Norsat International 20F 2013 Annual report | SEC Filing

Exhibit 99.4

CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2013, 2012 and 2011
(Expressed in US dollars)

Norsat International Inc.

Table of Contents


Report of independent registered public accounting firm		3
Consolidated statements of financial position		5
Consolidated statements of earnings and comprehensive income		6
Consolidated statements of changes in shareholders’ equity		7
Consolidated statements of cash flows		8
Notes to the consolidated financial statements		9
1.	Nature of business	9
2.	Basis of preparation	9
3.	Significant accounting policies	9
4.	Cost of sales and expenses	27
5.	Business combination	27
6.	Capital disclosures	31
7.	Financial instruments and risk exposures	33
8.	Government contributions	35
9.	Inventories	37
10.	Property and equipment, net	38
11.	Intangible asset, net	39
12.	Goodwill	39
13.	Operating line of credit	40
14.	Acquisition loan	41
15.	Warranties	41
16.	Issued capital	42
17.	Treasury shares	45
18.	Earnings per share	46
19.	Income taxes	46
20.	Segmented information	48
21.	Supplemental cash flow and other disclosures	50
22.	Related party transactions	50
23.	Commitments and contingencies	50
24.	Discontinued operations	51


Report of Independent Registered	Grant Thornton LLP
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To the Shareholders of
Norsat International Inc.

We have audited the accompanying consolidated financial statements of Norsat International Inc., which comprise the consolidated statements of financial position as at December 31, 2013 and December 31, 2012, and the consolidated statements of earnings and comprehensive income, consolidated statements of changes in shareholders’ equity, and consolidated statements of cash flows for the years ended December 31, 2013, December 31, 2012 and December 31, 2011, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Audit • Tax • Advisory
Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Norsat International Inc. as at December 31, 2013 and December 31, 2012, and its financial performance and its cash flows for the years ended December 31, 2013, December 31, 2012 and December 31, 2011, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.


Vancouver, Canada
February 25, 2013	Chartered accountants

Audit • Tax • Advisory
Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

Norsat International Inc.

Consolidated Statements of Financial Position

(Expressed in US Dollars)


			As at December 31
	Notes		2013			2012
ASSETS
Current assets
Cash and cash equivalents		$	3,272,595		$	5,053,445
Trade and other receivables	7		6,821,155			7,093,169
Inventories	9		9,566,289			9,039,415
Prepaid expenses and other			572,038			624,025
Current assets			20,232,077			21,810,054
Non-current assets
Property and equipment, net	10		1,055,160			941,352
Intangible assets, net	11		7,377,107			8,544,267
Goodwill	12		5,104,370			5,388,501
Long-term prepaid expenses and other			9,340			26,295
Deferred income tax assets	19		4,900,000			4,172,000
Non-current assets			18,445,977			19,072,415
Total assets		$	38,678,054		$	40,882,469

LIABILITIES
Current liabilities
Trade and other payables		$	2,162,196		$	2,340,985
Accrued liabilities			1,956,998			3,482,535
Provisions	15		851,437			385,950
Promissory note payable	5b		-			693,129
Taxes payable	19		270,263			174,939
Deferred revenue			586,925			231,068
Current liabilities before acquisition loan			5,827,819			7,308,606
Acquisition loan	14		4,413,296			6,953,255
Current liabilities			10,241,115			14,261,861
Non-current liabilities
Long-term deferred revenue			10,457			22,344
Deferred income tax liabilities	19		2,002,973			2,364,702
Non-current liabilities			2,013,430			2,387,046
Total liabilities			12,254,545			16,648,907
SHAREHOLDERS' EQUITY
Issued capital	16		39,850,648			39,850,648
Treasury shares	17		(318,255	)		(131,474	)
Contributed surplus			4,278,843			4,041,715
Accumulated other comprehensive (loss) income			(1,315,478	)		251,826
Deficit			(16,072,249	)		(19,779,153	)
Total shareholders' equity			26,423,509			24,233,562
Total liabilities and shareholders' equity		$	38,678,054		$	40,882,469

See accompanying notes to the consolidated financial statements.
Approved by the Board and authorized for issue on February 25, 2014


“ Fabio Doninelli”	“ James Topham”
Board of Director	Board of Director

Norsat International Inc.

Consolidated Statements of Earnings and Comprehensive Income

(Expressed in US Dollars)


	Notes		Year Ended December 31
			2013			2012			2011

Revenue	20	$	36,417,698		$	42,428,760		$	37,791,757
Cost of sales	4		22,594,407			24,268,619			21,435,229
Gross profit	20		13,823,291			18,160,141			16,356,528

Expenses:
Selling and distributing expenses	4		6,276,842			7,212,626			5,614,121
General and administrative expenses	4		3,708,873			5,096,920			7,195,473
Product development expenses, gross	4		3,512,958			3,419,951			3,001,249
Less: Government contributions	4		(2,079,572	)		(1,046,603	)		(1,706,476	)
			11,419,101			14,682,894			14,104,367
Earnings before other expenses/(income)			2,404,190			3,477,247			2,252,161

(Gain) loss on disposal of property and equipment	10		(13,653	)		53,345			-
Interest and bank charges			329,866			620,203			591,765
(Gain) loss on foreign exchange			(887,777	)		250,485			(100,222	)
Earnings before income taxes			2,975,754			2,553,214			1,760,618

Current income tax expense	19		269,812			782,034			811,081
Deferred income tax (recovery) expense	19		(1,000,962	)		(3,283,132	)		478,585
Net earnings from continuing operations			3,706,904			5,054,312			470,952

Net earnings (loss) from discontinued operations	24		-			80,690			(60,062	)
Net earnings		$	3,706,904		$	5,135,002		$	410,890

Other comprehensive income/(loss)
Exchange differences on translation of operations in currencies other than US Dollars			(1,567,304	)		322,572			(70,746	)
Total comprehensive income		$	2,139,600		$	5,457,574		$	340,144

Net earnings per share
Basic earnings per share
Earnings from continuing operations	18	$	0.06		$	0.09		$	0.01
Earnings from discontinued operations	24		-			-			-
Total		$	0.06		$	0.09		$	0.01
Diluted earnings per share
Earnings from continuing operations	18	$	0.06		$	0.09		$	0.01
Earnings from discontinued operations	24		-			-			-
Total		$	0.06		$	0.09		$	0.01

Weighted average number of shares outstanding
Basic	18		57,802,680			58,146,053			58,045,606
Diluted	18		57,824,811			58,148,712			58,165,203

See accompanying notes to the consolidated financial statements.

Norsat International Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in US Dollars)


											Accumulated other						Total
								Contributed			comprehensive						shareholders'
	Notes		Issued capital		Treasury shares			surplus			(loss) income			Deficit			equity
As at January 1, 2013		$	39,850,648	$	(131,474	)	$	4,041,715		$	251,826		$	(19,779,153	)	$	24,233,562
Net earnings for the period			-		-			-			-			3,706,904			3,706,904
Other comprehensive income			-		-			-			(1,567,304	)		-			(1,567,304	)
Total			39,850,648		(131,474	)		4,041,715			(1,315,478	)		(16,072,249	)		26,373,162

Vesting of RSUs	16d		-		43,100			(50,905	)		-			-			(7,805	)
Purchase shares for RSUs	16d		-		(223,277	)		-			-			-			(223,277	)
Share purchase cost	16d		-		(6,604	)		-			-			-			(6,604	)
Share-based payments	16c,d		-		-			288,033			-			-			288,033
As at December 31, 2013		$	39,850,648	$	(318,255	)	$	4,278,843		$	(1,315,478	)	$	(16,072,249	)	$	26,423,509


											Accumulated other						Total
								Contributed			comprehensive						shareholders'
			Issued capital		Treasury shares			surplus			(loss) income			Deficit			equity
As at January 1, 2012		$	39,850,648	$	-		$	3,812,151		$	(70,746	)	$	(24,914,155	)	$	18,677,898
Net earnings for the period			-		-			-			-			5,135,002			5,135,002
Other comprehensive income			-		-			-			322,572			-			322,572
Total			39,850,648					3,812,151			251,826			(19,779,153	)		24,135,472

Purchase shares for RSUs	16d		-		(131,474	)		-			-			-			(131,474	)
Share-based payments	16c,d		-		-			229,564			-			-			229,564
As at December 31, 2012		$	39,850,648	$	(131,474	)	$	4,041,715		$	251,826		$	(19,779,153	)	$	24,233,562

See accompanying notes to the consolidated financial statements.

Norsat International Inc.

Consolidated Statements of Cash Flows

(Expressed in US Dollars)


			Year ended December 31
	Notes		2013			2012			2011
Cash and cash equivalents provided by/(used in)
Operating activities:
Net earnings for the period		$	3,706,904		$	5,135,002		$	410,890
Income taxes paid			(134,804	)		(1,344,364	)		(956,735	)
Non-cash adjustments to reconcile net earnings to net cash flows:
Amortization			1,401,323			1,475,795			1,525,345
Foreign exchange(gain)/loss			(887,777	)		363,392			336,818
Loan acquisition cost amortization			27,146			26,844			23,643
(Gain)/Loss on disposal of property and equipment	10		(13,653	)		53,345			-
Gain on sale of subsidiary	24		-			(93,986	)		-
Current income tax expense	19		269,812			782,034			811,081
Deferred income tax (recovery)/expense	19		(1,000,962	)		(3,283,132	)		478,585
Share-based payments	16c,d		288,033			229,564			114,237
Accretion of promissory notes			31,871			95,904			94,289
Government contribution	8		(2,113,720	)		(1,108,673	)		(1,602,199	)
Changes in non-cash working capital	21		(1,523,806	)		(55,534	)		1,089,665
Net cash flows provided by operating actitivies			50,367			2,276,191			2,325,619
Investing activities:
Acquisition of business	5		(530,170	)		-			(15,235,954	)
Purchase of intangible assets, property and equipment			(584,787	)		(547,662	)		(276,673	)
Proceeds from government contributions for acquisition of property and equipment	8		124,883			260,214			-
Proceeds from sale of property and equipment			4,200			42,390			-
Proceeds from sale of asset held for sale	5a		54,768			-			-
Redemption of short-term investment			-			67,918			-
Proceeds from sale of subsidiary	24		13,583			76,369			-
Net cash flows used in investing activities			(917,523	)		(100,771	)		(15,512,627	)
Financing activities:
Repayment of acquisition loan	14		(2,370,000	)		(2,800,000	)		(2,200,000	)
Proceeds from government contributions	8		2,356,450			1,554,669			1,127,888
Payment of promissory note	5b		(725,000	)		-			-
Purchase of treasury shares	16d		(229,881	)		(131,474	)		-
Vesting of RSUs	16d		(7,805	)		-			-
Proceeds from acquisition loan	14		-			-			11,892,959
Proceeds from shares issued under ESOP, net of share issuance costs	16b		-			-			348,792
Repurchase of common shares and related fees			-			-			(27,916	)
Proceeds from exercising warrants and options			-			-			32,559
Net cash flows provided by/(used in) financing activities			(976,236	)		(1,376,805	)		11,174,282

Effect of foreign currency translation on cash and cash equivalents			62,542			61,955			(109,442	)

(Decrease)/increase in cash and cash equivalents			(1,780,850	)		860,570			(2,122,168	)
Cash and cash equivalents, beginning of period			5,053,445			4,192,875			6,315,043
Cash and cash equivalents, end of period		$	3,272,595		$	5,053,445		$	4,192,875

Supplemental cash flow and other disclosures (note 21)
See accompanying notes to the consolidated financial statements.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


1.	Nature of Business

Norsat International Inc. (“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 is a publicly listed company on the Toronto Stock Exchange (TSX) under the ticker symbol ‘NII’ and the OTC Bulletin Board (“OTCBB”) under the ticker symbol ‘NSATF’.

The Company is a leading provider of innovative communication solutions used by government organizations, militaries, transportation, resource and marine industry companies, news organizations, public safety search and rescue operators and others. Our solutions enable the transmission of data, audio and video for remote and challenging applications. Our products and services include leading-edge product design and development, production, distribution and infield support and service of fly-away satellite terminals, microwave components, M2M Solutions, antennas, radio frequency (“RF”) conditioning products, maritime based satellite terminals and remote networks connectivity solutions.

The Company’s business operates primarily through three business segments – RF antennas and filters (“Sinclair Technologies”), Satellite Solutions, and Microwave Products.


2.	Basis of Preparation

Statement of compliance

The consolidated financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

The consolidated financial statements for the year ended December 31, 2013, including comparatives, have been approved and authorized for issue by the board of directors on February 25, 2014.

These consolidated financial statements are presented in United States Dollars, except when otherwise indicated.


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:

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


3.1	Basis of Consolidation

The consolidated financial statements comprise the financial statements of the Company and its wholly owned subsidiaries. The Company’s significant subsidiaries are as follows:


Name of the	Country of	Principal	Principal activity	Proportion of ownership
subsidiary	incorporation	place		interests held by
		of business		the Company
				December 31,
				2013		2012
Norsat International (America), Inc.	USA	USA	Distributor of Satellite Solutions	100	%	100	%
Norsat International (UK) Ltd.	UK	UK	Distributor of Microwave Products	100	%	100	%
Norsat S.A.	Switzerland	Switzerland	Distributor of Satellite Solutions	100	%	100	%
Sinclair Technologies Ltd.	UK	UK	Distributor of Radio Frequency conditioning products	100	%	-
Sinclair Technologies Inc.	USA	USA	Distributor of Radio Frequency conditioning products	-	(i)	100	%

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 parent controls a subsidiary if it is exposed or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Intercompany transactions and balances are eliminated upon consolidation.

	(i)	The Company’s legal structure was reorganized on December 31, 2013 such that wholly owned subsidiaries of Norsat, Norsat International (America), Inc. (“Norsat US”), a Virginia corporation, and Sinclair Technologies, Inc. (“Sinclair US”), a New York corporation, were merged. Sinclair US was merged into Norsat US, which was the surviving corporation in the merger under the Virginia Stock Corporation Act and the New York Business Corporation Law.


3.2	Business Combinations

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 acquiree’s identifiable net assets. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3Business Combinationsare recognized at their fair values at the acquisition date. Acquisition costs are expensed in the period that 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 Statements of Earnings and Comprehensive Income.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

The Company uses judgement to determine the purchase price allocation and estimates to value identifiable net assets, including the fair value of contingent consideration, if applicable, at the acquisition date. The Company may engage independent third-parties to determine the fair value of property and equipment and intangible assets. The Company uses estimates to determine cash flow projections, including future growth and discount rates, among other factors.


3.3	Significant Management Judgement and Estimation Uncertainty

The preparation of consolidated financial statements in conformity with IFRS requires the Company’s management to undertake a number of judgements, estimates and assumptions that affect amounts reported in the consolidated financial statements and notes thereto. Actual amounts may ultimately differ from these estimates and assumptions. The Company reviews its estimates and underlying assumptions on an ongoing basis. Revisions are recognized in the period in which the estimates are revised and may impact future periods as well.

Significant Management Judgement

The following are significant management judgements in applying the accounting policies of the Company that have the most significant effect on recognition and measurement of assets, liabilities, income and expenses:

Recognition of deferred tax assets
The extent to which deferred tax assets can be recognized is based on an assessment of the probability of the Company’s future taxable income against which the deferred tax assets can be utilized. In addition, significant judgement is required in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions.

Recognition of service and contract revenues
Determining when to recognize revenues from after-sales services requires an understanding of the customer’s use of the related products, historical experience and knowledge of the market. Recognizing construction contract revenue also requires significant judgement in determining milestones, actual work performed and the estimated costs to complete the work.

Recognition of Government contributions
The Company recognizes Government contributions of eligible expenditures when there is reasonable assurance that the Company will comply with the conditions attached to the grant and the grant will be received. The Company estimates Government contributions based on labour costs and expenses incurred and its belief of what will ultimately be approved for payment by Government agencies. Uncertainty relates to the acceptability of the contribution amounts claimed, actual timing and ultimate collectability that can vary from the Company’s estimation.

Estimation Uncertainty

Information about estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.

Selling prices of multi-element sales arrangements
Determining selling prices for multi-element arrangements follows a hierarchy of selling prices. If vendor specific objective evidence and third party evidence of selling price do not exist, then management’s best estimate of selling price for the deliverable is used. This requires significant

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

judgement in determining the selling price based on an understanding of the customer’s use of the related product or service, historical experience and knowledge of the market.

Impairment of long-lived assets
In assessing impairment, management estimates the recoverable amount of each asset or cash generating unit based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate. In 2013, 2012 and 2011, the Company did not recognize any impairment losses of long-lived assets.

Useful lives of depreciable assets
The Company reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utilization of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utilization of certain software and equipment.

Inventories
The Company estimates the net realizable values of inventories, taking into account the most reliable evidence available at each reporting date. The future realization of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices. A change to these assumptions could impact our inventory valuation and impact our gross margins.

Business combinations
The Company uses valuation techniques in determining fair values of the various elements of a business combination based on future expected cash flows and a discount rate. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate.

Share-based payment - stock options
The Company measures the cost of equity-settled share-based transactions by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the stock option, volatility and dividend yield and making assumptions about them.

Share-based payment - restricted share units
The Company measures the cost of equity-settled share-based transactions by reference to the fair value of the equity instruments at the date at which they are granted. For restricted share units, the Company uses the TSX share price at grant date as fair value of the restricted share units. The resulting fair value of the restricted share units is then adjusted for an estimated forfeiture amount. Determining the forfeiture rate is based on historical experience. Actual number of restricted share units that vest is likely to be different from estimation.

Provision for warranties
The Company provides for warranty expenses by analyzing historical failure rates, warranty claims, current sales levels and current information available about returns based on warranty periods. Uncertainty relates to the timing and amount of actual warranty claims that can vary from the Company’s estimation.

Allowance account for credit losses
The Company provides for bad debt by analyzing the historical default experience and current information available about customer’s credit worthiness on an account by account basis. Uncertainty relates to the actual collectivity of customer balances that can vary from the Company’s estimation.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


3.4	Foreign Currency Translation

Functional and presentation currency
The Company’s consolidated financial statements are presented in United States dollars, which is also the Company’s functional currency.

Foreign currency transactions and balances
Foreign currency transactions are translated into the functional currency of the respective currency of the entity or division, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the re-measurement of monetary items denominated in foreign currency at period-end exchange rates are recognized in the Consolidated Statements of Earnings and Comprehensive Income.

Non-monetary items that are not re-translated at period end and are measured at historical cost (translated using the exchange rates at the transaction date), except for non-monetary items measured at fair value which are translated using the exchange rates as at the date when fair value was determined.

Foreign operations
In the Company’s financial statements, all assets, liabilities and transactions of the Company’s foreign operations with a functional currency other than US dollars are translated into US dollars upon consolidation.

Each foreign operation of the Company determines its own functional currency and items included in the financial statements of each foreign operation are measured using that functional currency and presented in US dollars.

The functional currency of the Company’s foreign operations has remained unchanged during the reporting period.

For foreign operations with a non-US dollar functional currency, the Company translates assets and liabilities into US dollars using the period-end exchange rates. Goodwill and intangible assets arising from acquisition of a foreign operation have been treated as assets and liabilities of the foreign operation and translated into US dollars at the period-end exchange rate. Income and expenses have been translated into US dollar at the average rate over the reporting period. Exchange differences are charged/ credited to other comprehensive income and recognized in the currency translation reserve in equity. On disposal of a foreign operation, the related cumulative translation differences recognized in equity are reclassified to profit or loss and are recognized as part of the gain or loss on disposal.

For foreign operations with a US dollar functional currency, which represents the currency of the primary economic environment in which they operate, the Company translates monetary assets and liabilities denominated in foreign currencies into US dollars at the period-end exchange rates. The Company translates non-monetary assets and liabilities denominated in foreign currencies at historic rates, and translates revenue and expenses at the average exchange rates over the reporting period. Exchange gains and losses also arise on the settlement of foreign-currency denominated transactions. Foreign currency differences arising on translation are recognized in the Consolidated Statements of Earnings and Comprehensive Income.


3.5	Share-Based Payments

Stock options
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 16c. The

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

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. Measurement inputs include the price of the common shares on the grant date, exercise price of the option, expected volatility of our common shares (based on weighted average historic volatility), weighted average expected life of the option (based on historical experience and general option holder behavior), the risk-free interest rate and the estimated forfeiture rate. The fair value of the options is amortized over the vesting period and is included in operating expenses with a corresponding increase in contributed surplus. The amount recognized as an expense is adjusted to reflect the number of share options expected to eventually vest. When options are exercised, the proceeds are credited to issued capital.

Restricted share units
The Company grants restricted share units (“RSUs”) to directors, senior officers and employees pursuant to an incentive restricted share unit plan described in note 16d. The RSU plan gives the eligible persons the right to receive, at the discretion of the Board, common shares, which are not to be issued from treasury, without any monetary consideration payable to the Company. The vesting of the RSUs is subject to time-based vesting terms, condition and restrictions as determined by the Board in its sole discretion. Each RSU is convertible into one common share.

The Company recognizes compensation expenses for RSUs awarded based on the fair value of the common shares at the grant date. The fair value, which is determined by multiplying the Company’s share price by the number of RSUs granted, is amortized over the vesting period and is included in operating expenses with a corresponding increase in equity. The amount recognized as an expense is adjusted to reflect the number of RSUs expected to eventually vest.

Shares issued under Employee Share Ownership Plan (“ESOP”)
The Company issues common shares in connection with an ESOP offering under the Employee Investment Act (British Columbia) to directors, senior officers and employees as described in note 16b. The shares are issued at a discount from share market price as approved by the Toronto Stock Exchange. The Company recognizes compensation expense for the difference between issue price and market price.


3.6	Treasury Shares

When the Company reacquires its own shares, the amount of the consideration paid is recognized as a deduction from shareholders’ equity. No gains or losses are recognized in the Consolidated Statements of Earnings and Comprehensive Income on the purchase, sale, issue or cancellation of the Company’s own shares. Repurchased shares are classified as treasury shares and are presented as a deduction from total shareholders’ equity. The Company has granted restricted share units as part of the Company’s long term incentive plan. The Company shall purchase common shares in the open market to satisfy the delivery of these share units. Treasury shares are recorded at the cost of the shares acquired in the open market. When treasury shares are sold or released subsequently, the amount received is recognized as an increase in treasury shares, and the resulting surplus or deficit on the transaction is transferred to/from retained earnings.


3.7	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

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

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.


3.8	Allowance Account for Credit Losses

All of the Company’s trade and other receivables have been reviewed for indicators of impairment. The Company maintains an allowance account for credit losses 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 trade and other receivables balance. The allowance set aside is then adjusted to align with the specific analysis performed.


3.9	Inventories

Parts and supplies inventory is stated at the lower of weighted average cost 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.


3.10	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.


3.11	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
	Leasehold improvements	Shorter of term of lease or useful life

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 Statements of Earnings and Comprehensive Income as incurred.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end.


3.12	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 Statements of Earnings and Comprehensive Income.

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 Statements of Earnings 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

Brand is developed through years of advertising, promotional campaign and customer satisfaction. It contains beneficial elements to the Company that have been created over time and continue to create value to the Company. Hence, brand which reflects consumer awareness and recognition is considered indefinite in nature.


3.13	Impairment of Long-Lived 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

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

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 Statements of Earnings and Comprehensive Income.

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 Statements of Earnings and Comprehensive Income.

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.


3.14	Goodwill

Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognized. See note 12 for information on how goodwill is determined. Goodwill is carried at cost less accumulated impairment losses. Refer to note 3.13 for a description of impairment testing procedures.


3.15	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, airtime 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.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


3.16	Comprehensive Income

Comprehensive income is comprised of net earnings for the period and other comprehensive income. Included in accumulated other comprehensive income are unrealized foreign exchange amounts on the translation of certain subsidiaries’ and divisions’ functional currency to United States dollars.

Financial Instruments

Financial assets

Financial assets are classified into one of four categories:

financial assets at fair value through profit or loss (“FVTPL”);
held-to-maturity investments;
available-for-sale financial assets; and
loans and receivables.

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 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.

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 Statements of Financial Position at fair value with changes in fair value recognized in the Consolidated Statements of Earnings and Comprehensive Income.

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 and Comprehensive Income.

The Company has not designated any financial assets as held-to-maturity investments.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


	iii.	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 and Comprehensive Income and removed from the available-for-sale reserve.

The Company has not designated any financial assets as available-for-sale assets.


	iv.	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 throughout 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 and Comprehensive Income. 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 and trade and other receivables as loans and receivables.

De-recognition

A financial asset is derecognized when the rights to receive cash flows from the asset have expired.

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:

significant financial difficulty of the issuer or counterparty;
default or delinquency in interest or principal payments; or
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.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

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 and Comprehensive Income.

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, acquisition loan, 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.

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 and Comprehensive Income.

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 and Comprehensive Income.

The Company has classified trade and other payables, accrued liabilities, acquisition loan and promissory note payable as other financial liabilities.

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.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


3.17	Revenue Recognition

The Company’s revenues consist of sales of hardware, 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.

The Company has single deliverable and multiple deliverable revenue arrangements.

For single deliverable revenue arrangements relating to the sale of hardware, the Company recognizes revenue when all of the following conditions have been satisfied:

the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the good sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the Company; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.

For single deliverable revenue arrangements relating to the sale of services, the Company recognizes revenue by reference to the stage of completion of the transaction at the end of the reporting period when the outcome of a transaction can be estimated reliably. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the entity;
the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

Multiple deliverable revenue arrangements are to be divided into more than one unit of accounting and the criteria for revenue recognition are considered separately for each accounting unit if the following criteria are met:

the delivered item(s) has standalone value and
when a general right of return exists for the delivered item, the delivery or performance of undelivered item is probable and substantially in the control of the Company.

For those contracts where the services are not essential to the functionality of any other element of transaction, the Company determines selling price for these services based on a hierarchy of selling prices:

Vendor specific objective evidence (“VSOE”) of selling price,
If VSOE does not exist then third party evidence of selling price (“TPE”) is used, or
If neither VSOE nor TPE exist, then management’s best estimate of selling price for the deliverable is used.

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.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

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).

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.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


3.18	Construction Contracts

The Company also earns revenue from fixed-price construction contracts. These contracts specifically negotiated for the construction of a combination of products and services are awarded at agreed prices. Revenue from fixed-price contracts is recognized under the percentage-of- completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. Contract revenue is recognized as revenue in profit or loss in the accounting periods in which the work is performed. Contract costs are usually recognized as an expense in the Consolidated Statement of Earnings and Comprehensive Income in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognized as an expense immediately.

If circumstances arise that change the original estimates of revenues, costs or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated revenues or costs and are reflected in the Consolidated Statement of Earnings and Comprehensive Income in the period in which the circumstances that give rise to the revision become known by management. Provisions for estimated losses, if any, are recognized in the year or period in which the loss is determined. Contract losses are measured as the amount by which the estimated costs of the contract exceed the estimated total revenue from the contract. Contract work-in-progress revenue is recorded to the extent that revenue has been recognized, but not yet billed to the customer.


3.19	Research and Development Costs

Research costs are expensed as incurred. Development costs are deferred if the Company can demonstrate (i) the technical feasibility of completing the product or process, (ii) the intention to complete the project, (iii) the ability to use or sell the product in commercial production, (iv) future economic benefits that the product or process can generate, including the existence of a market for the output of the project (v) the availability of adequate technical, financial and other resources to complete the development and to use or sell the product, and (vi) the ability to measure reliably the expenditure attributable to the project during development. If these criteria are not met, development costs are expensed as incurred. The Company did not capitalize any research and development costs for the years ended 2013, 2012 or 2011.


3.20	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. The Company recognizes government grants only when there is reasonable assurance that the Company will comply with the conditions attached to the grant and the grant will be received. The Company presents the grant as a deduction of the carrying amount of the asset the grant relates to in the Consolidated Statements of Financial Position. The grant is recognized in the Consolidated Statements of Earnings and Comprehensive Income over the life of the depreciable assets as a reduced depreciation expense.


3.21	Government repayment:

The Company is required to make annual repayments under the SADI I contract as described in note 8a. On a quarterly basis, the Company calculates the repayment based on actual revenues achieved for the reporting period. If the revenue criteria for repayment have been met, a liability will be recognized with a corresponding increase in cost of goods sold. The Company will set up a liability in the period the actual revenues are recognized that cause the grant to become repayable. Given historical sales

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

volume, the accrual for repayment, if any, is likely to be recognized in the fourth quarter of the fiscal year. Depending on the sales volume achieved during the repayment period, the amount of the repayment can significantly impact our gross margins percentages and amounts.


3.22	Income Taxes

Income tax expense consists of current and deferred income tax expense. Income tax expense is recognized in the Consolidated Statement of Earnings and Comprehensive Income.

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.


3.23	Profit or Loss From Discontinued Operations

A discontinued operation is a component of the Company that either has been disposed of, or is classified as held for sale, and:

represents a separate major line of business or geographical area of operations
is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations or
is a subsidiary acquired exclusively with a view to resale.

Profit or loss from discontinued operations, including prior year components of profit or loss, is presented in a single amount in the Consolidated Statements of Earnings and Comprehensive Income. This amount, which comprises the post-tax profit or loss of discontinued operations and the post-tax gain or loss resulting from the measurement and disposal of assets classified as held for sale, is further analyzed in note 24.

The disclosure for the discontinued operations in the prior year relate to all operations that have been discontinued by the end of the reporting period for the latest period presented.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


3.24	Net earnings Per Share

Basic net earnings per share are computed by dividing net earnings 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.


3.25	Provisions and Contingent Liabilities

Provisions for product warranties, legal claims, onerous contracts or other claims 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. Timing or amount of the outflow may still be uncertain. The expense relating to any provision is presented in the Consolidated Statements of Earnings and Comprehensive Income, net of any reimbursement.

Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material.

In those cases where the possible outflow of economic resources as a result of present obligations is considered improbably or remote, no liability is recognized.


3.26	Changes in Accounting Policies and Future Accounting Pronouncements

Effective January 1, 2013, the Company adopted the following accounting policies:

IFRS 10 Consolidated Financial Statements builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 10 Consolidated Financial Statements replaces SIC-12 Consolidation-Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements. The adoption of IFRS 10 did not require any adjustments to the Company’s financial statements.

IFRS 12 Disclosure of Interests in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The adoption of IFRS 12 did not require any adjustments to the Company’s financial statements.

IFRS 13 Fair Value Measurements explains how to measure fair value by providing a clear definition and introducing a single set of guidance for (almost) all fair value measurements. It clarifies how to measure fair value when a market becomes less active and improves transparency through additional

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

disclosures. The adoption of IFRS 13 did not require any adjustments to the Company’s financial statements.

In 2012, the Company has early adopted the Annual Improvements to IFRSs 2009-2011 Cycle of IAS 1 Presentation of Financial Statements. The amendments to IAS 1 clarifies the requirements for comparative information when entities apply accounting policies retrospectively, makes a retrospective restatement of items in the financial statements, or when items are reclassified in its financial statements. By early adopting the standard, the Company has determined that they are not required to present a third statement of financial position for items that have been reclassified retrospectively. The amendments are effective for annual periods beginning on or after January 1, 2013 but can be applied earlier.

The following new accounting pronouncements have been issued but are not effective and may have an impact on the Company:

IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement, and is currently being developed in stages by the IASB. It addresses the classification, measurement and derecognition of financial assets and financial liabilities. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. In November 2013, the IASB issued an amendment to IFRS 9 which includes a new hedge model that aligns accounting more closely with risk management as well as enhancements to the disclosures about hedge accounting and risk management. Additionally, as the impairment guidance in IFRS 9, as well as certain limited amendments to the classification and measurement requirements of IFRS 9 are not yet complete, the previously mandated effective date of IFRS 9 of January 1, 2015 has been removed. Entities may apply IFRS 9 before the IASB completes the amendments, but are not required to. IFRS 9 has also been amended not to require the restatement of comparative period financial statements for the initial application of the classification and measuring requirements of IFRS 9, but instead requires modified disclosures on transition to IFRS 9. The Company has not early adopted this standard and is currently assessing the impact that this standard will have on the consolidated financial statements.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


4.	Cost of Sales and Expenses


		Year ended December 31
		2013			2012			2011
Cost of Sales
Direct cost of sales	$	22,462,874		$	24,152,329		$	21,350,947
Depreciation and amortization		131,533			116,290			84,282
	$	22,594,407		$	24,268,619		$	21,435,229

Selling and distributing expenses
Direct expenses	$	5,503,105		$	6,507,349		$	4,940,721
Depreciation and amortization		795,578			758,400			673,400
Less: Government contribution (Note 8)		(21,841	)		(53,123	)		-
	$	6,276,842		$	7,212,626		$	5,614,121

General and administrative expenses
Direct expenses	$	3,917,375		$	5,171,267		$	7,087,370
Capitalized to inventory/transfer to cost of sales		(347,957	)		(191,861	)		(112,581	)
Depreciation and amortization		151,763			182,325			220,684
Less: Government contribution (Note 8)		(12,308	)		(64,811	)		-
	$	3,708,873		$	5,096,920		$	7,195,473

Product development expenses, net
Direct expenses	$	3,190,509		$	3,001,171		$	2,454,270
Depreciation and amortization		322,449			418,780			546,979
	$	3,512,958		$	3,419,951		$	3,001,249
Government contribution (Note 8)		(2,079,572	)		(1,046,603	)		(1,706,476	)
	$	1,433,386		$	2,373,348		$	1,294,773

Supplementary information:
Short-term employee benefits	$	10,665,348		$	13,276,567		$	11,996,369

Short-term employee benefits include wages, salaries, bonus, sales commissions, social security contributions, extended health premiums, Medical Services Plan payments, Registered Retirement Savings Plan contributions and vacation accrual.


5.	Business Combination


a.)	Acquisition of US-Based Satellite Communication Business

On April 16, 2013, the Company entered into a definitive agreement to acquire certain business assets and assume certain liabilities of CVG, Incorporated (“CVG”), a US-based satellite communication business. The Company financed the transaction with cash from operations. The acquired assets include new products and associated intellectual property (“IP”) that align with the Company’s existing product roadmap and allow the Company to immediately enter new and additional areas within the satellite communications markets with solid state power amplifiers (“SSPAs”), high power block upconverters (“BUCs”), SATCOM baseband kits and Microsatellite terminals (terminals with antenna sizes below 1 metre).

The CVG acquisition has been accounted for as an acquisition of a business and the identified assets, and liabilities 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 purchase price allocation below.

The assessed fair value of the identifiable assets and liabilities of CVG as at April 16, 2013 are as follows:

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


Fair value recognized on acquisition
Assets
Inventories	$	793,153
Property and equipment		258,687
Assets held for sale		32,778
Total Assets		1,084,618

Liabilities
Accrued liabilities		21,308
Provisions		533,140
Total Liabilities		554,448

Total identifiable net assets at fair value	$	530,170
Purchase consideration transferred	$	530,170

The Company recognized $32,778 assets held for sale at acquisition date, comprised of assets redundant to the Company’s operation and which the Company intends to dispose of within one year. Subsequent to the acquisition, the Company realized $32,778 relating to the disposal of these assets. As at December 31, 2013, the Company did not hold any assets held for sale.

Provisions relate to product warranty liabilities for products sold by CVG prior to the acquisition.

Purchase consideration

The Company paid cash consideration of $530,170 and financed the purchase from the Company’s cash and cash equivalents.

As at December 31, 2013, acquisition related costs, including legal, professional fees and relocation expenses amounting to $131,399 have been recognized as a general and administrative expense in the Consolidated Statements of Earnings and Comprehensive Income.

CVG’s contribution to the Company’s results

CVG has contributed the following revenue and net earnings to the Company’s results, from the acquisition date to December 31, 2013:


		Revenue		Net earnings
Norsat International Inc. (without CVG)	$	34,880,922	$	3,321,969
CVG		1,536,776		384,935
	$	36,417,698	$	3,706,904

Had the acquisition occurred on January 1, 2013, the Company’s revenue and net earnings for the period to December 31, 2013 would have been the following:
		Revenue		Net earnings
Norsat International Inc. (without CVG)	$	34,880,922	$	3,321,969
CVG		2,169,566		543,437
	$	37,050,488	$	3,865,406

These amounts have been determined by applying the Company’s accounting policies and adjusting the results of CVG to reflect additional employee expenses, depreciation and amortization that would have

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

been charged assuming the fair value adjustments to property and equipment had been applied from January 1, 2013.


b.)	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 acquired Sinclair because the Company believes the acquisition of Sinclair complemented the Company’s core businesses and supported the Company’s goal of becoming a leading provider of innovative communication solutions that enable the transmission of data, audio and video for challenging applications and environments. With the addition of Sinclair’s product lines and customer base, the Company has diversified into the commercial space and into the municipal government level. In addition, by combining forces with Sinclair, the Company was able to realize opportunities to cross sell its customer base, resell Sinclair’s products using its Microwave Products segment, and expose Sinclair’s products to the Company’s 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:

In 2013, the Company released $1,000,000 in cash from escrow to the vendors as part of the purchase consideration. The funds were originally held in escrow to act as security for certain events should the Company be subject to any liabilities, claims or similar arising from representation or warranties made by the vendors.

In 2013, the Company also paid $755,258 in cash to the vendors, respectively, as part of the purchase consideration, representing full settlement of a promissory note with total principal payments owing of $725,000 and accumulated interest of $30,258.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


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		597,689
Intangible assets, net		10,138,717
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

Goodwill is primarily related to growth expectations, expected future profitability, the substantial skill and expertise of Sinclair’s workforce and expected cost synergies. Goodwill arising on the acquisition of Sinclair is not deductible for tax purposes.

The Company has collected substantially all of the trade and other receivables recognized on acquisition.

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, debt financing from its principal banker of $12,000,000, contingent consideration of 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.

$1,000,000 of the cash consideration was 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

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

the vendors. The $1,000,000, less claimed amounts, if any, is releasable to the vendors on January 21, 2013. The $1,000,000 was released to the vendors during the first quarter of 2013.

At December 31, 2011, the 4,028,932 common shares component of the purchase consideration was held in escrow. The common shares were to be released to the vendors, at rate of 100%, 75% or 0%, subject to Sinclair achieving certain financial metrics for the year ended December 31 2011. Based on Sinclair’s fiscal 2011 financial results, the Company released from escrow 100% of the common shares to the vendors during the second quarter of 2012.

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:


Risk free interest rate	1.70%
Expected life	1.57 years
Vesting period	Immediately
Expected volatility	60.4%
Expected dividends	nil

The promissory notes were held in escrow and were to 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.

On May 30, 2012 the vendors and the Company agreed to a reduction in the final contingent payment from the original face value of $750,000 to $725,000 for immediate release of the promissory notes from escrow. The timing of the payout remains unchanged: 50% of the principal plus interest to be paid on March 29, 2013 and the balance of the principal plus interest on June 28, 2013. As a result of the change in face value, the Company decreased in the second quarter the related accretion expense by $20,833 and accumulated interest accrued by $312 with a corresponding decrease in promissory note payable and accrued liabilities. The value of the promissory notes as at December 31, 2012 was $693,129 (2011-$597,226). During 2013, all of the promissory notes were redeemed by the Company.

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 14).

The Company incurred transaction costs of approximately $800,000 of which $500,000 and $300,000 were incurred in 2011 and 2010 respectively, in relation to the acquisition that were recognized in the Consolidated Statements of Earnings and Comprehensive Income.

6.	Capital Disclosures

The Company's objectives and policies for managing capital are to maintain a strong capital base so as to maintain investor, creditor and market confidence, sustain future development of the business and to safeguard the 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 Statements of Financial Position in the shareholders’ equity section, promissory note payable, government contributions 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 December 31, 2013 shareholder’s equity was $26,423,509 (2012 - $24,233,562).

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

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 13).

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 8a).

As described in Note 8b, the Company has signed a new SADI agreement in 2013. Funding is conditional on maintaining certain reporting requirements. As at December 31, 2013, the Company is in compliance with these reporting requirements.

For the year ended December 31, 2013, there were no changes in the Company's approach to capital management.

As at December 31, 2013 the Company had the following externally imposed capital requirements under its operating line of credit agreements (Note 13) and the acquisition loan agreement (Note 14):

Working capital ratio (current assets divided by current liabilities) cannot be less than 1.25:1.00 – calculated quarterly,
Debt service coverage ratio cannot be (i) less than 1.00 to 1.00 for fiscal year ending December 31, 2013 (ii) less than 1.10 to 1.00 for the fiscal year ending December 31, 2014, (iii) less than 1.20 to 1.00 for the fiscal year ending December 31, 2015, and thereafter. The ratio is based on earnings before interest, tax, depreciation, amortization and share-based payments (“EBITDAS”) plus loss on sale of assets less cash taxes, dividends, distributions, advances to related parties, gains on sale of assets and unfunded capital expenditures divided by the aggregate principal and interest payments made during the relevant fiscal year. This ratio shall be calculated annually and based on the Company’s consolidated financial statements. For the fiscal year ending December 31, 2013, the debt service coverage ratio calculation shall exclude business acquisitions (share or asset purchases) from unfunded capital expenditures.
Funded debt to EBITDAS, less unfunded capital expenditures cannot at any time exceed 2.50:1.00 – calculated quarterly, on a rolling 12 month basis. Funded debt includes the Company’s operating line of credit and acquisition loan.

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 (Note 14).

As at December 31, 2013, the Company is in compliance with its externally imposed covenants.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


7.	Financial Instruments and Risk Exposures

Fair value measurement

The Company’s financial assets include cash and cash equivalent and trade and other receivables. The Company’s financial liabilities include trade and other accounts payable, accrued liabilities, acquisition loan, and promissory note payable.

The Company has classified its cash and cash equivalents and trade and other receivables, as loans and receivables, measured at amortized cost using the effective interest rate method. Trade and other payables, accrued liabilities, provisions, acquisition loan, and promissory note payable are classified as other financial liabilities, measured at amortized cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability.

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 trade and other receivables and establishes an allowance account for credit losses based on its best estimate of any potentially uncollectible accounts. As at December 31, 2013, the balance of the allowance account for credit losses was $55,859 (2012-$71,744).

Pursuant to their respective terms, net trade and other receivables was aged as follows as at December 31, 2013 and 2012:


		As at December 31
		2013		2012
0-30 days	$	3,960,760	$	3,854,154
31-60 days		2,061,790		1,802,502
61-90 days		648,255		1,176,067
Greater than 90 days		150,350		260,446
Total trade and other receivables	$	6,821,155	$	7,093,169

There is a possibility of increased customer credit risk due to the ongoing global recessionary trends. As at December 31, 2013, the Company’s trade accounts receivable are made up of approximately 5% (2012 –15%) government trade receivables and the balance of the outstanding trade accounts receivable are spread over a large number of customers.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

The Company may also have credit risk relating to cash and cash equivalents, which it manages by dealing with large 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 December 31, 2013 totaled $3,272,595 (2012- $5,053,445), and trade and other receivables of $6,821,155 (2012- $7,093,169), 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 to funds in Canadian and or United States dollars to meet short-term financing obligations.

As at December 31, 2013, the Company had cash and cash equivalents of $3,272,595, and trade and other receivables of $6,821,155 for a total of $10,093,750. The liquidity and maturity timing of these assets are adequate for the settlement of the following short-term financial obligations:


		2014
Acquisition loan	$	1,920,000
Accrued liabilities		1,956,998
Trade and other payables		2,162,196
Total	$	6,039,194

Although the acquisition loan is due on demand, the Company does not believe that the demand feature will be exercised. Assuming payment of the acquisition loan is not demanded, scheduled repayment on the acquisition loan over the next five years is shown under note 23, Commitments and Contingencies.

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, acquisition loan and provisions) in currencies other than the United States dollar, primarily the Canadian dollar. In addition, the Company also has Canadian dollar denominated trade and other receivables that are subject to currency risk.

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 $195,000 (2012 - $180,000, 2011 - $177,000).

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s acquisition loan subject to floating interest rates. The Company does not enter into any interest rate swaps to mitigate interest rate risk.


8.	Government Contributions


a.)	Strategic Aerospace & Defense Initiative (“SADI I”)

The Company entered into an agreement with the Canadian Federal Minister of Industry (the “Minister”) through the Strategic Aerospace & Defense Initiative (“SADI”) in September 2008 and subsequently amended in October 2011. The Company has claimed the maximum funding of Cdn$5,975,200 under this agreement as at December 31, 2012.

For the year ended December 31, 2013, the Company received the remaining funds of $571,817 (Cdn$592,270) relating to SADI I that was outstanding as at December 31, 2012. As at December 31, 2013, nil remains in trade and other receivables relating to SADI I. Total cash received relating to SADI I was $1,673,055 for the year ended December 31, 2012 (2011-$1,127,888).

For the year ended December 31, 2013, the Company did not record any amounts as a reduction to product development expenses related to SADI I as the Company has claimed the maximum funding in 2012. For the year ended December 31, 2012, the Company recorded $930,772 (2011- 1,602,199) as a reduction to product development expense in the Consolidated Statements of Earnings and Comprehensive Income relating to SADI I. For the year ended December 31, 2012, the Company also recorded $15,863 (2011-$191,383) and $nil (2011-$68,831) as a reduction to property and equipment costs and software costs, respectively.

Starting in 2013, the Company is obligated to make annual repayments over the defined Repayment Period, with the following terms:

The Repayment Period began January 1, 2013 and will continue for 15 years, or until such time as the maximum amount of Cdn$8,962,800 (representing 1.5 times the contributions received) of the actual amounts disbursed by the Minister (Cdn$5,975,200) is repaid, whichever occurs earlier.
Annual repayment amounts under the SADI I repayment period are calculated based on a repayment rate of 0.94% multiplied by gross business revenue as defined in the SADI I agreement multiplied by the adjustment rate (based on the growth of gross business revenue over the previous year). The adjustment factor is based on year-over-year change of gross business revenue.

As at December 31, 2013, the Company has calculated the SADI I repayment amount to be nil as annual actual sales did not meet the criteria for repayment pursuant to the repayment terms of the SADI I agreement and the Company’s accounting policy relating to SADI repayment (see Note 3.23 Government repayment).


b.)	Strategic Aerospace & Defense Initiative (“SADI II”)

On March 28, 2013, the Company entered into an agreement with the Minister through the SADI whereby the Minister will provide funding of 30% of eligible spending related to the research and development of the aerospace, defence, space or security (“A&D”) technology development projects to a maximum funding amount of Cdn$13,270,265 for eligible costs starting from July 27, 2012 up to and including December 31,

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

2017 (“SADI II”). The Company is obliged to repay the funding over the SADI II defined Repayment Period.

For the year ended December 31, 2013, the Company has recorded $2,113,720 as a reduction to product development expenses in the Consolidated Statements of Earnings and Comprehensive Income related to SADI II and $124,883 as a reduction to property and equipment costs relating to SADI II.

As at December 31, 2013, $343,311 (Cdn$506,000) remains in trade and other receivables relating to SADI II for costs incurred.

For the year ended December 31, 2013, total cash received under SADI II was $1,779,326.

SADI II repayment is contingent on performance benchmarks established at the end of the Company’s fiscal 2017 year end and is capped at the lesser of 1.5 times the contribution received (actual amounts disbursed by the Minister) and the amounts actually repaid over a period of 15 years, commencing in 2018. 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 December 31, 2013, the Company did not accrue any liability for repayment relating to SADI II as the amount to be repaid cannot yet be determined since the repayment amount is contingent on 2018 financial results compared to those achieved in 2017.


c.)	Digital Technology Adoption Pilot Program (“DTAPP”)

In February 2012, the Company entered into an agreement with the National Research Council Canada (“NRC”), as represented by its Industrial Research Assistance Program, whereby the NRC agrees to reimburse the Company 80% of salary costs and 50% of contractor fees incurred related to eligible projects that adopt digital technology to improve productivity (“February DTAPP”). The NRC has agreed to provide the Company maximum funding of Cdn$99,993 for the designated project covering the time period January 16, 2012 to March 31, 2012. Repayment of contributions received is not required.

In July 2012, the Company entered into an agreement with the NRC relating to a separate project that adopts digital technology to improve productivity (“July DTAPP”). The NRC has agreed to reimburse the Company 80% of salary costs incurred between June 1, 2012 and February 28, 2013 relating to the project. The NRC has agreed to provide the Company maximum funding of Cdn$99,999.

In August 2012, the Company entered into an agreement with the NRC relating to a separate project that adopts digital technology to improve productivity (“August DTAPP”). The NRC has agreed to reimburse the Company 80% of salary costs and 75% contractor fees incurred between August 1, 2012 and March 15, 2013 relating to the project. The NRC has agreed to provide the Company maximum funding of Cdn$90,000. Effective February 1, 2013, the NRC extended the expiry date of the eligible period from March 15, 2013 to September 30, 2013 with all other terms and conditions remaining unchanged.

For the year ended December 31, 2013, the Company has recorded $98,886 as a reduction to expenses in the Consolidated Statements of Earnings and Comprehensive Income relating to its DTAPP agreements (2012- $177,902).

Total cash received was $130,190 for the year ended December 31, 2013 (2012-$141,808).

As at December 31, 2013, the Company has completed all DTAPP programs and have received all government funding claimed. As a result, nil remains outstanding in trade and other receivables relating to the DTAPP agreements (December 31, 2012 - $36,662 (Cdn$36,623)).

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


d.)	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 this 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 1,206,811 warrants issued to TPC expired.

In addition, the Company is also obligated to make royalty payments to TPC based on the following terms:

1.88% on sales of legacy products
1.28% before and 1.03% after issuance of warrants on sales of new SIT technology products
The royalty payment period was amended to commence on January 1, 2004 and end on the earliest of the following dates;
- the date before December 31, 2007, for which cumulative royalties accrued reach Cdn$15 million;
- 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. As a result, there are no more royalties accruing to the government as of January 1, 2012.

Royalties due under the TPC Agreements are recorded and expensed as the related sales occurred. The royalty was payable annually within 60 days of the year end.

During the year ended December 31, 2012, the Company made a final payment of $91,466 in royalties based upon revenues generated in fiscal 2011 (2011- $86,466).


9.	Inventories


		As at December 31
		2013		2012
Parts and supplies	$	7,772,531	$	6,864,243
Work in process		629,465		267,295
Finished goods		3,836,114		3,590,347
Gross inventory balance (a)	$	12,238,110	$	10,721,885

For the year ended December 31, 2013, the Company recognized inventories of $22,441,712 (2012-$24,152,329, 2011-$21,350,947) as expenses (Note 4).

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

Changes in the obsolescence provision of the periods presented are as follows:


		As at December 31
		2013			2012
Obsolescence balance, beginning of period	$	1,682,470		$	1,409,365
Net increase		1,073,254			350,142
Write-off		(83,903	)		(77,037	)
Obsolescence balance, end of period (b)		2,671,821			1,682,470

Net inventory balance, end of period (a-b)	$	9,566,289		$	9,039,415


10.	Property and Equipment, net


		Equipment			Furniture and			Leasehold			Total
					Fixtures			Improvements
Cost
Balance, December 31, 2011	$	1,370,166		$	169,830		$	683,555		$	2,223,551
Additions		331,928		$	44,641		$	56,222			432,791
Disposals		(234,283	)		-			-			(234,283	)
Sale of subsidiary (Note 24)		(38,524	)		(33,987	)		(25,200	)		(97,711	)
Government contributions (Note 8)		(15,863	)		-			-			(15,863	)
Transfers		(21,952	)		21,952			-			-
Foreign exchange translation		120,467			9,319			-			129,786
Balance, December 31, 2012	$	1,511,939		$	211,755		$	714,577		$	2,438,271
Additions		425,897			14,029			21,119			461,045
Acquired through business combination (Note 5a)		253,487			5,200			-			258,687
Disposals		(46,803	)		(2,250	)		-			(49,053	)
Government contributions (Note 8)		(103,518	)		-			(2,760	)		(106,278	)
Foreign exchange translation		(343,777	)		(31,073	)		-			(374,850	)
Balance, December 31, 2013	$	1,697,225		$	197,661		$	732,936		$	2,627,822


Accumulated Depreciation
Balance , December 31, 2011	$	498,183		$	51,427		$	597,202		$	1,146,812
Depreciation for the period		370,658			29,710			31,436			431,804
Sale of subsidiary (Note 24)		(22,981	)		(12,785	)		(19,367	)		(55,133	)
Disposals		(145,091	)		-			-			(145,091	)
Foreign exchange translation		109,713			8,814			-			118,527
Balance, December 31, 2012	$	810,482		$	77,166		$	609,271		$	1,496,919
Depreciation for the period		391,183			34,550			33,176			458,909
Disposals		(34,236	)		(2,250	)		-			(36,486	)
Foreign exchange translation		(316,457	)		(30,223	)		-			(346,680	)
Balance, December 31, 2013	$	850,972		$	79,243		$	642,447		$	1,572,662

Net book value
Balance, December 31, 2012		701,457			134,589			105,306			941,352
Balance, December 31, 2013	$	846,253		$	118,418		$	90,489		$	1,055,160

As at December 31, 2012, the Company has abandoned its involvement in a particular R&D project. The related cost of $183,421 and accumulated amortization of $145,091 were written off from the Statements of Financial Position and are presented under Disposals in the above table. A total of $38,330 was included as loss in disposal of property and equipment in the Consolidated Statements of Earnings and Comprehensive Income.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


11.	Intangible Assets, net


		Software			Customer			Product			Brand			Other			Total
					Relationships			Designs
Cost
Balance, December 31, 2011	$	871,098		$	5,495,678		$	2,936,427		$	1,228,265		$	283,219		$	10,814,687
Additions		92,917			-			-			-			-			92,917
Disposals		(131,169	)		-			-			-			-			(131,169	)
Foreign exchange translation		2,773			69,407			65,101			27,231			6,279			170,791
Balance, December 31, 2012		835,619			5,565,085			3,001,528			1,255,496			289,498			10,947,226
Additions		153,500			-			-			-			-			153,500
Government contributions (Note 8)		(18,606	)		-			-			-			-			(18,606	)
Foreign exchange translation		(39,942	)		(111,912	)		(193,811	)		(81,068	)		(18,693	)		(445,426	)
Balance, December 31, 2013	$	930,571		$	5,453,173		$	2,807,717		$	1,174,428		$	270,805		$	10,636,694


Accumulated Amortization
Balance, December 31, 2011	$	672,916		$	610,491		$	134,586		$	-		$	57,467		$	1,475,460
Amortization for the period		167,387			669,795			149,438			-			57,372			1,043,992
Disposals		(131,169	)		-			-			-			-			(131,169	)
Foreign exhange translation		2,212			7,280			3,622			-			1,562			14,676
Balance, December 31, 2012		711,346			1,287,566			287,646			-			116,401			2,402,959
Amortization for the period		86,002			664,395			144,996			-			47,021			942,414
Foreign exhange translation		(33,769	)		(19,822	)		(23,184	)		-			(9,011	)		(85,786	)
Balance, December 31, 2013	$	763,579		$	1,932,139		$	409,458		$	-		$	154,411		$	3,259,587

The Company conducts an annual impairment assessment of intangible assets with indefinite life (“Brand”) in the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

For the purpose of annual impairment testing, Brand is allocated to Sinclair Technologies (“Sinclair”), the cash-generating unit in which Brand belongs. The Company assesses Brand and Goodwill together as a part of the annual impairment test for Sinclair. Refer to note 12 for the impairment test on Sinclair.

The impairment test performed resulted in no impairment of Brand at December 31, 2013 or December 31, 2012.


12.	Goodwill

The movements in the gross and net carrying amount of goodwill are as follows:


		Goodwill
Balance, December 31, 2011	$	5,277,620
Foreign exchange translation		110,881
Balance, December 31, 2012		5,388,501
Foreign exchange translation		(284,131	)
Balance, December 31, 2013	$	5,104,370

For the purpose of annual impairment testing, goodwill is allocated to Sinclair, the cash-generating unit in which goodwill belongs.

The recoverable amount of Sinclair was determined based on value in use calculations, covering a five-year forecast , followed by an extrapolation of expected cash flows for the remaining useful lives using growth rates for revenue estimated by management. The cash flow projection is based on the annual budget approved by the Board of Directors. The growth rate is approximately 2%. The present value of the expected cash flows is determined by applying a suitable discount rate. The discount rate for 2013 is 16.4%.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

The growth rates of revenue reflect the long-term average growth rates for the product lines and industry of the segment.

The discount rate reflects appropriate adjustments relating to market risk and specific risk factors of the segment.

Management’s key assumptions to cash flow forecasting include moderately increasing net profit margins, based on past experience and current trends in the markets that the segment operates. The Company believes that this is the best available input for forecasting cash flows.

The recoverable amount of Sinclair based on value in use exceed its carrying value by approximately $3.4 million.

The impairment test performed resulted in no impairment of Goodwill at December 31, 2013 and 2012.

Apart from the considerations in determining the value in use of the segment described above, the Company is not aware of any other probable changes that would necessitate changes in its key estimates. Sensitivity testing was conducted as a part of the 2013 annual test. If the discount rate used is increased by 1%, the recoverable amount of Sinclair would reduce by approximately $1.5 million, which is approximately $1.9 million above its carrying value.


13.	Operating Line of Credit

On July 3, 2013, the Company renewed and amended its existing credit facility with HSBC Bank Canada (the “Bank”).

At the Company’s request, the demand revolving operating line of credit has been reduced to US$2.25 million (previously US$2.8 million). If drawn, applicable interest rates are as follows:

the Bank’s Prime Rate plus 0.5% per annum for amounts outstanding in Canadian dollars (previously the Bank’s Prime Rate plus 1.35% per annum) and/or
the Bank’s U.S. Base Rate plus 0.50% per annum for amounts outstanding in US dollars (previously the Bank’s U.S. Base Rate plus 1.35% per annum).

The covenants were amended and reflected in note 6 Capital Disclosure.

The following summarizes the Company’s credit facilities extended by the Bank as at December 31, 2013:

The Company has a secured revolving operating line of credit with the Bank of US$2.25 million (2012 -US$2.8 million) subject to an interest rate at the Bank’s Prime Rate plus 0.5% per annum for amounts outstanding in Canadian dollars and/or the Bank’s U.S. Base Rate plus 0.5% per annum for amounts outstanding in US dollars. The operating line of credit is payable upon demand by the Bank. As at December 31, 2013 and 2012, the Company had no borrowings outstanding with respect to the operating line of credit.

In addition, the Company has a secured non-revolving demand loan of US$1,000,000 to assist in financing the working capital requirements of the Company, subject to an interest rate at the Bank’s US base rate plus an applicable spread and/or the Bank’s LIBOR rate plus an applicable spread. The applicable spread ranges from 0.5% to 3.5% (previously 1% to 4%) depending on the Company’s funded debt to EBITDAS ratio determined on a rolling 12 month basis based on the Company’s consolidated financial statements. As at December 31, 2013, the Company had no borrowings outstanding with respect to the non-revolving demand note.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

The Company also has an additional revolving demand note with HSBC Bank USA in the principal amount of US$900,000 subject to an interest rate of prime plus 1.5% per annum and payable upon demand. As at December 31, 2013 and 2012, the Company had no borrowing outstanding with respect to the revolving demand note.

Accordingly, as at December 31, 2013, the Company has access to undrawn credit facilities totaling $4.15 million and is in compliance with its externally imposed covenants.


14.	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 the Bank 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 acquisition loan was repayable in full within 48 months of the date of the initial advance, January 21, 2011. A portion of the loan is repayable in Canadian dollars and the remaining loan is repayable in U.S. dollars

The loan is secured by all assets of the Company under a general security assignment.

On July 3, 2013, the Company renewed and amended its existing credit facility with the Bank. The acquisition loan was extended for 3 years, ending on June 30, 2016. As a result, monthly principal repayments have been reduced to $160,000 (previously $250,000), with applicable interest rate spread ranging from 0.5% to 3.5% (previously 1% to 4%) depending on the Company’s funded debt to EBITDAS ratio determined on a rolling 12 month basis based on the Company’s consolidated financial statements.

For the year ended December 31, 2013, the Company made principal repayments totaling $2,370,000 (2012-$2,800,000) against the acquisition loan. As at December 31, 2013, the Company’s combined weighted average interest rate was 3.02% (2012 – 4.29%).

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 of these capitalized costs as at December 31, 2013 was $29,408 (2012-$56,554).

The Company has externally imposed capital requirements under its acquisition loan agreement. Please refer to note 6, Capital Disclosures.

As at December 31, 2013, the Company is in compliance with its externally imposed covenants.


15.	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.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


		Amount
Balance, December 31, 2011	$	186,716
Warranty additions		557,439
Warranty used/expired		(358,205	)
Balance, December 31, 2012	$	385,950
Warranty additions		409,717
Warranty acquired through business combination (Note 5a)		533,140
Warranty used/expired		(477,370	)
Balance, December 31, 2013	$	851,437


16.	Issued Capital

a)	Authorized

	On May 8, 2013, the shareholders of Norsat voted and approved the increase of the Company’s authorized capital from 100,000,000 common shares without par value to an unlimited number of common shares without par value (2012-100,000,000).

b)	Shares issued and outstanding

	Total shares issued and outstanding as at December 31, 2013 and 2012 were 58,316,532 at $39,850,648.

	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.

c)	Share purchase option plan

	On May 9, 2012, the shareholders of the Company approved the adoption of a new stock option plan (the “New Stock Option Plan”) in order to modernize and incorporate the changes to the Toronto Stock Exchange (the “TSX”) policies and regulations. In addition, the New Stock Option Plan addressed recent amendments to applicable Canadian income tax regulations, whereby issuers are required to collect withholding taxes from optionees in connection with option exercises.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

Under the New Stock Option Plan, any increase in the number of outstanding common shares of the Company will result in an increase in the number of common shares that are available to be issued under the plan in the future, and any exercise of an option previously granted under the plan will result in an additional grant being available under the plan. All validly outstanding options existing on May 9, 2012 were counted for the purposes of calculating what may be issued under the New Stock Option Plan.

The Company has reserved 5,831,653 common shares under its incentive share option plan of which all remain available. 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.

Options vest in 2 years and expire 5 years from the grant date.

Share purchase options outstanding as at December 31, 2013, 2012 and 2011are as follows:


Share purchase options outstanding	Number of options			Weighted average exercise
Balance, December 31, 2011	1,941,900		$	0.87
Granted	177,000			0.5
Expired	(280,300	)		1.85
Forfeited	(63,200	)		0.62
Balance, December 31, 2012	1,775,400		$	0.69
Granted	708,928			0.53
Expired	(104,200	)		1.39
Forfeited	(309,969	)		0.52
Balance, December 31, 2013	2,070,159		$	0.62

The following table summarizes information pertaining to the Company’s share purchase options outstanding at December 31, 2013:


	Options outstanding			Options exercisable
Range of	Number of	Weighted average	Weighted	Number of	Weighted
exercise prices	options	remaining contractual	average	options	average
Cdn$	outstanding	life(years)	exercise price	exercisable	exercise price
			Cdn$		Cdn$
$0.25 to $0.49	417,000	3.06	0.48	381,000	0.48
$0.50 to $0.74	1,259,559	3.02	0.60	620,600	0.67
$0.75 to $0.99	393,600	1.74	0.84	393,600	0.84
	2,070,159	2.79	0.62	1,395,200	0.67

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 share based payment 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 years ended December 31, 2013, 2012 and 2011:


		Year ended December 31
		2013		2012		2011
Share-based payments - options	$	155,925	$	179,353	$	114,237

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

The weighted average assumptions used to estimate the fair value of options granted during the years ended December 31, 2013, 2012 and 2011 were:


	Year ended December 31
	2013		2012		2011
Risk free interest rate	1.27	%	1.26	%	1.86	%
Expected life	3.12		3.5		3.5
Vesting period	2 years		2 years		2 years
Expected volatility	51	%	67	%	75	%
Expected dividends	Nil		Nil		Nil
Average fair value	Cdn$0.19		Cdn$0.24		Cdn$0.34
Forfeiture rate	18	%	18	%	14	%

During 2013, a total of 707,928 stock purchase options were granted at an average exercise price of Cdn$0.54 and weighted average fair value of Cdn$0.19 , of which, 459,020 stock purchase options were granted to senior management and directors at an average exercise price of Cdn$0.54 and fair value of Cdn$0.19

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)	Restricted Share Unit Plan

On May 9, 2012, the shareholders of the Company approved the adoption of a Restricted Share Unit Plan (the “RSU Plan”) as part of a new long term incentive plan developed to attract and retain the Company’s employees. This RSU Plan is valid for ten years after the date of adoption.

On May 9, 2012 the Company granted 341,173 RSUs to directors, officers and employees that fully vest after a 34 month period, with one third of the grants vesting on May 9, 2013, one third vesting on May 9, 2014 and one third on March 9, 2015. Upon vesting, the participants will receive one common share or cash equivalent for each RSU share held. The only performance condition is the lapse of time and that the participant remains at the Company’s employ for the specified periods. The granting of RSUs is considered an equity-settled share-based payment transaction. The fair value of the grant was determined by multiplying the Company’s share price at grant date by the number of RSUs granted. The resulting fair value is then adjusted by an estimated forfeiture rate of 18% and then recognized over the vesting period. Since there are three vesting periods, the recognition of expenses is front loaded with most of the expenses recognized during the first year following the grant date.

The measurement of the compensation expense is recorded as a charge to operating expenses over the vesting period of the RSUs.

On May 10, 2013, the Company granted 555,624 RSUs to its employees with fair value of $0.50 per share, of which 430,196 RSUs were issued to directors and senior management. One third of the RSUs will vest on May 9, 2014, one third on May 8, 2015 and the remaining one third on November 6, 2015.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

The following table summarizes information pertaining to the Company’s RSUs outstanding at December 31, 2013:


	# of RSUs outstanding
Balance, December 31, 2011	-
Granted	341,173
Forfeited	(10,901	)
Balance, December 31, 2012	330,272
Granted	555,624
Vested	(108,912	)
Forfeited	(64,809	)
Balance, December 31, 2013	712,175

The Company charged share-based payments of $132,108 (2012 - $50,211 & 2011 – nil) to operating expenses in connection with the Company’s RSU plan, with a corresponding increase in contributed surplus.


17.	Treasury shares

The Company purchases common shares in the open market to provide shares to participants of RSUs at applicable vesting dates. These shares are held by a third party trustee to be released to participants upon vesting of the RSUs.

The following table summarizes information pertaining to treasury shares outstanding at December 31, 2013, 2012 and 2011:


Treasury Shares Outstanding	Number of shares			Amount
Balance, December 31, 2011	-		$	-
Shares purchased to settle RSUs	279,800			131,474
Balance, December 31, 2012	279,800			131,474
RSUs issued upon vesting	(91,724	)		(43,100	)
Shares purchased to settle the RSUs	454,100			223,277
Share purchase cost	-			6,604
Balance, December 31, 2013	642,176		$	318,255

As at December 31, 2013, the trustee held a total of 642,176 common shares of the Company with a market value of approximately $295,849 (Cdn$314,666).

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


18.	Earnings per Share

The reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations was as follows for the years ended December 31, 2013, 2012 and 2011:


		Year ended December 31
		2013		2012		2011
Numerator
Net earnings from continuing operations	$	3,706,904	$	5,054,312	$	470,952
Denominator:
Weighted average number of shares outstanding used to compute basic EPS		57,802,680		58,146,053		58,045,606
Dilution from exercise of stock options		22,131		2,659		119,597
Weighted average number of shares outstanding used to compute diluted EPS		57,824,811		58,148,712		58,165,203

Net earnings per share - from continuing operations:
Basic	$	0.06	$	0.09	$	0.01
Diluted	$	0.06	$	0.09	$	0.01

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.


19.	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 from operations before income taxes. The principal factors causing these differences are shown below:


		Year ended December 31
		2013			2012			2011
Earnings before income taxes	$	2,975,754		$	2,553,214		$	1,760,618
Statutory tax rate		26.00	%		25.00	%		26.50	%
Calculated tax payable		773,696			638,304			466,564
Increase (decrease) resulting from:
Foreign tax rate difference		311,701			275,339			37,485
Effect of statutory rate change		276,134			12,527			36,846
Non allowable (non taxable) income		(632,956	)		(271,010	)		(164,623	)
(Unrecognized) recognized deductible temporary items		(1,143,828	)		(2,974,835	)		974,636
Change in foreign exchange		-			-			218,263
Adjustments for purchase price allocation		(272,962	)		(296,037	)		(231,541	)
Other		(42,935	)		114,614			(47,964	)
Income tax (recovery)/expense	$	(731,150	)	$	(2,501,098	)	$	1,289,666

Current income tax expense		269,812			782,034			811,081
Deferred income tax(receovery)/expense		(1,000,962	)		(3,283,132	)		478,585
Income tax (recovery)/expense	$	(731,150	)	$	(2,501,098	)	$	1,289,666

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)


b)	Deferred Income Tax Assets & Liabilities

The tax effect of the temporary differences that give rise to deferred income tax assets are presented below:


		As at December 31
		2013			2012
Scientific research and experimental development pool	$	1,566,933		$	3,327,913
Scientific research and experimental tax credit		2,248,276			273,103
Temporary differences in working capital		1,084,791			570,984
Deferred income tax assets		4,900,000			4,172,000
Deferred income tax liabilities		(2,002,973	)		(2,364,702	)
Net deferred income tax assets (liabilities)	$	2,897,027		$	1,807,298

The tax effect of the temporary differences that give rise to unrecognized tax assets are presented below:


		As at December 31
		2013		2012
Non capital loss carryforwards	$	3,071,471	$	2,372,438
Scientific research and experimental development pool		1,459,481		-
Scientific research and experimental tax credit		1,146,068		2,973,656
Capital assets		1,906,295		2,985,638
Net capital loss carryforwards		957,121		920,309
Unrecognized deferred income tax assets		8,540,436		9,252,041
Unrecognized deferred income tax liabilities from unrealized foreign exchange		-		(37,571	)
Net unrecognized deferred income tax assets	$	8,540,436	$	9,214,470


c)	Loss Carry Forwards and Investment Tax Credits

At December 31, 2013 the Company has federal and provincial investment tax credits of Cdn$3,038,209 and Cdn$967,053, respectively, available to reduce future Canadian federal and provincial taxes payable. The amounts expire as follows:


		Federal investment		Provincial investment
		tax credit		tax credit
		Cdn$		Cdn$
2014	$	-	$	14,292
2015		-		-
2016		-		140,190
2017		-		147,423
2018		73,878		131,708
2019 and after		2,964,331		533,440
	$	3,038,209	$	967,053

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$12,438,000. Management has assessed that these tax credits and the SRED pool will be utilized before they expire.

The Company has also available approximately Cdn$7,362,000 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 as management assessed the likelihood of their utilization at less than probable.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

As at December 31, 2013 the Company has approximately $4,980,000 of net operating losses relating to Norsat International (America), Inc. The amount consists of losses accumulated from 2006 to 2013 and will expire from 2026 to 2033. The tax effect of these carry forwards has not been recorded in the consolidated financial statements as management assessed the likelihood of their utilization at less than probable.

At December 31, 2013, the Company has approximately $660,000 (£400,000) of losses carryforwards accumulated from 2004 to 2013 available to reduce future years' income for income tax purposes relating to Norsat International (United Kingdom) Ltd. The tax effect of these carry forwards has not been recorded in the consolidated financial statements as management assessed the likelihood of their utilization at less than probable.

At December 31, 2013, the Company has approximately $2,100,000 (£1,270,000) of losses carry forwards accumulated from 2007 to 2013 available to reduce future years' income for income tax purposes relating to relating to Sinclair Technologies Limited in the United Kingdom. The tax effect of these carry forwards has not been recorded in the consolidated financial statements as management assessed the likelihood of their utilization at less than probable.

At December 31, 2013, the Company had approximately $7,610,000 (CHF6,776,000) of loss carryforwards relating to Norsat S.A. The amount consists of losses accumulated from 2009 to 2013 and will expire from 2016 to 2020. The tax effect of these carry forwards has not been recorded in the consolidated financial statements as management assessed the likelihood of their utilization at less than probable.


20.	Segmented Information

The Company’s business operates primarily through three business segments – RF antennas and filters (“Sinclair Technologies”), Satellite Solutions, and Microwave Products.

These operating segments are monitored by the Company’s chief operating decision makers and strategic decisions are made on the basis of segment operating results.

Sinclair Technologies has over 2,000 different products including Base Station Antennas, Mobile/Transit Antennas, Covert Antennas, Filters, Receiver Multi-couplers, and Accessories. Sinclair Technologies’ two main product lines are antennas and filters.

The Satellite Solutions segment designs, develops and markets portable satellite systems, related accessories and services.

The Microwave Products segment designs, develops and markets receivers, transmitters and power amplifiers.

These Satellite Solutions and Microwave Products 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 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.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

The following tables set forth sales and gross profit information by operating segments for the years ended December 31, 2013, 2012 and 2011.


				Year ended December 31
		2013		2012		2011
Sales to external customers
Sinclair Technologies	$	22,477,034	$	24,173,342	$	20,218,382
Satellite Solutions		4,822,175		8,677,878		9,162,005
Microwave Products		9,118,489		9,577,540		8,411,370
	$	36,417,698	$	42,428,760	$	37,791,757

Gross Profit
Sinclair Technologies	$	9,587,855	$	10,618,718	$	9,151,996
Satellite Solutions		425,774		3,307,877		3,669,165
Microwave Products		3,809,662		4,233,546		3,535,367
	$	13,823,291	$	18,160,141	$	16,356,528

Total assets related to operations for each segment are calculated based on the percentage of total sales to external customers of each segment (Sinclair Technologies, Satellite Solutions and Microwave Products) over total consolidated sales, whereas property, equipment, and intangible assets of each segment reflect the carrying value of the assets.


		Sinclair		Satellite		Microwave		Consolidated
As at December 31, 2013
Total assets related to operations	$	22,800,887	$	5,492,025	$	10,385,142	$	38,678,054
Property and equipment, net		163,976		308,266		582,918		1,055,160
Intangible assets, net		7,325,348		17,904		33,855		7,377,107

As at December 31, 2012
Total assets related to operations	$	24,735,365	$	7,675,672	$	8,471,432	$	40,882,469
Property and equipment, net		472,627		164,053		304,672		941,352
Intangible assets, net		8,419,994		59,074		65,199		8,544,267

The Company generated revenues from external customers located in the following geographic locations:


		Year ended December 31
		2013		2012		2011

Canada	$	6,203,261	$	7,569,490	$	8,561,990
United States		21,731,159		24,333,221		21,374,717
Europe and other		8,483,278		10,526,049		7,855,050
	$	36,417,698	$	42,428,760	$	37,791,757

Substantially all of the Company’s property and equipment, intangible assets and goodwill are located in Canada.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

Customer Concentration:

For the year ended December 31, 2013, one customer of the Sinclair Technologies operating segment individually represented 10% or more of total consolidated revenue (2012 – one customer). The one customer represented a total of 14% for the year ended December 31, 2013 (2012 – 11%).


21.	Supplemental cash flow and other disclosures


		Year ended December 31
		2013			2012			2011
Change in non-cash operating working capital:
Trade and other receivables	$	(245,950	)	$	56,051		$	(549,882	)
Contract work in progress		-			300,985			(300,985	)
Inventories		783			1,221,172			174,474
Prepaid expenses and other		62,567			54,713			41,317
Accounts payable and accrued liabilities		(1,619,032	)		(1,360,036	)		2,463,127
Provisions		(66,144	)		199,234			44,904
Deferred revenue		343,970			(527,653	)		(783,290	)
	$	(1,523,806	)	$	(55,534	)	$	1,089,665
Supplementary information:
Interest paid	$	236,177		$	395,250		$	530,807


22.	Related Party Transactions

Compensation of key management personnel, including the Company’s President and Chief Executive Officer, Chief Financial Officer, and General Managers (2012- President and Chief Executive Officer, Chief Financial Officer, General Manager and former President of a significant subsidiary) in the ordinary course of their employment are as follows:


		Year ended December 31
		2013		2012		2011
Short-term employee benefits	$	1,351,174	$	2,114,764	$	2,585,876
Share-based payments		138,125		72,822		17,165
Total	$	1,489,299	$	2,187,586	$	2,603,041

The amounts disclosed in the table are the amounts recognized as an expense during the reporting period related to key management personnel.


23.	Commitments and Contingencies

Future minimum payments at December 31, 2013 under loan commitments, purchasing commitments and operating lease obligations for each of the next five calendar years are approximately as follows:


		2014		2015		2016		2017		2018 and		Total
										after
Acquisition loan	$	1,920,000	$	1,920,000	$	602,704	$	-	$	-	$	4,442,704
Inventory purchase obligations		3,747,198		97,238		-		-		-		3,844,436
Operating lease obligations		816,599		436,991		402,005		8,577		-		1,664,172
Total	$	6,483,797	$	2,454,229	$	1,004,709	$	8,577	$	-	$	9,951,312

The Company, in the normal course of business, enters into purchase commitments, including inventory purchase obligations as disclosed above.

The Company has operating lease commitments that extend to June 2017.

Norsat International Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2013, 2012 and 2011

(Expressed in US dollars)

In addition, the Company is required to make contingent repayment of SADI I government contributions with repayment contingent on 2014 financial results compared to those achieved in 2013. As at December 31, 2013, the Company did not accrue any liability for repayment as the amount cannot yet be determined (Note 8).

Legal Proceedings

From time to time the Company may enter into legal proceedings relating to certain potential claims. It is impossible at this time for the Company to predict with any certainty the outcome of any such claims. However, management is of the opinion, based on legal assessment and information available, that it is unlikely that any liability would be material in relation to the Company’s consolidated financial position.


24.	Discontinued Operations

On July 17, 2012, the Company sold Norsat Italia S.r.l., a wholly owned subsidiary of the Company for cash consideration of Euro 70,000 ($85,764). Norsat Italia S.r.l operated the Company’s vessel monitoring unit. Proceeds of Eur 60,000 (US$76,369) and Eur 10,000 (US$13,583) were received in 2012 and 2013, respectively. The Consolidated Statements of Earnings and Comprehensive Income have been re-presented to show the discontinued operation separately from continued operations.


		Year Ended December 31
		2012			2011
Results of discontinued operation
Revenue	$	277,809		$	563,504
Expenses		291,105			623,566
Results from operating activities		(13,296	)		(60,062	)

Gain on sale of discontinued operation		93,986			-
Net earnings (loss) for the period - from discontinued operations	$	80,690		$	(60,062	)

Net earnings (loss) per share - basic		0.00			(0.00	)
Net earnings (loss) per share - diluted		0.00			(0.00	)

Weighted average number of shares outstanding
Basic		58,182,759			58,045,606
Diluted		58,185,435			58,165,203

Cash flows provided by discontinued operation
Net cash provided by operating activities	$	84,534		$	30,576
Net cash provided by investing activities		24,641			-
Net cash provided by financing activites		-			-
Net cash flows for the period	$	109,175		$	30,576

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Norsat International Inactive 20-F2013 FY Annual report (foreign)

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