NSAT Norsat International Inc. (New)

Fiscal 2014 Compared to Fiscal 2013

Earnings before income taxes for the year ending December 31, 2014 increased to $3.7 million, from $3.0 million in 2013, reflecting a $0.6 million higher gross profit, $0.4 million less net expenses, and $0.1 million less interest charges compared to the same period in 2013. This was offset by $0.3 million less gain on foreign exchange for the year ended December 31, 2014 compared to same period in 2013.

Income tax recovery for the year ended December 31, 2014 was $0.5 million compared to $0.7 million for the same period in 2013, reflecting a current income tax recovery of $0.2 million for the year ended December 31, 2014 compared to a current tax expense of $0.3 million in 2013. Deferred income tax recovery of $0.3 million for the year ended December 31, 2014, compared to a deferred income tax recovery of $1.0 million in 2013.

For the year ended December 31, 2014, net earnings increased to $4.2 million, or $0.73 per share, basic and diluted, from net earnings of $3.7 million, or $0.64 per share, basic and diluted, during the same period in 2013.

Fiscal 2013 Compared to Fiscal 2012

For the year ended December 31, 2013, earnings before income taxes increased to $3.0 million, from $2.6 million in 2012, reflecting lower operating expenses and a higher foreign exchange gain, partially offset by a lower gross margin.

Net income tax recovery was $0.7 million, compared to $2.5 million in 2012. The significant income tax recovery in 2012 resulted from the reorganization of our legal structure.

Net earnings in 2013 were $3.7 million, compared to $5.1 million in 2012, reflecting reduced gross margin of $4.3 million and income tax recovery of $1.8 million, offset by lower overall expenses of $4.8 million. Earnings per share were $0.06 per share, basic and diluted, compared to $0.09 per share, basic and diluted, in 2012.

Outlook

For fiscal 2015 the Company is expecting modest revenue growth compared to 2014 due to the increased quotation activity and backlog. The Company expects solid growth from its satellite solutions division from 2014 levels, due to a healthy backlog of military spending from our Datacom contract and our recently announced contract from a Eurasian defense contractor to deliver an array of satellite terminals. The Company’s Sinclair Technologies division’s prospects are expected to remain strong, driven by the Positive Train Control market, while government spending continues to be slow, especially in Canada. The Microwave segment, while supported by Norsat’s diversification activities, including the additions into the ATOM product portfolio may not initially be able to replicate the same volumes of the Harris deliveries in 2014.

Going forward, the Company will continue to work to diversify its business by broadening its product portfolio and expanding its customer base on a geographic and market sector basis. Norsat continues to focus on markets beyond the US, as well as on the commercial, resource, transportation and public safety segments. The Company is also continuing to pursue other new revenue opportunities.

The current global economic uncertainties, coupled with Norsat’s stable financial position and capital structure, continue to create excellent conditions for realizing growth through business combinations. The Company will continue to actively pursue merger and acquisition opportunities that provide strong value, further key strategic objectives and have the potential to be accretive to shareholders.

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Management will also continue to execute a balanced growth strategy that incorporates investment in staffing levels, new product introductions, continued enhancement of existing product lines, greater diversification by geographic region as well as by industry verticals, and a broadening of the solutions we provide to customers. In addition, the Company continues to evaluate other strategic opportunities for improving overall operating and financial performance.

Based on the outlook and information currently available to the company, due to the timing on delivery of orders, backlog and the impact of the large Harris contract in 2014, the Company expects revenues in the first quarter of 2015 to be lower compared to the first quarter of 2014.

Critical Accounting Estimates

Accounting Estimates

We have discussed the development and selection of our critical accounting estimates and policies with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the following disclosures.

Significant Management Judgements

The following are significant management judgments in applying 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 our future taxable income against which the deferred tax assets can be utilized. In addition, significant judgment 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 judgment in determining milestones, actual work performed and the estimated costs to complete the work.

Recognition of Government contributions

We recognize Government contributions of eligible expenditures when there is reasonable assurance that we will comply with the conditions attached to the grant and the grant will be received. We estimate Government contributions based on labour costs and expenses incurred and our assessment 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 our 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

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Determining selling prices for multi-element arrangement 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 judgment 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 units 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 2014, the Company recognized an impairment loss of approximately $47,000 (2013- $nil) on its property and equipment.

Useful lives of depreciable assets

We review our 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

We estimate 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

We use 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

We measure 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

We measure 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, we use 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

We provide for warranty expenses by analyzing historical failure rates, warranty claims, current sales levels and current information available about returns based on warranty periods.

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Uncertainty relates to the timing and amount of actual warranty claims that can vary from our estimation.

Allowance account for credit losses

We provide 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.

Accounting Policies

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 3 Business Combinations are 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 the excess of the consideration transferred over the fair value of 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.

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

Foreign Currency Translation

Functional and presentation currency

Our consolidated financial statements are presented in United States dollars. The functional currency of the parent company is United States dollars and the functional currency of the Company’s Sinclair Technologies’ operating segment is Canadian dollars.

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 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 our financial statements, all assets, liabilities and transactions of our foreign operations with a functional currency other than US dollars are translated into US dollars upon consolidation.

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Each of our foreign operations 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 our 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.

Share-Based Payments

Stock Options

We grant stock options to buy common shares of the Company to directors, senior officers, employees and service providers pursuant to an incentive share option plan. The Board of Directors grants such options for periods of up to 5 years, with vesting periods determined at its sole discretion and at prices equal to the closing market price on the day the options were granted.

We recognize 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) and the risk-free interest 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

We grant restricted share units (“RSUs”) to directors, senior officers and employees pursuant to an incentive restricted share unit plan. 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 us. 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.

We recognize 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 our 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.

Treasury Shares

When we reacquired our 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

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of our own shares. Repurchased shares are classified as treasury shares and are presented as a deduction from total shareholders’ equity. We have granted restricted share units as part of our long term incentive plan. We 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 issued capital.

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 original terms to maturity of up to three months. The cash and cash equivalents act as our primary source of cash and fluctuate directly as a result of our cash flows from operating, investing and financing activities.

Allowance Account for Credit Losses

All of our trade and other receivables have been reviewed for indicators of impairment. We maintain an allowance account for credit losses for estimated losses that may arise if any of our customers are unable to make required payments. We provide for bad debts by setting aside a percentage of sales towards the allowance account. The percentage is based on our historical default experience and is reviewed periodically to ensure consistency with default experience. In addition, periodically throughout the fiscal year, we specifically analyze 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 our trade and other receivables balance. The allowance set aside is then adjusted to align with the specific analysis performed.

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.

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.

Property and Equipment

Property and equipment are stated at cost less applicable tax credits, government assistance, and net of accumulated depreciation and accumulated impairment losses. 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:

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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.

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

Intangible Assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their 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 are 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.

We record amortization of intangible assets on a straight-line basis at the following annual rates, which approximate the useful lives of the assets:

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

Impairment of Long-Lived Assets

At each reporting date, we assess 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, we estimate the asset’s recoverable amount.

The recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs of disposal 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.

Goodwill

Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognized. Goodwill is initially measured at the excess of the consideration transferred over the fair value of 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. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

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Deferred Revenue

Revenue that has been paid for by customers but will qualify for recognition within the next year under our 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 our products.

Revenue that has been paid for by customers but will not qualify for recognition within the next year under our 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 us to customers.

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.

We determine 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.

Our 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:

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.

We have not designated any financial assets as FVTPL.

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Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when we have 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.

We have not designated any financial assets as held-to-maturity investments.

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.

We have not designated any financial assets as available-for-sale assets.

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.

We have 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;

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• 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.

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. We determine 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 and acquisition loan.

Subsequent measurement of financial liabilities depends on their classification as follows:

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.

We have not designated any financial liabilities upon initial recognition as FVTPL.

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.

We have classified trade and other payables, accrued liabilities and acquisition loan as other financial liabilities.

De-recognition

A financial liability is derecognized when the obligation under the liability is discharged, cancelled, or expired.

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Fair value measurement

Our financial assets include cash and cash equivalent and trade and other receivables. Our financial liabilities include trade and other accounts payable, accrued liabilities and acquisition loan.

We have 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 and acquisition loan are classified as other financial liabilities, measured at amortized cost using the effective interest rate method.

The carrying value of our 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.

Revenue Recognition

Our 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.

We have single deliverable and multiple deliverable revenue arrangements.

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

• we have transferred to the buyer the significant risks and rewards of ownership of the goods;

• we retain 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 us; 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, we recognize 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 by us.

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For those contracts where the services are not essential to the functionality of any other element of transaction, we determine 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, we are required to determine the selling price for each deliverable provided the conditions for separation have been met.

Hardware is considered a separate unit of accounting because (1) the delivered item has standalone value to customers as it is sold separately by us 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 by us. In establishing selling price for hardware, we rely on third party evidence based on stand-alone sales of largely interchangeable products. Our 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.

We recognize 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.

Our multiple-element sales arrangements include arrangements where hardware with embedded software licenses and the associated post contract customer support (“PCS”) are sold together. We use VSOE to determine selling price of the undelivered PCS elements based on fair value labour rates and consistent renewal rates.

Our 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 us 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 by us.

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 our 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 us 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 by us.

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For reseller arrangements, fees are fixed or determinable on delivery to the reseller because our agreements with customers and resellers do not contain product return rights.

Construction Contracts

We also earn 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.

Research and Development Costs

Research costs are expensed as incurred. Development costs are deferred if we 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 development costs for the years ended 2014 and 2013.

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. We amortize the cost of the related property and equipment over its useful life according to our accounting policy relating to property and equipment. We recognize government grants only when there is reasonable assurance that we will comply with the conditions attached to the grant and the grant will be received. We present 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.

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

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achieved for the reporting period. If the revenue criteria for repayment have been met, a liability will be recognized with a corresponding increase in product development expenses. 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 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.

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.

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 we intend to settle its current tax assets and liabilities on a net basis.

We accounts for income tax credits in accordance with IAS 12 Income taxes.

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 Section 11.0 “Discontinued Operations”.

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.

Net Earnings Per share

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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 we generate net earnings.

Provisions and Contingent Liabilities

Provisions for product warranties, legal claims, onerous contracts or other claims are recognized when we have 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.

Segment Reporting

The Company’s business operates primarily through three operating segments – RF antennas and filters (“Sinclair Technologies”), Satellite Solutions and Microwave Products. These reportable segments are strategic business units that offer different products and services, which is also the basis for the Company’s chief operating decision makers to identify these reportable segments. They are managed separately because each business is in a different stage in its life cycle and they require different marketing strategies. 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.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

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Related Party Transactions

Compensation of key management personnel, including the Company’s President and Chief Executive Officer, Chief Financial Officer, and General Manager (2013 - 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:

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

The Company’s related party transactions relate solely to compensation of key management personnel.

Recent Accounting Pronouncements

In 2014, we have adopted the following accounting policies:

IFRIC 21 Levies clarifies that the obligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by the government’s legislation. If this activity arises on a specific date within an accounting period then the entire obligation is recognized on that date. The same recognition principles apply in the annual and interim financial statements. IFRIC 21 has no material effect on the Company’s financial statements as the Company has no significant levies that needs to be paid. IFRIC 21 has been applied retrospectively in accordance with its transitional provisions and had no material effect on the Company’s financial statements for any period presented.

Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities clarify the application of certain offsetting criteria in IAS 32, including the meaning of ‘currently has a legally enforceable right of set-off’ and some gross settlement mechanisms may be considered equivalent to net settlement. The amendments have been applied retrospectively in accordance with their transitional provisions. As the Company does not currently present any of its financial assets and financial liabilities on a net basis using the provisions of IAS 32, these amendments had no material effect on the Company’s financial statements for any period presented.

Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets clarify that an entity is required to disclose the recoverable amount of an asset or cash generating unit whenever an impairment loss has been recognized or reversed in the period. In addition, they introduce several new disclosures required to be made when the recoverable amount of impaired assets is based on fair value less costs of disposal, including additional information about fair value measurement including the applicable level of the fair value hierarchy, a description of any valuation techniques used and key assumptions made and the discount rates used if fair value less costs of disposal is measured using a present value technique. The amendments have been applied retrospectively in accordance with their transitional provisions.

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In 2013, the Company has 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 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 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. 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 ISAB has now deferred the effective date to annual period beginning on or after January 1, 2018. Early adoption of the standard is permitted. The Company has not early adopted this standard and is currently assessing the impact that this standard will have on the Company’s financial statements.

IFRS 15 Revenue from Contracts with Customers will replace IAS 18 Revenue, IAS 11 Construction Contracts and some revenue related interpretations. IFRS 15 establishes a new control-based revenue recognition model, changes the basis for deciding whether revenue is to be recognized over time or at a point in time, and improves disclosures about revenue. IFRS 15 provides more detailed guidance on contracts involving the delivery of two or more goods and services as to when to account separately for the individual performance obligations in a multiple element arrangement, how to allocate the transaction price and when to combine contracts. IFRS 15 also provides guidance on how to treat arrangements with variable pricing, such as performance based pricing and how revenue can be constraint. In addition, IFRS 15 provides

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guidance on time value of money as to when to adjust a contract price for a financing component. The ISAB has an effective date to annual period beginning on or after January 1, 2017. Early adoption of the standard is permitted. The Company has not early adopted this standard and is currently assessing the impact that this standard will have on the Company’s financial statements.

Non-IFRS Measures

Management uses non-IFRS measures, EBITDA and Adjusted EBITDA as supplemental measures to evaluate the performance of the Company. EBITDA is defined as earnings before income tax expense, financing costs, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted with foreign exchange gain or loss, corporate development costs, write-down of inventory, impairment charges or recoveries, discontinued operations and other non-cash charges. Corporate development costs are predominately external costs incurred to pursue acquisition.

Management believes that EBITDA and Adjusted EBITDA provide important measures of the Company’s operating performance because they allow management, investors and others to evaluate and compare the Company’s core operating results, including its return on capital and operating efficiencies, from period to period by removing the impact of its capital structure (interest expenses), asset base (depreciation and amortization) and tax consequences. Both EBITDA and Adjusted EBITDA do not have any standardized meaning prescribed by IFRS, other companies may calculate these non-IFRS measures differently, and therefore our EBITDA and Adjusted EBITDA may not be comparable to similar titled measures of other companies. Accordingly, investors are cautioned not to place undue reliance on them and are also urged to read all IFRS accounting disclosures presented in the audited consolidated financial statements and accompanying notes for year ended December 31, 2014.
The following table sets forth, for the years indicated, a reconciliation of IFRS to non-IFRS measures:

Adjusted EBITDA for the year ended December 31, 2014 was $4.7 million, compared to $5.1 million the same period in 2013, reflecting a combination of a decrease of gross profit by $0.4 million, excluding the $1.3 million write-off in inventory in 2013, due to lower margined product mix mostly in the Satellite Solutions and Sinclair Technologies segments, partially offset by a decrease in operating expenses of $0.1 million, excluding depreciation and amortization.

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Adjusted Working Capital

Adjusted Working Capital is a non-IFRS measure that does not have a standardized meaning and may not be comparable to a similar measure disclosed by other issuers. We use working capital changes as a supplemental financial measure in our evaluation of liquidity. We believe that monitoring working capital items assists in assessing the efficiency of allocation of short-term financial resources. Adjusted Working Capital is calculated by subtracting current liabilities, excluding acquisition loan, from current assets. As at December 31, 2014, Adjusted Working Capital increased 12% to $16.1 million, from $14.4 million at December 31, 2013. As at December 31, 2012, Adjusted Working Capital was $14.5 million.

Adjusted Current Ratio

Adjusted Current Ratio is a non-IFRS measure that does not have a standardized meaning and may not be comparable to a similar measure disclosed by other issuers. We believe that monitoring our current ratio helps to assess the health of our liquidity. Adjusted Current Ratio is defined as current assets divided by current liabilities, excluding the acquisition loan. As at December 31, 2014, Adjusted Current Ratio was 3.2 times compared to 3.5 times as at December 31, 2013. As at December 31, 2012, Adjusted Current Ratio was 3.0 times.

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The following table sets forth, for the periods indicated, a reconciliation of IFRS to non-IFRS measures:

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Business Combinations

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:

We recognized $32,778 assets held for sale at acquisition date, comprised of assets redundant to our operation. Subsequent to the acquisition, we disposed all of the assets held for sale and realized $32,778 in 2013.

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

Purchase consideration

The Company paid cash consideration of $0.5 million and financed the purchase from the Company’s cash and cash equivalents.

Acquisition-related costs, including legal, professional fees and relocation expenses amounting to approximately $0.1 million have been recognized as a general and administrative expense in the Consolidated Statements of Earnings and Comprehensive Income in 2013.

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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:

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.

In 2012, the Company has collected substantially all of the trade and other receivables recognized on acquisition.

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Purchase consideration

The fair value of the purchase consideration is summarized as follows:

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.

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:

$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 the vendors. The $1,000,000, less claimed amounts, if any, is releasable to the vendors on January 21, 2013. The Company released $1,000,000 in cash from escrow to the vendors as part of the purchase consideration in 2013.

The 4,028,932 common shares component of the purchase consideration was held in escrow and 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 in 2012.

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 remained unchanged: 50% of the principal plus interest was paid on March 29, 2013 and the balance of the principal plus interest on June 28, 2013. In 2013, the Company paid $755,258 in cash to the vendors, representing full settlement of a promissory note with total principal payments owing of $725,000 and accumulated interest of $30,258.

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The Company paid its principal banker $108,000 in financing fees to acquire the $12,000,000 debt financing. The financing fee of $108,000 was capitalized as part of the cost of the debt and is being amortized over the term.

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.

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 year-to-date change to Goodwill on acquisition of Sinclair is as follows:

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 Technologies 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 2014 is 16.8%.

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 Technologies based on value in use exceeds its carrying value by approximately $2.2 million.

The impairment test performed resulted in no impairment of Goodwill as at December 31, 2014, 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

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key estimates. Sensitivity testing was conducted as a part of the 2014 annual test. If the discount rate used is increased by 1%, the recoverable amount of Sinclair Technologies would reduce by approximately $1.5 million, which is approximately $0.7 million above its carrying value.

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.

Liquidity

Our principal cash requirements are for working capital, capital expenditures and acquisition loan repayment.

Our balance sheet remains sound. As at December 31, 2014, we had $5.5 million in cash and cash equivalents, an increase of $2.2 million from $3.3 million as at December 31, 2013. To meet our working capital requirements and to provide additional short-term liquidity in each period, we may draw on our $3.7 million operating line of credit. As at December 31, 2014, there were no amounts drawn under our operating line of credit. Please refer to “Capital Resources” below for changes in our operating line of credit amount as at March 18, 2015.

Cash generated from operating activities was $4.0 million for the year ended December 31, 2014, compared to $50,367 and $2.3 million for the comparable periods in 2013 and 2012, respectively.

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Cash used in investing activities was $0.6 million for the year ended December 31, 2014 compared to $0.9 million and $0.1million in 2013 and 2012, respectively. Investing activities for the year ended December 31, 2013 were comprised of the $0.5 million of cash used to acquire CVG.

Cash used in financing activities was $1.1 million compared to $1.0 million and $1.4 million in 2013 and 2012, respectively. In 2014, we purchased $0.1 million of treasury shares, which is equivalent to 225,800 common shares at a weighted average share price of $0.50. We also repaid $1.9 million of the acquisition loan and received $1.0 million in government funding in 2014.

Our working capital requirements are mainly for materials, production, selling, operations and general administrative expenses. Our working capital may be improved by increasing sales, shortening collection cycles and monetizing inventory.

Adjusted Working Capital¹ as at December 31, 2014 was at $16.1 million, compared to $14.4 million at December 31, 2013 and $14.5 million at December 31, 2012. The current ratio as at December 31, 2014 was 3.2 times, compared to 3.5 times as at December 31, 2013 and 3.0 times for the 2012 year.

Trade and other receivables were $7.6 million as at December 31, 2014, up from $6.8 million as at December 31, 2013 and $7.1 million as at December 31, 2012. Net government funding receivables were $0.6 million as at December 31, 2014, compared to $0.5 million in 2013 and $0.6 million in 2012.

Trade and other payables and accrued liabilities increased to $5.4. million as of December 31, 2014 compared to $4.1 million in 2013 and $5.8 million in 2012. The increase in 2014 over 2013 reflects an approximately $0.6 million vendor payment accrued related to a significant contract, $0.4 million payable for government contributions received but not yet recorded as a reduction to product development expenses and timing of other vendor payments. The $1.7 million reduction in 2013 over 2012 reflects improvement in cash flow that enabled us to reduce our payables with suppliers and differences in timing of payables and settlement.

Current deferred revenue was $1.2 million as at December 31, 2014, compared to $0.6 million and $0.2 million as at December 31, 2013 and 2012, respectively. The increase in 2014 reflects the deferred revenue of a significant Satellite contract.

Inventory as at December 31, 2014 was $10.1 million, compared to $9.6 million as at December 31, 2013 and $9.0 million as at December 31, 2012. The increase in inventory in 2014 reflects an increase of $1.0 million in work in progress from $1.7 million as at December 31, 2014 compared to $0.6 million in 2013 related to a significant Satellite contract, partially offset by approximately $0.3 million increase of inventory obsolescence provision. The increase in inventory in 2013 over 2012 reflects our increased projection for sales in the first quarter of 2014, offset by the impact of the $1.1 million net increase to our provision for excess and slow-moving inventory.

As of December 31, 2014, shareholders’ equity increased to $29.0 million, from $26.4 million at December 31, 2013 and $24.2 million at December 31, 2012. The increase in 2014 over 2013 reflects $4.2 million in 2014 earnings, a $0.1 million increase in contributed surplus from stock-based compensation on options and restricted share units; offset by a $1.8 million increase in accumulated other comprehensive loss due to foreign exchange movement.

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Going forward, we may deploy cash for any suitable investments consistent with our long-term strategy of entering new geographic markets, broadening our customer base, and expanding into new market verticals. In addition to utilizing some or all of our current cash resources, we may also raise additional capital from equity markets or utilize debt to complete investment and financing transactions that would accelerate our growth in the areas outlined above.

Capital Resources

Our 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 our ability to support normal operating requirements on an ongoing basis.

Our capital consists of the items included in the Consolidated Statements of Financial Position in the shareholders’ equity section, and the operating line of credit (if drawn). We manage our capital structure and make changes based on economic conditions and the risk characteristics of our assets. As at December 31, 2014 shareholders’ equity was $29.0 million (2013 - $26.4 million and 2012 - $24.2 million).

To manage our capital requirements, we have a planning and budgeting process that helps determine the funds required to ensure we have the appropriate liquidity to meet our operating and growth objectives. We plan to continue to fund our short-term cash requirements through operations, and if required, we have an operating line of credit in place that can be drawn upon.

On March 28, 2013, we entered into an agreement with the Canadian Federal Minister of Industry (the “Minister”) through the Strategic Aerospace & Defense Initiative (“SADI I”). Under this agreement, the Minister will provide funding of 30% of eligible spending related to the research and development of the aerospace, defense, space or security (“A&D”) technology development projects to a maximum funding amount of Cdn$13.3 million. The agreement covers eligible costs starting from July 27, 2012 up to and including December 31, 2017 (“SADI II”). We are obliged to repay the funding over the repayment period. Funding is conditional on maintaining certain reporting requirements. As at December 31, 2014, 2013 and 2012, we were in compliance with these reporting requirements.

For the year ended December 31, 2014, 2013 and 2012, there were no other changes in our approach to capital management.

As at December 31, 2014 the Company had the following externally imposed capital requirements under its operating line of credit agreements and the acquisition loan agreement:

• 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 1.10 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 ⁽¹⁾ , 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

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Company’s operating line of credit and acquisition loan. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization and is a non-IFRS measure. 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.

Credit Facilities

Operating Line of Credit

On July 3, 2013, we renewed and amended our existing credit facility with HSBC Bank Canada (the “Bank”). The acquisition loan was extended for three 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 our funded debt to EBITDA ratio determined on a rolling 12-month basis based on our consolidated financial statements.

At our request, the demand revolving operating line of credit has been reduced to US$2.2 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 under the “Capital Resources” section above.

The following summarizes the Company’s credit facilities extended by the Bank as at December 31, 2014:

The Company has a secured revolving operating line of credit with the Bank of US$2.2 million (2013 - $2.25 million and 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, 2014, 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$1.0 million (2013 and 2012 - $1.0 million) 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, 2014, 2013 and 2012, the Company had no borrowings outstanding with respect to the non-revolving demand note.

The Company also has an additional revolving demand note with HSBC Bank USA in the principal amount of US$0.5 million (2013 and 2012 - $0.9 million) subject to an interest rate of prime plus 1.5% per annum and payable upon demand. As at December 31, 2014, 2013 and 2012, the Company had no borrowing outstanding with respect to the revolving demand note.

Accordingly, as at December 31, 2014, the Company has access to undrawn credit facilities totaling $3.7 million (2013 - $4.15 million, 2012 - $4.7 million) and is in compliance with its externally imposed covenants.

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There are currently no major capital projects or divestitures in progress.

As at December 31, 2014, there were no amounts drawn under our operating line of credit.

Acquisition Loan

On December 22, 2010, the Company secured a non-revolving acquisition loan of Cdn$13.2 million or US$12 million 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, 2014, the Company made principal repayments totaling $1.9 million (2013 - $2.37 million, 2012 - $2.8 million) against the acquisition loan. As at December 31, 2014, the Company’s combined weighted average interest rate was 2.77% (2013 – 3.02%, 2012 – 4.29%).

The Company has externally imposed capital requirements under its acquisition loan agreement as explained in the above section “Capital Resources”.

As at December 31, 2014, 2013 and 2012, the Company is in compliance with its bank covenants.

In 2008, the Company’s receipt of an award by the Canadian Ministry of Industry is an external validation of the Company’s excellence in research & development activities. The Cdn$5.97 million repayable contribution through the Ministry’s Strategic Aerospace and Defense Initiative (SADI) program provides the Company with a significant contribution towards assisting R&D efforts and provides for continued investment in technological innovation. The Company has claimed the maximum funding of Cdn$5.97 million under this agreement as at December 31, 2012.

In 2013, the Company received another award by the Canadian Ministry of Industry as an external validation of the Company’s excellence in research & development activities. The Cdn$13.3 million repayable contribution through the SADI program continues to provide the Company with a significant contribution towards assisting R&D efforts and provides for continued investment in technological innovation.

In 2014, 2013 and 2012, the Company continued to develop products in all business lines. The Company’s product development efforts continue to be performed through the support of the Canadian Federal Government through the SADI grants awarded in 2008 and 2013.

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The following table provides further details of the Company’s research and development expenditures:

Radio Frequency Based Communications - Trends

Communication networks, and in particular, mobile wireless communications systems, are widely used in public safety, national security, natural resource management, and other specialized applications.

• Limited availability of licensed and unlicensed frequencies is causing governments to re- assign spectrum for public safety networks. As an example, US Broadcasters were recently required to vacate the 700 MHz frequency band to allow spectrum for new public safety networks;

• Demand by mobile radio users for more radio channels is causing network operators to reduce channel spacing and increase demand for filter products;

• Large competitors are more focused on the larger cellular market and appear to be reducing investment in new product development for the PMR market; and

• Original equipment manufacturers (OEMs) are driving greater efficiencies and increasing their bargaining power by favouring fewer vendors with a broad product portfolio

Satellite-Based Communications - Trends

Although we continue to see softness in the satellite-based communications market as a result of the US budget cuts and decrease in U.S. military spending, investments to develop new products have been well received by other global militaries, which we believe will translate into future revenue growth. In addition, we believe that a number of longer term trends are positively influencing the sector. Specific trends include the following:

• There is a growing expectation that organizations and individuals are always “connected” to some type of communications infrastructure, regardless of where they may be positioned geographically.

• As companies are increasingly required to look beyond traditional locations to meet the world’s demand for natural resources, there has been a proliferation of remote sites far removed from existing infrastructure. Demand for bandwidth is ever-expanding as users increasingly expect that video and audio files are capable of being transmitted, and that the transmissions will occur in real time.

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• In the era of 24-hour news coverage, viewers have come to expect media to cover a breaking story nearly instantaneously, regardless of where it occurs around the world. Media outlets need to be able to deploy quickly to meet this expectation.

• Major media are experiencing competition from alternative news sources that typically make content available over the Internet. Partly in response, governments and non-governmental organizations are increasingly producing their own content relating to events they deem significant, and making this available to third parties or directly to the public.

• The nature of modern military operations is such that mobility and rapid establishment of communication links in the field are increasingly considered vital.

• Major organizations that have global operations are increasingly aware of, and plan for, natural or manmade crisis events. Their plans often include establishing communication capabilities that are not dependent on terrestrial infrastructure as part of their contingency or emergency action plans.

• A number of large-scale disasters in recent years have proven the critical importance of first responders being able to establish rapid communication links to coordinate recovery efforts.

• Experience with information technology and communication equipment in recent decades has conditioned users to expect that related hardware will become smaller and more portable over time, while offering improved functionality. Providers who are able to meet this expectation can realize competitive advantages.

• Applications for satellite technology are becoming ubiquitous. From their traditional role in the broadcast and telecommunications fields, communications satellites have more recently been extended to such applications as broadband services, cellular and Internet backhaul, location-based services and satellite imagery. As a result, a broader base of users has a need for ground-based satellite equipment.

Not applicable.

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The Company’s known contractual obligations at December 31, 2014 are quantified in the following table:

Although the acquisition loan is due on demand, it is not expected that the demand feature will be exercised. The scheduled repayment on the debt is over the next year.

The Company, in the normal course of business, enters into purchase commitments, including inventory purchase obligations as disclosed above. The operating lease obligations are related to office premises. In addition, the Company is required to make repayment of SADI I government contributions with repayment contingent on 2015 financial results compared to those achieved in 2014. As at December 31, 2014, the Company did not accrue any liability for repayment as the amount cannot yet be determined. Future interest payment of approximately $66,000 on the acquisition loan balance of $2,371 million, based on a weighted average interest rate of 2.77% as at December 31, 2014, has not been included under acquisition loan.

Statements in this report relating to matters that are not historical fact are forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, general economic conditions, changes in technology, reliance on third party manufacturing, managing rapid growth, global sales risks, limited intellectual property protection and other risks and uncertainties described in Norsat’s public filings with securities regulatory authorities.

Directors

The following section sets forth certain information regarding the current directors, as of March 18, 2015:

Fabio Doninelli
Chairman of the Board, member of the Audit Committee and Compensation Committee

Mr. Fabio Doninelli became a director and Chairman of the Board of Norsat on March 7, 2011. Mr. Doninelli is President and Board Member of Prismafin S.A., an international investment organization with offices in Chiasso and Zurich, Switzerland. Mr. Doninelli has extensive experience in strategic advisory, portfolio management, and structuring funds. From 1982 to

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1986, Mr. Doninelli served as Vice President of Trading for the Zurich Stock Exchange. Mr. Doninelli also serves as Strategy Advisor to the Boards of several public and private companies around the world. Mr. Doninelli is also Chairman of Lifeware SA, which is an online life insurance software company with offices in Chiasso, Lugano, Zurich and Frankfurt, Germany. Mr. Doninelli, who lives in Mendrisio Switzerland, exercises direction over the 198,558 post-conversion Norsat common shares held by Prismafin S.A.

Joseph Caprio
Director, Chair of the Compensation Committee and member of the Audit Committee

Mr. Caprio became a director of Norsat on April 30, 2005. Mr. Caprio has 35 years of experience as a recognized organizational development expert. Mr. Caprio is a former Associate Dean at Colgate University and has served as a management consultant and as the operating officer of entrepreneurial businesses. Mr. Caprio, who lives in New York, is a strong proponent of the participative management philosophy of the American Management Association and has counseled a number of successful organizations. Mr. Caprio holds a BS degree in management from the University of Rhode Island, Kingston, RI and an MA degree from Colgate University, Hamilton, NY.

James Topham
Director and Chair of the Audit Committee

Mr. Topham became director and Chair of Audit Committee of Norsat on May 12, 2011. Mr. Topham has 30 years of public practice experience as a Chartered Accountant and prior to his retirement in 2008, was a Technology Partner of KPMG’s Vancouver office. Mr. Topham currently serves on the Board of two other public technology companies as well as working with several other private technology companies. Mr. Topham was also a founder and for the first nine years, board member of the BC Technology Industry Association (“BCTIA”). In 2003, Mr. Topham founded the predecessor to the BC Cleantech CEO Alliance, to promote the cleantech industry in BC. He is a founder of Social Venture Partners Vancouver (formerly known as BC Social Venture Partners), which has raised several million dollars towards funding specific community projects. Mr. Topham has a computer science major and a Bachelor of Commerce degree with Honours, and was the most distinguished graduate, from the Commerce Faculty of the University of Saskatchewan (1972).

Shannon Byrne Susko
Director and member of the Compensation Committee

Ms. Susko became director of Norsat on May 7, 2014. Ms. Susko has been working with CEOs, Boards, executive teams, and individuals for over 10 years. She is the former President of DST Subserveo and former Co-founder, President and Chief Executive Officer of Subserveo Inc. Her technical expertise is coupled with extensive sales, marketing, operations, and mergers and acquisitions experience. Ms. Susko has and continues to serve on several for-profit and not-for-profit boards at a regional, national and international level. Ms. Susko was Vancouver’s ACG and BIV 2011 Dealmaker of the Year, and Canada’s Top 40 under 40 recipient for the year 2000. Ms. Susko holds a Bachelor of Commerce and Bachelor of Science degree from Saint Mary’s University and a Masters of Computer Science from the Technical University of Nova Scotia. She has also recently received the ICD.D designation from the Institute of Corporate Directors.

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