NORSAT INTERNATIONAL INC.
Interim Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended and as at September 30, 2011
(Expressed in US dollars)
Norsat International Inc. Interim Consolidated Statements of Financial Position (Expressed in US Dollars - unaudited) | ||||||||||
Notes | September 30, 2011 | December 31, 2010 | ||||||||
(Note 21) | ||||||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 4,353,242 | $ | 6,315,043 | ||||||
Short term investments | 65,694 | 39,030 | ||||||||
Trade and other receivables | 6 | 7,929,209 | 4,562,606 | |||||||
Inventories | 8 | 8,914,266 | 5,727,989 | |||||||
Prepaid expenses and other |
| 669,799 | 590,451 | |||||||
| 21,932,210 | 17,235,119 | ||||||||
Non-current assets |
| |||||||||
Property and equipment, net | 9 | 1,332,156 | 958,649 | |||||||
Intangible assets, net | 10 | 9,449,238 | 340,258 | |||||||
Goodwill | 4 | 5,148,418 | — | |||||||
Long-term prepaid expenses and other |
| 9,340 | 9,340 | |||||||
Deferred income tax assets | 16 | 1,785,031 | 1,870,723 | |||||||
| 17,724,183 | 3,178,970 | ||||||||
Total assets |
| $ | 39,656,393 | $ | 20,414,089 | |||||
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LIABILITIES |
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Current liabilities |
| |||||||||
Trade and other payables |
| $ | 3,979,404 | $ | 1,574,336 | |||||
Accrued liabilities |
| 1,774,068 | 1,128,016 | |||||||
Provisions | 13 | 182,652 | 141,813 | |||||||
Interest bearing loans and borrowings | 12 | 3,000,000 | — | |||||||
Taxes payable |
| 1,226,404 | 139,775 | |||||||
Deferred revenue |
| 951,056 | 1,201,250 | |||||||
| 11,113,584 | 4,185,190 | ||||||||
Non-current liabilities |
| |||||||||
Interest bearing loans and borrowings | 12 | 7,141,522 | — | |||||||
Long-term deferred revenue |
| 196,542 | 395,720 | |||||||
Deferred income tax liabilities | 16 | 2,648,231 | — | |||||||
Promissory note payable | 4 | 570,402 | — | |||||||
| 10,556,697 | 395,720 | ||||||||
Total liabilities |
| 21,670,281 | 4,580,910 | |||||||
SHAREHOLDERS’ EQUITY |
| |||||||||
Issued capital | 14 | 39,850,648 | 37,447,180 | |||||||
Contributed surplus | 14 | 3,764,037 | 3,718,244 | |||||||
Accumulated other comprehensive income |
| (934,831 | ) | — | ||||||
Deficit |
| (24,693,742 | ) | (25,332,245 | ) | |||||
Total shareholders’ equity |
| 17,986,112 | 15,833,179 | |||||||
Total liabilities and shareholders’ equity |
| $ | 39,656,393 | $ | 20,414,089 |
“ Fabio Doninelli” | “James Topham” | |
Board of Director | Board of Director |
2
Norsat International Inc. Interim Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) (Expressed in US Dollars - unaudited) | ||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Notes | 2011 | 2010 | 2011 | 2010 | ||||||||||||
(Note 21) | (Note 21) | |||||||||||||||
Revenue | 17 | $ | 11,380,633 | $ | 4,491,708 | $ | 28,739,061 | $ | 14,577,064 | |||||||
Cost of sales | 8 | 6,301,086 | 2,353,774 | 16,225,686 | 7,441,472 | |||||||||||
Gross profit | 17 | 5,079,547 | 2,137,934 | 12,513,375 | 7,135,592 | |||||||||||
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Expenses: |
| |||||||||||||||
Selling, general and administrative expenses |
| 3,041,830 | 1,331,604 | 8,891,498 | 4,639,718 | |||||||||||
Product development, net | 7 | 339,109 | 67,047 | 858,695 | 197,746 | |||||||||||
Amortization |
| 393,087 | 85,318 | 1,097,183 | 238,898 | |||||||||||
| 3,774,026 | 1,483,969 | 10,847,376 | 5,076,362 | ||||||||||||
Earnings before other expenses |
| 1,305,521 | 653,965 | 1,665,999 | 2,059,230 | |||||||||||
| ||||||||||||||||
Gain on disposal of property and equipment |
| — | (36,500 | ) | — | (29,396 | ) | |||||||||
Interest and bank charges |
| 176,461 | 11,071 | 471,618 | 47,434 | |||||||||||
Impairment of assets |
| — | 108,591 | — | 108,591 | |||||||||||
Loss (gain) on foreign exchange |
| (548,758 | ) | (37,431 | ) | (558,864 | ) | 2,043 | ||||||||
Earnings before income taxes |
| 1,677,818 | 608,234 | 1,753,245 | 1,930,558 | |||||||||||
| ||||||||||||||||
Current income tax expense | 16 | 426,458 | — | 959,390 | — | |||||||||||
Deferred income tax expense | 16 | 148,409 | — | 162,551 | — | |||||||||||
Net earnings for the period |
| $ | 1,102,951 | $ | 608,234 | $ | 631,304 | $ | 1,930,558 | |||||||
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Other comprehensive income (loss) |
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Exchange differences on translation of operations |
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in currencies other than U.S. dollars |
| (1,319,870 | ) | — | (934,831 | ) | — | |||||||||
Total comprehensive income (loss) for the period |
| $ | (216,919 | ) | $ | 608,234 | $ | (303,527 | ) | $ | 1,930,558 | |||||
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Net earnings per share |
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Basic | 15 | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.04 | |||||||
Diluted | 15 | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.04 | |||||||
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Weighted average number of shares outstanding |
| |||||||||||||||
Basic | 15 | 58,350,902 | 53,438,941 | 57,954,304 | 53,568,013 | |||||||||||
Diluted | 15 | 58,379,732 | 53,551,178 | 58,034,776 | 53,735,597 |
3
Norsat International Inc. Interim Consolidated Statement of Changes in Shareholders’ Equity (Expressed in US Dollars - unaudited) | |||||||||||||||||||
Notes | Issued capital | Contributed surplus | Accumulated other comprehensive income | Deficit | Total equity | ||||||||||||||
As at January 1, 2011 | $ | 37,447,180 | $ | 3,718,244 | $ | — | $ | (25,332,245 | ) | $ | 15,833,179 | ||||||||
Net earnings for the period | — | — | — | 631,304 | 631,304 | ||||||||||||||
Other comprehensive income (loss) | — | — | (934,831 | ) | — | (934,831 | ) | ||||||||||||
Total | 37,447,180 | 3,718,244 | (934,831 | ) | (24,700,941 | ) | 15,529,652 | ||||||||||||
Shares repurchased | 14 | (35,113 | ) | — | — | 7,199 | (27,914 | ) | |||||||||||
Exercise of options | 14 | 3,453 | (1,026 | ) | — | — | 2,427 | ||||||||||||
Exercise of warrants | 14 | 49,436 | (19,304 | ) | — | — | 30,132 | ||||||||||||
Shares issued under ESOP | 14 | 348,792 | — | — | — | 348,792 | |||||||||||||
Stock-based compensation | 14 | — | 66,123 | — | — | 66,123 | |||||||||||||
Acquisition of subsidiary | 4 & 14 | 2,036,900 | — | — | — | 2,036,900 | |||||||||||||
At September 30, 2011 |
| $ | 39,850,648 | $ | 3,764,037 | $ | (934,831 | ) | $ | (24,693,742 | ) | $ | 17,986,112 |
Issued capital | Contributed | Accumulated | Deficit | Total equity | ||||||||||||
As at January 1, 2010 | $ | 37,401,639 | $ | 3,682,068 | $ | — | $ | (27,478,665 | ) | $ | 13,605,042 | |||||
Net earnings for the period | — | — | — | 1,930,558 | 1,930,558 | |||||||||||
Total | 37,401,639 | 3,682,068 | — | (25,548,107 | ) | 15,535,600 | ||||||||||
Shares repurchased | (318,102 | ) | — | — | 6,279 | (311,823 | ) | |||||||||
Shares issued under stock appreciation rights | 9,614 | — | — | — | 9,614 | |||||||||||
Exercise of options | 52,546 | (52,546 | ) | — | — | — | ||||||||||
Shares issued under ESOP | 133,019 | — | — | — | 133,019 | |||||||||||
Share issuance cost related to ESOP | (2,196 | ) | — | — | — | (2,196 | ) | |||||||||
Stock-based compensation | — | 81,051 | — | — | 81,051 | |||||||||||
At September 30, 2010 | $ | 37,276,520 | $ | 3,710,573 | $ | — | $ | (25,541,828 | ) | $ | 15,445,265 |
4
Norsat International Inc. Interim Consolidated Statements of Cash Flows (Expressed in US Dollars - unaudited) | ||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Notes | 2011 | 2010 | 2011 | 2010 | ||||||||||||
(Note 21) | ||||||||||||||||
Cash and cash equivalents provided by (used in) | ||||||||||||||||
Operating activities: | ||||||||||||||||
Net earnings for the period | $ | 1,102,951 | $ | 608,234 | $ | 631,304 | $ | 1,930,558 | ||||||||
Income taxes paid | (63,290 | ) | — | (795,546 | ) | — | ||||||||||
Non-cash adjustments to reconcile net earnings to net cash flows: | ||||||||||||||||
Amortization | 393,087 | 85,318 | 1,097,183 | 238,898 | ||||||||||||
Foreign exchange loss (gain) | (153,814 | ) | (37,431 | ) | (8,305 | ) | 2,043 | |||||||||
Loan acquisition costs amortization | 7,065 | — | 17,138 | — | ||||||||||||
Gain on disposal of property and equipment | — | (36,500 | ) | — | (29,396 | ) | ||||||||||
Impairment of assets | — | 108,591 | — | 108,591 | ||||||||||||
Current income tax | 16 | 426,458 | — | 959,390 | — | |||||||||||
Deferred income tax | 16 | 148,409 | — | 162,551 | — | |||||||||||
Stock-based compensation | 14 | 52,298 | 26,783 | 66,123 | 90,666 | |||||||||||
Accretion of promissory notes |
| 25,656 | — | 67,465 | — | |||||||||||
Government contribution | 7 | (187,565 | ) | (256,939 | ) | (761,400 | ) | (831,222 | ) | |||||||
Changes in non-cash working capital | 18 | (1,391,020 | ) | (557,176 | ) | 432,445 | (1,312,529 | ) | ||||||||
Net cash flows from (used in) operating actitivies |
| 360,235 | (59,120 | ) | 1,868,348 | 197,609 | ||||||||||
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Investing activities: |
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Purchase of intangible assets, property and equipment |
| (26,613 | ) | — | (190,154 | ) | (16,571 | ) | ||||||||
Proceeds from sale of property and equipment |
| — | 36,500 | — | 61,500 | |||||||||||
Acquisition of subsidiary, net of cash acquired | 4 | — | — | (15,235,954 | ) | — | ||||||||||
Net cash flows from (used in) investing activities |
| (26,613 | ) | 36,500 | (15,426,108 | ) | 44,929 | |||||||||
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Financing activities: |
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Repurchase of common shares | 14 | (27,656 | ) | (5,009 | ) | (27,656 | ) | (311,824 | ) | |||||||
Share issuance costs | 14 | (260 | ) | — | (260 | ) | (2,196 | ) | ||||||||
Proceeds from interest bearing borrowings | 12 | — | — | 11,892,959 | — | |||||||||||
Proceeds from shares issued under ESOP | 14 | — | — | 348,792 | 133,019 | |||||||||||
Proceeds from exercising warrants and options | 14 | — | — | 32,559 | — | |||||||||||
Proceeds from government contributions | 7 | 262,624 | — | 1,127,888 | 892,666 | |||||||||||
Repayment of interest bearing borrowings | 12 | (600,000 | ) | — | (1,600,000 | ) | — | |||||||||
Net cash flows from (used in) financing activities |
| (365,292 | ) | (5,009 | ) | 11,774,282 | 711,665 | |||||||||
Effect of foreign currency translation on |
| |||||||||||||||
cash and cash equivalents |
| (192,385 | ) | 15,911 | (178,323 | ) | (45,333 | ) | ||||||||
Increase (decrease) in cash and cash equivalents |
| (224,055 | ) | (11,718 | ) | (1,961,801 | ) | 908,870 | ||||||||
Cash and cash equivalents, beginning of period |
| 4,577,297 | 5,635,232 | 6,315,043 | 4,714,644 | |||||||||||
Cash and cash equivalents, end of period |
| $ | 4,353,242 | $ | 5,623,514 | $ | 4,353,242 | $ | 5,623,514 |
5
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
1. Nature of Business
The Company is incorporated under the laws of British Columbia, Canada, and its registered office is Suite 110 – 4020 Viking Way, Richmond, British Columbia, Canada. The Company’s business operates primarily through three business segments – Antenna and Radio Frequency Conditioning Products (Sinclair Division), Satellite Systems and Microwave Products. The Company also has three additional segments which have limited activity – Maritime Solutions, Wireless Networks, and Norsat Capital.
2. Basis of Preparation
The unaudited interim consolidated financial statements, including comparatives, have been prepared in accordance with IAS 34 “Interim Financial Reporting” and IFRS 1 “First Time Adoption of International Financial Reporting Standards”. The Company’s first annual consolidated financial statements under IFRS will be presented for the year ending December 31, 2011. The accounting policies adopted in these interim financial statements are consistent with the accounting policies the Company expects to adopt in its first IFRS consolidated financial statements for the year ending December 31, 2011, and are based on IFRS as issued by the International Accounting Standards Board that the Company expects to be applicable at that time.
The Company’s date of transition to IFRS and its opening IFRS balance sheet is as at January 1, 2010.
These interim consolidated financial statements do not include all disclosures required by IFRS for annual consolidated financial statements and accordingly should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2010 presented under Canadian generally accepted accounting principles and in conjunction with the IFRS transition disclosures in note 21 to these interim consolidated financial statements.
These interim consolidated financial statements are presented in United States Dollars, except when otherwise indicated.
The results for the three and nine months ended September 30, 2011 may not be indicative of the results that may be expected for the full year or any other period.
3. Significant Accounting Policies
The consolidated financial statements have been prepared under the historical cost convention, except for revaluation of certain financial instruments. The Company’s principal accounting policies are outlined below:
a)
Basis of Consolidation
The consolidated financial statements comprise the financial statements of the Company and its wholly owned subsidiaries, which are as follows:
Ø
Norsat International (America), Inc.
Ø
Norsat International (United Kingdom) Ltd.
Ø
Norsat Korea Ltd.
Ø
Norsat Capital (formerly 0841954 BC Ltd.)
Ø
Norsat S.A.
Ø
Sinclair Technologies Holding Inc.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All significant intercompany balances and transactions have been eliminated.
6
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
b)
Business Combinations and Goodwill
Business combinations that occurred prior to January 1, 2010 were not accounted for in accordance with IFRS 3Business Combinations and IAS 27Consolidated and Separate Financial Statements in accordance with the IFRS 1First-time Adoption of International Financial Reporting Standards exemption discussed further in note 21.
Business combinations are accounted for using the acquisition method. The cost of the business combination is measured as the aggregate of the consideration transferred, measured at the acquisition date at fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the appropriate share of the acquirer’s identifiable net assets. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3Business Combinations are recognized at their fair values at the acquisition date. Acquisition costs are expensed in the period in which they are incurred.
Goodwill is initially measured at cost being the excess of the consideration transferred over the net identifiable assets acquired and liabilities assumed. If the consideration transferred is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in the Consolidated Statement of Earnings (Loss) and Comprehensive Income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
c)
Use of Estimates
The preparation of consolidated financial statements in conformity with IFRS requires the Company’s management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and notes thereto. Actual amounts may ultimately differ from these estimates.
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, impairment of non-financial assets, valuation of deferred tax assets, useful lives for depreciation and amortization, share-based payment, allocation of purchase price of acquisitions, selling prices, fair value of revenues, provisions for warranties and income taxes.
d)
Foreign Currency Translation
The Company’s consolidated financial statements are presented in United States dollars, which is also the Company’s functional currency. Each entity of the Company determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency and presented in United States dollars.
Transactions in foreign currencies are initially recorded by the Company’s entities at their respective functional currency rates prevailing at the date of transaction.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange prevailing at the reporting date.
7
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Non-monetary items that are measured in terms of historical costs in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates as at the date when fair value is determined.
Statement of earnings items are translated at the rate in effect at the time of the transaction and for the subsidiaries, are translated using average exchange rates for the period where the rates do not fluctuate significantly and the rate in effect on the date of the transaction where the rate over the period does fluctuate significantly.
All gains and losses on translation of these foreign currency transactions are included in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
e)
Share-based Compensation
The Company grants stock options to buy common shares of the Company to directors, senior officers, employees and service providers pursuant to an incentive share option plan described in note 14. The Board of Directors grants such options for periods of up to 5 years, with vesting periods determined at its sole discretion and at prices equal to the closing market price on the day the options were granted.
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 with a corresponding increase in equity. The amount recognized as an expense is adjusted to reflect the number of share options expected to eventually vest.
f)
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid interest bearing term deposits that are readily convertible to known amounts of cash with terms to maturity of up to 3 months. The cash and cash equivalents act as the Company’s primary source of cash and fluctuate directly as a result of its cash flows from operating, investing and financing activities.
g)
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.
h)
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, periodically throughout the 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.
8
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
i)
Prepaid Expenses and Other
Included in short-term 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.
Long-term prepaid expenses and other include other deposits of greater than one year.
j)
Inventories
Parts and supplies inventory is 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. Finished goods and work in process inventories include parts and supplies, 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, government assistance, and net of accumulated depreciation. 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 |
When significant parts of property and equipment are required to be replaced in intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciation, respectively. When a major inspection is performed, its cost is recognized in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income as incurred.
Leasehold improvements are amortized over the shorter of the term of the lease or their estimated useful lives.
The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end.
l)
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.
The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income.
9
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Gains or losses arising from disposal of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the Consolidated Statement of Earnings/(Loss) and Comprehensive Income when the asset is derecognized.
The Company records amortization of intangible assets on a straight-line basis at the following annual rates, which approximate the useful lives of the assets:
Assets |
| Period |
|
|
|
Software |
| 1 to 3 years |
Customer relationships |
| 5 to 12 years |
Product designs |
| 20 years |
Brand |
| Indefinite |
Other |
| 1.5 to 15 years |
m)
Impairment of Non-Financial Assets
The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount.
The recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairment losses are recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) for the period.
An impairment loss is reversed if there is an indication that an impairment loss recognized in prior periods may no longer exist. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized previously. Such reversal is recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
10
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
The following criteria are also applied in assessing impairment of specific assets:
Goodwill is tested for impairment annually or when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash generating unit is less than their carrying amount an impairment loss is recognized to the extent the carrying amount exceeds the recoverable amount. Impairment losses relating to goodwill are not reversed in future periods.
Intangible assets with indefinite lives are tested for impairment annually either individually or at the cash generating unit level, as appropriate, or when circumstances indicate that the carrying value may be impaired.
n)
Deferred Revenue
Revenue that has been paid for by customers but will qualify for recognition within the next year under the Company’s policies is reflected in current liabilities 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.
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 in non-current liabilities as long-term deferred revenue (revenue that can be recognized in more than one year). Included in long-term deferred revenue are extended warranty and other services provided by the Company to its customers.
o)
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net earnings (loss) for the period and other comprehensive income (loss). Included in accumulated other comprehensive income are unrealized foreign exchange amounts on the translation of certain entities’ functional currency to United States dollars.
p)
Financial Instruments
Financial assets
Financial assets are classified into one of four categories:
Ø
financial assets at fair value through profit or loss (“FVTPL”);
Ø
held-to-maturity investments;
Ø
loans and receivables; and
Ø
available-for-sale financial assets.
The Company determines the classification of its financial assets at initial recognition, depending on the nature and purpose of the financial asset.
All financial assets, except financial assets at fair value through profit or loss, are recognized initially at fair value plus directly attributable transaction costs.
The Company’s financial assets include cash and cash equivalents, short term investments, and trade and other receivables.
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.
11
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
The subsequent measurement of financial assets depends on their classification as follows:
i.
Financial assets at FVTPL
Financial assets are classified as FVTPL when the financial asset is held for trading or is designated upon initial recognition as FVTPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term, it is part of an identified portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking or it is a derivative that is not designated as an effective hedging instrument.
Financial assets classified as FVTPL are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss)
.
The Company has not designated any financial assets as FVTPL.
ii.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Company has the positive intention and ability to hold it to maturity. After initial measurement held-to-maturity investments are measured at amortized cost using the effective interest method. The losses arising from impairment are recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income.
The Company has not designated any financial assets as held-to-maturity investments.
iii.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest method. The impairment loss of receivables is based on a review of all outstanding amounts periodically through out the fiscal year. Bad debts are written off during the period in which they are identified. The losses arising from impairment are recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Interest income is recognized by applying the effective interest rate.
The effective interest method calculates the amortized cost of a financial asset and allocates interest income over the corresponding period. The effective interest rate is the rate that discounts estimated future cash receipts over the expected life of the financial asset, or, where appropriate, a shorter period.
The Company has classified cash and cash equivalents, short-term investments, and trade and other receivables as loans and receivables.
iv.
Available-for-sale financial assets
Non-derivative financial assets are designated as available–for-sale or are prescribed to this classification if not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. After initial measurement, available-for-sale financial assets are subsequently measured at fair value with unrealized gains or losses recognized as other comprehensive income in the available-for-sale reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) and removed from the available-for-sale reserve.
12
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
The Company has not designated any financial assets as available-for-sale assets.
v.
De-recognition
A financial asset is derecognized when the rights to receive cash flows from the asset have expired.
vi.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each reporting date. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.
Objective evidence of impairment could include the following:
Ø
significant financial difficulty of the issuer or counterparty;
Ø
default or delinquency in interest or principal payments; or
Ø
it has become probable that the borrower will enter bankruptcy or financial reorganization.
For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the financial asset’s original effective interest rate.
The carrying amount of all financial assets, excluding trade receivables, is directly reduced by the impairment loss. The carrying amount of trade receivables are reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
Financial liabilities
Financial liabilities are classified as either financial liabilities at fair value through profit or loss or other financial liabilities. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value, net of transaction cost except FVTPL.
The financial liabilities include trade and other payables, accrued liabilities, interest bearing loans and borrowings, and promissory note payable.
Subsequent measurement of financial liabilities depends on their classification as follows:
i.
FVTPL
FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
13
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative instruments that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Gains and losses on liabilities held for trading are recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
The Company has not designated any financial liabilities upon initial recognition as FVTPL.
ii.
Other financial liabilities
After initial recognition at fair value less transaction costs, other financial liabilities are subsequently measured at amortized cost using the effective interest method.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the corresponding period. The effective interest rate is the rate that discounts estimated future cash payments over the expected life of the financial liability.
Gains and losses are recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
The Company has classified trade and other payables, accrued liabilities and interest bearing loans and borrowings and promissory note payable as other financial liabilities.
iii.
De-recognition
A financial liability is derecognized when the obligation under the liability is discharged, cancelled, or expired.
The carrying value of financial liabilities approximates their fair value due to their immediate or short-term to maturity, or their ability for liquidation at comparable amounts.
q)
Revenue Recognition
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. 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 on a hierarchy of selling prices:
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, or
Ø
If neither VSOE nor TPE exist, then management’s best estimate of selling price for the deliverable is used.
14
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
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 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 of selling price would not be possible.
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 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.
Extended warranty of 1 to 3 years can be purchased separately by customers. Revenue on extended warranty is 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 received 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).
15
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
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.
r)
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.
s)
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.
t)
Income Taxes
Income tax expense consists of current and deferred income tax expense. Income tax expense is recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
Current income tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.
Deferred income taxes are recorded using the statement of financial position liability method. Under this method, deferred income tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability is settled.
The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that substantive enactment occurs.
A deferred income tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a future tax asset will be recovered, it provides a valuation allowance against the excess.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, when they relate to income taxes levied by the same taxation authority, and when the Company intends to settle its current tax assets and liabilities on a net basis.
The Company accounts for income tax credits in accordance with IAS 12 Income taxes.
16
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
u)
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period.
Diluted net earnings per share is computed similar to basic net earnings per shares, except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of stock options and warrants at the beginning of the reporting period, if dilutive. The number of additional shares is calculated assuming that outstanding stock options and warrants were exercised and the proceeds from such exercises were used to repurchase common shares at the average market price during the reporting 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 net earnings.
v)
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the Consolidated Statement of Earnings (Loss) and Comprehensive Income, net of any reimbursement.
4. Business Combination
Acquisition of Sinclair Technologies Holdings Inc.
On January 21, 2011, the Company acquired 100% of the outstanding shares of Sinclair Technologies Holdings Inc. (“Sinclair”), a private company based in Aurora, Ontario specializing in the manufacture of antenna and radio frequency conditioning products.
The Company believes the acquisition of Sinclair complements the Company’s core businesses and supports the Company’s goal of becoming a premium provider of broadband communication solutions for remote and austere regions. It is expected that Sinclair will help diversify the Company’s markets into the commercial space and into the municipal government level. In addition, the Company believes that combining forces with Sinclair may create opportunities to cross sell its customer base, resell Sinclair’s products using its Microwave products division, potentially have target design antennas for its maritime solutions and wireless networks divisions, and expose Sinclair’s products to its relationships in Europe and the military markets.
The identified assets, liabilities, and purchase price below are a result of management’s best estimates and assumptions after taking into account all relevant information available. The Company conducted studies and analysis of the acquired assets and liabilities to arrive at the final purchase price allocation below.
The assessed fair value of the identifiable assets and liabilities of Sinclair as at January 21, 2011 are as follows:
17
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Fair value recognized on acquisition | ||||
Assets | ||||
Cash and cash equivalents | $ | 726,102 | ||
Short-term investments | 29,997 | |||
Trade and other receivables | 2,300,607 | |||
Inventories | 4,844,883 | |||
Prepaid expenses and other | 152,856 | |||
Property and equipment, net | 668,406 | |||
Intangible assets | 10,068,000 | |||
Deferred income tax assets | 66,993 | |||
Total Assets | 18,857,844 | |||
Liabilities | ||||
Trade and other payables | 2,064,882 | |||
Deferred income tax liabilities | 2,910,040 | |||
Taxes payable | 741,369 | |||
Total Liabilities | 5,716,291 | |||
Total identifiable net assets at fair value | $ | 13,141,553 | ||
Goodwill on acquisition of Sinclair | 5,360,340 | |||
Purchase consideration transferred | $ | 18,501,893 |
The Company estimates that all cash flows related to trade and other receivables will be collected.
Purchase consideration
The fair value of the purchase consideration is summarized as follows:
Cash | $ | 15,962,056 | ||
Shares issued, at fair value | 2,036,900 | |||
Promissory notes payable | 502,937 | |||
Total purchase consideration | $ | 18,501,893 |
The Company paid cash consideration of $15,962,056, financed from the Company’s cash and cash equivalents in the amount of $3,962,056 and $12,000,000 in debt financing from its principal banker, 4,028,932 common shares issued from treasury with a fair value of $2,036,900 and promissory notes with a total face value of $750,000 plus interest at 3% per annum with a fair value of $502,937. The issuance of the common shares and the payment of promissory notes are contingent upon Sinclair achieving certain financial metrics.
The Company discounted the promissory notes with a total face value of $750,000 using a discount rate of 20% for the duration of its maturity. The 4,028,932 common shares were discounted compared to the acquisition date’s listed stock exchange price using the Black-Scholes Option Pricing model. The assumptions used for the fair value discount of the common shares were as follows:
18
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Risk free interest rate | 1.70% |
Expected life | 1.57 years |
Vesting period | Immediately |
Expected volatility | 60.4% |
Expected dividends | nil |
The Company paid its principal banker $108,000 in financing fees to acquire the $12,000,000 debt financing. The $108,000 was capitalized as part of the cost of the debt and is being amortized over the term (Note 12).
The Company has incurred approximately $800,000 (2011 - $500,000, 2010 - $300,000) transaction costs to date in relation to the acquisition that has been recognized in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
$1,000,000 of the cash consideration is held in escrow and acts as a security for certain events should the Company be subject to any liabilities, claims or similar arising from representation or warranties made by the vendors. The $1,000,000, less claimed amounts, if any, is releasable to the vendors on January 21, 2013.
The common shares are held in escrow and will be released to the vendors, at a rate of 100%, 75% or 0%, subject to Sinclair achieving certain financial metrics for the year ending December 31, 2011. The Company currently does not have sufficient information to measure the final number of shares to be released to the vendors.
The promissory notes are held in escrow and will be released to the vendors, at a rate of 100%, 75% or 0%, subject to Sinclair achieving certain financial metrics for the year ended December 31, 2012. The Company currently does not have sufficient information to measure the final amount of promissory notes to be released to the vendors. The value of the promissory notes as at September 30, 2011 was $570,402 (December 31, 2011- $0).
The breakdown of consolidated revenue and consolidated net earnings of Norsat International Inc. and Sinclair for the nine months ended September 30, 2011 were as follows:
Revenue | Net earnings/(loss) | ||||||
Norsat International Inc. (without Sinclair) | $ | 13,760,716 | $ | (1,320,554 | ) | ||
Sinclair Holdings Technologies Inc. | 14,978,345 | 1,951,858 | |||||
Total | $ | 28,739,061 | $ | 631,304 |
The following pro-forma information has been prepared for the Company as if the acquisition occurred on January 1, 2011:
Revenue | Net earnings | ||||||
Norsat International Inc. (Consolidated) | $ | 29,439,061 | $ | 904,158 |
Goodwill from the acquisition of Sinclair Technologies Holdings Inc. for tax purposes is not deductible. The year-to-date change to Goodwill on acquisition of Sinclair is as follows:
Goodwill on acquisition | $ | 5,360,340 | ||
Foreign exchange translation | (211,922 | ) | ||
Goodwill as at September 30, 2011 | $ | 5,148,418 |
19
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
5. 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 Company’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 Statement of Financial Position in the shareholders’ equity section, the promissory note and the operating line of credit (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 September 30, 2011 shareholder’s equity was $17,986,112 (December 31, 2010 - $15,833,179).
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 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, 2012 (Note 7).
For the nine months ended September 30, 2011, there were no changes in the Company's approach to capital management.
As at September 30, 2011 the Company has the following externally imposed capital requirements under its operating line of credit agreements (Note 11) and the acquisition loan agreement (Note 12):
Ø
working capital ratio (current assets divided by current liabilities) cannot be less than 1.25:1.00 – calculated quarterly,
Ø
debt to tangible net worth ratio (total liabilities less cash on hand and deferred tax liabilities divided by the sum of share capital, contributed surplus, accumulated other comprehensive income, retained earnings less intangible assets and goodwill) cannot exceed
5.65:1.00 as at December 31, 2011
4.35:1.00 as at March 31, 2012
3.65:1.00 as at June 30, 2012
3.15:1.00 as at September 30, 2012, and
2.50:1.00 thereafter – calculated quarterly
Ø
debt service coverage ratio cannot be less than 1.00. Based on EBITDA less unfunded capital expenditures – calculated annually beginning December 31, 2012, and
Ø
funded debt to EBITDA less unfunded capital expenditures (“Debt to EBITDA Ratio”) cannot exceed 5.45:1.00 for the three months ending March 31, 2012
3.35:1.00 for the three months ending June 30, 2012
3.00:1.00 for the three months ending September 30, 2012 and December 31, 2012, and
2.50:1.00 thereafter – calculated quarterly, on a rolling 12 month basis.
EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. Unfunded capital expenditures are defined as capital expenditures which are not financed by external sources, such as being financed by the Company’s own cash and cash equivalents. Funded debt includes only the acquisition loan, see Note 12 – Acquisition loan.
20
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
As at September 30, 2011, the Company is in compliance with its bank covenants.
6. Financial Instruments and Risk Exposures
Fair value measurement
The Company’s financial assets include cash and cash equivalents, short term investments, and trade and other receivables. The Company’s financial liabilities include trade and other accounts payable, accrued liabilities, interest bearing loans and borrowings, and promissory note payable.
The Company has classified its cash and cash equivalents, short-term investments, and trade and other receivables as loans and receivables, measured at amortized cost using the effective interest rate method. Accounts payable, interest bearing loans and borrowings, promissory note payable and accrued liabilities are classified as other financial liabilities, measured at amortized cost using the effective interest rate method.
The carrying value of the Company’s financial assets and liabilities is considered to be a reasonable approximation of fair value due to their immediate or short term maturity, or their ability for liquidation at comparable amounts.
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 September 30, 2011, the balance of the allowance for doubtful accounts was $80,920 (December 31, 2010 - $34,910).
Pursuant to their respective terms, net accounts receivable was aged as follows as at September 30, 2011and December 31, 2010:
September 30, 2011 | December 31, 2010 | ||||||
0-30 days | $ | 5,305,163 | $ | 1,647,657 | |||
31-60 days | 1,535,821 | 1,578,256 | |||||
61-90 days | 675,666 | 398,685 | |||||
Greater than 90 days | 412,559 | 938,008 | |||||
Total accounts receivable | $ | 7,929,209 | $ | 4,562,606 |
There is a possibility of increased customer credit risk due to the ongoing global recessionary trends. As at September 30, 2011, the Company’s trade accounts receivable are made up of approximately 16% (December 31, 2010 – 39%) government trade receivables and the balance of the outstanding accounts receivable are spread over a large number of customers.
21
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
The Company may also have credit risk relating to cash and cash equivalents, which it manages by dealing with large chartered banks 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 as at September 30, 2011 totaled $4,353,242 (December 31, 2010 -$6,315,043), and accounts receivable of $7,929,209 (December 31, 2010 - $4,562,606), representing the maximum exposure to credit risk of these financial assets.
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 September 30, 2011, the Company had cash and cash equivalents of $4,353,242, short term investments of $65,694 and trade and other receivables of $7,929,209 for a total of $12,348,145 which will cover its short-term financial obligations from its trade and other payables of $3,979,404, accrued liabilities of $1,774,068, provisions of $182,652, annual minimum interest bearing loans and borrowings repayments of $3,000,000 and taxes payable of $1,240,543 which total $10,162,528. The liquidity and maturity timing of these assets are adequate for the settlement of the short-term financial obligations.
Contractual Obligations | Less than 1 year | 1 to 3 years | Total | |||||||
Interest bearing loans and borrowings | $ | 3,000,000 | $ | 7,141,522 | $ | 10,141,522 | ||||
Promissory note payable | — | 750,000 | 750,000 | |||||||
Accrued liabilities | 1,774,068 | — | 1,774,068 | |||||||
Trade and other payables | 3,979,404 | — | 3,979,404 | |||||||
Total | $ | 8,753,472 | $ | 7,891,522 | $ | 16,644,994 |
Currency risk
Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates.
The Company is exposed to currency risk as a result of components of cost being denominated in currencies other than the United States dollar, primarily the Canadian dollar. The Company holds cash and has liabilities (primarily trade and other payables, accrued liabilities and provisions) in currencies other than the United States dollar, primarily the Canadian dollar.
The Company manages currency risk by holding cash in foreign currencies to support forecasted foreign currency denominated liabilities and does not use derivative instruments to reduce its exposure to foreign currency risk.
A 1% appreciation (depreciation) in the United States dollar price of Canadian dollars would result in gain (loss) of approximately $167,000 (December 31, 2010 - $9,000).
22
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
7. 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 (see Note 22 Subsequent Event).
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 (see Note 22 Subsequent Event). 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). As at September 30, 2011, the Company did not accrue any liability for repayment as the amount can not yet be determined.
For the three and nine month period ended September 30, 2011, the Company recorded $187,565 and $761,400 respectively (three and nine months ended September 30, 2010 - $256,939, $831,222) as a reduction to product development expense in the Consolidated Statement of Earnings (Loss) and Comprehensive Income. Total cash received was $262,624 and $1,127,888 respectively for the three and nine months ended September 30, 2011 (three and nine months ended September 30, 2010 - $0, $892,666). As at September 30, 2011, $209,679 remains in accounts receivable (December 31, 2010 - $592,232).
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 had a life of five years and were 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.
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 Company issued 1,206,811 warrants to TPC with an exercise price of Cdn$1.09 expired.
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;
23
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
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.
Royalties due under the TPC Agreements are recorded and expensed as the related sales occur. The royalty is payable annually within 60 days of the year end. As at September 30, 2011, $64,890 was accrued based upon revenue generated through 2011 (December 31, 2010 - $86,466). The total amount of royalties accrued and paid to September 30, 2011 are $1,187,367.
8. Inventories
September 30, 2011 | December 31, 2010 | ||||||
Parts and supplies | $ | 7,397,895 | $ | 4,927,033 | |||
Work in process | 581,103 | 99,588 | |||||
Finished goods | 2,291,590 | 1,306,724 | |||||
Gross inventory balance (a) | $ | 10,270,588 | $ | 6,333,345 |
For the three and nine month period ended September 30, 2011, the Company recognized inventories of $6,301,086 and $16,225,686 respectively (three and nine months ended September 30, 2010 - $2,353,774, $7,441,472) as expenses.
Changes in the obsolescence provision of the periods presented are as follows:
September 30, 2011 | December 31, 2010 | ||||||
Obsolescence balance, beginning of period | $ | 605,356 | $ | 549,294 | |||
Increase/(Recovery) | 750,966 | 56,062 | |||||
Obsolescence balance, end of period (b) | $ | 1,356,322 | $ | 605,356 | |||
Net inventory balance, end of period (a-b) | $ | 8,914,266 | $ | 5,727,989 |
On January 21, 2011, obsolescence increased by $697,593 due to the acquisition of Sinclair’s inventories.
24
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
9. Property and Equipment, net
Equipment | Furniture and Fixtures | Leasehold Improvements | Total | ||||||||||
Cost | |||||||||||||
Balance as at December 31, 2010 | $ | 875,390 | $ | 134,933 | $ | 672,827 | $ | 1,683,150 | |||||
Additions | 145,521 | 53,930 | 6,495 | 205,946 | |||||||||
Assets acquired (Note 4) | 627,082 | 41,324 | — | 668,406 | |||||||||
Balance as at September 30, 2011 | $ | 1,647,993 | $ | 230,187 | $ | 679,322 | $ | 2,557,502 | |||||
Accumulated Depreciation | |||||||||||||
Balance as at December 31, 2010 | $ | 221,382 | $ | 36,944 | $ | 466,175 | $ | 724,501 | |||||
Depreciation for the period | 331,316 | 72,580 | 96,949 | 500,845 | |||||||||
Balance as at September 30, 2011 | $ | 552,698 | $ | 109,524 | $ | 563,124 | $ | 1,225,346 | |||||
Net book value | |||||||||||||
As at December 31, 2010 | 654,008 | 97,988 | 206,652 | 958,649 | |||||||||
As at September 30, 2011 | $ | 1,095,295 | $ | 120,663 | $ | 116,198 | $ | 1,332,156 | |||||
Software | Customer Relationships | Product Designs | Brand | Other | Total | ||||||||||||||
Cost | |||||||||||||||||||
Balance as at December 31, 2010 | $ | 821,580 | $ | — | $ | — | $ | — | $ | — | $ | 821,580 | |||||||
Additions | 42,328 | 42,328 | |||||||||||||||||
Assets acquired (Note 4) | — | 5,545,000 | 2,986,000 | 1,249,000 | 288,000 | 10,068,000 | |||||||||||||
Foreign exchange translation | — | (101,874 | ) | (137,022 | ) | (57,314 | ) | (13,216 | ) | (309,426 | ) | ||||||||
Balance as at September 30, 2011 | $ | 863,908 | $ | 5,443,126 | $ | 2,848,978 | $ | 1,191,686 | $ | 274,784 | $ | 10,622,482 | |||||||
Accumulated Depreciation | |||||||||||||||||||
Balance as at December 31, 2010 | $ | 481,322 | $ | — | $ | — | $ | — | $ | — | $ | 481,322 | |||||||
Depreciation for the period | 115,332 | 441,074 | 94,966 | — | 40,550 | 691,922 | |||||||||||||
Balance as at September 30, 2011 | $ | 596,654 | $ | 441,074 | $ | 94,966 | $ | — | $ | 40,550 | $ | 1,173,244 | |||||||
Net book value | |||||||||||||||||||
As at December 31, 2010 | 340,258 | — | — | — | — | 340,258 | |||||||||||||
As at September 30, 2011 | $ | 267,254 | $ | 5,002,052 | $ | 2,754,012 | $ | 1,191,686 | $ | 234,234 | $ | 9,449,238 |
11. Operating Line of Credit
The Company has a secured operating line of credit with HSBC Bank (the “Bank”) of Cdn$3.5 million or US$2.8 million subject to an interest rate at the Bank’s prime rate plus 1.35% per annum for amounts outstanding in Canadian dollars and/or the bank’s U.S. base rate plus 1.35% per annum for amounts outstanding in U.S. dollars. The operating line of credit is payable upon demand by the Bank. As at September 30, 2011 and December 31, 2010, the Company had no borrowings outstanding with respect to the operating line of credit.
The Company also has an additional revolving demand note with HSBC in the principal amount of US$950,000 subject to an interest rate of prime plus 1.5% per annum and payable upon demand. As at September 30, 2011 and December 31, 2010, the Company had no borrowing outstanding with respect to the revolving demand note.
25
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
12. Acquisition Loan
On December 22, 2010, the Company secured a non-revolving acquisition loan of Cdn$13,200,000 or US$12,000,000 with HSBC subject to an interest rate at the Bank’s banker’s acceptance rate plus an applicable spread for amounts outstanding in Canadian dollars and/or the Bank’s LIBOR rate plus an applicable spread for amounts outstanding in U.S. dollars. The applicable spread ranges from 1% to 4% depending on the Company’s funded debt to EBITDA ratio determined quarterly on a rolling 12 month basis based on its consolidated financial statements. A portion of the loan is repayable in Canadian dollars and the remaining loan is repayable in U.S. dollars. As at September 30, 2011, the Company’s combined weighted average interest rate and spread rate was 4.08%.
EBITDA is defined as earnings before interest, taxes, depreciation, and amortization.
The acquisition loan is repayable in monthly principal repayments of 1/60th of the original principal balance, together with interest payments. In addition, the Company repays an amount equal to the greater of (a) 5% of the original balance, and (b) 30% of the Company’s net income plus depreciation and amortization, less capital expenditures and less aggregate principal payments made during the relevant fiscal year. The acquisition loan is repayable in full within 48 months of the date of the initial advance, January 21, 2011. The loan is secured by all assets of the Company under a general security assignment.
The Company incurred costs of $108,000 related to the cost of acquiring the loan. These costs were capitalized as part of the cost of the loan and are being amortized over the life of the loan. The unamortized balance as at September 30, 2011 was $89,903.
13. Warranties
A provision is recognized for expected warranty claims on certain products sold during the last two to five years, based on past experience of the level of repairs and returns. It is expected that most of these costs will be incurred in the next financial year and all will have been incurred within two to five years of the reporting date. Assumptions used to calculate the provision for warranties are based on current sales levels and current information available about returns based on the two to five year warranty period.
14. Issued Capital
(a)
Authorized
100,000,000 common shares without par value
(b) Shares issued and outstanding
Shares issued and outstanding |
| Number of shares |
| Amount |
Balance, December 31, 2010 |
| 53,658,909 | $ | 37,447,180 |
Shares issued for acquisition (Note 4) |
| 4,028,932 |
| 2,036,900 |
Shares repurchased and cancelled (Note 14(b) (i)) |
| (51,000) |
| (35,113) |
Shares issued under ESOP (Note 14(b)(ii)) |
| 611,915 |
| 348,792 |
Shares issued, warrants exercised (Note 14(b)(iii)) |
| 62,776 |
| 49,436 |
Shares issued, exercise options (Note 14(c)) |
| 5,000 |
| 3,453 |
Balance, September 30, 2011 |
| 58,316,532 | $ | 39,850,648 |
(b)(i)
On August 26, 2010, the Company obtained regulatory approval to commence a normal course issuer bid to purchase up to a maximum of 5,269,674 of its common shares, representing approximately 10% of the public float as of August 17, 2010, through the facilities of the Toronto Stock Exchange ("TSX"). The Company’s total issued and outstanding common shares were 53,440,245 as of August 17, 2010. The normal course issuer bid commenced on August 30, 2010 and terminated on August 29, 2011.
26
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
During the three months ended September 30, 2011, the Company repurchased 51,000 common shares at a weighted average share price Cdn$0.53 ($0.55) per share under the terms of normal course issuer bid. Other than the period described above, there were no other repurchases under the terms of normal course issuer bid. Fees relating to the normal course issuer bid of $260 reduced share capital. The effects of the shares repurchased during the three months ended September 30, 2011 resulted in a decrease in share capital of $35,113 and a net increase in retained earnings of $7,199.
(b)(ii)
On February 18, 2011, the Company issued and received consideration for 611,915 common shares (the “Private Placement”) in connection with its Employee Share Ownership Plan ("ESOP") offering under the Employee Investment Act (British Columbia) announced on January 27th, 2011.
The Private Placement was approximately 61% subscribed with participation from employees, senior management, and directors.
The Company generated gross proceeds of $348,792 and issued common shares at the price of $0.57 (Cdn$0.568).
The Company’s ESOP offering was open to eligible persons until February 15, 2011. Each eligible employee, full-time contractor and director was offered an equal number of common shares to purchase. The Company's offering under its ESOP was conducted in accordance with the requirements of the Toronto Stock Exchange and the Employee Investment Act (British Columbia).
All of the common shares are subject to a four-month hold period which ended June 19, 2011. During this period, these securities could neither be traded nor were they freely transferable. Of the securities issued under the Private Placement, 74,329 common shares will be held in escrow until February 18, 2014. The escrow requirement applies to employee shareholders resident in British Columbia, who have elected to receive tax credits under the Employee Investment Act (British Columbia). Employee shareholders may seek government approval for an early release from escrow upon the repayment of any tax credits received.
On February 26, 2010, the Company issued and received consideration for 245,554 common shares in connection with its ESOP announced on January 18th, 2010. The Company generated gross proceeds of $133,019 and issued common shares at the price of $0.54 (Cdn$0.555).
(b)(iii)
In January, 2011, 62,776 warrants were exercised at an exercise price of $0.48 per share, for total proceeds of $30,132. On January 12, 2011, all remaining outstanding warrants expired unexercised. The warrants were held by an employee of the Company and a Director of the Company.
During the year ended December 31, 2010, a total of 222,664 warrants were exercised at an exercise price of $0.48. Proceeds of $106,879 were credited to share capital and $68,470 was reclassified from contributed surplus to share capital.
27
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
(c)
Share purchase option plan
The Company has reserved 6,306,505 common shares under its 1999 (amended)incentive share option plan of which 2,539,231 common shares have been utilized. The plan provides for the granting of stock options at the fair market value of the Company at the grant date, with terms to a maximum of ten years and vesting provisions to be determined by the Board of Directors.
Share purchase options outstanding as at December 31, 2010 and September 30, 2011 are as follows:
Share purchase options outstanding | Number of options | Weighted average exercise price Cdn$ |
Balance, December 31, 2010 | 1,518,500 | $ 1.19 |
Granted | 604,000 | 0.78 |
Exercised | (5,000) | 0.47 |
Expired | (15,000) | 0.90 |
Cancelled | (44,000) | 0.82 |
Forfeited | (350,000) | 0.72 |
Balance, September 30, 2011 | 1,708,500 | $ 1.16 |
The following table summarizes information pertaining to the Company’s share purchase options outstanding at September 30, 2011:
| 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$ |
$0.50 to $0.99 | 1,338,000 | 3.17 | 0.72 |
| 430,800 | 0.65 |
$1.00 to $1.49 | 114,400 | 1.50 | 1.37 |
| 114,400 | 1.37 |
$1.50 to $1.99 | 76,600 | 1.33 | 1.50 |
| 76,600 | 1.50 |
$2.50 | 44,875 | 0.17 | 2.50 |
| 44,875 | 2.50 |
$3.40 | 44,875 | 0.17 | 3.40 |
| 44,875 | 3.40 |
$4.50 | 44,875 | 0.17 | 4.50 |
| 44,875 | 4.50 |
$6.15 | 44,875 | 0.17 | 6.15 |
| 44,875 | 6.15 |
| 1,708,500 | 2.65 | 1.16 |
| 801,300 | 1.62 |
The exercise price of all share purchase options granted during the period are equal to the closing market price at the grant date. The Company calculates stock based compensation from the vesting of stock options using the Black Scholes Option Pricing Model with assumptions noted below and records related compensation expense as follows for the three and nine months ended September 30, 2011 and 2010:
|
| For the three months ended September 30, |
| For the nine months ended September 30, | ||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Total compensation (increase in contributed surplus and stock based compensation) | $ | 52,298 | $ | 26,783 | $ | 66,123 | $ | 81,051 |
For the nine months ended September 30, 2010, stock based compensation expense also included $9,614 related to shares issued under stock appreciation rights.
28
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
The weighted average assumptions used to estimate the fair value of options granted during the three and nine months ended September 30 were:
| For the three months ended September 30, | For the nine months ended September 30, | ||
| 2011 | 2010 | 2011 | 2010 |
Risk free interest rate | 1.92% | 2.14% | 2.34% | 2.51% |
Expected life | 3.50 | 3.50 | 3.50 | 3.37 |
Vesting period | 2 years | 2 years | 2 years | 2 years |
Expected volatility | 75% | 79% | 81% | 84% |
Expected dividends | nil | nil | nil | Nil |
Forfeiture rate | 14% | 14.% | 14% | 14% |
A total of 604,000 stock purchase options were granted at an average strike price of Cdn$0.78 and weighted average fair value of Cdn$0.31 during the nine months ended September 30, 2011:
Strike Price | Number of options granted |
Cdn$0.51 | 5,000 |
Cdn$0.52 | 5,000 |
Cdn$0.68 | 5,000 |
Cdn$0.70 | 101,000 |
Cdn$0.72 | 25,000 |
Cdn$0.73 | 101,000 |
Cnd$0.80 | 212,000 |
Cdn$0.86 | 150,000 |
Weighted Average Cdn$0.78 | Total 604,000 |
Options vest in 2 years and expire 5 years from the grant date. A total of 250,000 options were granted to directors and 100,000 to senior management during the nine months ended September 30, 2011.
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 with exercise price of $0.48 and expired on January 12, 2011 is as follows:
Balance, December 31, 2010 | 138,526 |
Warrants exercised | (62,776) |
Warrants expired | (75,750) |
Balance, September 30, 2011 | - |
During the nine months ended September 30, 2011, a total of 62,776 warrants were exercised at a strike price of $0.48. Proceeds of $30,132 were credited to share capital and $19,304 was reclassified from contributed surplus to issued capital. As at September 30, 2011, all remaining warrants had expired and no warrants were outstanding.
29
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
(e) Contributed surplus
Balance, December 31, 2010 | $ | 3,718,244 |
Stock-based compensation expense (Note 14(c)) |
| 66,123 |
Reclassification to issued capital for warrants exercised |
| (19,304) |
Reclassification to issued capital for options exercised |
| (1,026) |
Balance, September 30, 2011 | $ | 3,764,037 |
15. Earnings per Share
The reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations was as follows for the three and nine months ended September 30, 2011 and 2010:
Three month ended September 30, | Nine months ended September 30, | ||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
Numerator | |||||||||||||
Net earnings | $ | 1,102,951 | $ | 608,234 | $ | 631,304 | $ | 1,930,558 | |||||
Effects of dilution form unvested | stock | ||||||||||||
options | — | (22,122 | ) | — | (22,122 | ) | |||||||
Adjusted net earnings | $ | 1,102,951 | $ | 586,112 | $ | 631,304 | $ | 1,908,436 | |||||
Denominator: | |||||||||||||
Weighted average number of shares | |||||||||||||
outstanding used to compute basic EPS | 58,350,902 | 53,438,941 | 57,954,304 | 53,568,013 | |||||||||
Dilution from exercise of stock options | 28,830 | 35,638 | 56,113 | 61,319 | |||||||||
Dilution from exercise of warrants | — | 76,599 | 24,359 | 106,625 | |||||||||
Weighted average number of shares | |||||||||||||
outstanding used to compute diluted | |||||||||||||
EPS | 58,379,732 | 53,551,178 | 58,034,776 | 53,735,597 | |||||||||
Net earnings per share: | |||||||||||||
Basic | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.04 | |||||
Diluted | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.04 |
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 average market price of the Company’s common shares at the end of the periods shown in the table, assumed exercise of those particular stock options and warrants were not included.
30
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
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:
Three month ended September 30, | Nine months ended September 30, | ||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
Earnings before income taxes | $ | 1,677,818 | $ | 608,234 | $ | 1,753,245 | $ | 1,930,558 | |||||
Statutory tax rate | 26.50 | % | 28.50 | % | 26.50 | % | 28.50 | % | |||||
Expected income tax payable | 444,622 | 173,347 | 464,610 | 550,209 | |||||||||
Increase (decrease) resulting from: | |||||||||||||
Foreign tax rate difference | 94,526 | 53,053 | 96,793 | 168,393 | |||||||||
Effect of statutory rate change | (38,598 | ) | 17,825 | 447 | 56,576 | ||||||||
Non allowable(non taxable) income | (24,651 | ) | (195,782 | ) | (346,970 | ) | (621,419 | ) | |||||
Change in valuation allowance | 269,419 | 48,670 | 565,203 | 154,480 | |||||||||
Change in foreign exchange | (1,606 | ) | (149,546 | ) | 365,538 | (474,665 | ) | ||||||
Other | (168,845 | ) | 52,433 | (23,680 | ) | 166,426 | |||||||
Income tax expense | $ | 574,867 | $ | — | $ | 1,121,941 | $ | — | |||||
Current income tax expense | $ | 426,458 | $ | — | $ | 959,390 | $ | — | |||||
Deferred income tax expense | 148,409 | — | 162,551 | — | |||||||||
$ | 574,867 | $ | — | $ | 1,121,941 | $ | — |
b)
Deferred Income Tax Assets & Liabilities
The tax effect of the temporary differences that give rise to deferred income tax assets are presented below:
September 30, 2011 | December 31, 2010 | ||||||
Non-capital loss carryforwards | $ | 2,648,624 | $ | 2,141,929 | |||
Scientific research and experimental | |||||||
development pool | 2,762,655 | 2,868,860 | |||||
Scientific research and experimental | |||||||
development tax credit | 1,888,654 | 1,961,772 | |||||
Tax value of capital asset expenditure | |||||||
in excess of book value | 2,840,451 | 2,848,453 | |||||
Net capital loss carry forwards | 819,874 | 845,321 | |||||
Temporary differences in working capital | 374,217 | — | |||||
Unrealised foreign exchange | — | 235,614 | |||||
11,334,475 | 10,901,949 | ||||||
Valuation allowance | (9,549,444 | ) | (9,031,226 | ) | |||
Deferred income tax asset | 1,785,031 | 1,870,723 | |||||
Deferred income tax liabilities | |||||||
Book value of intangible asset expenditure | |||||||
in excess of tax value | (2,648,231 | ) | — | ||||
Net deferred income tax asset (liabilities) | $ | (863,200 | ) | $ | 1,870,723 |
31
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
c)
Loss Carry Forwards and Investment Tax Credits
At September 30, 2011, the Company has approximately Cdn$5454,000 of non-capital loss carry forwards available until 2030 to reduce future years' income for income tax purposes relating to Norsat International Inc. Also, the Company has federal and provincial investment tax credits of approximately Cdn$1,934,000 and Cdn$903,000, respectively, available to reduce Canadian federal and provincial taxes payable.
The amounts expire as follows:
Non-capital loss carry forward Cdn$ | Federal |
| Provincial | |||||||
2011 | — | — | 56,000 | |||||||
2012 | — | — | 194,000 | |||||||
2013 | — | — | 128,000 | |||||||
2014 | — | — | 14,000 | |||||||
2015 | 3,023,000 | — | — | |||||||
2016 | — | — | 139,000 | |||||||
2017 and later | 2,431,000 | 1,934,000 | 372,000 | |||||||
$ | 5,454,000 | $ | 1,934,000 | $ | 903,000 |
The Company also has available Cdn$6,775,000 of net capital losses to be applied against future capital gains. The tax effect of these carry forwards has not been recorded in the consolidated 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$13,914,000.
As at September 30, 2011 the Company has approximately $1,873,000 of net operating losses relating to Norsat International (America), Inc. The amount consists of losses accumulated from 2006 to 2009 and will expire from 2026 to 2029.
At September 30, 2011, the Company has approximately $531,000 (£330,000) of losses carry forwards accumulated from 2004 to 2009 available to reduce future years' income for income tax purposes relating to Norsat International (United Kingdom) Ltd.
At September 30, 2011, the Company has approximately $1,939,000 (£1,205,000) of losses carry forwards accumulated from 2007 to 2010 available to reduce future years' income for income tax purposes relating to relating to Sinclair Technologies Limited in United Kingdom.
As at September 30, 2011 the Company has approximately $103,000 (KRW115,000,000) of losses carry forward relating to Norsat Korea Ltd. The amount consists of losses accumulated in 2008 to 2010 and will expire from 2018 to 2020.
32
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
17. Segmented Information
The Company’s business operates primarily through three business segments – Antenna and Radio Frequency Conditioning Products (Sinclair Division), Satellite Systems and Microwave Products. The Company also has three additional segments which have limited activity – Maritime Solutions, Wireless Networks, and Norsat Capital.
The Antenna and Radio Frequency Conditioning Products (Sinclair Division) has over 2,000 different products including Base Station Antennas, Mobile/Transit Antennas, Covert Antennas, Filters, Receiver Multi-couplers, and Accessories. The Sinclair Division’s two main product lines are antennas and filters.
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 Microwave Products segment designs, develops and markets receivers, transmitters and power amplifiers.
The Maritime Solutions segment develops and markets satellite systems, related accessories and services for the marine environment. Similar to Microwave Products and Satellite Systems, these products establish broadband communications links interoperating with geostationary satellites, but have the additional challenge of needing to accommodate a vessel’s motion and movement.
The Wireless Networks segment develops, markets and deploys wireless communications systems that would address a customer’s need to solve connectivity challenges covering an area larger than Wi-Fi solutions. These solutions are specific technology agnostic and can be based on different protocols such as WiMAX, LTE and/or 4G.
The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business is in a different stage in its life cycle and they require different marketing strategies.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
33
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Three month ended September 30, | Nine months ended September 30, | ||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
Sales to external customers | |||||||||||||
Sinclair division | $ | 5,413,687 | $ | — | $ | 14,978,345 | $ | — | |||||
Satellite systems | 3,270,381 | 2,180,936 | 6,949,862 | 8,102,173 | |||||||||
Microwave products | 2,458,451 | 2,229,353 | 6,132,076 | 6,214,256 | |||||||||
Maritime solutions | 238,114 | 81,419 | 678,778 | 260,635 | |||||||||
$ | 11,380,633 | $ | 4,491,708 | $ | 28,739,061 | $ | 14,577,064 | ||||||
Gross Profit | |||||||||||||
Sinclair division | $ | 2,559,217 | $ | — | $ | 6,642,693 | $ | — | |||||
Satellite systems | 1,434,705 | 1,106,532 | 3,022,401 | 4,300,933 | |||||||||
Microwave products | 985,204 | 1,011,031 | 2,574,053 | 2,737,749 | |||||||||
Maritime solutions | 100,421 | 20,371 | 274,228 | 96,910 | |||||||||
$ | 5,079,547 | $ | 2,137,934 | $ | 12,513,375 | $ | 7,135,592 |
Microwave Products | Satellite Systems | Maritime Solutions | Sinclair Division | Consolidated | ||||||||||||
As at September 30, 2011 | ||||||||||||||||
Total assets related to operations | $ | 6,543,097 | $ | 7,415,697 | $ | 724,275 | $ | 24,973,324 | $ | 39,656,393 | ||||||
Property and equipment, net | 386,863 | 438,456 | 42,823 | 464,014 | 1,332,156 | |||||||||||
Intangible assets, net | 119,094 | 134,977 | 13,183 | 9,181,984 | 9,449,238 | |||||||||||
As at December 31, 2010 | ||||||||||||||||
Total assets related to operations | $ | 8,568,212 | $ | 11,445,989 | $ | 399,888 | $ | — | $ | 20,414,089 | ||||||
Property and equipment, net | 402,365 | 537,505 | 18,779 | — | 958,649 | |||||||||||
Intangible assets, net | 142,814 | 190,779 | 6,665 | — | 340,258 |
Three month ended September 30, | Nine months ended September 30, | ||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
Canada | $ | 3,534,853 | $ | 121,281 | $ | 6,592,365 | $ | 266,998 | |||||
United States | 5,952,009 | 2,138,715 | $ | 15,930,090 | 8,341,094 | ||||||||
Europe and other | 1,893,772 | 2,231,712 | $ | 6,216,606 | 5,968,972 | ||||||||
$ | 11,380,634 | $ | 4,491,708 | $ | 28,739,061 | $ | 14,577,064 |
34
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Three month ended September 30, | Nine months ended September 30, | ||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
Change in non-cash operating working capital: | |||||||||||||
Accounts receivable | $ | (2,490,330 | ) | $ | (628,338 | ) | $ | (1,727,192 | ) | $ | 563,756 | ||
Inventories | 336,699 | (715,206 | ) | 1,314,862 | (2,558,491 | ) | |||||||
Prepaid expense and other | (90,513 | ) | 5,601 | 59,424 | 101,138 | ||||||||
Accounts payable & accrued liabilities | 1,017,290 | 775,831 | 1,169,324 | 639,645 | |||||||||
Provisions | (20,268 | ) | — | 40,839 | — | ||||||||
Deferred revenue | (143,898 | ) | 4,936 | (423,761 | ) | (58,577 | ) | ||||||
Short term investments | — | — | (1,051 | ) | — | ||||||||
$ | (1,391,020 | ) | $ | (557,176 | ) | $ | 432,445 | $ | (1,312,529 | ) | |||
Supplementary information: | |||||||||||||
Interest paid | $ | 68,914 | $ | — | $ | 313,795 | $ | 885 |
Three month ended September 30, | Nine months ended September 30, | ||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||
Short-term employee benefits | $ | 328,778 | $ | 85,277 | $ | 785,998 | $ | 478,442 | |||||
Stock-based compensation | 5,857 | 4,630 | 20,374 | 21,254 | |||||||||
Total | $ | 334,635 | $ | 89,907 | $ | 806,372 | $ | 499,696 |
Remaining 2011 | 2012 | 2013 | 2014 | 2015 and after | Total | ||||||||||||||
Inventory purchase obligations | $ | 2,405,095 | $ | 1,643,428 | $ | 615,397 | $ | 153,849 | $ | — | $ | 4,817,769 | |||||||
Operating lease obligations | 217,913 | 688,290 | 304,870 | 310,242 | 551,934 | 2,073,249 | |||||||||||||
$ | 2,623,008 | $ | 2,331,718 | $ | 920,267 | $ | 464,091 | $ | 551,934 | $ | 6,891,018 |
35
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
21. Transition to IFRS
IFRS 1First Time Adoption of International Financial Reporting Standards sets forth guidance for the initial adoption of IFRS. Under IFRS 1 the standards are applied retroactively at the transitional statement of financial position date with all adjustments to assets and liabilities taken to retained earnings or if appropriate another category of equity unless certain exemptions are applied. The Company has applied the following exemptions to its opening statement of financial position dated January 1, 2010:
a)
Business Combinations
IFRS 1 indicates that a first-time adopter may elect not to apply IFRS 3Business Combinations retrospectively to business combinations before the date of transition to IFRS. The Company has elected to use this election and has applied IFRS 3 to business combinations that occurred on or after January 1, 2010.
b)
Consolidated and Separate Financial Statements
According to IFRS 1, if a company elects to apply IFRS 3Business Combinations retrospectively, IAS 27Consolidated and Separate Financial Statements must also be applied retrospectively. As the Company elects to apply IFRS 3 prospectively, the Company has also elected to apply IAS 27 prospectively.
c)
Cumulative Translation Differences
IFRS 1 allows a first-time adopter an exemption as it relates to the requirements of IAS 21The Effects of Changes in Foreign Exchange Rates for cumulative translation differences that existed at the date of transition to IFRS. The Company has chosen to apply this election and has eliminated the cumulative translation difference and adjusted retained earnings by the same amount at the date of transition to IFRS. If subsequent to adoption, a foreign operation is disposed of, the translation differences that arose before the date of transition to IFRS will have no effect on the gain or loss on disposal.
d)
Share-Based Payments
IFRS 1 encourages, but does not require, first time adopters to apply IFRS 2Share-Based Payment to equity instruments that were granted on or before November 7, 2002, or equity instruments that were granted subsequent to November 7, 2002 and vested before the later of the date of transition to IFRS and January 1, 2005. The Company has elected to take advantage of the exemption and not apply IFRS 2 to awards that vested prior to January 1, 2010.
IFRS 1 also outlines specific guidance that a first-time adopter must adhere to under certain circumstances. The Company has applied the following guidelines to its opening consolidated statement of financial position dated January 1, 2010.
e)
Estimates
According to IFRS 1, an entity's estimates under IFRS at the date of transition to IFRS must be consistent with estimates made for the same date under previous GAAP, unless there is objective evidence that those estimates were in error. This exemption is to prevent an entity from adjusting previously made accounting estimates for the benefit of hindsight. The Company's IFRS estimates as of January 1, 2010 are consistent with its Canadian GAAP estimates for the same date.
IFRS employs a conceptual framework that is similar to Canadian GAAP, however, significant differences exist in certain matters of recognition, measurement and disclosure. While adoption of IFRS has not changed the Company's actual cash flows, it has resulted in changes to the Company's reported financial position and results of operations and statement of cash flows. In order to allow the users of the financial statements to better understand these changes, the Company's Canadian GAAP Consolidated Balance Sheets, Consolidated Statement of Earnings/(Loss), Deficit, and Comprehensive Income (Loss), and Consolidated Statements of Cash Flows as at September 30, 2010 and for the three and nine months ended September 30, 2010 and the period ended December 31, 2010 have been reconciled to IFRS, with the resulting differences explained in the following section:
36
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
(i)
Accumulated other comprehensive income
IFRS 1 allows a first-time adopter to an exemption as it relates to the requirements of IAS 21The Effects of Changes in Foreign Exchange Rates for cumulative translation differences that existed at the date of transition to IFRS.
The Company has chosen to apply this election and has eliminated the cumulative translation difference of $399,537 in the accumulated other comprehensive income account and adjusted deficit by the same amount at the date of transition to IFRS. If subsequent to adoption, a foreign operation is disposed of, the translation differences that arose before the date of transition to IFRS will have no effect on the gain or loss of disposal.
(ii)
Share-based payment
Under IFRS:
Ø
Each tranche of an award with different vesting dates is considered a separate grant for the calculation of fair value, and the resulting fair value is amortized over the vesting period of the respective tranches.
Ø
Forfeiture estimates are recognized in the period they are estimated, and are revised for actual forfeitures in subsequent periods.
Under Canadian GAAP:
Ø
The fair value of stock-based awards with graded vesting are calculated as one grant and the resulting fair value is recognized on a straight line basis over the vesting period.
Ø
Forfeitures of awards are recognized as they occur.
Under Canadian GAAP, when share options are forfeited before vesting, all the previous period changes are to be reversed in the period that the options are cancelled using either the estimation or actual method. The Company has previously chosen to reverse such forfeited options using the actual method.
However, IFRS requires those forfeited options to be reversed using an estimation method based on estimated forfeitures.
(iii)
Deferred income tax asset/liability
Under IFRS:
Ø
All deferred income tax assets and liabilities must be classified as non-current.
Canadian GAAP
Ø
Deferred income tax assets and liabilities are classified as current or non-current as appropriate.
As a result, the Company reclassified current deferred income tax assets and liabilities to non-current assets and liabilities respectively.
37
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
(iv)
Provisions
Under IFRS:
Ø
Provisions are presented separately from accrued liabilities
Under Canadian GAAP:
Ø
Provisions are not required to be presented separately.
Norsat provides standard one year warranty on satellite products, standard three year warranty on microwave products and standard two year warranty on maritime products under which customers are covered for the cost of repairs of any manufacturing defects that become apparent after purchase. The Company accrues on a quarterly basis warranty provision of 0.25% of satellite sales, 1% of microwave sales and 1% of maritime sales.
Since IFRS requires that provisions be separately presented from accrued liabilities, the Company has reclassified its warranty provision from accrued liabilities to provisions.
(v)
Statement of cash flows
The transition from Canadian GAAP to IFRS has not had a material impact on the consolidated statement of cash flows.
38
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Previously reported under Canadian GAAP | Cumulative translation difference (note 21e) (i)) | Share-based payment (note 21e) (ii)) | Deferred tax asset/liability (note 21e) (iii)) | Provisions (note 21e) (iv)) | Total effect of transition to IFRS | Restated under IFRS | ||||||||||||||||
ASSETS | ||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 5,623,514 | $ | 5,623,514 | ||||||||||||||||||
Short-term investments | 37,720 | 37,720 | ||||||||||||||||||||
Accounts receivable, net | 5,367,975 | 5,367,975 | ||||||||||||||||||||
Inventories | 6,082,136 | 6,082,136 | ||||||||||||||||||||
Prepaid expenses and other | 1,046,021 | 1,046,021 | ||||||||||||||||||||
Deferred tax asset | 235,920 | (235,920 | ) | (235,920 | ) | — | ||||||||||||||||
Total current assets | 18,393,286 | (235,920 | ) | (235,920 | ) | 18,157,366 | ||||||||||||||||
Long-term prepaid expenses and other | 9,340 | 9,340 | ||||||||||||||||||||
Property and equipment, net | 758,843 | 758,843 | ||||||||||||||||||||
Intangible assets, net | 177,985 | 177,985 | ||||||||||||||||||||
Deferred tax asset | 1,737,748 | 235,920 | 235,920 | 1,973,668 | ||||||||||||||||||
Total assets | $ | 21,077,202 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 21,077,202 | ||||||||
LIABILITIES | ||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||
Accounts payable | $ | 1,697,671 | $ | 1,697,671 | ||||||||||||||||||
Accrued liabilities | 1,886,336 | (163,937 | ) | (163,937 | ) | 1,722,399 | ||||||||||||||||
Provisions | 163,937 | 163,937 | 163,937 | |||||||||||||||||||
Deferred revenue | 1,348,772 | 1,348,772 | ||||||||||||||||||||
Deferred tax liability | 2,163 | (2,163 | ) | (2,163 | ) | — | ||||||||||||||||
Total current liabilities | 4,934,942 | (2,163 | ) | — | (2,163 | ) | 4,932,779 | |||||||||||||||
Long-term deferred revenue | 371,863 | 371,863 | ||||||||||||||||||||
Deferred tax liability | 325,132 | 2,163 | 2,163 | 327,295 | ||||||||||||||||||
Total liabilities | 5,631,937 | — | — | 5,631,937 | ||||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||
Issued capital | 37,276,520 | 37,276,520 | ||||||||||||||||||||
Contributed surplus | 3,709,506 | 1,067 | 1,067 | 3,710,573 | ||||||||||||||||||
Accumulated other comprehensive income | 399,537 | (399,537 | ) | (399,537 | ) | — | ||||||||||||||||
Deficit | (25,940,298 | ) | 399,537 | (1,067 | ) | 398,470 | (25,541,828 | ) | ||||||||||||||
Total shareholders’ equity | 15,445,265 | — | — | — | 15,445,265 | |||||||||||||||||
Total liabilities and shareholders’ equity | $ | 21,077,202 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 21,077,202 |
39
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Three Months Ended September 30, 2010 | Previously reported under Canadian GAAP | Share-based payment (note 21e) (ii)) | Restated under IFRS | |||||||
Sales | $ | 4,491,708 | $ | 4,491,708 | ||||||
Cost of sales | 2,353,774 | 2,353,774 | ||||||||
Gross Profit | 2,137,934 | 2,137,934 | ||||||||
Expenses: | ||||||||||
Selling, general and administrative | 1,336,512 | (4,908 | ) | 1,331,604 | ||||||
Product development, net | 67,047 | 67,047 | ||||||||
Amortization | 85,318 | 85,318 | ||||||||
1,488,877 | (4,908 | ) | 1,483,969 | |||||||
Earnings for the year before other expenses | 649,057 | 4,908 | 653,965 | |||||||
Other expenses | 45,731 | 45,731 | ||||||||
Earnings before income taxes | ||||||||||
and Net earnings for the period | $ | 603,326 | $ | 4,908 | $ | 608,234 |
Nine Months Ended September 30, 2010 | Previously reported under Canadian GAAP | Share-based payment (note 21e) (ii)) | Restated under IFRS | |||||||
Sales | $ | 14,577,064 | $ | 14,577,064 | ||||||
Cost of sales | 7,441,472 | 7,441,472 | ||||||||
Gross Profit | 7,135,592 | 7,135,592 | ||||||||
Expenses: | ||||||||||
Selling, general and administrative | 4,626,870 | 12,848 | 4,639,718 | |||||||
Product development, net | 197,746 | 197,746 | ||||||||
Amortization | 238,898 | 238,898 | ||||||||
5,063,514 | 12,848 | 5,076,362 | ||||||||
Earnings for the year before other expenses | 2,072,078 | (12,848 | ) | 2,059,230 | ||||||
Other expenses | 128,672 | 128,672 | ||||||||
Earnings before income taxes | ||||||||||
and Net earnings for the period | $ | 1,943,406 | $ | (12,848 | ) | $ | 1,930,558 |
40
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Three Months Ended September 30, 2010 | Previously reported under Canadian GAAP | Share-based payment (note 21e) (ii)) | Restated under IFRS | |||||||
Cash and cash equivalents provided by (used in) | ||||||||||
OPERATING ACTIVITIES: | ||||||||||
Net earnings for the period | $ | 603,326 | $ | 4,908 | $ | 608,234 | ||||
Items not involving cash: | ||||||||||
Amortization | 85,318 | 85,318 | ||||||||
Foreign exchange (gain) loss | (37,431 | ) | (37,431 | ) | ||||||
Gain on disposal of property, plant and equipment | (36,500 | ) | (36,500 | ) | ||||||
Impairment of assets | 108,591 | 108,591 | ||||||||
Stock-based compensation | 31,691 | (4,908 | ) | 26,783 | ||||||
Government contribution | (256,939 | ) | (256,939 | ) | ||||||
Changes in non-cash working capital | (557,176 | ) | (557,176 | ) | ||||||
Net cash flows used in operating actitivies | (59,120 | ) | — | (59,120 | ) | |||||
INVESTING ACTIVITIES: | ||||||||||
Purchase of property and equipment | 36,500 | 36,500 | ||||||||
Net cash flows from investing activities | 36,500 | — | 36,500 | |||||||
FINANCING ACTIVITIES: | ||||||||||
Repurchase of common shares | (5,009 | ) | (5,009 | ) | ||||||
Net cash flows used in financing activities | (5,009 | ) | — | (5,009 | ) | |||||
Effect of foreign currency translation on | ||||||||||
cash and cash equivalents | 15,911 | 15,911 | ||||||||
Decrease in cash and cash equivalents | (11,718 | ) | — | (11,718 | ) | |||||
Cash and cash equivalents, beginning of period | 5,635,232 | 5,635,232 | ||||||||
Cash and cash equivalents, end of period | $ | 5,623,514 | $ | — | $ | 5,623,514 |
41
Norsat International Inc.
Notes to Interim Consolidated Financial Statements
Three and nine months ended September 30, 2011
(Expressed in US Dollars - Unaudited)
Nine Months Ended September 30, 2010 | Previously reported under Canadian GAAP | Share-based payment (note 21e) (ii)) | Restated under IFRS | |||||||
Cash and cash equivalents provided by (used in) | ||||||||||
OPERATING ACTIVITIES: | ||||||||||
Net earnings for the period | $ | 1,943,406 | $ | (12,848 | ) | $ | 1,930,558 | |||
Items not involving cash: | ||||||||||
Amortization | 238,898 | 238,898 | ||||||||
Foreign exchange (gain) loss | 2,043 | 2,043 | ||||||||
Gain on disposal of property, plant and equipment | (29,396 | ) | (29,396 | ) | ||||||
Impairment of assets | 108,591 | 108,591 | ||||||||
Stock-based compensation | 77,818 | 12,848 | 90,666 | |||||||
Government contribution | (831,222 | ) | (831,222 | ) | ||||||
Changes in non-cash working capital | (1,312,529 | ) | (1,312,529 | ) | ||||||
Net cash flows from operating actitivies | 197,609 | — | 197,609 | |||||||
INVESTING ACTIVITIES: | ||||||||||
Purchase of property and equipment | (16,571 | ) | (16,571 | ) | ||||||
Proceeds from sale of assets | 61,500 | 61,500 | ||||||||
Net cash flows from investing activities | 44,929 | — | 44,929 | |||||||
FINANCING ACTIVITIES: | ||||||||||
Repurchase of common shares | (311,824 | ) | (311,824 | ) | ||||||
Share issuance cost | (2,196 | ) | (2,196 | ) | ||||||
Shares issued under ESOP | 133,019 | 133,019 | ||||||||
Proceeds from government contributions | 892,666 | 892,666 | ||||||||
Net cash flows from financing activities | 711,665 | — | 711,665 | |||||||
Effect of foreign currency translation on | ||||||||||
cash and cash equivalents | (45,333 | ) | (45,333 | ) | ||||||
Increase in cash and cash equivalents | 908,870 | 908,870 | ||||||||
Cash and cash equivalents, beginning of period | 4,714,644 | 4,714,644 | ||||||||
Cash and cash equivalents, end of period | $ | 5,623,514 | $ | — | $ | 5,623,514 |
Subsequent to September, 30, 2011, the Canadian Federal Minister of Industry amended the SADI agreement with the Company. The amended agreement now extends the program by one additional year and moves the performance benchmarks and contingent repayments, if any, out by one year to fiscal 2012 and 2013, respectively.
42