EX-99.2 3 exhibit99-2.htm CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR JUNE 30, 2016 AND 2015 Exhibit 99.2

Exhibit 99.2

CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)

For the three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars)

1




Norsat International Inc.
Condensed Interim Consolidated Statements of Financial Position
(Expressed in United States dollars)
(Unaudited)

  Notes   June 30, 2016     December 31, 2015  
ASSETS              
Current assets              
Cash and cash equivalents   $ 9,318,248   $ 4,585,754  
Trade and other receivables     8,753,411     8,987,392  
Inventories     11,339,377     10,956,524  
Prepaid expenses and other     258,347     394,617  
      29,669,383     24,924,287  
Non-current assets              
Property and equipment, net     570,756     558,609  
Intangible assets, net     4,434,258     4,724,490  
Goodwill     4,097,751     4,097,751  
Investment tax credits recoverable     4,694,480     4,985,139  
Deferred income tax assets     1,704,126     2,218,848  
      15,501,371     16,584,837  
Total assets   $ 45,170,754   $ 41,509,124  
LIABILITIES              
Current liabilities              
Trade and other payables   $ 2,545,612   $ 1,906,703  
Accrued liabilities     2,149,332     2,375,107  
Provisions     957,466     947,682  
Deferred revenue     1,430,914     286,432  
      7,083,324     5,515,924  
Non-current liabilities              
Long-term deferred revenue     14,199     45,889  
Total liabilities     7,097,523     5,561,813  
SHAREHOLDERS' EQUITY              
Issued capital 6   39,995,215     39,850,648  
Treasury shares 7   (431,547 )   (320,750 )
Contributed surplus     4,148,106     4,318,487  
Accumulated other comprehensive loss     (4,508,316 )   (4,673,811 )
Deficit     (1,130,227 )   (3,227,263 )
Total shareholders' equity     38,073,231     35,947,311  
Total liabilities and shareholders' equity   $ 45,170,754   $ 41,509,124  
Commitments and Contingencies (Note 12)              

See accompanying notes to the unaudited condensed interim consolidated financial statements.

Approved by the Board and authorized for issue on August 3, 2016

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

2




Norsat International Inc.
Condensed Interim Consolidated Statements of Earnings and Comprehensive Income
(Expressed in United States dollars, except per share amount)
(Unaudited)

      Three months ended June 30     Six months ended June 30  
  Notes   2016     2015     2016     2015  
                           
Revenue 9 $ 8,959,936   $ 8,950,091   $ 18,513,363   $ 17,360,416  
Cost of sales 4   4,846,117     5,467,065     10,224,397     10,519,547  
Gross profit 9   4,113,819     3,483,026     8,288,966     6,840,869  
                           
Expenses:                          
Selling and distributing 4   1,259,794     1,271,795     2,663,736     2,538,788  
General and administrative 4   821,057     734,713     1,703,158     1,759,170  
Product development 4   856,782     730,932     1,640,777     1,489,708  

Less: Government contributions

 4&5   (387,703 )   (312,933 )   (767,178 )   (643,957 )
Loss on foreign exchange     131,550     210,792     82,391     388,541  
Interest and bank charges     27,583     40,908     54,383     76,306  
Total expenses     2,709,063     2,676,207     5,377,267     5,608,556  
                            
Earnings before income taxes     1,404,756     806,819     2,911,699     1,232,313  
                           
Current income tax expense/(recovery)   3,373     -     3,373     (66,068 )
Deferred income tax expense     466,382     132,710     811,290     64,585  
Net earnings   $ 935,001   $ 674,109   $ 2,097,036   $ 1,233,796  
                           
Other comprehensive income (loss)                          

Exchange differences on translation of operations in currencies other than United States dollars

   148,558     464,402     165,495     (79,377 )
Total comprehensive income   $ 1,083,559   $ 1,138,511   $ 2,262,531   $ 1,154,419  
                           
Net earnings per share                          

Basic earnings per share

 8 $ 0.16   $ 0.12   $ 0.36   $ 0.21  

Diluted earnings per share

 8 $ 0.16   $ 0.12   $ 0.36   $ 0.21  
                           
Weighted average number of shares outstanding                        

Basic

 6&8   5,764,892     5,759,439     5,765,922     5,762,789  

Diluted

 6&8   5,815,681     5,783,048     5,800,064     5,785,985  

See accompanying notes to the unaudited condensed interim consolidated financial statements.

3




Norsat International Inc.
Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in United States dollars)
(Unaudited)

                                  Total  
          Treasury     Contributed   Accumulated other           shareholders'  
  Notes   Issued capital   shares     surplus   comprehensive loss     Deficit     equity  
As at January 1, 2016   $ 39,850,648 $ (320,750 ) $ 4,318,487   $ (4,673,811 ) $ (3,227,263 ) $ 35,947,311  
Net earnings for the period     -   -     -     -     2,097,036     2,097,036  
Other comprehensive income     -   -     -     165,495     -     165,495  
      39,850,648   (320,750 )   4,318,487     (4,508,316 )   (1,130,227 )   38,209,842  
Vesting of RSUs 6   -   155,221     (155,221 )   -     -     -  
Purchase of shares for RSUs 7   -   (264,859 )   -     -     -     (264,859 )
Exercise of share purchase options 6   144,567   -     (144,567 )   -     -     -  
Share purchase cost 7   -   (1,159 )   -     -     -     (1,159 )
Share-based payments 6   -   -     129,407     -     -     129,407  
As at June 30, 2016   $ 39,995,215 $ (431,547 ) $ 4,148,106   $ (4,508,316 ) $ (1,130,227 ) $ 38,073,231  
                                     
                                   Total  
          Treasury     Contributed   Accumulated other           shareholders'  
  Notes   Issued capital   shares     surplus   comprehensive loss     Deficit     equity  
As at January 1, 2015   $ 39,850,648 $ (326,527 ) $ 4,371,778   $ (3,033,963 ) $ (11,877,494 ) $ 28,984,442  
Net earnings for the period     -   -     -     -     1,233,796     1,233,796  
Other comprehensive loss     -   -     -     (79,377 )   -     (79,377 )
      39,850,648   (326,527 )   4,371,778     (3,113,340 )   (10,643,698 )   30,138,861  
                                     
Vesting of RSUs     -   198,916     (198,033 )   -     -     883  
Purchase of shares for RSUs     -   (287,705 )   -     -     -     (287,705 )
Share purchase cost     -   (1,107 )   -     -     -     (1,107 )
Share-based payments 6   -   -     118,361     -     -     118,361  
As at June 30, 2015   $ 39,850,648 $ (416,423 ) $ 4,292,106   $ (3,113,340 ) $ (10,643,698 ) $ 29,969,293  

See accompanying notes to the unaudited condensed interim consolidated financial statements.

4




Norsat International Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Expressed in United States dollars)
(Unaudited)

      Three months ended June 30     Six months ended June 30  
  Notes   2016     2015     2016     2015  
Cash and cash equivalents provided by/(used in)                          
Operating activities:                          
Net earnings for the period   $ 935,001   $ 674,109   $ 2,097,036   $ 1,233,796  
Income taxes paid     (3,373 )   (43,270 )   (3,373 )   (43,270 )
Adjustments for items not affecting cash:                          

Depreciation and amortization

 4   201,919     329,742     431,247     657,791  

Write-off of property and equipment

     -     -     -     31,139  

Unrealized foreign exchange loss

     119,569     210,793     144,425     388,541  

Acquisition loan cost amortization

     -     -     -     2,262  

Other income

     -     (198,997 )   -     (198,997 )

Current income tax expense/(recovery)

     3,373     -     3,373     (66,068 )

Deferred income tax expense

     466,382     132,710     811,290     64,585  

Share-based payments

 6   84,531     64,410     129,407     118,361  

Vesting of RSUs

     -     (14,632 )   -     (14,632 )

Government contributions

 5   (387,703 )   (312,933 )   (767,178 )   (643,957 )
Changes in non-cash working capital 10   1,065,497     (1,977,058 )   1,298,835     (2,888,486 )
Net cash flows provided by/(used in) operating activities     2,485,196     (1,135,126 )   4,145,062     (1,358,935 )
                           
Investing activities:                          

Purchase of intangible assets, property and equipment, net of SADI

 5   (111,222 )   (43,454 )   (134,640 )   (99,549 )
Net cash flows used in investing activities     (111,222 )   (43,454 )   (134,640 )   (99,549 )
                           
Financing activities:                          
Repayment of acquisition loan     -     (1,306,762 )   -     (2,286,762 )
Purchase of treasury shares, including purchase costs 7   (266,018 )   (273,298 )   (266,018 )   (273,298 )
Government contributions 5   46,058     69,727     1,000,518     833,211  
Net cash flows (used in)/provided by financing activities     (219,960 )   (1,510,333 )   734,500     (1,726,849 )
                           

Effect of foreign currency translation on cash and cash equivalents

     (7,514 )   (73,410 )   (12,428 )   266,812  
                           
Increase/(decrease) in cash and cash equivalents     2,146,500     (2,762,323 )   4,732,494     (2,918,521 )
Cash and cash equivalents, beginning of period     7,171,748     5,357,535     4,585,754     5,513,733  
Cash and cash equivalents, end of period   $ 9,318,248   $ 2,595,212   $ 9,318,248   $ 2,595,212  

Supplemental cash flow and other disclosures (Note 10 )
See accompanying notes to the unaudited condensed interim consolidated financial statements.

5




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

 

1. Basis of Preparation

Statement of Compliance

These condensed interim consolidated financial statements for the three and six months ended June 30, 2016 and 2015, including comparatives, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), applicable to the preparation of interim financial statements, including International Accounting Standard (“IAS”) 34 Interim Financial Reporting. They do not include all of the information required in annual financial statements in accordance with IFRS as issued by the IASB and should be read in conjunction with the Company’s 2015 annual consolidated financial statements.

The condensed interim consolidated financial statements for the three and six months ended June 30, 2016 and 2015 have been approved and authorized for issue by the Board of Directors on August 3, 2016.

Change in Functional Currency

Effective January 1, 2016, the Company’s Canadian division of Sinclair Technologies has changed its functional currency from Canadian dollars to U.S. dollars. The Company performed an analysis of the primary and secondary indicators in IAS 21 The Effect of Changes in Foreign Exchange Rates, and determined that there has been an increased economic exposure to the U.S. dollar due to increased levels of U.S. dollar expenditures, as well as significant Canadian dollar pricing changes to raw materials that are being influenced by the U.S. dollar. As a result of this increased exposure, management has determined that the functional currency of the Canadian division of Sinclair Technologies is U.S. dollars.

The Company has accounted for this change prospectively, as provided for under IAS 21, and any amounts that were previously accumulated in other comprehensive income (“AOCI”) prior to the change will continue to be included in AOCI until the disposal of the operation.

Seasonal Fluctuations

Quarterly results from the Company’s two operating segments fluctuate from quarter to quarter due to seasonal influences on sales volumes. In the Company’s Land Mobile Radio (“Sinclair Technologies”) segment, the first and second quarters are historically the strongest, as most of Sinclair Technologies’ customers build inventories as they commence installation in the fall and winter seasons. For the Satellite Communications segment, the third and fourth quarters are typically the strongest, as these are traditionally the periods when military sales occur. The timing of contract awards also creates significant fluctuations in the Company’s quarterly results as some large contracts represent a significant share of sales for a given quarter. The timing of these orders can vary and cannot be predicted with historical patterns.

2. Significant Accounting Policies

The condensed interim consolidated financial statements have been prepared using accounting policies and accounting estimates consistent with those used in the preparation of the annual consolidated financial statements for the year ended December 31, 2015.

3. Significant Management Judgments and Estimation Uncertainty

The preparation of condensed interim consolidated financial statements in conformity with IFRS requires the Company’s management to undertake a number of judgments, estimates and assumptions that affect amounts reported in the condensed interim consolidated financial statements and accompanying notes.

6




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

Actual amounts may ultimately differ from these estimates and assumptions.

The judgments, estimates and assumptions applied in the condensed interim consolidated financial statements, including key sources of estimation uncertainty, were the same as those applied in the Company’s last annual consolidated financial statements for the year ended December 31, 2015, with the addition of the change in functional currency for the Canadian division of Sinclair Technologies effective January 1, 2016 as described in Note 1.

4. Cost of Sales and Expenses

 

    Three months ended June 30     Six months ended June 30  
    2016     2015     2016     2015  
Cost of sales                        
Raw materials and overhead costs $ 3,968,689   $ 4,643,939   $ 8,485,462   $ 8,853,362  
Labour costs   857,263     800,275     1,696,816     1,619,581  
Depreciation and amortization   20,165     22,851     42,119     46,604  
  $ 4,846,117   $ 5,467,065   $ 10,224,397   $ 10,519,547  
                         
Selling and distributing expenses                        
Direct expenses $ 411,056   $ 391,268   $ 960,297   $ 872,207  
Labour costs   778,915     718,251     1,535,411     1,342,479  
Depreciation and amortization   69,823     162,276     168,028     324,102  
  $ 1,259,794   $ 1,271,795   $ 2,663,736   $ 2,538,788  
                         
General and administrative expenses                        
Direct expenses $ 361,308   $ 233,986   $ 893,834   $ 780,107  
Labour costs   590,275     631,839     1,079,325     1,175,444  
Depreciation and amortization   64,039     94,114     128,437     184,907  
    1,015,622     959,939     2,101,596     2,140,458  
Capitalized to inventory/transfer to cost of sales   (194,565 )   (225,226 )   (398,438 )   (381,288 )
  $ 821,057   $ 734,713   $ 1,703,158   $ 1,759,170  
                         
Product development expenses                        
Direct expenses $ 252,861   $ 152,910   $ 509,401   $ 345,242  
Labour costs   581,786     527,521     1,080,141     1,042,288  
Depreciation and amortization   47,892     50,501     92,663     102,178  
    882,539     730,932     1,682,205     1,489,708  
Capitalized to inventory/transfer to cost of sales   (25,757 )   -     (41,428 )   -  
    856,782     730,932     1,640,777     1,489,708  
Less: Government contributions (Note 5)   (387,703 )   (312,933 )   (767,178 )   (643,957 )
  $ 469,079   $ 417,999   $ 873,599   $ 845,751  

Labour costs include wages, salaries, bonuses, sales commissions, share-based payments, social security contributions, extended health premiums, government medical services plan payments, Registered Retirement Savings Plan contributions and vacation accrual.

5. Government Contributions

For the three and six months ended June 30, 2016, the Company recorded government contributions of $387,703 and $767,178 (three and six months ended June 30, 2015 - $312,933 and $643,957) as a reduction to product development expenses in the Condensed Interim Consolidated Statements of Earnings and Comprehensive Income. For the three and six months ended June 30, 2016, the Company recorded $20,850 (three and six months ended June 30, 2015 - $nil) as a reduction to property and equipment costs related to SADI II.

7




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

Strategic Aerospace & Defense Initiative (“SADI I”)

As at June 30, 2016, the Company calculated the SADI I repayment amount to be $nil as the 2016 year-to-date gross business revenue 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.

Strategic Aerospace & Defense Initiative (“SADI II”)

For the three and six months ended June 30, 2016, the Company recorded $352,184 and $696,194 (three and six months ended June 30, 2015 - $312,933 and $643,957) as a reduction to product development expenses related to SADI II in the Condensed Interim Consolidated Statements of Earnings and Comprehensive Income. For the three and six months ended June 30, 2016, the Company recorded $20,850 (three and six months ended June 30, 2015 - $nil) as a reduction to property and equipment costs related to SADI II.

As at June 30, 2016, the Company has recorded total claims of Cdn$6,860,830 (December 31, 2015 -Cdn$5,828,102) of the maximum funding amount of Cdn$13,270,265 under SADI II.

As at June 30, 2016, the Company recorded $372,150 (December 31, 2015 - $625,380) in trade and other receivables related to reimbursements for eligible costs for SADI II.

For the three and six months ended June 30, 2016, total cash received under SADI II was $9,237 and $958,391 (three and six months ended June 30, 2015 - $69,727 and $833,211).

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). These amounts will be repaid over a period of 15 years, commencing in 2018. The annual repayment amount is 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 June 30, 2016, 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.

Industrial Research Assistance Program (“IRAP”)

For the three and six months ended June 30, 2016, the Company recorded $35,519 and $70,984 (three and six months ended June 30, 2015 - $nil) as a reduction to product development expenses related to IRAP in the Condensed Interim Consolidated Statements of Earnings and Comprehensive Income.

As at June 30, 2016, the Company has recorded total claims of Cdn$123,522 (December 31, 2015 -Cdn$21,092) of the maximum funding amount of Cdn$150,000 under IRAP.

As at June 30, 2016, the Company recorded $33,185 (December 31, 2015 - $15,239) in trade and other receivables related to reimbursements for eligible costs for IRAP.

For the three and six months ended June 30, 2016, total cash received under IRAP was $36,821 and $42,127 (three and six months ended June 30, 2015 - $nil).

8




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

 

6. Issued Capital

Shares Issued and Outstanding

Total shares issued and outstanding as at June 30, 2016 were 5,845,308 (December 31, 2015 - 5,831,658) at a book value of $39,995,215 (December 31, 2015 - $39,850,648).

During the three and six months ended June 30, 2016, 50,000 share purchase options were exercised at a weighted average exercise price of Cdn$5.80 and were converted into 13,650 shares. $144,567 was reclassified from contributed surplus to share capital.

Share Purchase Option Plan

During the three months ended June 30, 2016, a total of 10,100 stock purchase options were granted at an average exercise price of Cdn$7.27 and weighted average fair value of Cdn$2.04, which included 10,000 stock purchase options granted to a Director at an average exercise price of Cdn$7.27 and fair value of Cdn$2.04 per option.

During the three months ended June 30, 2015, a total of 3,000 stock purchase options were granted at an average weighted exercise price of Cdn$5.99 and weighted average fair value of Cdn$1.96, of which nil were granted to Directors or senior management.

During the six months ended June 30, 2016, a total of 72,242 stock purchase options were granted at an average exercise price of Cdn$6.22 and weighted average fair value of Cdn$1.73, which included 41,137 stock purchase options granted to Directors and senior management at an average exercise price of Cdn$6.25 and fair value of Cdn$1.74 per option.

During the six months ended June 30, 2015, a total of 29,352 stock purchase options were granted at an average exercise price of Cdn$6.75 and weighted average fair value of Cdn$2.20, which included 4,642 stock purchase options granted to Directors and senior management at the same average price and fair value per option.

Options typically vest in two years and expire five years from the grant date.

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. The weighted average assumptions used to estimate the fair value of options granted during the three and six months ended June 30, 2016 and 2015 were as follows:

  Three months ended June 30   Six months ended June 30  
  2016   2015   2016   2015  
Risk-free interest rate 0.80%   0.80%   0.57%   0.56%  
Expected life 3.1 years   3.1 years   3.1 years   3.1 years  
Vesting period 2 years   2 years   2 years   2 years  
Expected volatility 39%   47%   39%   47%  
Expected dividends Nil   Nil   Nil   Nil  
Average fair value Cdn$2.04   Cdn$1.96   Cdn$1.73   Cdn$2.20  
Forfeiture rate 21%   18%   21%   18%  

The exercise price of all share purchase options granted during the period is equal to the closing market price on the grant date. The Company calculated share-based payment from the vesting of share purchase

9




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

options using the Black-Scholes Option Pricing Model with assumptions noted above and recorded related compensation expense as follows for the three and six months ended June 30, 2016 and 2015:

    Three months ended June 30   Six months ended June 30  
    2016   2015   2016   2015  
Share-based payments - options $ 13,121 $ 13,386 $ 18,794 $ 27,014  

Share purchase options outstanding as at December 31, 2015 and June 30, 2016 were as follows:

        Weighted average  
        exercise price  
Share purchase options outstanding Number of options     Cdn$  
Balance, December 31, 2015 229,814   $ 6.03  
Granted 72,242   $ 6.22  
Exercised (50,000 ) $ 5.80  
Expired (32,753 ) $ 8.04  
Forfeited (17,163 ) $ 6.47  
Balance, June 30, 2016 202,140   $ 5.79  

The following table summarizes information pertaining to the Company’s share purchase options outstanding at June 30, 2016:

  Options outstanding   Options exercisable
          Weighted         Weighted  
Range of Number of   Weighted average   average     Number of   average  
exercise prices options   remaining contractual   exercise price     options   exercise price  
Cdn$ outstanding   life (years)   Cdn$     exercisable   Cdn$  
$0 to $4.99 20,600   0.77 $ 4.81     20,600 $ 4.81  
$5.00 to $9.99 181,540   3.34 $ 5.90     78,555 $ 5.33  
  202,140   3.07 $ 5.79     99,155 $ 5.22  

Restricted Share Unit (“RSU”) Plan

The Company charged the following share-based payments to operating expenses in connection with the Company’s RSU plan, with a corresponding increase in contributed surplus:

    Three months ended June 30   Six months ended June 30  
    2016   2015   2016   2015  
Share-based payments - RSUs $ 71,410 $ 51,024 $ 110,613 $ 91,347  

RSUs outstanding as at December 31, 2015 and June 30, 2016 were as follows:

  No. of units  
Balance, December 31, 2015 77,037  
Granted 54,643  
Vested (31,232 )
Forfeited (3,502 )
Balance, June 30, 2016 96,946  

10




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

 

7. Treasury Shares

During the three and six months ended June 30, 2016, the Company recorded a reduction in treasury shares of $155,221 or 31,232 common shares for RSUs that vested on May 6, 2016. These shares were issued to RSU participants to satisfy the delivery of shares upon vesting of RSUs.

In addition, the Company purchased 46,105 common shares in the open market for $264,859 (Cdn$330,937) in order to provide shares to RSU participants at applicable vesting dates. The amount was recorded under treasury shares, reducing shareholders’ equity. These shares were held by a third party trustee to be released to participants at future vesting dates of the RSUs. The Company also recorded a related share purchase cost of $1,159.

The following summarizes information pertaining to treasury shares outstanding as at December 31, 2015 and June 30, 2016:

  No. of shares  
Balance, December 31, 2015 64,701  
Shares issued upon RSU vesting (31,232 )
Shares purchased to settle RSUs 46,105  
Balance, June 30, 2016 79,574  

 

8. Earnings per Share

The reconciliation of the numerators and denominators of the basic and diluted earnings per share (“EPS”) calculations was as follows for the three and six months ended June 30, 2016 and 2015:

    Three months ended June 30   Six months ended June 30  
    2016   2015   2016   2015  
Numerator                  
Net earnings $ 935,001 $ 674,109 $ 2,097,036 $ 1,233,796  
                   
Denominator                  

Weighted average number of shares outstanding used to compute basic EPS

   5,764,892   5,759,439   5,765,922   5,762,789  

Dilution from exercise of stock options

   50,789   23,609   34,142   23,196  

Weighted average number of shares outstanding used to compute diluted EPS

   5,815,681   5,783,048   5,800,064   5,785,985  
                   
Net earnings per share                  
Basic $ 0.16 $ 0.12 $ 0.36 $ 0.21  
Diluted $ 0.16 $ 0.12 $ 0.36 $ 0.21  

The calculation of assumed exercise of share purchase options includes the effect of the dilutive options. 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 share purchase options was not included.

9. Segmented Information

The Company’s business operates primarily through two operating segments – Land Mobile Radio (“Sinclair Technologies”) and Satellite Communications. These operating segments are monitored by the

11




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

Company’s chief operating decision makers, and strategic decisions are made on the basis of segment operating results.

The Company’s operating 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 in the annual consolidated financial statements for the year ended December 31, 2015, except for the change in functional currency for the Sinclair Technologies operating segment effective January 1, 2016 (Note 1).

The following tables set forth sales and gross profit information by operating segments for the three and six months ended June 30, 2016 and 2015:

    Three months ended June 30   Six months ended June 30  
    2016   2015   2016   2015  
Sales to external customers                  
Sinclair Technologies $ 4,773,752 $ 4,813,636 $ 9,234,482 $ 9,458,434  
Satellite Communications   4,186,184   4,136,455   9,278,881   7,901,982  
  $ 8,959,936 $ 8,950,091 $ 18,513,363 $ 17,360,416  
                   
Gross profit                  
Sinclair Technologies $ 2,361,670 $ 2,216,724 $ 4,551,485 $ 4,222,363  
Satellite Communications   1,752,149   1,266,302   3,737,481   2,618,506  
  $ 4,113,819 $ 3,483,026 $ 8,288,966 $ 6,840,869  

The following table provides assets information by operating segments as at June 30, 2016 and December 31, 2015:

    Sinclair   Satellite      
    Technologies   Communications   Consolidated  
As at June 30, 2016              
Total assets related to operations $ 23,656,976 $ 21,513,778 $ 45,170,754  
Property and equipment, net $ 217,069 $ 353,687 $ 570,756  
Intangible assets, net $ 4,334,214 $ 100,044 $ 4,434,258  
               
As at December 31, 2015              
Total assets related to operations $ 21,802,701 $ 19,706,423 $ 41,509,124  
Property and equipment, net $ 184,912 $ 373,697 $ 558,609  
Intangible assets, net $ 4,612,041 $ 112,449 $ 4,724,490  

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

    Three months ended June 30   Six months ended June 30  
    2016   2015   2016   2015  
                   
United States $ 6,292,600 $ 4,504,083 $ 10,522,992 $ 9,389,887  
Europe and other   1,920,162   3,717,254   6,183,482   2,032,081  
Canada   747,174   728,754   1,806,889   5,938,448  
  $ 8,959,936 $ 8,950,091 $ 18,513,363 $ 17,360,416  

12




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

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

Economic Dependence:

For the three months ended June 30, 2016, no customer (three months ended June 30, 2015 - three customers) represented 10% (three months ended June 30, 2015 - 38%) or more of the Company’s consolidated revenue.

For the six months ended June 30, 2016, two customers (six months ended June 30, 2015 - one customer) represented 25% (six months ended June 30, 2015 - 11%) of the Company’s consolidated revenue.

10. Supplemental Cash Flow and Other Disclosures

 

    Three months ended June 30     Six months ended June 30  
    2016     2015     2016     2015  
Changes in non-cash working capital:                        
Trade and other receivables $ 176,496   $ (1,369,282 ) $ 18,034   $ (1,365,579 )
Inventories   (638,174 )   (512,031 )   (373,030 )   (1,017,655 )
Prepaid expenses and other   80,413     (15,189 )   138,127     (77,585 )
Trade and other payables   203,603     140,746     620,852     (401,483 )
Accrued liabilities   (72,048 )   956,207     (226,879 )   473,148  
Provisions   86,577     (85,729 )   9,784     80,519  
Deferred revenue   1,228,630     (1,091,780 )   1,111,947     (579,851 )
  $ 1,065,497   $ (1,977,058 ) $ 1,298,835   $ (2,888,486 )
Supplementary information:                        
Interest (received)/paid $ (2,258 ) $ 7,139   $ (3,816 ) $ 21,644  

 

11. Related Party Transactions

The following table discloses the compensation amount of Board of Directors and key management personnel in the ordinary course of their employment recognized as an expense during the reporting periods. Key management personnel include the Company’s President and Chief Executive Officer, Chief Financial Officer and General Manager.

    Three months ended June 30   Six months ended June 30  
    2016   2015   2016   2015  
Directors' fees $ 24,453 $ 26,374 $ 47,398 $ 52,472  
Short-term employee benefits   300,715   265,820   545,837   527,146  
Share-based payments   72,423   49,519   108,527   88,068  
Total $ 397,591 $ 341,713 $ 701,762 $ 667,686  

13




Norsat International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three and six months ended June 30, 2016 and 2015
(Expressed in United States dollars, except when otherwise indicated)
(Unaudited)

 

12. Commitments and Contingencies

Future minimum payments at June 30, 2016 under purchasing commitments and operating lease obligations are approximately as follows:

    Inventory purchase   Operating lease      
    obligations   obligations   Total  
Remaining 2016 $ 3,726,825 $ 323,933 $ 4,050,758  
2017   361,645   450,562   812,207  
2018   -   341,307   341,307  
2019   -   368,027   368,027  
2020 and after   -   373,857   373,857  
  $ 4,088,470 $ 1,857,686 $ 5,946,156  

During the three months ended June 30, 2016, the Company renewed one of its operating lease agreements related to office premises. The Company has operating lease commitments extending to November 2021. The Company also enters into purchase commitments, including inventory purchase obligations in the normal course of business as disclosed above. In addition, the Company is required to make contingent repayment of SADI I and SADI II government contributions pursuant to the repayment terms of the agreement. As at June 30, 2016, the Company did not accrue any liability for repayment (Note 5).

Legal Proceedings

From time to time, the Company may be involved with legal proceedings relating to certain potential claims. Management is of the opinion, based on legal assessment and information available, that it is not probable that any liability would be material in relation to the Company’s Condensed Interim Consolidated Statements of Financial Position.

13. Comparative Figures

Certain comparative figures have been reclassified to conform to the current period’s financial statement presentation.

14