat. The contribution period is from September 2007 to December 2011. Repayment of the contribution will start in 2012, paid over a maximum of 15 years and based on a repayment formula contingent on the Company’s sales growth. (contract appended as exhibit).
On December 11, 2009, the Company entered into a contract to invest $500,000 in Tonse Solutions. Tonse Solutions is a Greenfield internet service provision (“ISP”) company that utilizes WiMAX technology as the “last-mile” solution to provide services to its customers. In addition to the investment contract, the Company also entered into a contract for a convertible loan of $700,000 to Tonse Solutions. The loan is repayable at the end of three years and has a coupon rate of ten percent. The loan also has a convertible feature at the Company’s option. As at December 31, 2009, the Company has paid a deposit of $10,000 into Tonse Solutions. No other amounts have been paid as of December 31, 2009. (contract appended as exhibit)
D.
Exchange controls
To the best of the Company's knowledge, there are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of the Company’s Common Shares. Any remittances of dividends to United States residents are, however, subject to a 15% withholding tax (10% if the shareholder is a corporation owning at least 10% of the outstanding common shares of the Company) pursuant to Article X of the reciprocal tax treaty between Canada and the United States.
Except as provided in the Investment Canada Act, there are no limitations under the laws of Canada, the Province of British Columbia or in the charter or any other constituent documents of the Company on the right of foreigners to hold or vote the Common Shares of the Company.
E.
Taxation
United States Federal Income Tax Consequences
The following summary describes certain of the material U.S. federal income tax consequences to U.S. Holders (as defined below) arising from the purchase, ownership and disposition of Common Shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect.
This summary does not deal with all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders in light of their particular circumstances, or to U.S. Holders subject to special rules, including, without limitation, certain retirement plans, insurance companies, U.S. Holders of securities held as part of a "straddle," "synthetic security," "hedge," "conversion transaction" or other integrated investment, persons that enter into "constructive sales" involving Common Shares or substantially identical property with other investments, U.S. Holders whose functional currency is not the United States dollar, certain expatriates or former long-term residents of the United States, financial institutions, broker-dealers, tax-exempt organizations and U.S. Holders who own (directly, indirectly or through attribution) 10% or more of the Company's outstanding voting stock. The following discussion does not address the effect of any applicable state, local or foreign tax laws. This summary does not consider the tax treatment of persons who own Common Shares through a partnership or other pass-through entity, and deals only with Common Shares held as "capital assets" as defined in Section 1221 of the Code.
93
This discussion is addressed only to "U.S. Holders." A U.S. Holder is a holder of Common Shares that is a U.S. citizen, an individual resident in the United States for U.S. federal income tax purposes, a domestic corporation, an estate the income of which is includible in its gross income for U.S. federal income tax purposes without regard to its source, or a trust if either: (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all the substantial decisions of the trust or (ii) the trust was in existence on August 20, 1996 and, in general, would have been treated as a U.S. Holder under rules applicable prior to such time, provided the trust elects to continue such treatment thereafter.
U.S. holders of Common Shares are advised to consult with their own Tax advisors with respect to the U.S federal, state and local tax consequences, as well as the tax consequences in other jurisdictions, of the purchase, ownership and sale of Common Shares applicable in their particular Tax situations.
Sale or Exchange of Common Shares
A U.S. Holder's sale or exchange of Common Shares generally will result in the recognition of capital gain or loss by such U.S. Holder in an amount equal to the difference between the amount realized and the U.S. Holder's tax basis in the Common Shares sold. If a U.S. Holder's holding period on the date of the sale or exchange is more than one year, such gain or loss will be long-term capital gain or loss. Long-term capital gains realized on the sale of Common Shares by non-corporate U.S. Holders will be subject to a maximum 15% federal income tax rate if the Common Shares sold have been held for more than one year at the time of the sale or exchange. U.S. Holders who are corporations would be subject to a maximum federal income tax rate of 35% regardless of their holding period. If the U.S. Holder's holding period on the date of the sale or exchange was one year or less, such gain or loss will be short-term capital gain (general ly subject to the same effective federal income tax rates as ordinary income) or loss. See "Certain Canadian Federal Income Tax Considerations-Taxation of Capital Gains on Sale of Common Shares" for a discussion of taxation by Canada of capital gains realized on the sale or exchange of Common Shares. In general, any capital gain recognized by a U.S. Holder upon the sale or exchange of Common Shares will be treated as U.S. source income for U.S. foreign tax credit purposes. Capital losses realized upon the sale, exchange or other disposition of Common Shares generally are deductible only against capital gains and not against ordinary income, except that in the case of non-corporate taxpayers, a capital loss is deductible only to the extent of capital gains plus ordinary income of up to $3,000 ($1,500 if married and filing separately).
A U.S. Holder's tax basis in his, her or its Common Shares generally will be the purchase price paid therefore by such U.S. Holder. The holding period of each Common Share owned by a U.S. Holder will commence on the day following the date of the U.S. Holder's purchase of such Common Share and will include the day on which such U.S. Holder sells the Common Share.
Treatment of Dividend Distributions
For U.S. federal income tax purposes, the gross amount of any distribution made with respect to, or in some cases a partial purchase or redemption of, Common Shares (including the amount of any Canadian taxes withheld therefrom) will be included in a U.S. Holder's income as ordinary dividend income to the extent that the dividends are paid out of current or accumulated earnings and profits of the Company, as determined based on U.S. tax principles. Such dividends will not be eligible for the dividends received deduction allowed to U.S. corporations under Section 243 of the Code. Dividend distributions in excess of the Company's current and accumulated earnings and profits will be treated first as a non-taxable return of the U.S. Holder's tax basis in his, her or its Common Shares to the extent thereof and then as a gain from the sale of Common Shares. Dividends paid in Canadian dollars will be includible in income in a U.S. dollar amount based on the exchange rate at the time of their receipt. Any gain or loss resulting from currency fluctuations during the period from the date a dividend is paid to the date such payment is converted into U.S. dollars generally will be treated as ordinary income or loss.
94
Dividends paid to a U.S. Holder with respect to Common Shares will be treated as foreign source dividend income for U.S. foreign tax credit limitation purposes. Subject to certain conditions and limitations, any Canadian withholding tax imposed on such dividends generally will be eligible for credit against such U.S. Holder's U.S. federal income tax liability or, at the U.S. Holder's election, may be claimed as a deduction against income in determining such tax liability. The limitations on claiming a foreign tax credit include computation rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends with respect to the Common Shares generally will be classified as "passive income" for purposes of computing the foreign tax credit limitation. Foreign income taxes exceeding the credit limitation for the year of payment or accrual may be carried back for two taxable years and forward for five taxable years in order to reduce U.S. federal income taxes, subject to the credit limitation applicable in each of such years. Other restrictions on the foreign tax credit include a prohibition on the use of the credit to reduce liability for the U.S. individual and corporation alternative minimum taxes by more than 90%.
In addition, a U.S. Holder generally will not be entitled to claim a credit for Canadian tax withheld unless the U.S. Holder has held the Common Shares for at least 16 days within the 30 day period beginning 15 days before the applicable ex-dividend date. The calculation of allowable foreign tax credits and, in the case of a U.S. Holder that elects to deduct foreign taxes, the availability of deductions for foreign taxes paid involves the application of rules that depend on a U.S. Holder's particular circumstances. Accordingly, U.S. Holders should consult their own tax advisors regarding their eligibility for foreign tax credits or deductions.
Information Reporting and Backup Withholding
Any dividends paid on the Common Shares to U.S. Holders may be subject to U.S. information reporting requirements and the 28% U.S. backup withholding tax. In addition, the proceeds of a U.S. Holder's sale of Common Shares may be subject to information reporting and the 30% U.S. backup withholding tax. Backup withholding will not apply if the holder (i) is a corporation or other exempt recipient or (ii) the holder provides a U.S. taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with any applicable backup withholding requirements. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder's U.S. federal income tax, provided the required information is furnished to the U.S. Internal Revenue Service.
Canadian Federal Income Tax Considerations
The following discussion summarizes the material Canadian Federal income tax considerations relevant to an investment in the Common Shares by a holder who, for income tax purposes, is resident in the United States and not in Canada, holds the Common Shares as capital property, deals at arm's length with the Company, does not use or hold the Common Shares in carrying on a business through a permanent establishment or in connection with a fixed base in Canada and, in the case of an individual investor, is also a United States citizen. The tax consequences of an investment in the Common Shares by an investor who is not as described above may be expected to differ from the tax consequences discussed herein.
This discussion is based upon the provisions of the Income Tax Act (Canada) (the "Tax Act"), regulations under the Tax Act, specific proposals to amend the Tax Act publicly announced prior to the date hereof, the Canada-United States Income Tax Convention (1980), as amended (the "Convention"), and administrative practices published by Canada Custom and Revenue Agency, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to a holder as otherwise described herein. The discussion does not take in account the tax laws of the various provinces or territories of Canada.
95
Taxation of Distributions from the Company
Dividends paid or credited on the Common Shares to U.S. residents will be subject to a Canadian withholding tax. Under the Convention, the rate of withholding tax generally applicable is 15% of the gross amount of the dividends, including stock dividends and payments deemed to be dividends upon the repurchase of Common Shares by the Company, as described below. The rate of withholding tax is reduced if the beneficial owner of the dividend is a company, which owns at least 10% of the voting stock of the Company at the time the dividend, is paid. In this case, the rate is 5% of the gross amount of the dividends.
If Common Shares are purchased by the Company, a holder will be deemed to have received a dividend to the extent that the amount paid on the repurchase exceeds the paid-up capital, as defined in the Tax Act, of the Common Shares acquired. The portion, if any, of the acquisition proceeds that are deemed to be a dividend will be subject to Canadian withholding tax on dividends, as described above. Further, the holder will be deemed to have disposed of the Common Shares for the amount paid by the Company for the Common Shares less the amount deemed to have been received as a dividend. If this results in a capital gain to a holder, the tax consequences will be as described below.
Taxation of Capital Gains on Sale of Common Shares
Under the Tax Act, a holder will not be subject to Canadian tax on any capital gain realized on an actual or deemed disposition of a common share, including a deemed disposition at death, provided that he did not hold the Common Share as capital property used in carrying on a business in Canada, or that neither he nor persons with whom he did not deal at arm's length alone or together owned 25% or more of the issued shares of any class of the Company at any time in the five years immediately preceding the disposition.
A holder who otherwise would be liable for Canadian tax in respect of a capital gain realized on an actual or deemed disposition of a Common Share will be relieved under the Convention from such liability unless:
a.
the Common Share formed part of the business property of a permanent establishment in Canada that the Holder had within the twelve-month period preceding the disposition; or
b.
the holder
i.
is an individual and was resident in Canada for 120 months during any 20-year period preceding the disposition,
ii.
was resident in Canada at any time during the 10 years immediately preceding the disposition; and owned the Common Share when he ceased to be a resident of Canada
F.
Dividends and paying agents
Not applicable.
96
G.
Statement by experts
Not applicable.
H.
Documents on display
Copies of the most recent annual report, financial statements for the year ended December 31, 2009 and subsequent interim financial statements of the Company may be obtained, upon request, from the Secretary of the Company. The Company may require the payment of a reasonable fee in respect of a request therefore made by a person who is not a security holder of the Company.
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and file reports and other information with the SEC. You may read and copy any of our reports and other information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of the SEC’s regional offices at 7 World Trade Center, Suite 1300, New York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. In addition, the SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We are required to file reports and other information with the securities commissions in British Columbia and Ontario. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with those provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent of the SEC’s electronic document gathering and retrieval system. We ‘‘incorporate by reference’’ information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this report and more recent information automatically updates and supersedes more dated information contained or incorporated by r eference in this report. Our SEC file number is 0-12600. As a foreign private issuer, we are exempt from the rules under the Securities Exchange act of 1934, as amended, prescribing the furnishing and content of proxy statements to shareholders. We have included in this report certain information disclosed in our Proxy Statement (Information Circular) prepared under Canadian securities rules. We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: Norsat International Inc., 110 – 4020 Viking Way, Richmond, British Columbia, Canada V6V 2N2 Attention Corporate Secretary.
I.
Subsidiary Information
Reference is made under “Item 4c. Organization Structure”.
11.
Quantitative and Qualitative Disclosures About Market Risk
Risks Associated with Foreign Exchange
97
The Company’s financial instruments include cash, short-term investments, accounts receivables, accounts payable, accrued liabilities, short term loans. The carrying value of cash, short-term investments, accounts receivables, accounts payable and accrued liabilities is approximate to their fair values due to the short-term nature of these financial assets and liabilities.
The Company is exposed to foreign currency exchange risk as a result of its operating expenses being predominately denominated in Canadian Dollars. A stronger Canadian dollar increases expenses when translated into United States Dollars. The Company does not engage in any formal hedging transactions.
Foreign Exchange Effect on Income Statement. The Company’s “Sales” and “Cost of Sales” are predominately denominated in U.S. dollars and the Company’s “Operating Expenses” are predominately denominated in Canadian dollars. Foreign currency revenues and expenses are translated at the exchange rate in effect on the dates of the related transactions, with the impact being reflected immediately in Net Income.
Foreign Exchange Effect on Balance Sheet. Non -U.S. dollar denominated balance sheet accounts are translated into U.S. dollars at the year-end exchange rate for monetary items such as accounts receivable, accounts payable, long-term debt and cash, and at historical exchange rates for non-monetary items. Unrealized gains and losses arising from the translation of the monetary items are included in income immediately as foreign exchange gains/(losses) in the consolidated statement of operations.
Risks Associated with Current Market Conditions
Management believes that there is minimal impact on the Company from the current global credit crisis. The majority of the Company’s trade accounts receivables is generated from various military customers and is not believed to be at risk of default. The balance of the amounts owing are spread over a fairly large range of customers. While the risk of default from commercial customers is higher than government accounts, management feels that the likelihood of default is very low. Management is cognizant of the extent of the current credit crisis and will remain vigilant in the Company’s credit granting practices.
The current recessionary trends coupled with the Company’s strong financial position represent an opportunity for accelerating growth through strategic acquisitions that may be immediately accretive to shareholders. In addition, management continues to seek ways to grow the Company organically in a controlled and steady manner.
The Company’s capital resources as at December 31, 2009, included cash. Cash flows are funded primarily through operations and, where necessary, liquidity requirements may be funded through the use of a standby line of credit, issuance of debt, and/or equity.
On December 12, 2007 the Company obtained a C$500,000 or U$400,000 unsecured operating line of credit with HSBC Bank Canada (the “Bank”).Interest on the line of credit is set at the Bank’s prime rate plus 0.85% per annum. During fiscal year 2009, the Company increased its secured operating line of credit to Cdn$1,000,000 or US$800,000 from Cdn$500,000 or US$400,000. As of December 31, 2009, the Company did not access its secured operating line of credit.
12.
Description of Securities Other than Equity Securities
Not applicable.
98
PART II
13.
Defaults, Dividend Arrearages and Delinquencies
None.
14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
15.
Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) on a timely basis so that appropriate decisions can be made regarding public disclosure.
An evaluation of the effectiveness of the design and operation of disclosure controls and procedures was conducted as of December 31, 2009, by and under the supervision of the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that the disclosure controls and procedures, as defined in by Rule 13a-15(e) under the Securities Exchange Act of 1934 (“the Exchange Act”) are effective to ensure that (i) information required to be disclosed in reports that are filed or submitted under Canadian securities legislation and the Exchange Act is recorded, processed, summarized and reported within the time periods specified in those rules and forms; and (ii) material information relating to the Company is accumulated and communicated to the Company’s management, including the CEO and CFO, or persons performing similar functions.
MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP and the requirements of the Securities and Exchange Commission in the United States, as applicable. Management is responsible for establishing and maintaining adequate internal controls over financial reporting for the Company.
The Company’s Chief Executive Office and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures ( as defined in Rule 13a – 5(e) under the United States Securities Exchange Act of 1934, as amended) for the Company. The Chief Executive Officer and Chief Financial Officer have assessed the effectiveness of the Company’s internal control over financial reporting as at Dec. 31, 2008. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based upon their assessment, the CEO and CFO concluded that as of December 31, 2009, the Company’s internal control over financial reporting was effective.
While the Company’s CEO and CFO believe that the Company’s internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.
99
Audit Committee Financial Expert
Reference is made to “Item 6-C – Board Practices”. Norsat’s Board of Directors has determined that it has at least one audit committee financial expert serving on its Audit Committee. Mr. James Sharpe has been determined to be such audit committee financial expert. The Commission has indicated that the designation of Mr. Sharpe as an audit committee financial expert does not make Mr. Sharpe an “expert” for any other purpose, impose any duties, obligations or liability on Mr. Sharpe that are greater than those imposed on members of the Audit Committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the Audit Committee. Mr. Sharpe is “independent” as that term is defined in the listing standards of the NASDAQ Stock Market.
Mr. Sharpe serves as the chairman of the audit committee of Norsat. Mr. James Sharpe has over twenty-five years of senior-level management experience in the public and private sectors as a chief executive officer and as a chief financial officer for small to large complex organizations. Mr. Sharpe holds a BA in accounting from the University of Washington, an MBA from Pepperdine University and a MS in International Business from the University of Strathclyde, Scotland.
16B. Code of Ethics
Norsat’s Code of Ethics, which provides guidelines for the behaviour of all directors, officers and employees, including Norsat’s principal executive officer, principal financial officer and principal accounting officer, in carrying out their responsibilities is posted on the Company web site atwww.norsat.com under the heading Investor Information, Corporate Governance, Charters and Policies.
16C. Principal Accountant Fees and Services
The following table sets forth fees paid by the Company to Ernst &Young LLP for all services in 2009 and 2008 (fees paid to Ernst & Young LLP are in Canadian Dollars):
| Audit Fees | Audit Related Fees | Tax Fees | All Other Fees |
2009 | $304,875 | $10,000 | $340,000 | $20,000 |
2008 | $265,500 | $8,000 | $376,000 | $19,000 |
Audit fees are for the audit of the annual consolidated financial statements.Audit related fees are primarily for services related to review of other statutory filings.Tax fees are primarily for the preparation of Canadian and U.S. corporate tax returns and assistance with tax planning.
From time to time, management of the Company recommends to and requests approval from the audit committee for non-audit services to be provided by the Company’s auditors. The auditor committee routinely considers such requests at committee meetings, and if acceptable to a majority of the audit committee members, pre-approves such non-audit services by a resolution authorizing management to engage the Company’s auditors for such non-audit services, with set maximum dollar amounts for each itemized services. The Audit Committee during their pre-approval process, assess, among other factors, whether the services requested would be considered “prohibited services” as contemplated by the US Securities and Exchange Commission and whether the services requested and the fees related to such services could impair the independence of the auditors.
100
16D. Exemptions from the listing standards for Audit Committees
Not applicable
16E. Purchases of Equity Securities by the Issuer
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 59,388,305 at June 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 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.
As at December 31, 2009, the Company repurchased 759,500 common shares at a weighted average price of Cdn$0.72 ($0.68) per share pursuant to the normal issuer bid. The Company follows CICA Section 3240 Share Capital to account for the shares repurchased. 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 retained earnings. The effects of the shares repurchased at December 31, 2009 are reflected in a decrease in Share Capital of $508,675, a decrease in retained earnings of $8,121.
PART III
17.
Financial Statements
Reference is made under Item 8 “Financial Information”.
18.
Financial Statements
Not applicable. See Item 17.
19.
Exhibits
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
101
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Amiee Chan
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Eugene Syho
4.1
Employment Contract dated January 21, 2008 between the Company and Eugene Syho
4.2
4.3
Equity Investment Contract dated December 11, 2009 between Tonse Solutions and the Company
4.4
Convertible Loan Agreement dated December 11, 2009 between Tonse Solutions and the Company
SIGNATURES | |||
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. | |||
|
|
|
Norsat International Inc. |
|
|
| (Registrant) |
|
|
| “Eugene Syho” |
Date: | March 18, 2010 |
| Eugene Syho, Chief Financial Officer |
|
102
110-4020 Viking Way Richmond, British Columbia Canada V6V 2N2 | Tel: 604.821.2800 Fax: 604.821.2801 www.norsat.com |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Norsat International Inc. (the “Company”) on Form 20F for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Amiee Chan, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
|
|
|
|
Date: | March 18, 2010 |
| “Amiee Chan” |
|
|
| Amiee Chan |
|
|
| President & Chief Executive Officer |
103
Exhibit 31.2 to 20-F submission for Norsat International Inc.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Norsat International Inc. (the “Company”) on Form 20F for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eugene Syho, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
|
|
|
|
Date: | March 18, 2010 |
| “Eugene Syho” |
|
|
| Eugene Syho |
|
|
| Chief Financial Officer |
|
|
|
|
104
Exhibit 32.1 to 20-F submission for Norsat International Inc.
CERTIFICATION PURSUANT TO
SECTION 13(a) or 15(d) OF THE EXCHANGE ACT
I, Amiee Chan, certify that:
1. I have reviewed this annual report on Form 20-F Norsat International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
|
|
|
|
Date: | March 18, 2010 |
| “Amiee Chan” |
|
|
| Amiee Chan |
|
|
| President & Chief Executive Officer |
105
Exhibit 32.2 to 20-F submission for Norsat International Inc.
CERTIFICATION PURSUANT TO
SECTION 13(a) or 15(d) OF THE EXCHANGE ACT
I, Eugene Syho, certify that:
1. I have reviewed this annual report on Form 20-F Norsat International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
|
|
| |
Date: | March 18, 2010 |
| “Eugene Syho” |
|
|
| Eugene Syho |
|
|
| Chief Financial Officer |
106