EX-99.1 2 financials.htm FINANCIALS CC Filed by Filing Services Canada Inc. 403-717-3898



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Financial Statements (Unaudited)

Three Months Ended as at March 31, 2007





 Page 1


Norsat International Inc.

Consolidated Balance Sheets

(See note 1 – Organization and Going Concern Uncertainty)

(Unaudited - Expressed in Canadian Dollars)


    March 31,     December 31,  
    2007     2006  
Assets         
Current assets:         
Cash and cash equivalents  $  583,846   $  1,793,187  
Short-term investments    69,500     69,500  
Accounts receivable    2,760,728     2,799,554  
Inventories    3,465,860     3,456,988  
Prepaid expenses and other    597,385     372,982  
    7,477,319     8,492,211  
Property and equipment    1,278,066     1,314,986  
Deferred finance costs    -     13,561  
  $  8,755,385   $  9,820,758  
Liabilities and Shareholders' Equity         
Current liabilities:         
Accounts payable  $  1,281,315   $  1,666,250  
Accrued liabilities    1,398,163     1,848,632  
Deferred revenue    267,390     467,731  
Convertible debt (note 4)    -     2,255,252  
Short term loan (note 4)    1,189,141     -  
    4,136,009     6,237,865  
Shareholders' equity:         
Share capital (note 5)    45,226,689     44,854,902  
Contributed surplus ( note 5)    5,023,488     2,708,991  
Equity component of long-term debt    -     2,190,779  
Deficit    (45,630,801 )    (46,171,779 ) 
    4,619,376     3,582,893  
  $  8,755,385   $  9,820,758  


See accompanying notes to consolidated financial statements.







 Page 2



Norsat International Inc.

Consolidated Statements of Operations, Comprehensive Earnings and Deficit

(See note 1 – Organization and Going Concern Uncertainty)

(Unaudited - Expressed in Canadian Dollars)


    Three months ended March 31,  
    2007     2006  
Sales  $  4,408,285   $  2,919,454  
Cost of sales    2,078,769     1,784,087  
    2,329,516     1,135,367  
Expenses:         
 Selling, general and administrative    1,311,699     1,932,562  
 Product development    261,327     817,610  
 Amortization    75,051     124,026  
    1,648,077     2,874,198  
Earnings (loss) from continuing         
 operations before other expenses    681,439     (1,738,831 ) 
 Other expenses (note 6)    140,461     41,413
Earnings (loss) from continuing         
operations before income taxes    540,978     (1,780,244 ) 
Income tax expense    -     1,814  
Net earnings (loss) and comprehensive earnings    540,978     (1,782,058 ) 
Deficit, beginning of period    (46,171,779 )    (41,823,705 ) 
Deficit, end of period  $  (45,630,801 )  $  (43,605,763 ) 
Net (loss) earnings per common share -         
basic and diluted (note 7)         
 Continuing operations  $  0.01   $  (0.04 ) 
 Net earnings (loss)  $  0.01   $  (0.04 ) 




See accompanying notes to consolidated financial statements.

 Page 3



Norsat International Inc.

Consolidated Statements of Cash Flows

(See note 1 – Organization and Going Concern Uncertainty)

(Unaudited - Expressed in Canadian Dollars)


    Three months ended March 31,  
    2007     2006  
Cash provided by (used in):         
Operations:         
 Earnings (loss) from continuing operations  $  540,978   $  (1,782,058 ) 
 Items not involving cash:         
     Amortization    75,051     124,026  
     Interest accreted on long-term         
debt and deferred finance cost         
amortization    68,291     63,940  
     Foreign exchange loss (gain)    (12,205 )    35,028  
     Stock-based compensation    28,590     24,787  
 Changes in non-cash working         
     capital (note 9)    (1,230,194 )    (2,553,846 ) 
 Cash used in continuing         
     operations    (529,489 )    (4,088,123 ) 
Investments:         
 Net purchase of property and         
     equipment    (38,132 )    (214,515 ) 
     Cash used in investment activities    (38,132 )    (214,515 ) 
Financing:         
     Payment on convertible debt    (2,309,200 )    -  
     Proceeds from short term loan (note 4)    1,189,141     -  
     Proceeds on exercise of stock options    -     132,062  
     Proceeds from private placement    466,916     2,975,943  
     Cash used (provided) by financing activities    (653,143 )    3,108,005  
Effect of change in exchange         
 rates on cash    11,422     (35,027 ) 
    -     -  
Decrease in cash and         
 cash equivalents    (1,209,341 )    (1,229,660 ) 
Cash and cash equivalents,         
 beginning of period    1,793,187     2,458,138  
Cash and cash equivalents,         
 end of period  $  583,846   $  1,228,478  


Supplemental cash flow and other disclosures (note 9).

See accompanying notes to consolidated financial statements.


 Page 4


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)



1.  Organization and going concern uncertainty


The Company is incorporated under the laws of British Columbia and its principal business activities include the marketing, design and sales of microwave products and portable satellite products that provide rapidly deployable broadband satellite data and video continuity in areas where traditional communication infrastructure is insufficient, damaged or non-existent.


The Company has incurred recurring operating losses and has a deficit of $45,630,801 as at March 31, 2007. Consequently, there is substantial doubt about its ability to continue as a going concern. Management has been able, thus far, to finance the operations through a series of equity and debt financings.  In January 2007, the Company received net proceeds of $466,915 in connection with the private placement under the Employee Share Purchase Plan. In March 2007, the Company paid off a convertible debt in the amount of $2,309,200 (US$2,000,000). The convertible debt payment was partially financed through short-term loans of US$900,000 and $150,000 at an interest rate of 8%.  Management implemented a new cost structure in late 2006 aimed to achieve net profits and generate positive cash flows through its operations; however, there is no assurance that the Company will be successful in achieving these goals. The Company may need additional financing from time to time, and there are no assurances that any such financing can be obtained on favorable terms, if at all.


In view of these conditions, the ability of the Company to continue as a going concern is dependent upon achieving profitable operations and on the ability of the Company to obtain additional financing. The outcome of these matters can not be predicted at this time. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue in business.



2.  Basis of Presentation


These financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial reporting, and the accounting polices used, are consistent with the most recent audited annual financial statements. There were no significant adoptions and changes in accounting policies or estimates since the fiscal year ended December 31, 2006 other than that noted in note 5. These financial statements do not contain all disclosures required by Canadian GAAP for annual financial statements, and accordingly, should be read together with the  audited annual consolidated financial statements, accompanying notes and management discussion and analysis included in the Company's 2006 Annual Report.


The results for the three months ended March 31, 2007 may not be indicative of the results that may be expected for the full year or any other period.


The interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, which presume the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.



3.  Changes in Accounting Policies


Income Tax


The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"), on January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement 109, "Accounting for Income Taxes", and prescribes a recognition threshold and measurement process for financial




 Page 5


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)



statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting and interim periods, disclosure and transition.  The Company and its subsidiaries are subject to U.S. federal income tax, Canadian income tax, as well as income tax of multiple state and local jurisdictions.  Based on the Company's evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements.  The Company's evaluation was performed for the tax years ended December 31, 2003, 2004, 2005 and 2006, the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2007. The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company's financial results.  In the event the Company has received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expenses.


Comprehensive Income


In the first quarter ended March 31, 2007, the Company has adopted CICA Handbook Section 1530, “Comprehensive Income”, which defines and establishes the reporting requirements for comprehensive income. Comprehensive income is the change in shareholders’ equity during a period from transactions and other events and circumstances from non-owner sources. Under this section, the Company is required to present comprehensive income and its components in a financial statement showing (a) net income for the period; (b) each component of revenue, expense, gain and loss that is recognized in other comprehensive income and (c) the total of (a) and (b).  As at the end of March 31, 2007, the Company has no other comprehensive income.


As a consequence of adopting Section 1530, the Company has also adopted the Section 3251, “Equity”, Section 3855, “Financial Instruments – Recognition and Measurement”, Section 3861, “Financial Instrument – Disclosure and Presentation”, and Section 3865, “Hedges”.


Financial Instrument


Under Section 3855, all financial instruments are classified into one of five categories:  held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities.  All financial instruments are measured in the balance sheet either at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows:  held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income.  Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized or compared.


As a result of the adoption of these new standards, the Company has classified its cash and cash equivalents and short-term investments as held-for-trading.  Accounts receivable are classified as loans and receivables.  Accounts payable, certain accrued liabilities, long-term debt and convertible debentures are classified as other liabilities, all of which are measured at amortized cost.


Section 3855 also provides guidance on accounting for transaction costs incurred upon the issuance of debt instruments or modification of a financial liability.  Transaction costs are now deducted from the financial liability and are amortized using the effective interest method over the expected life of the related liability.  As a result of the application of Section 3855, deferred financing charges have been reclassified against convertible debentures.  The adoption of these new standards had no impact on the Company’s deficit position as at January 1, 2007.


Carrying value and fair value of financial assets and liabilities as at March 31, 2007 are summarized as follows:




 Page 6


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)



                      

Classification

Carrying Value

Fair Value

 

$000’s

$000’s

Held-for-trading

654

654

Loans and receivables

2,761

2,761

Held-to-maturity

-

-

Other liabilities

4,136

4,136



    4.    Short Term Debt

On March 22 and March 28, 2007, the Company received short term loans for $150,000 from an officer of the Company and for US$900,000 from a financial institution respectively. The loans bear the annum interest rate at 8% expiring on May 31, 2007. The Company has the option to renew these loans upon maturity at similar terms. Partial payments may be made during the term of the loans at the Company’s discretion (see note 12 (b)).


 

March 31,

2007

March 31,

2006

Current debt

 

 

Convertible debt

-

2,255,252

Short term loans

1,189,141

-

Total current debt

1,189,141

2,255,252

Face value of US$2,000,000

-

2,330,800

Less unamortized discount from conversion option                                 

-

75,548

Carrying value, December 31

-

2,255,252

     Less current portion

-

2,255,252

Total convertible debt

-

2,255,252




















 Page 7


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)



5. Share Capital


(a)

Authorized

        75,000,000 common shares without par value


(b)  Issued

            

Shares issued and outstanding

 

 

Number   #

Amount   $

Balance, December 31, 2006

49,562,558

44,854,902

 

 

 

Private placement, net of costs, January 12, 2007

1,065,968

371,786

Balance, March 31, 2007

50,628,526

45,226,689


On January 12, 2007, the Company issued 1,065,968 common shares at $0.45 per share and 532,984 non transferable share purchase warrants to its employees under the Amended Employee Share Ownership Plan for net proceeds of $466,915.  Each share purchase warrant entitles the holder to purchase one common share at a price of US$0.48 for two years from the closing date.


Under Canadian GAAP, the Company has bifurcated the proceeds between the shares and the warrants based on their relative fair values. The assigned fair value of the common shares ($735,518) was calculated by using the TSX share price on the date of issuance ($0.69), and the fair value of the warrants ($188,197) was determined using the Black-Scholes valuation model. Net proceeds of $466,915 were then allocated based on the percentage of these relative fair values.  The amount allocated to common shares ($371,786) is accounted for as common shares and the amount allocated to the warrants ($95,129) is accounted for as contributed surplus.


All of the common shares and warrants are subject to a four-month hold period which ends May 13, 2007. During this period, these securities cannot be traded nor are they freely transferable. Of the securities issued under this private placement, 145,644 common shares will be held in escrow under an escrow agent between the Company and a trust company selected by the BC government until January 12, 2010. 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 share holders may seek government approval for an early release from escrow upon the repayment of any tax credits received.

     

(c)   Share purchase option plan


The Company has reserved 6,306,505 common shares under its 1999 (amended) incentive share option plan. The plan provides for the granting of stock options at the fair market value of the Company at the grant date, with terms to a maximum of ten years and vesting provisions to be determined by the board of directors.


The continuity schedule of share purchase option is as follows:





 Page 8


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)






Share purchase option outstanding

Number of options

Weighted average

exercise price

Balance, December 31, 2006

1,948,150

$   1.57

     Granted

161,000

0.73

     Expired

(175,000)

2.09

     Forfeited

(24,100)

2.63

Balance, March 31, 2007

1,910,050

$   1.25


The following table summarizes information pertaining to the Company’s share purchase options          outstanding at March 31, 2007:

      

 

Options outstanding

 

Options exercisable

Range of exercise prices

Number of options outstanding

Weighted average remaining contractual life(years)

Weighted average exercise price

 

Number of options exercisable

Weighted average exercise price

$0.50 to $2.39

1,712,550

3.87

$0.88

 

1,094,050

$1.02

$2.40 to $4.29

98,750

4.51

$2.95

 

98,750

$2.95

$4.30 to $6.19

98,750

4.51

$5.33

 

98,750

$5.33

$0.50 to $6.19

1,910,050

3.93

$1.25

 

1,291,550

$1.50

      

The exercise price of all share purchase options granted during the period are equal to the closing market price at the grant date. Using an option pricing model with assumptions noted below, the estimate fair value of all options granted during 2007 and 2006 have been reflected in the statements of operations as follows:


 

 

 

Three months ended

March  31

 

 

 

 

2007

2006

Stock-based compensation recognized in operations

 

 

 


28,590


24,787

Total compensation credited to contributed surplus

 

 

 


28,590


24,787


 

The weighted average assumptions used to estimate the fair value of options during the period were:


 

 

 

Three months ended

March 31

 

 

 

 

2007

2006

Risk free interest rate

 

 

 

3.963%

3.935%

Expected life

 

 

 

3.935

4.317

Vesting period

 

 

 

2 to 10 years

2 to 10 years

Expected volatility

 

 

 

83.88%

88.80%

Expected dividends

 

 

 

nil

nil


161,000 stock purchase options were granted during the three months ended March 31, 2007.


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 faire value estimate, and




 Page 9


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)



therefore the existing models may not necessarily provide a reliable measure of the fair value of the Company’s share purchase options.


(d) Warrants


The continuity of share purchase warrants is as follows:


Expiry date

8-Apr-09

6-Mar-08

6-Mar-08

12-Jan-09

 Total

Exercise price

$1.09

    US$0.75

 US$0.45



US$0.475

 Number of warrants outstanding

Balance, December 31, 2006

    1,206,811

3,065,232

1,250,000


-

       5,522,043

Upon issue for private placement (note 4 (b))

-

-

         -


532,984

       532,984

Balance, March 31, 2007

1,206,811   

        3,065,232

         1,250,000


532,984

      6,055,027

 

(e)  Contributed surplus


Balance, December 31, 2006

$    2,708,991

Change during 2007

 

    Non-cash stock-based compensations

28,590

    Equity component of long-term debt

2,190,779

    Allocation of proceeds from private

                placement to warrants


95,128

Balance,  March 31, 2007

$    5,023,488



6.   Other Expenses


    Three months ended  
    March 31,   
    2007     2006  
Net interest - cash  $  106,480   $  (2,964 ) 
Interest - non-cash    34,156     101,426  
Foreign currency loss (gain)    (175 )    (57,049 ) 
  $  140,461   $  41,413  


7.   Earnings Per Share


As the Company has net earnings from continuing operations in the period presented in the three month periods ended March 31, 2007, basic and diluted net earnings per share are the same, as the exercise of in the money warrants or options would be anti-dilutive. The weighted average number of shares used in calculating basic net earnings (losses) per share for the three months ended March 31, 2007 was 50,486,397 (2006 – 44,003,497).  




 Page 10


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)



8.  Segmented Information


The following tables set forth information by operating segments from continuing operations for the three months ended March 31, 2007 and 2006 respectively.

 

 

 

Three months ended March 31

 

 

 

 

2007

2006

Sales

 

 

 

$

$

Microwave

 

 

 

2,682,795

1,912,547

Satellite system

 

 

 

1,725,490

1,006,907

 

 

 

 

4,408,285

2,919,454

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

Microwave

 

 

 

1,245,908

828,437

Satellite system

 

 

 

1,083,608

306,930

 

 

 

 

2,329,516

1,135,367


 

 

Microwave

Satellite System

Consolidated

As at March 31, 2007

 

$

$

$

Total assets related to continuing operations

5,527,091

3,228,294

          8,755,385

      Property and equipment

806,816

471,250

1,278,066

 

 

 

 

As at March 31, 2006

 

 

 

 

Total assets related to continuing operations

2,073,594

7,457,150

9,530,744

      Property and equipment

106,439

697,549

803,988


9. Supplemental cash flow and other disclosures









 Page 11


Norsat International Inc.

Notes to the Consolidated Financial Statements

Three months ended March 31, 2007
(Unaudited - Expressed in Canadian dollars)




10. Comparative Figures


Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in 2007.



11. Commitments


Future minimum payments at March 31, 2007 under various purchasing commitments, loan commitments and operating lease agreements for each of the next five years are approximately as follows:


 

2007

2008

2009

2010

2011

Short term loan

1,189,141

Inventory purchase obligation

3,473,879

Operating lease obligations

404,268

466,395

420,692

420,692

385,634

Total

5,067,288

466,395

420,692

420,692

385,634


In the normal course of operations the Company enters into purchase commitments. The Company has accrued for estimated losses, if any, when determinable, including losses on disputed purchase commitments with suppliers. Included in 2007 commitments are inventory and material purchase obligations of $3,473,879 and the scheduled short term loan payment due on May 31, 2007 in the amount of $1,189,141.



12. Subsequent Events


a)

Stock Purchase Options


Subsequent to March 31, 2007, 22,600 stock purchase options were forfeited.


b)

Short term loan repayment


Subsequent to March 31, 2007, the Company repaid a portion of the short term loans totaling $150,000 to an officer of the Company.








 Page 12