NSAT Norsat International Inc. (New)

Table 1 below summarizes selected consolidated financial data for Norsat International Inc. (“the Company”, “Norsat”, or “we”) for the last five fiscal years ended December 31, 2016, 2015, 2014, 2013 and 2012 which have been extracted from the Company’s audited consolidated financial statements and related notes and should be read in conjunction with such financial statements. The table should be read together with "Item 5 - Operating and Financial Review and Prospects."

The audited consolidated financial statements as at December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 are referenced under the heading “Item 8 A. Consolidated Statements and Other Financial Information” and filed as Exhibit 6.1.

Our consolidated financial statements for fiscal years 2012 through 2016 are prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

In this Form 20-F Annual Report, unless otherwise specified, all monetary amounts are expressed in United States dollars. All references to "US$" or "$" are to U.S. dollars and all references to "Cdn$" are to Canadian dollars. The following table sets forth, for each period indicated, exchange rates Canadian dollar expressed in U.S. dollars:

Table 1: Selected Financial Information

On January 16, 2015, the Company consolidated its outstanding common shares on the basis of one new common share for every ten existing common shares. As a result, earnings per share and weighted average common shares outstanding are reflected on a post-consolidated basis. For further information please see Item 10B.

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Note:

Not applicable.

Not applicable.

Investors should carefully consider the risks and uncertainties described below before making an investment decision. If any of the following risks actually occur, our business, financial condition or operating results could be materially harmed. This could cause the trading price of our common shares to decline, and you may lose all or part of your investment. The items of the following list of risk factors are in no particular order or priority to the Company.

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RISKS ASSOCIATED WITH FINANCIAL RESULTS

The Company’s inability to generate sufficient cash flows from its operations may affect its ability to continue as a going concern. The Company’s consolidated financial statements have been prepared on a going concern basis, which presumes the realization of assets and the settlement of liabilities in the normal course of operations. The application of the going concern basis is dependent upon the Company having sufficient available cash resources and achieving profitable operations to generate sufficient cash flows to fund continued operations. Should the Company fail to generate sufficient cash flows from operations, it will require additional financing to remain a going concern.

The Company’s inability to accurately forecast its results from quarter -to-quarter may affect its cash resources and result in wide fluctuations in the market price of the Company's stock. The operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are described below. Due to these and other factors, most of which are outside of the Company’s control, the quarterly revenues and operating results are difficult to forecast. As a result, the Company may not be able to accurately predict its necessary cash expenditures during each quarter or obtain financing in a timely manner to cover any shortfalls. The Company also believes that period-to-period comparisons of its operating results may not be meaningful and one should not rely on any such comparisons as an indication of its future performance.

RISKS ASSOCIATED WITH BUSINESS AND OPERATIONS

The Company’s exposure to business and operation risks includes but is not limited to the following:

The Company recognizes the threats posed by operating in an uncertain global economic environment. The uncertain global economy and financial markets continue to limit overall visibility to end markets. This uncertainty may continue to impact our industry, resulting in lower demand for some of the products we manufacture and limiting end-market visibility for our customers. This environment can pose significant risk to our business by impacting demand for our customers’ products, the financial condition of our customers or suppliers, as well as the level of customer satisfaction. A deterioration in economic environment may accelerate the effect of the various risk factors described in this Annual Report, as well as result in other unforeseen events that will impact our business and financial condition.

The Company cannot be sure it will be able to identify emerging technology and market trends, enhance its existing technologies or develop new technologies in order to effectively compete in the communications industry. The communications industry is characterized by rapid technological changes, short technology and product life cycles, pressure to provide improved solutions at increasingly lower prices and frequent introduction of new technologies and products. To succeed, the Company must be able to control spending and prudently allocate financial resources to optimize value. Also, the Company must identify emerging trends and enhance its existing technologies and develop new technologies and products to meet market requirements. To drive sales, the Company’s products must meet the needs of existing and potential customers and be competitively priced; additional judgment will need to be exercised if the granting of credit to customers is required to close the transaction. In view of the current difficulty, both in obtaining credit and accessing the capital markets, stewardship of cash continues to be critical to the Company’s success. Additionally, there must be sufficient interest in and demand for the Company’s products. If the Company does not develop these new technologies and products in a timely and cost effective manner, or if others develop new technologies ahead of us, the Company may not achieve profitability in the communications industry and may not be able to participate in selling these new technologies or products. While the Company is able to continue to develop products with funding contributions from the Canadian Federal Government through the Strategic Aerospace & Defense Initiative

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(“SADI”) program; without the SADI program contribution, the Company’s product development costs would not be sustainable, thereby jeopardizing our ability to maintain product innovation and leadership.

The Company has customer concentration. A significant portion of the Company’s revenues have been recognized from a customer. A decline in revenue from the customer on which we are dependent or the loss of a large customer could have a material effect on our financial condition and operating results.

For the year ended December 31, 2016, one customer (2015 – one customer) of the Sinclair Technologies operating segment and one customer (2015 – nil) of the Satellite Communications operating segment represented 11% (2015 – 10%, 2014 – 11%, 2013 – 14%, 2012 – 11%) and 10% (2015, 2014, 2013 and 2012 – nil) of the Company’s consolidated revenue.

While the Company has been diversifying its customer base, the efforts to date may be insufficient to offset the effects of the quarterly variance of sales and delays associated with selling to the government sector. The Company expects that a majority of the Satellite Communications revenues will continue to be dependent on sales to a small number of customers. The Company also expects that customers will vary from period-to-period as existing customers are under no obligation to continue buying from Norsat.

The Company cannot be sure that it will be able to compete effectively with its current competitors. The Company’s markets are intensely competitive. Some competitors have technologies and products that may be more advantageous and compete directly with the Company. Some of these competitors are large, established companies which have significantly greater resources than we do.

Aggressive pricing is a common business dynamic in our markets. Some of our competitors have greater scale as well as a broader service offering than we have. Some of our current or potential competitors may also increase or shift their presence in new lower-cost regions to try to offset the continuous competitive pressure and increasing labor costs, may develop or acquire services comparable or superior to those we develop, combine or merge to form larger competitors, or adapt more quickly than we may to new technologies, evolving industry trends and changing customer requirements.

The Company’s ability to compete effectively will depend on its ability to increase sales, attract new customers in a timely and cost effective manner and sell these products at competitive prices. The Company is dependent on others for the supply and manufacture of components and products it sells. The Company has outsourced substantially all of the manufacturing of the microwave products it sells. The Company relies on its suppliers to provide components for the production of other products. If either the manufacturers or suppliers cannot deliver products to the Company on time, its revenues and profits will be adversely affected.

The Company has limited intellectual property protection. The Company’s success and ability to compete are dependent, in part, upon its proprietary technology, brand and reputation in the marketplace, and customer relationships. While the Company currently holds four patents (US Patents# 6931245; 7218289; 8200150; 8125400) and has applied for patent protection on certain other parts of its technology, it relies primarily on trade secrets and does not have adequate trademark and patent protection on all of its technology. The Company also enters into confidentiality, and non-compete agreements with its employees and limits the access to and distribution of the product design documentation and other proprietary information. The Company cannot be sure that these efforts will deter misappropriation or prevent an unauthorized third party, including former associates and former employees, from obtaining or using information, which it deems to be proprietary. Although the Company believes that its technology does not currently infringe upon patents or trademarks held by others, it cannot be sure that such

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infringements do not exist or will not exist in the future, particularly as the number of products and competitors in its industry segment grows.

If the Company experiences rapid growth and does not manage it effectively, profitability may be affected . If our technologies and products achieve widespread acceptance, the Company may experience rapid growth. This growth may require the Company to hire more employees, recruit additional management, improve its financial control systems, and expand and manage the technical, sales and support service operations. The Company will need increased revenues and additional funding to operate these increased activities. If the Company does not manage its growth effectively, its profitability may be impacted.

The Company depends on its key employees and it cannot be sure that it will be able to keep these employees or hire and train replacements . The Company’s success depends on the skills, experience and performance of the senior management and other key personnel. While it offers competitive compensation packages and stock options to attract key employees, the Company does not carry key person insurance on these employees. Highly skilled technical employees and management in the communications industry are in demand and the market for such persons is highly competitive. The Company cannot be sure that it will be able to retain these employees or hire replacements. If the Company does not successfully retain the key personnel or hire and train replacements, it will be unable to develop the new products and technologies necessary to compete in its markets or to effectively manage its business.

The Company intends to expand its international operations, and thus faces a number of risks including tariffs, export controls and other trade barriers; political and economic instability in foreign markets; and fluctuations in foreign currencies. These external risks may not be under the Company’s control. Additional human and financial resources may be required for this expansion which the Company may not be able to attract or afford. Failure to expand internationally may impact the Company’s prospects for revenue growth and profitability.

The Company may encounter difficulties completing or integrating our acquisitions which could adversely affect its operating results. The Company expects to expand its presence in new end-markets or expand its capabilities, some of which may occur through acquisitions. These transactions may involve acquisitions of entire companies and/or acquisitions of selected assets of companies. Potential difficulties related to our acquisitions include:

• integrating acquired operations, systems and businesses;

• retaining customer, supplier, employee or other business relationships of acquired operations;

• addressing unforeseen liabilities of acquired businesses;

• limited experience with new technologies; and

• not achieving anticipated business volumes.

Any of these factors could prevent the Company from realizing the anticipated benefits of an acquisition, including additional revenue, operational synergies and economies of scale. The Company’s failure to realize the anticipated benefits of acquisitions could adversely affect its business and operating results. The Company’s acquisition of Sinclair Technologies Holdings Inc. in 2011 has resulted in the recording of a significant amount of goodwill and intangible assets at the time of acquisition. The Company’s failure to support the carrying value of goodwill and intangible assets in periods subsequent to the acquisitions could require write-downs that adversely affect our financial results.

In certain instances, the Company sells products which may be subject to export and/or re-export restrictions. The export laws of the governments of Canada and United States apply to products that the Company sells. The United States Department of Commerce, through its Export Administration Regulations, and the Government of Canada, through its Export Controls Division, regulate exports and re-exports of "dual-use" items, i.e., goods, software and

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technologies with commercial and proliferation/ military applications. In ascertaining whether such items may be subject to export control restrictions, the Company is sometimes forced to rely on information in the specifications of certain components from the manufacturers and vendors. Should this information later prove to be incorrect, the Company may be subjected to penalties and fines. It may also be subjected to penalties and fines should there be a breach in the processes.

The Company buys components and products which may, in certain instances, be subject to contractual obligations to purchase minimum quantities during a given period, maintain resale records and abide by certain resale restrictions. Failure to fulfil any or all of these may negatively impact liquidity should the Company be forced to take ownership of any un-purchased units. It may also affect the Company’s ability to continue supplying products as originally specified and thus affect obligations to fulfil orders.

The Company may be subject to product liability claims, which are not fully covered by insurance. The manufacture, sale and marketing of our products expose us to the risk of product liability claims. Given the complex nature of our products, the products may contain undetected errors or performance problems may arise. Although the Company’s products undergo testing prior to release into the market, it is possible that such products may yet still contain errors and performance problems, which are discovered only after commercial introduction. If these defects and errors are discovered after shipment, they could result in a loss of sales revenues, delay in market acceptance, product returns, warranty claims and the loss of a potential market. In addition, components and other products manufactured and distributed by others, which are incorporated into the Company’s products, may also contain such defects and errors, which could substantially reduce the performance of the products. The Company is also at risk of exposure to potential product liability claims from distributors and end-users for damages resulting from defects in products that it distributes. Although product defects have not been a significant factor, the Company maintains comprehensive general liability insurance which provides limited coverage against claims originating in product failure. The Company cannot be sure that this insurance will be adequate to cover all claims brought against us or that this insurance will continue to be available to us on acceptable terms. If these claims are not fully covered by the Company’s product liability insurance, they could severely and negatively impact the business liability insurance coverage and the available cash resources. A product liability claim, even one without merit or for which the Company has substantial coverage, could result in significant legal defense costs, thereby increasing the expenses, lowering the earnings and, depending on revenues, potentially resulting in additional losses.

The Company’s operations may be disrupted by natural disasters and extreme weather conditions. The Company’s headquarters is located in the Greater Vancouver region which has, in recent times, been subjected to high winds and extreme weather conditions. While the Company has managed to continue operating through some of these conditions, employee productivity during these periods is negatively impacted.

Long sales and implementation cycles for the Company’s products may adversely affect its operating results. The Company’s customers generally devote substantial time, money and other resources to their purchasing decisions. Typically, the larger the potential sale, the more time, money and other resources will be invested. As a result, it may take many months or a few years after the first contact with a customer before a sale may actually be completed. The Company may invest significant sales and other resources in a potential customer that may not generate revenue for a substantial period of time, if at all. Long sales and implementation cycles may affect the size or timing of the order or even cause it to be cancelled. For example, purchasing decisions may be postponed, or large purchases reduced, during periods of economic uncertainty; the Company or its competitors may announce or introduce new products; or the customer’s own budget and purchasing needs may change. In addition, long sales and implementation cycles may impact the margins that the Company earns on its products. It may cost the Company more to produce its products by the time the purchasing decision is made due

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to increased supply costs or currency fluctuations. If these events were to occur, sales of the Company’s products may be cancelled or delayed, which would reduce its revenue.

Mergers or other strategic transactions by competitors could weaken the Company’s competitive position or reduce its revenue. If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Our competitors may also establish or strengthen cooperative relationships with existing or prospective clients, thereby limiting our ability to promote its products and services. Disruptions in the Company’s business caused by these events could reduce its competitiveness and ultimately its revenue.

If the Co mpany’s suppliers do not supply us with a sufficient amount and quality of components at acceptable prices, and in a timely manner, our ability to manufacture the Company’s products would be harmed and the business would suffer. The Company relies on third-party suppliers to provide components and product subassemblies. A supplier’s failure to supply components or product subassemblies in a timely manner, or failure to supply components or product subassemblies that meet the Company’s quality, quantity or cost requirements, or its inability to obtain substitute sources of these components or product subassemblies in a timely manner or on terms acceptable to the Company, could adversely affect its ability to manufacture or source products. The Company may experience delays in the manufacture or sourcing of products and the business and financial results would suffer if we fail to identify alternate suppliers, or if our supply is interrupted or reduced or if there is a significant increase in cost.

The Company’s level of indebtedness and failure to comply with its indebtedness arrangements may adversely affect its business and operations. The Company relies on the availability of indebtedness arrangements with its lenders. The arrangements contain restrictive covenants that limit the Company’s discretion with respect to certain business matters. These covenants place significant restrictions on the Company’s ability to pledge or create liens or other encumbrances on its assets. These financial covenants require the Company to meet certain financial ratios and financial condition tests. If the lender was to demand or cancel these facilities, there can be no assurance that the Company’s assets would be sufficient to repay in full the indebtedness. It is possible that the Company will not have sufficient funds at the time to fund its operations. In addition, there can be no assurance that future borrowings or equity financing will be available to the Company or available on acceptable terms, in an amount sufficient to meet its repayment obligations. In the event that the lending arrangements cannot be refinanced, or if they can only be refinanced on terms that are less favorable than the current terms, the Company’s business and operations may be adversely affected.

The Company is subject to the risk of increased income taxes and our ability to successfully defend tax audits could adversely affect our financial condition and financial results. The Company conducts business operations in a number of countries. The Company develops its tax filing positions based upon the anticipated nature and structure of our business and the tax laws, administrative practices and judicial decisions currently in effect in the jurisdictions in which the Company has assets or conducts business, all of which are subject to change or differing interpretations, possibly with retroactive effect. In addition, certain of our subsidiaries provide financing, products and services to, and may from time-to-time undertake certain significant transactions with, other subsidiaries in different jurisdictions. Moreover, several jurisdictions in which the Company operates have tax laws with detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles, and that contemporaneous documentation must exist to support such pricing.

The Company is subject to tax audits and reviews by local tax authorities of historical information and our contemporaneous documentation which could result in additional tax expense in future periods relating to prior results. Any such increase in our income tax expense and related

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interest and penalties could have a significant impact on the Company’s future earnings and future cash flows.

Any failure to successfully manage the Company’s international operations would have a material adverse effect on its financial condition and operating results. The Company has operations in a number of countries, including Canada, United States, United Kingdom and Switzerland. International operations are subject to inherent risks which may adversely affect us, including:

• labor unrest and differences in regulations and statutes governing employee relations;

• changes in regulatory requirements;

• inflation and rising costs;

• difficulty in staffing and managing foreign operations;

• ability to build infrastructure to support operations;

• changes in local tax rates or adverse tax consequences, including the repatriation of earnings;

• compliance with a variety of foreign laws, including changing import and export regulations;

• adverse changes in trade policies between countries in which we maintain operations;

• economic and political instability;

• potential restrictions on the transfer of funds; and

• foreign exchange risks.

RISKS ASSOCIATED WITH THE VALUE OF NORSAT SHARES

The exercise of the existing outstanding options may substantially dilute the value of the Company’s common shares . The Company has unlimited number of Common Stock authorized, of which 5,848,808 were outstanding on a post-consolidated basis at March 23, 2017. See Item 10B below for more information. Although the Board of Directors has no present intention to do so, it has the authority, within parameters set by the Toronto Stock Exchange (the “TSX”), without action by the shareholders, to issue authorized and unissued shares of Common Stock. Any series of Preferred Stock, if and when established and issued, could also have rights superior to shares of the Company’s Common Stock, particularly in regard to voting, the payment of dividends and upon liquidation of Norsat.

The current financial market volatility can result in wide fluctuations in the market price of the Company’s stock. Our operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future. In addition, the uncertainty and volatility in current financial markets, including any publicly announced strategic opportunities and the completion of such opportunities, can result in wide fluctuations in the market price of our stock.

RISKS ASSOCIATED WITH FOREIGN EXCHANGE

The Company’s operations are heavily exposed to fluctuations in foreign currencies. Most of the Company’s sales are denominated in U.S. dollars, Canadian dollars and Great British Pound (GBP). While the Company expects its revenues and expenses will continue to be denominated primarily in U.S. dollars, a portion of its revenues and expenses may be denominated in other foreign currencies in the future. As the functional currency is U.S. dollars, the Company could experience and has experienced the risks of fluctuating currencies. A weaker Canadian dollar decreases operating expenses on conversion to the U.S. dollar. From time to time the Company may choose to engage in currency hedging activities, which may be unsuccessful and expensive.

A 9% (2015 - 9%) strengthening/(weakening) in the US$ against the Cdn$ would result in a loss/(gain) in net earnings and an increase/(decrease) in the net financial liabilities of approximately $86,000 (2015 - $38,000 decrease in the net financial assets).

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An 14% (2015 - 8%) strengthening/(weakening) in the US$ against the GBP would result in a loss/(gain) in net earnings and a decrease/(increase) in the net financial assets of approximately $31,000 (2015 - $19,000).

For further information, please refer to note 6 Financial Instruments Risk under the heading “Currency Risk” set forth in the Audited Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014, filed as Exhibit 6.1 to this annual report on Form 20-F.

RISKS ASSOCIATED WITH INTEREST RATES

Borrowings under the Company’s credit facilities bear interest at prime rate plus a margin. If the Company borrows under the credit facilities, it is exposed to interest rate risks due to fluctuations in these rates. A 1% increase in these rates would increase interest expense by approximately $39,000 annually, assuming the Company borrows a maximum of $3.9 million under our credit facilities. As at December 31, 2016, the Company had access to undrawn credit facilities for approximately $3.5 million. For further information, please refer to note 6 Financial Instruments Risk under the heading “Interest rate risk” set forth in the Audited Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014, filed as Exhibit 6.1 to this annual report on Form 20-F.

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During 2016, the Company made purchases of property and equipment in the amount of $0.4 million (2015 - $0.2 million, 2014 - $0.6 million) primarily relating to the purchase of equipment for product development and test equipment and operations. There are currently no major capital projects or divestitures in progress.

1. Norsat Business and Principal Activities

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

Our common shares are traded on the TSX under the ticker symbol ‘NII’ and on the NYSE MKT under the ticker symbol ‘NSAT’. See Item 10B below with respect to Norsat’s common shares

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commencing trading on the NYSE MKT and ceasing trading on the OTCBB concurrently on February 10, 2015.

Canada. This “re-farming” of frequencies creates new demand, which we can satisfy through engineering derivative modifications to our existing products.

Our Sinclair Technologies segment also manufactures several lines of omni-directional, yagi and panel dipole antennas covering the 30 MHz to 1900 MHz bands. Sinclair Technologies played a role in developing low passive inter-modulation (“PIM”) antennas.

Filters

Sinclair Technologies also produces an extensive portfolio of RF filter products used to optimize the performance of antenna systems including cavity filters, transmitter combiners, duplexers, isolators, circulators and receiver multi-couplers. Our filter product line is based on standard cavity and combines resonator technologies, as well as very small high-performance filters, using cross-coupled technology.

Sinclair Technologies - Market Profile

The antenna and filter products supplied by our Sinclair Technologies segment are used primarily by the Land Mobile Radio industry and specifically by the following industry segments:

• Public safety operators, including several police forces, coast guards and navies, and a large set of ambulance and fire dispatch services;

• Private sector networks including rail, ground and air transportation networks used by natural resource, utility, taxi, trucking, and construction companies, as well as other dedicated network operators. These customers are generally served through an extensive set of dealers specializing in radio systems;

• Mobile radio, public safety, aviation and heavy transport industries; and

• Original equipment manufacturers (OEMs).

Sinclair Technologies products are well established globally. Operating in the 30 MHz to 1.9 GHz frequency range, Sinclair Technologies antennas and filters are integral components of many wireless communications networks - controlling, enhancing and propagating radio frequency signals associated with these systems. Most Sinclair Technologies products support both voice and data.

Competition

The primary competition for antenna and filter products are PCTEL Inc. (NASDAQ:PCTI), Laird PLC (LSE: LRD.L), Bird Technologies, EMR Corporation, Axell Wireless Ltd., RFI Corporation, Comprod Inc. and dbSpectra .

(b) Satellite Communications Business Segment

Our Satellite Communications segment provides two broad categories of products: satellite terminals and microwave components.

Our Satellite Solutions segment provides a comprehensive portfolio of “fly-away” (compact portable) satellite terminals and software interfaces designed for use in locations where traditional communication infrastructure is insufficient, unreliable, damaged or non-existent. In addition, we design, develop and market receivers, transmitters and power amplifiers that enable the transmission, reception and amplification of signals to and from satellites. Our product portfolio of

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microwave components includes a comprehensive range of satellite receivers, transmitters, transceivers, SSPAs and other microwave components.

Satellite Terminals

The following is a description of our primary portfolio of portable satellite systems.

Norsat GLOBETrekker™ 2.0 is an intelligent, auto-acquire, rapidly deployable fly-away satellite terminal. GLOBETrekker™ has a modular architecture that enables easy component swapping in the field, a simple one-touch interface, elevated electronics for all terrain deployment and a variety of other feature enhancements that improve usability, performance and ruggedness. The terminal is built to military-grade specifications (MIL-STD-810G) and is easily transported via airline checkable packaging. GLOBETrekker™ is ideal for users with mission critical communication requirements such as military, resource, emergency response, and transportation applications.

The Norsat ROVER™ is an ultra-portable fly-away satellite terminal with assisted acquire technology. The ROVER™ is ideal for the rapid deployments of military and other highly mobile operations.

SigmaLink™ is a fly-away satellite terminal with antenna sizes up to 2.4m, suitable for longer term deployments. SigmaLink™ is ideal for use by government and peacekeeping agencies, broadcasters, resource exploration companies, distance education institutions, financial institutions, and large corporations.

We also have available the RANGER - an assisted-acquire micro-sat terminal. The RANGER is a portable terminal ideal for rapid deployments where portability is essential.

We also offer a series of SATCOM Baseband Kits. These convenient, all-in-one tool kits can be used for worldwide satellite system field deployments. Baseband kits support a variety of applications and are available in Compact Flyaway Kits, Emergency Communications Kits and Red/Black Gateway Kits.

Norsat’s satellite communications for the maritime market includes the COM series, which is a high performance very small aperture terminal solution, designed for militaries, fisheries, Oil & Gas and other commercial applications.

Norsat is currently developing a COM series product that will connect to the Wideband Global SATCOM system (“WGS”) (“COM-WGS series”). WGS is a high capacity satellite communications system planned for use in partnership by the United States Department of Defense (DoD) and the Australian Department of Defence.

We have also launched the Journey Manpack ultra-portable Ku-Band satellite terminal, which is a 6-segment, carbon fiber portable terminal weighing less than 18 kilograms (40 pounds), including the backpack, ideal for military Special Forces and government applications that require maximum portability and quick set up.

Microwave Products

The following is a description of our primary portfolio of microwave components.

We manufacture LNBs and BUCs. An LNB is a key component of every satellite antenna (or “dish”) irrespective of aperture or location. The LNB is mounted at the focal point of the dish to convert incoming microwave signals into electrical signals that are routed to the remote receiver or indoor unit. BUCs convert electrical signals into microwave signals that can be transmitted to an orbiting satellite.

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Norsat’s product offering includes the new ATOM Series BUCs. These BUCs are amongst the smallest, lightest and most energy efficient transmitters available on the market today.

Norsat is a market leader in microwave products. Through more than three decades of participation in this market, we have developed a reputation for quality, reliability and innovation. We believe that we have the largest market share of any of our competitors in the commercial LNB space.

Satellite-based Communications - Market Profile

Our satellite and microwave products are used primarily by the satellite communications industry and specifically by organizations in the following satellite ground segments:

• Defence, including military organizations for secure communications and broadband connectivity for short notice deployment or prolonged missions such as base camps;

• Commercial operators, including television broadcasters, satellite television and other dedicated data networks;

• Communications on the move, maritime vessels including commercial and naval fleets and leisure craft and the aviation industry; and

• Public Safety operators including federal agencies and non-governmental organizations.

Competition

For satellite terminals, the Company faces competition from General Dynamics Corporation (NYSE: GD), C3ISR, a segment of L3 Technologies Inc. (NYSE: LLL), TeleCommunication Systems, Inc. (NASDAQ: TSYS), Globecomm Systems Inc. (NASDAQ: GCOM) and Ultra electronics, Gigasat, a segment of Ultra electronics Holdings PLC (LSE: ULE). From time to time, the Company also faces competition from Swe-Dish, a subsidiary of Rockwell Collins, Inc. (NYSE: COL). At times, the Company also faces competition from systems integrators who construct systems on a custom basis for the military including Airbus Group SE (Euronext: EAD), Lockheed Martin (NYSE: LMT) and Raytheon Company (NYSE: RTN).

In the broadcast and commercial markets, the Company faces competition from terrestrial alternatives such as microwave radio vendors and the traditional providers of portable satellite systems including: Swe-Dish, a subsidiary of Rockwell Collins (NYSW: COL); VisLink Plc’s

Advent business unit; Ultra Electronics Holdings (LSE: ULE), Gigasat and Holkirk Communications, a subsidiary of Sematron UK Ltd. The Company also faces competition from service providers such as Harris Caprock Communications and Spacenet, a subsidiary of Gilat Satellite Networks Ltd. (NYSE:GILT).

For microwave products, the primary competition for this business unit comes from New Japan Radio Co, Ltd. (Tokyo Stock Exchange: 6911) and to a lesser extent from the Company’s own suppliers. The Company also faces competition in the BUCs market from Wavestream, a subsidiary of Gilat Satellite Networks Ltd. (NASDAQ: GILT).

2. Marketing

The Company sells most of its microwave components and portable satellite, other than those bound for the U.S. government, through resellers. Almost all of the portable satellite systems sold to the U.S. government have been through the Company’s direct sales force.

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Norsat also sells antenna and radio frequency conditioning products to approximately 1,800 distinct customers. The Company markets these products in North America through a direct sales force, OEMs, distributors and manufacturer representatives. In Europe, Middle East and Africa, the Company’s products are sold through a direct sales force, OEMs, and system integrators. The Company will continue to use these sales channels and pursue opportunities to cross-sell these products to customers within all of the Company’s divisions.

The Company’s primary value proposition is rooted in its longevity and reputation for quality. Customers with critical applications tend to place significant value in the quality of Norsat products and the after-sales support infrastructure.

3 . Research and Development

R&D activities and projects are focused on developing new products in the different business segments the Company is involved in. The Company spent 8% of its annual revenues excluding any government contributions and allocated 20% of its staff towards R&D activities.

4. Intellectual Property

The Company relies on patent, trademark, trade secret and copyright laws to protect our proprietary technology and to protect us against claims from others. The Company believes it has direct intellectual property rights covering substantially all of its material technologies. However, there can be no assurance that claims of infringement will not be asserted against the Company or against its customers in connection with their use of its systems and products, nor can there be any assurance as to the outcome of any such claims, given the technological complexity of the Company’s systems and products.

The Company has renewed interest in employing patent protection due to competition in its markets. The Company has a patent portfolio of four patents. The Company does not believe that any single patent is material to its business as a whole.

The Company conducts its business through Norsat International Inc., the holding and principal operating company, and the following four wholly-owned subsidiaries as at December 31, 2016:

• Norsat International (America), Inc., incorporated and located in Richmond, VA, United States of America;

• Norsat International (UK) Ltd., incorporated and located in Lincolnshire, England

• Norsat S.A., incorporated in Lausanne, Switzerland

• Sinclair Technologies Ltd., registered and located in Somersham, United Kingdom

The mandate of Norsat International (America), Inc. is to market, distribute and support sales of satellite systems, antennas and radio frequency conditioning products into the U.S. markets. It also provides sales and marketing services.

Norsat International (UK) Ltd. is a former distributer of microwave component products in the Europe Middle East and Africa regions. We are in the process of winding up this entity.

Norsat S.A. is a former distributer of satellite systems. We are in the process of winding up this entity.

The mandate of Sinclair Technologies Ltd. is to market and support sales of antennas and radio frequency conditioning products into the Europe Middle East and Africa regions. It also provides sales and marketing services.

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Description of Property

The Company's head office and principal place of business has been located in Richmond, British Columbia, Canada since September 2006. The Company leases its head office premises.

The lease is for approximately 30,400 square feet of space. This location houses the Company's corporate office, engineering and production department and includes warehouse space.

The Company has leased premises in Aurora, Ontario, Canada. The lease is for approximately 45,246 square feet of space. This location houses the antenna and radio frequency conditioning product sales office, engineering and production department. It also includes warehouse space.

Most of the Company’s products are produced and shipped out of the Richmond and Aurora locations.

Norsat also operates out of leased premises in Lincoln and Somersham, England; and Hamburg, New York.

For the expiry dates of the operating lease agreements related to office premises, refer to “Item 5 F. Tabular Disclosure of Contractual Obligations”.

There are no known environmental issues that may affect the Company’s utilization of its assets at any of the above locations.

present fairly our financial position as at December 31, 2016 and the results of operations, comprehensive income and cash flows for the year ended December 31, 2016.

The following table shows certain key operating results, financial information and other financial data for the years indicated:

Note:

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The following table shows quarterly unaudited financial data for the periods indicated:

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Note:

Results from our two revenue generating business segments fluctuate from quarter-to-quarter due to seasonal influences on sales volumes. In our Sinclair Technologies segment, the first and second quarters are historically the strongest, as most of Sinclair Technologies’ customers build inventories during these quarters prior to commencing installation in the fall and winter seasons. For our Satellite Communications segment, the third and fourth quarters are typically the strongest, as these have traditionally been the periods when military sales occur. The timing of contract awards also creates significant fluctuations in our quarterly results as some large contracts represent a significant share of sales for a given quarter. The timing of these orders can vary and cannot be predicted with historical patterns.

We are working to reduce quarterly revenue fluctuations by cultivating revenue streams that are more stable in nature and distributed throughout the year. Our acquisition of Sinclair Technologies reflects this strategy as Sinclair Technologies’ sales are generally more evenly distributed than our Satellite Communications segment. They also tend to be strongest during periods when sales from the Satellite Communications segment are relatively weak. We have mitigated revenue instability by creating revenue backlog, which is expected to help reduce some of the volatility in our financial results in 2017.

Fiscal 2016 Compared to Fiscal 2015

For the year ended December 31, 2016, Norsat recorded total sales of $38.0 million, compared to total sales of $36.1 million for 2015.

Sinclair Technologies sales were $20.0 million for 2016, compared to $18.8 million for 2015, reflecting gradual improvement of economic condition in the U.S. and a good demand for our positive train control (“PTC”) products.

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Satellite Communications sales were $18.1 million for 2016 compared to $17.3 million for 2015, reflecting the delivery of satellite terminals to a major Eurasian defense contractor. The increase in sales was also due to traction in ATOM product line sales and from an expanding product offering, including shipments to Harris.

On a consolidated basis, gross profit was $17.1 million or 45% for 2016 compared to $14.6 million or 41% for 2015. The Sinclair Technologies segment achieved a gross profit margin of 49% for 2016, compared to 46% for 2015. The Satellite Communications segment recorded a gross profit margin of 41%, compared to 35% for 2015. The increase in gross profit margin reflected higher-margin revenues in the product mix of our products.

Fiscal 2015 Compared to Fiscal 2014

For the year ended December 31, 2015, Norsat recorded total sales of $36.1 million, consistent with total sales of $36.2 million for 2014.

Sinclair Technologies sales were $18.8 million for 2015, compared to $21.7 million for 2014. Sales from this segment were impacted by the continued softness in the infrastructure and public safety markets as a result of the current economic conditions, especially in Canada.

Satellite Communications sales were $17.3 million for 2015 compared to $14.5 million for 2014, reflecting stronger satellite terminal sales to commercial customers in addition to the existing military market. The increase in satellite terminal sales were offset by decrease in microwave products due to the deliveries against a significant ATOM product contract in 2014, which was not repeated in 2015.

On a consolidated basis, gross profit was $14.6 million or 41% for 2015 compared to $14.4 million or 40% for 2014. Sinclair Technologies’ gross profit margin percentage for 2015 increased to 46% from 40% for 2014, as a result of the strengthening of the U.S. dollar against the Canadian dollar as our labor, overhead costs and certain material costs were incurred in Canadian dollars. Gross profit margins from the Satellite Communications segment were 35% for 2015, compared to 40% for 2014, which reflected lower margin revenue in the product mix and competitive price pressures.

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Product development expenses, net include:

Fiscal 2016 Compared to Fiscal 2015

For the year ended December 31, 2016, total expenses were $12.7 million, compared to $9.9 million for 2015.

For the year ended December 31, 2016, selling and distributing expenses were $4.7 million, compared to $4.9 million for 2015.

General and administrative expenses were $3.9 million for 2016, compared to $4.1 million for 2015. Amortization expenses for 2016 were lower than 2015 as some of the intangible assets have been fully amortized, which were offset by the higher corporate development expenses incurred in 2016.

For the year ended December 31, 2016, direct product development expenses increased to $3.1 million, compared to $2.9 million for 2015.

Government contributions were $1.5 million for the year ended December 31, 2016, compared to $1.3 million for 2015.

Government repayment obligation was $2.1 million for the year ended December 31, 2016, compared to $nil for 2015. Based on our recent history of strong financial performance, we have determined that it is that probable future government repayments will be required to be made under the terms of the SADI programs. Based on management’s best estimates for forecast revenues between 2017 and 2032, the repayment obligation of $2.1 million was the present value of total estimated government repayments of $4.6 million to be made during the same periods.

As a result, net product development expenses were $3.7 million for the year ended December 31, 2016, compared to $1.6 million for 2015.

Loss on foreign exchange for the year ended December 31, 2016 was $0.3 million, compared to gain on foreign exchange of $0.8 million for 2015.

Fiscal 2015 Compared to Fiscal 2014

For the year ended December 31, 2015, total expenses were $9.9 million, compared to $10.7 million in 2014.

Selling and distributing expenses decreased to $4.9 million in 2015, from $5.4 million in 2014, reflecting the strengthening of the U.S. dollar against the Canadian dollar, as a significant portion of the Company’s selling and distribution expenses were incurred in Canadian dollars. In addition, commission expenses were lower in Sinclair Technologies in 2015 due to the decrease in sales but were partially offset by higher commission expenses in the Satellite Communications segment due to the increase in sales in that segment.

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General and administrative expenses increased to $4.1 million in 2015, from $4.0 million in 2014. The increase reflected investments in organizational infrastructure, increased bonus due to the Company substantially tracking towards its 2015 targets and objectives, and offset by the strengthening of the U.S. dollar against the Canadian dollar as a significant portion of the Company’s administration expenses were incurred in Canadian dollars.

For the year ended December 31, 2015, direct product development expenses increased to $2.9 million from $2.8 million for 2014. The increase headcount in product development was partially offset by the strengthening of the U.S. dollar against the Canadian dollar as a significant portion of the Company’s product development expenses were incurred in Canadian dollars.

Government contributions were $1.3 million for the year ended December 31, 2015, consistent with $1.3 million in 2014.

As a result net product development expenses were $1.6 million for the year ended December 31, 2015, consistent with $1.6 million in 2014.

Gain on foreign exchange for the year ended December 31, 2015 was $0.8 million, compared to $0.6 million gain for 2014.

Interest expense was reduced to $0.1 million for the year ended December 31, 2015 from $0.2 million for 2014 due to the repayment of the remaining balance of the acquisition loan in Q2 2015.

Fiscal 2016 Compared to Fiscal 2015

Earnings before income taxes for the year ended December 31, 2016 was $4.5 million, compared to $4.8 million for 2015.

The decrease reflected an increase of gross profit of $2.5 million from higher sales volume and margins, which was offset by an increase of total expenses of $2.8 million of which $2.1 million was government repayment obligation related to the SADI agreements as a result of the positive financial results of the Company and management’s best estimates of forecast revenues for future periods.

Net income tax expense for the year ended December 31, 2016 was $1.2 million, compared to net income tax recovery of $3.9 million for 2015. This reflected a current income tax expense of approximately $13,000 for the year ended December 31, 2016 compared to current income tax recovery of $66,000 for 2015 and a deferred income tax expense of $1.2 million for the year ended December 31, 2016 compared to a deferred income tax recovery of $3.8 million for 2015. During the fourth quarter of 2015, we assessed the Company’s ability to realize deferred income tax assets and based on our history of profitability in our Canadian operations, we concluded that

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it was probable an additional $3.8 million of the deferred income tax assets will be recoverable against estimated future taxable income.

For the year ended December 31, 2016, net earnings decreased to $3.3 million, or $0.57 and $0.56 per share, basic and diluted, from net earnings of $8.7 million, or $1.50 per share, basic and diluted, for 2015.

Fiscal 2015 Compared to Fiscal 2014

Earnings before income taxes for the year ended December 31, 2015 increased to $4.8 million, from $3.7 million in 2014.

The increase was mainly as a result of an increase of gross margin of $0.3 million and a decrease of total expenses by $0.8 million. The increase in gross margin and decrease in operating costs primarily reflected the strengthening of the U.S. dollar against the Canadian dollar as our labor, overhead and operating costs were incurred in Canadian dollars.

Net income tax recovery for the year ended December 31, 2015 was $3.9 million compared to $0.5 million for 2014. This reflected a current income tax recovery of approximately $66,000 for the year ended December 31, 2015 compared to $0.2 million in 2014 and a deferred income tax recovery of $3.8 million for the year ended December 31, 2015 compared to $0.3 million in 2014. During the fourth quarter of 2015, we assessed the Company’s ability to realize deferred income tax assets and based on our history of profitability in our Canadian operations, we concluded that it was probable an additional $3.8 million of deferred income tax assets and investment tax credits recoverable will be utilized against estimated future taxable income.

For the year ended December 31, 2015, net earnings increased to $8.7 million, or $1.50 per share, basic and diluted, from net earnings of $4.2 million, or $0.73 per share, basic and diluted, for 2014.

Outlook

For fiscal 2017, the Company has had a positive start and has received an approximate $3.3 million order for its satellite terminals from a government organization in the U.S. The Sinclair Technologies segment also has good quoting activity as a result of the gradual improvement of the U.S. economy as well as the good demand for our PTC products.

Looking longer-term, the Company continues to invest in R&D 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 U.S., as well as on the commercial, resource, transportation and public safety segments. The Company is also continuing to pursue other new revenue opportunities both organically and via business combinations.

Despite the current global economic uncertainties, Norsat continues to generate profits and strong cash flow. This stability has created a strong financial position and capital structure, and will enable management to continue to create excellent conditions for realizing additional growth opportunities 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. In the interim, the Company’s cash position should continue to remain strong.

Management will also continue to execute a balanced growth strategy that incorporates investment in staffing level, new product introductions, continued enhancement of existing product lines, greater diversification by geographic regions as well as by industry verticals, and a

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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.

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 Judgments

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

Recognition of deferred tax assets and investment tax credits recoverable

The extent to which deferred tax assets and investment tax credits recoverable can be recognized is based on an assessment of the probability of the Company’s future taxable income against which the deferred tax assets can be utilized and application of income tax legislation when operating in multiple tax jurisdictions. The Company’s assessment of future taxable income is a significant estimate. In addition, significant judgment is required in assessing the impact of any legal or economic limits or uncertainties in foreign tax jurisdictions.

Recognition of service and contract revenues

Recognizing service and contract revenues requires significant management 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.

Determination of functional currency

Determining the appropriate functional currency requires management judgment and consideration of the economic factors in which the entity operates, such as the currency that mainly influences sales prices, labour, material and other costs.

Estimation Uncertainty

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

Selling prices of multi-element sales arrangements

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

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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.

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 may impact our inventory valuation and gross margins.

Business combinations and goodwill

We use valuation techniques such as discounted cash flows to determine the fair values of certain assets and liabilities in a business combination. A key input for the various valuation techniques requires using an appropriate discount rate or weighted average cost of capital which is subject to judgment and estimates. The discount rate used can have a significant impact on the fair values of assets acquired and liabilities assumed which will also affect the amount of the resulting goodwill.

Determination of government repayment obligation

In determining the amount of government repayment obligation, assumptions and estimates are made in relation to discount rates, expected revenues and the expected timing of revenues. Revenue projections take into account past experience and represent management’s best estimate about the future. The estimated repayment obligation is discounted using average rates ranging from 11.5% to 12.9% based on terms of similar financial instruments on the date the government contracts were entered into.

Share-based payment – share purchase 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 price of the Company’s common shares on the grant date, exercise price of the option, expected volatility of the Company’s common shares, weighted average expected life of the option, risk-free interest rate, dividend yield and forfeiture rate.

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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 (“RSUs”), we use the TSX share price at grant date as fair value of the RSUs. The resulting fair value of the RSUs is then adjusted for an estimated forfeiture rate which is determined based on historical data. Actual number of RSUs that will eventually 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. Uncertainty relates to the timing and amount of actual warranty claims which can vary from our estimation.

Allowance account for credit losses

We provide for bad debts by analyzing the historical default rates and current information available about customer’s creditworthiness on an account by account basis. Uncertainty relates to the actual collectability of customer balances which can vary from our estimation.

Significant 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 on 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 on the acquisition date. Acquisition costs are expensed in the period when 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.

We use judgment to determine the fair value of certain identifiable assets and liabilities acquired in a business combination, including the fair value of contingent consideration, if applicable, on the acquisition date. We may engage independent third-parties to assist us with the determination of the fair value of property and equipment and intangible assets. We use estimates to determine cash flow projections, including future growth and discount rates, among other factors.

Foreign Currency Translation

Functional and presentation currency

Our consolidated financial statements are presented in U.S. dollars. The functional currency of the parent company is in U.S. dollars.
Foreign currency transactions and balances

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Change in Functional Currency

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

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

The functional currency of Sinclair Technologies Ltd., the remaining foreign operation of the Company, remained unchanged as GBP during the reporting period.

Foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency of the respective 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 is determined.

Foreign operations

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

Our foreign operations determine their functional currency based on the primary economic environment in which the entity operates. For foreign operations with a non-U.S. dollars functional currency, we translate assets and liabilities into U.S. dollars using the period-end exchange rates. Goodwill, intangible assets and their fair value adjustments arising from acquisition of a foreign operation have been treated as assets and liabilities of the foreign operation and translated into U.S. dollars at the period-end exchange rate. Income and expenses have been translated into U.S. dollars at the average rate over the reporting period. Exchange differences are charged/credited to other comprehensive income and recognized in the AOCI. 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

Share Purchase Options

We grant share purchase options to purchase 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

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determined at its sole discretion and at prices equal to the closing market price on the day the options are granted.

Under this method, we recognize compensation expense for share purchase 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 the Company’s common shares (based on weighted average historical volatility), weighted average expected life of the option (based on historical data), risk-free interest rate, dividend yield and forfeiture rate. The fair value of the options is amortized over the vesting period and is included in operating expenses with a corresponding increase in contributed surplus. The amount recognized as an expense is adjusted to reflect the number of share options expected to eventually vest. When options are exercised, the proceeds are credited to issued capital.

Restricted Share Units

We grant RSUs to Directors, senior officers and employees pursuant to an incentive restricted share unit plan. The RSU plan provides the eligible persons the right to receive, at the discretion of the Board, common shares, which are not to be issued from treasury, without any monetary consideration payable to the Company. The vesting of the RSUs is subject to time-based vesting terms, conditions and restrictions as determined by the Board in its sole discretion. Each RSU is convertible into one common share.

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

Treasury Shares

When we purchase 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 of the Company’s own shares. Repurchased shares are classified as treasury shares and are presented as a deduction from total shareholders’ equity. We grant RSUs 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 the treasury shares are released to settle RSUs, a decrease in treasury shares and contributed surplus is recognized at the average cost of the treasury shares. If treasury shares are sold subsequently, the amount received is recognized as a decrease in treasury shares, and the resulting surplus or deficit on the transaction is transferred to/from contributed surplus.

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

We maintain an allowance account for estimated credit losses that may arise if any of our customers is unable to make the required payments. On each reporting date, we specifically analyze aging of outstanding customer balances, historical default rates, customer

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creditworthiness and changes in customer payment terms to evaluate collectability of our trade and other receivables balance. The allowance is then adjusted to align with the specific analysis performed.

Inventories

Inventories consist of parts and supplies, work in process and finished goods. Inventories are measured at the lower of cost and net realizable value. The cost of inventories is determined on a first in, first out basis. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expense. Inventories are recorded net of any obsolescence provisions. When there is a significant change in economic circumstances, inventories that had been previously written down below cost may be reversed up to the original carrying amount.

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 for less than one year.

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:

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

We assess, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, 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:

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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 its 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 carried at cost less accumulated impairment losses.

Deferred Revenue

Included in deferred revenue are typically amounts related to installation, training, extended warranty, airtime and post contract support associated with the sale of our products.

Payments that have been received from customers but will qualify for revenue recognition within the next year are reflected in current liabilities and the remaining balance is recorded in non-current liabilities.

Comprehensive Income

Comprehensive income comprises net earnings for the year 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 U.S. 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 our financial assets at initial recognition, depending on the nature and purpose of the financial asset. All financial assets, except financial assets at FVTPL, are recognized initially at fair value plus directly attributable transaction costs.

The subsequent measurement of financial assets depends on their classification as follows:

i. Financial assets at FVTPL

Financial assets are classified as FVTPL when the financial asset is held for trading or is designated upon initial recognition as FVTPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term, they are 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 they are a derivative that is not designated as an effective hedging instrument.

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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.

ii. Held-to-maturity investments

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 them 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 Statements of Earnings and Comprehensive Income.

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

iii. Available-for-sale financial assets

Non-derivative financial assets are designated as available-for-sale or are prescribed to this classification if not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at FVTPL. 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 Statements 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.

iv. Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest method. The impairment loss of receivables is based on a review of all outstanding amounts periodically throughout the fiscal year. Bad debts are provided for during the period in which they are identified. The losses arising from impairment are recognized in the Consolidated Statements of Earnings and Comprehensive Income. Interest income is recognized by applying the effective interest rate.

We have classified cash and cash equivalents and trade and other receivables as loans and receivables.

Derecognition

A financial asset is derecognized when the rights to receive cash flows from the asset have expired or we have transferred our rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement.

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:

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• significant financial difficulty of the issuer or counterparty;

• default or delinquency in interest or principal payments; or

• it has become probable that the borrower will enter bankruptcy or financial reorganization.

For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the financial asset’s original effective interest rate.

The carrying amount of trade receivables is reduced through the use of an allowance account. The Company will set up an allowance for the outstanding balance that is considered uncollectible. Subsequent recoveries of amounts previously provided for are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in the Consolidated Statements of Earnings and Comprehensive Income.

Financial liabilities

Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. We determine the classification of our financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value, net of transaction costs except FVTPL.

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

i. FVTPL

FVTPL includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at FVTPL.

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 International Accounting Standards (“IAS”) 39 Financial Instruments: Recognition and Measurement . Gains and losses on financial liabilities held for trading are recognized in the Consolidated Statements of Earnings and Comprehensive Income.

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

ii. Other financial liabilities

After initial recognition at fair value less transaction costs, other financial liabilities are subsequently measured at amortized cost using the effective interest method.

Gains and losses are recognized in the Consolidated Statements of Earnings and Comprehensive Income.

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

Derecognition

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

Fair value measurement

Our financial assets include cash and cash equivalents and trade and other receivables. Our financial liabilities include trade and other payables, accrued liabilities and acquisition loan.

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We have classified 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 services, we recognize revenue by reference to the stage of completion based on estimated total costs of the transaction at the end of the reporting period when the outcome of a transaction can be estimated 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 delivered item has standalone value and the delivery or performance of an undelivered item is probable and substantially in the control of the Company.

For those contracts where the services are not essential to the functionality of any other element of transaction, 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 exists, 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 as it meets the criteria for multiple deliverable revenue arrangements listed above. Our hardware components are customized in nature and specific to a customer’s order requirements. As a result, we use management’s best estimate of selling price for the deliverable.

Hardware under multiple deliverable revenue arrangements is recognized using the same criteria for hardware under single deliverable arrangements.

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 management’s best estimate to determine selling price of the undelivered PCS elements based on the fair value of labour rates and consistent renewal rates.

PCS revenue associated with hardware is recognized on a pro-rata basis 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 and diagnosis and extends to

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on-site repair of products. PCS is considered a separate unit of accounting as it meets the criteria for multiple deliverable revenue arrangements listed above.

Revenue on extended warranties is deferred and recognized in income on a straight-line basis over the contract period. Extended warranty revenue is recognized after the Company’s one year manufacturer’s warranty expires.

Revenue is recognized on installation, training, and consulting services when these services have been performed. The selling price of these services is determined on a stand-alone basis. These services are separate units of accounting because they meet the criteria for multiple deliverable revenue arrangements listed above.

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.

Research and Development Costs

Research costs are expensed as incurred. Development costs are capitalized 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 December 31, 2016, 2015 and 2014.

Government Contributions

Government funding of eligible research and development expenditures is credited when earned against product development expenses or the cost of property and equipment to which the funding relates. 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 Obligation

We are required to make annual repayment under the government contract. We calculate an estimated repayment obligation based on actual revenues achieved as well as management’s estimate of forecast revenues for future periods. For longer term government contract, management determines the present value of the repayment obligation based on an appropriate discount rate on the date the government contracts were entered. Any adjustments to the government repayment obligation as a result of the changes in assumptions will be recorded in the Consolidated Statements of Earnings and Comprehensive Income. Depending on the sales volume achieved during the repayment period, the amount of the repayment can significantly impact the product development expense of the Company. Changes to the government repayment obligation, as a result of the passage of time, are recorded as accretion expense in the period the changes occur.

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Income Taxes

Income tax expense consists of current and deferred income tax expense. Income tax expense is recognized in the Consolidated Statements 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 income 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.

Investment Tax Credits (“ITCs”)

We are entitled to certain Canadian federal and provincial tax incentives for qualified scientific research and development activities and for increasing research activities. These ITCs are available to us to reduce actual income taxes payable. Any credits that are not used in the year in which they are earned are recorded as a deferred asset when it is probable that such credits will be utilized. The utilization is dependent upon the generation of future taxable income. We assess the probability of usage of ITCs at the end of each reporting period.

Net Earnings Per share

Basic net earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period.

Diluted net earnings per share are 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 share purchase options at the beginning of the reporting period, if dilutive. The number of additional shares is calculated assuming that outstanding share purchase options were exercised and the proceeds from such exercises are used to repurchase common shares at the average market price during the reporting period. Share purchase options are dilutive when the market price of the common shares at the end of the period exceeds the exercise price of the options 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 past events, 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

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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 improbable or remote, no liability is recognized.

Segment Reporting

The Company’s business operates primarily through two operating segments – Sinclair Technologies and Satellite Communications. The two reportable segments are strategic business units that offer different products and services. They are managed separately with operating results reviewed by the Company’s chief operating decision makers because each business is in a different stage in its life cycle and they require different marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Related Party Transactions

Compensation of the Board of Directors and key management personnel, including the

The amounts disclosed in the table are the amounts recognized as an expense for the year-end.

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

Future Accounting Pronouncements

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

Amendments to IAS 7 Statement of Cash Flows have been released by the IASB in January 2016 as part of their Disclosure Initiative. The amendments will require entities to provide disclosures

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that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including non-cash changes and changes arising from cash flows. The amendments are effective for annual periods beginning on or after January 1, 2017 with earlier adoption permitted. Based upon current facts and circumstances, the Company does not expect its financial performance and disclosure to be materially affected by the application of this standard.

Amendments to IAS 12 Income Taxes have been released by the IASB in January 2016 to clarify how to account for deferred tax assets related to debt instruments measured at fair value. The amendments are effective for annual periods beginning on or after January 1, 2017 with earlier adoption permitted. Based upon current facts and circumstances, the Company does not expect its financial performance and disclosure to be materially affected by the application of this standard.

IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement . 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 IASB has deferred the effective date to annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.

IFRS 15 Revenue from Contracts with Customers will replace IAS 18 Revenue , IAS 11

Construction Contracts and related interpretations. IFRS 15 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, improves the comparability of revenue from contracts with customers and reduces the need for the development of case-by-case guidance for emerging revenue recognition issues, and improves disclosures about revenues. In April 2016, the IASB issued Clarifications to IFRS 15, Revenue from Contracts with Customers, clarifying application of some of the more complex aspects of the standard. The IASB has deferred the effective date to annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.

IFRS 16 Leases will replace IAS 17 Leases and related interpretations. IFRS 16 eliminates the distinction between operating and finance leases and requires most leases to be recorded on the statement of financial position for lessees under a single model unless the lease term is twelve months or less or the underlying asset has a low value. Lessor accounting remains largely unchanged and the distinction between operating and finance leases is retained. The IASB has an effective date for annual periods beginning on or after January 1, 2019 with early adoption permitted if IFRS 15 Revenue from Contracts with Customers has also been applied. The Company is currently assessing the impact of adopting this standard on its consolidated 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 for foreign exchange gain or loss, corporate development costs, write-down of inventory, impairment charges or recoveries, discontinued operations and other non-cash

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charges, if any. Corporate development costs are predominately external costs incurred to pursue acquisitions.

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), expense recognition of government repayment obligations recognized during the period that are non-current and non-cash until settled, as well as 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, 2016, 2015 and 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, 2016 was $7.6 million, compared to $5.3 million for 2015, primarily reflecting an increase of gross profit of $2.5 million from higher sales volume and margins offset by the current portion of government repayment obligation of $0.3 million. Adjusted EBITDA removed the impact of expense recognized related to government repayment obligation recognized during the year that was non-current and non-cash until settled.

Adjusted EBITDA for the year ended December 31, 2015 was $5.3 million, compared to $4.7 million in 2014, reflecting a combination of an increase of gross profit by $0.3 million and a decrease of total expenses (excluding adjustments to calculate adjusted EBITDA) by $0.3 million. This reflected the strengthening of the U.S. dollar against the Canadian dollar as a significant portion of the Company’s expenses were incurred in Canadian dollars.

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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. Our acquisition loan balance was a current liability but it was excluded from the Adjusted Working Capital calculations as we believe it was a non-operating item and not reflective of our current operations. Adjusted Working Capital is calculated by subtracting current liabilities, excluding acquisition loan, from current assets. As at December 31, 2016, Adjusted Working Capital increased 37% to $26.6 million, from $19.4 million at December 31, 2015. As at December 31, 2014, Adjusted Working Capital was $16.2 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. Our acquisition loan balance was also excluded from the Adjusted Current Ratio calculations for the reasons described above. Adjusted Current Ratio is defined as current assets divided by current liabilities, excluding the acquisition loan. As at December 31, 2016, Adjusted Current Ratio was 4.5 times, consistent with the ratio as at December 31, 2015. As at December 31, 2014, Adjusted Current Ratio was 3.2 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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Cash generated from operating activities was $9.2 million for the year ended December 31, 2016, compared to $0.7 million and $3.9 million in 2015 and 2014, respectively.

Cash used in investing activities was $0.4 million for the year ended December 31, 2016, compared to $0.2 million and $0.6 million in 2015 and 2014, respectively.

Cash generated from financing activities was $1.6 million for the year ended December 31, 2016, compared to using $1.3 million and $1.0 million for 2015 and 2014, respectively. We repaid $2.3 million of the acquisition loan in 2015 and received $1.9 million government contributions in 2016 compared to $1.3 million and $1.0 million in 2015 and 2014, respectively.

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 Capital ¹ as at December 31, 2016 was $26.6 million, compared to $19.4 million as at December 31, 2015 and $16.2 million as at December 31, 2014. Adjusted Current Ratio as at December 31, 2016 was 4.5 times, consistent with the ratio as at December 31, 2015 and compared to 3.2 times as at December 31, 2014.

Trade and other receivables were $8.3 million as at December 31, 2016, compared to $9.0 million as at December 31, 2015 and $9.6 million as at December 31, 2014. Net government contribution receivables were $0.3 million as at December 31, 2016, compared to $0.6 million as at December 31, 2015 and December 31, 2014.

Trade and other payables and accrued liabilities were $5.5 million as of December 31, 2016, compared to $4.3 million in 2015 and $5.4 million in 2014. The increase reflected the timing of vendor payments and the current portion of government repayment obligation of $0.3 million recorded in accrued liabilities related to the SADI agreements as a result of the positive financial results of the Company. The $1.1 million reduction in 2015 over 2014 reflected 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, 2016, compared to $0.3 million and $1.2 million as at December 31, 2015 and 2014, respectively. The higher deferred revenue in 2016 compared to 2015 reflected higher customer deposits received in 2016. The decrease in 2015 compared to 2014 was attributed to the revenue recognized for a significant satellite contract in 2015.

Inventory as at December 31, 2016 was $10.5 million, compared to $11.0 million as at December 31, 2015 and $10.1 million as at December 31, 2014.

As of December 31, 2016, shareholders’ equity increased to $39.5 million, from $35.9 million at December 31, 2015 and $29.0 million at December 31, 2014. The increase in 2016 over 2015 reflected $3.3 million in 2016 earnings and comprehensive income from foreign exchange of $0.3 million. The increase in 2015 over 2014 reflected $8.7 million in 2015 earnings offset by a comprehensive loss from foreign exchange of $1.6 million.

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

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financing transactions that would accelerate our growth in the areas outlined in the Outlook section 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, to sustain future development of the business and to safeguard our ability to support our 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, 2016, shareholders’ equity was $39.5 million (2015 - $35.9 million and 2014 - $29.0 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 credit facilities 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 SADI. Under this agreement, the Minister will provide funding of 30% of eligible spending related to the R&D 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”). Funding is conditional on maintaining certain reporting requirements. As at December 31, 2016, we were in compliance with these reporting requirements. We are obligated to repay the funding over the repayment period. As at December 31, 2016, we recorded $2.1 million of government repayment based on management’s best estimates for forecast revenues between 2017 and 2032.

In February 2016, we entered into an agreement with the National Research Council Canada (“NRC”) under its Industrial Research Assistance Program (“IRAP”) to provide funding in designing and modifying its ATOM product which forms part of the Satellite Communications segment. This project commenced on November 2, 2015 and the completion date has been extended to March 31, 2017 as a result of the amendment to the original agreement effective December 1, 2016. The NRC agreed to provide contributions to us up to a maximum of Cdn$0.2 million in connection with certain labour costs incurred during the project phase. We fulfilled all the conditions to receive the funding as at December 31, 2016.

For the years ended December 31, 2016, 2015 and 2014, there were no changes in our approach to capital management.

As at December 31, 2016, 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 less than 1.10:1.00 - calculated annually. The ratio is based on earnings before interest, tax, depreciation, amortization and share-based payments
  (“EBITDAS”) plus loss on sale of assets less taxes, dividends, distributions, advances to related parties, gains on sale of assets and unfunded capital expenditures divided by the aggregate overdraft interest, principal payments on long-term debt and capital lease plus

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• interest during the relevant fiscal year. This ratio shall be calculated annually and based on the Company’s consolidated financial statements; and

• Funded debt to EBITDAS, less unfunded capital expenditures cannot at any time exceed 2.50:1.00 – calculated quarterly, on a rolling 12 month basis. Funded debt includes the
  Company’s credit facilities.

Credit Facilities

HSBC Bank Canada

On October 21, 2016, the Company renewed and amended its existing credit facilities with HSBC Bank Canada (the “Bank”). There have been no changes to the covenants from the prior year.

The aggregate maximum outstanding balance under the Operating Loan, Import Loan and Guarantee Loan outlined below is the lesser of $3.0 million and the margin requirement calculated based on certain assets of the Company. The following summarizes the Company’s credit facilities extended by the Bank as at December 31, 2016:

• Revolving operating loan of $3.0 million (“Operating Loan”), secured, bearing interest at the Bank’s prime rate plus 0.5% per annum, repayable on demand.

• Revolving loan of Cdn$2.5 million (“Import Loan”), secured, subject to certain bank fees, repayable on demand.

• Standby letter of credit facility of $1.5 million (“Guarantee Loan”), secured, subject to certain bank fees, repayable on demand.

• Revolving foreign exchange loan of Cdn$360,000 (“Foreign Exchange Loan”), secured, repayable on demand.

• Other corporate loan of Cdn$200,000, secured, subject to certain bank fees, repayable on demand.

The above facilities are secured by the assets of the Company under a general security agreement.

As at December 31, 2016, the Company had access to undrawn credit facilities for $3.0 million (2015 - $3.2 million and 2014 - $3.7 million).

HSBC Bank USA

The Company has an additional revolving demand note with HSBC Bank USA in the principal amount of $500,000 subject to an interest rate at the HSBC Bank USA’s prime plus 1.5% per annum and repayable on demand. As at December 31, 2016, 2015 and 2014, the Company had no borrowing outstanding with respect to the revolving demand note.

As at December 31, 2016, 2015 and 2014, the Company was in compliance with its externally imposed covenants.

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Acquisition Loan

On December 22, 2010, the Company secured a non-revolving acquisition loan of Cdn$13.2 million or US$12.0 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.

On July 3, 2013, the Company renewed and amended its existing acquisition loan agreement with the Bank. The acquisition loan was extended for three years, ending on June 30, 2016. As a result, monthly principal repayments were reduced to $0.2 million (previously $0.3 million), with an 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.

During the year ended December 31, 2015, the Company fully repaid its loan balance by making principal repayments totaling $2.3 million against the acquisition loan.

In 2008, the Company’s receipt of an award from the Minister was an external validation of the Company’s excellence in R&D activities. The Cdn$5.98 million repayable contribution through the SADI program provides the Company with a significant contribution towards assisting R&D efforts and provides for continued investment in technological innovation (“SADI I”). The Company has claimed the maximum funding of Cdn$5.98 million under this agreement as at December 31, 2012.

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

In February 2016, the NRC agreed to provide contributions up to a maximum of Cdn$0.2 million to the Company in designing and modifying its ATOM product which forms part of the Satellite Communications segment.

In 2016, 2015 and 2014, 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 Government of Canada through the SADI grants awarded in 2008 and 2013 and the IRAP contribution in 2016.

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

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Radio Frequency Based Communications - Trends

In 2016, we experienced higher demands in the infrastructure and public safety markets as a result of the gradual improvement of the economic condition in the U.S. Also, we saw an increase in the sales of our PTC products as railroads worked toward the December 31, 2015 deadline. In late December 2015, the deadline for certain railroads to install PTC technologies was extended to December 31, 2018 with a possibility of further extension to the 2020 year if railroads meet certain conditions. In addition, 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, U.S. 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; and

• OEMs are driving greater efficiencies and increasing their bargaining power by favoring fewer vendors with a broad product portfolio.

Satellite-Based Communications - Trends

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.

• 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.

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• 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.

The Company’s known contractual obligations at December 31, 2016 are summarized in the following table:

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 and the Company has operating lease agreements extending to November 2021. During 2016, we renewed our operating lease agreements for certain office premises, which include the following offices with the new expiry dates:

• Corporate head office, Richmond, BC, Canada - November 2021;

• Aurora facility, Ontario, Canada - June 2019;

• Hamburg office, New York, U.S. - November 2017; and

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• Somersham office, Huntingdon, United Kingdom - June 2017.

The non-current portion of government repayment obligation is related to estimated future government repayments required to be made under the terms of the SADI programs between 2018 and 2032 as a result of the Company’s recent history of strong financial performance.

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.

James Topham
Director and Chair of the Audit Committee

Mr. Topham became the Director and Chair of the Audit Committee of Norsat on May 12, 2011. Mr. Topham has 30 years of public practice experience as a Chartered Professional Accountant and prior to his retirement in 2008, was a Technology Partner of KPMG’s Vancouver office. Mr. Topham currently serves on the boards of two other public technology companies and works 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).

Peter Ciceri
Director and member of the Audit and Compensation Committees

Mr. Ciceri became a Director of Norsat on July 16, 2015 and a member of the Audit and Compensation Committees on August 5, 2015. Mr. Ciceri is a successful CEO, Corporate Director, and international executive, is currently Chairman of Archipelago Marine Services and a Corporate Director of Terapeak Data Inc. Mr. Ciceri’s executive experience includes President and CEO of Custom House Global Payments which was successfully sold to Western Union for a 4x shareholder return and President and Managing Director of Compaq Canada where he managed the merger and integration of Digital Equipment, Tandem, and Compaq into a single $1.7 billion company. Mr. Ciceri is a member of the Institute of Corporate Directors. His other corporate board experience includes Lead Director and Chairman of Sierra Wireless Inc., MDSI Mobile Data Solutions, as well as the University of Victoria Board of Governors. Mr. Ciceri has also served as a member of British Columbia’s Premier’s Technology Council.

Amiee Chan, Executive Officer
Director, President and CEO

Dr. Chan became a Director of Norsat on August 5, 2009. This appointment was in addition to her responsibilities as President and CEO of the Company. See Senior Management section below.

Senior Management

The following section sets forth certain information regarding the current senior management, as of March 23, 2017:

Amiee Chan, Executive Officer
Director, President and CEO

Dr. Chan was appointed as the President and CEO, on September 8, 2006. Dr. Chan has over 15 years of experience in executive management and R&D in the telecommunications industry. Offering a rare blend of technical and corporate strength, Dr. Chan’s strategic vision has driven Norsat’s innovative product development programs and resulted in consistent revenue growth since her appointment as CEO in 2006. In 2012, Dr. Chan won a Women’s Executive Network Top 100 Award, ranked third in PROFIT/Chatelaine’s list of Top Female Entrepreneurs, and led Norsat to win a BC Export Award for Advancing Technology & Innovation. Dr. Chan holds an Executive MBA from Simon Fraser University (SFU) where she majored in Strategy and New Ventures and a Ph. D. in Satellite Communications from the University of British Columbia (UBC). An accomplished engineer, she has been published over a dozen times, holds three U.S. patents, and has been involved in high

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level research teams such as the NASA ACTS Terminal Program. Dr. Chan is a member of the UBC Engineering Advisory Council and serves on the Dean’s External Advisory Board for the Beedie School of Business at SFU.

Arthur Chin, Executive Officer
CFO

Mr. Chin was appointed as the CFO on February 1, 2011, bringing 16 years of professional experience in both public practice and public companies. Since leaving public practice in 2002, he has served in senior financial positions with several international companies, assisting them in planning and analysis of their financial reporting, handling corporate accounting and tax, corporate communications efforts, and providing corporate development strategies. Mr. Chin was previously with Norsat between 2002 and 2005 and was the Company’s Corporate Controller. Prior to rejoining Norsat, he held senior financial positions mostly in the high technology industry with DDS Wireless International Inc., a formerly TSX listed company that provides wireless mobile data solutions and Ascalade Communications Inc., formerly a TSX listed company that designed, developed and manufactured digital wireless and communication products and also with the Canadian Tourism Commission. Prior to his corporate experience he was in Big 4 public practice, most recently as a manager in the assurance practice of Deloitte LLP and originally with PricewaterhouseCoopers LLP. Mr. Chin is a Chartered Professional Accountant of the Institute of Chartered Professional Accountants of British Columbia.

Ken Broom
General Manager, Sinclair Technologies

Mr. Broom was appointed as the General Manager of the Company’s Sinclair Technologies segment on November 22, 2013. Mr. Broom brings more than 20 years of operations management experience in the high tech battery industry. Most recently, he held the position of VP of Operations at BAK Battery (“BAK”), a manufacturer of lithium-ion batteries for personal electronics, electric vehicles and battery storage applications. Prior to BAK, he was the General Manager of E-One Moli Energy Corporation, a producer of lithium-ion batteries based in British Columbia. During the past three decades, Mr. Broom has held leadership positions in quality, engineering, product design, operations, R&D and general management. Mr. Broom holds a degree in Chemical Engineering from the University of Waterloo and is a licensed Professional Engineer in Ontario.

Compensation of Directors

As part of a Director's total compensation and to create a direct linkage with corporate performance as well as shareholder value, the Board believes that a meaningful portion of a Director's compensation shall be provided and held in equity namely stock options and RSUs.

Under the current compensation plan each independent Board member shall receive stock options (at market value) upon joining the Board. The number of stock options will be determined by the Board on the grant date.

The Company pays its Directors, who are not executive officers of the Company, the following:

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In addition, each independent Director will be paid Cdn$1,000 for each Board meeting attended in person and Cdn$250 for each Board meeting attended by conference call during the calendar year.

Each independent Board member also receives an additional 60% of their base annual fees in the form of RSUs. The RSUs vest ratably over their annual term of appointment.

Fees of CHF 5,000 per year are also paid to each Director responsible for the Company’s Switzerland subsidiary.

The Company also reimburses its Directors for disbursements incurred on behalf of the Company.

Changes in Board compensation, if any, will come with the full discussion and concurrence by the Board.

During the fiscal year ended December 31, 2016, the aggregate cash compensation incurred by the Company and its subsidiaries to its Directors was $94,586.

In addition, the Company issued a total of 9,168 RSUs in 2016 to the Board of Directors. The value of these RSUs was $48,466 on the grant date based on the closing price on the Toronto Stock Exchange of Cdn$7.00 on May 6, 2016.

The Company issued 25,000 stock options at a fair value of $33,531 to Mr. Fabio Doninelli and Mr. James Topham on March 3, 2016 and May 12, 2016, respectively.

All compensation awarded to, earned by, paid to or payable to the Board of Directors are reported below in U.S. dollars. The following table sets forth all annual and long-term compensation earned from the Company and its subsidiaries for the year ended December 31, 2016 by each of the Directors:

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There were no other arrangements under which independent directors were compensated during 2016. No independent directors earned any compensation for consultancy or other services provided to the Company.

Although Dr. Chan is a member of the Board of Directors, her compensation is summarized in the next section “Compensation of Officers”.

Compensation of Officers

During the Company’s fiscal year ended December 31, 2016, the aggregate cash compensation awarded to, earned by, paid or payable by the Company and its subsidiaries to its Named Executive Officers, all of whose financial statements are consolidated with those of the Company, was $902,547 (2015 - $865,876 and 2014 - $1,053,923).

The following table, reported in U.S. Dollars, sets forth all annual and long-term compensation accrued or paid by the Company and its subsidiaries for the years ended December 31, 2016, 2015 and 2014 to each member of senior management.

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The bonus amounts (under Annual Incentives Plans) were paid pursuant to the Company’s Employee Compensation Plan. The plan remunerates employees based on successful completion of both corporate and/or personal objectives and each employee is tiered to a level to match their responsibilities within the Company.

Reference is also made to item C immediately below – specifically “Board practices -Performance Bonus” under the heading “Annual Cash Incentive Compensation Plan”.

Mandate of the Board

The Board of Directors is responsible for the stewardship of the Company and endorses a system of corporate governance designed to effectively manage and supervise the management of the business and the affairs of the Company. The Board also provides considerable guidance to management in pursuit of the Company’s objectives.

The Board acknowledges that good corporate governance is important to the effective performance of the Company and plays a key role in protecting the interests of shareholders.

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The Board continues to review the existing or proposed amendments to governance guidelines and practices in order to implement the most effective corporate governance policies and practices for the Company. The Board has adopted, and will continue to adopt changes to their governance guidelines and practices as necessary to comply with the U.S. Sarbanes-Oxley Act of 2002 and any new rules issued by the U.S. Securities and Exchange Commission, the Ontario Securities Commission, the TSX, and other applicable securities regulatory authorities.

Decisions Requiring Board Approval

In general, the Company’s management operates the business on a day-to-day basis. The Board approves the annual budget and strategic plans and reviews the performance of senior management against those standards. In addition, the Board approves all major acquisitions, dispositions, financings, both debt and equity, and changes in the structure of the Company. The Board also determines the responsibility and compensation of the CEO. The Board appoints the officers of the Company. The Board also determines the Directors’ compensation and considers the declaration of dividends.

Board Size

The Board has carefully considered issues relating to its size. The optimal size for the Board represents a balance between two opposing needs: a business need for strong, professional and industry sector representation; and the need to be small enough to facilitate open and effective dialogue and decision-making. The Board has currently determined that number to be five members.

Composition of the Board

The Board is currently composed of five directors, four of whom are considered “independent” to the Company. An “independent” director is a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to materially interfere with the director’s ability to act with a view to the best interests of the Company, other than interests and relationships arising from shareholdings.

Board and Executive Diversity

The Board recognizes the benefits to the Company of diversity, both at the Board level and within the executive levels. When there are vacancies within these positions, the Board and management consider the existing level of diversity representation such as gender and age and establish objective recruitment criteria. Ultimately, appointments to the Board and Executives are made on merit, based on a balance of skills, background, experience and knowledge and through a formal, rigorous and transparent process against objective criteria recommended by the Board and/or management. In identifying the most suitable candidates, the Board and management will take into account diversity considerations, with a view to ensuring that the Company benefits from a broader range of perspectives and relevant experience.

The Company has adopted a written policy relating to the identification and nomination of directors. With respect to Board composition, the Board has currently adopted a diversity objective and targeted a representation of a minimum of one female director. With respect to executive officer positions, the Board and management carefully consider diversity including gender and despite the current small number of executive positions within the Company, the Board has adopted a minimum target representation of at least one female within these roles.

The current members of the Board and executive officers have the wide range of skills and experience required to govern and lead the Company. The Board is currently comprised of five directors that include one female director. While in the executive level, there are currently three

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positions of which one position is held by a female. This representation meets the Board’s targeted representation of a minimum of one female on the Board and within the executive levels.

Because of the small size of the Board, the Board has not appointed a separate nominating committee to be responsible for proposing and assessing potential new directors. At present, a majority of the directors are independent and not involved in the daily operations or management of the Company to ensure the nomination process is objective.

Majority Voting Policy

The Board has adopted a majority voting policy. Under this policy, a director who is elected in an uncontested election with more votes withheld than voted in favour of his or her election will be required to tender his or her resignation to the Chairman for consideration by the Board. The resignation will be effective upon acceptance by the Board. The Board expects that resignations will be accepted, unless extenuating circumstances warrant a contrary decision. The Board will consider the offer of resignation and whether to accept it within 90 days following the applicable meeting where the election is held. The Board will announce its decision by press release including, if applicable, the reasons for declining the tendered resignation and file a copy with the Toronto Stock Exchange.

Director Term Limits

On March 3, 2015, the Board adopted a term limit policy for directors who join the Board after March 3, 2015, requiring them to tender their resignation to the Chairman after 10 years of service on the Board. The Board has the discretion to extend a director’s term for such period if the Board deems appropriate and is in the best interests of the Company.

Measures for Receiving Shareholder Feedback

Management has been asked to inform the Board, on an ongoing basis, of any significant shareholder concerns communicated to management. Currently the CEO and CFO respond to shareholder inquiries and direct appropriate matters to senior management. Senior management will meet with shareholders to discuss their concerns where appropriate.

T he Board’s Expectation of Management

The Board expects management to operate the Company in accordance with good and prudent business practices. Management is expected to report to the Board on financial and operating matters and to inform the Board of all important issues and major business developments. The Board also expects management to identify new business opportunities for acquisitions and/or expansions and to present appropriate reports to the Board regarding those opportunities.

Directors’ and Officers’ Liability Insurance

The Company has purchased, at its expense, Directors’ and Officers’ liability insurance. The

Directors’ and Officers’ liability insurance coverage is $15,000,000. Total premium expensed during 2016 were $55,738.

Director’s Service Contracts

The term of office for each of the present Directors expires at the Annual General Meeting. The current Directors have served are as follows: Mr. Doninelli since March 2011; Mr. Caprio since April 2005; Mr. Topham since May 2011, Mr. Ciceri since July 2015 and Dr. Chan since August 2009.

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The Company does not provide benefits for the directors who are not executives.

Board Committees

The Board currently has two standing committee being the Audit Committee and the Compensation Committee.

Audit Committee

The Company’s Audit Committee is comprised of three directors of the Board: Mr. Topham (Chair), Mr. Doninelli and Mr. Ciceri, each of whom is independent and an “unrelated” director. Each member of the Audit Committee considers himself financially literate and capable of reading and understanding financial statements, and Mr. Topham has an accounting designation and financial expertise. The Board has adopted a formal written charter for the Audit Committee, under which the Audit Committee is responsible for, among other things, reviewing the Company’s annual and quarterly financial statements, financial reporting procedures, internal controls and performance and independence of the Company’s external auditors. The Audit Committee is directly responsible for the appointment, compensation and oversight of the auditors including pre-approving all non-audit services provided by the audit firm.

During fiscal 2016, the Audit Committee met four times to carry out its responsibilities.

As part of its oversight of the Company’s financial statements, the Audit Committee reviewed and discussed with management and the external auditors about the annual and quarterly financial statements, prior to their issuance. Management advised the Audit Committee in each case that all financial statements were prepared in accordance with IFRS, and reviewed significant accounting issues with the Audit Committee.

On May 4, 2016, PricewaterhouseCoopers LLP (“PwC”) was re-appointed as the auditor of the Company for fiscal year ending December 31, 2016. PwC has been the auditor since March 3, 2015. Prior to that, Grant Thornton had been the auditor of the Company since March 29, 2010.

The Audit Committee discussed with the external auditors matters relating to its independence, including a review of audit and non-audit fees and the disclosures made to the Audit Committee pursuant to Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).

The Audit Committee reviewed and approved audit fees, audit related fees, tax fees and other non-audit related services fees charged by PwC and Grant Thornton LLP during the respective periods for which they were appointed as the Company’s independent auditors.

Taking all of these reviews and discussions into account, on March 7, 2017, the Audit Committee recommended to the Board of Directors to approve the Company’s consolidated financial statements for the fiscal year ended December 31, 2016.

A copy of the Audit Committee’s charter can be found on our website at www.norsat.com under Investors/Corporate Governance/ Board Mandate.

Compensation Committee

The Board dissolved the Compensation Committee by unanimous vote on November 9, 2006. All functions of the Compensation Committee were performed by the independent members of the Board.

On November 6, 2012, the Company reconstituted its Compensation Committee.

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The Company’s Compensation Committee is comprised of three directors of the Board: Mr. Caprio (Chair), Mr. Doninelli and Mr. Ciceri, each of whom is independent and an “unrelated” director.

It is the responsibility of the Compensation Committee to (a) review the Company’s annual Information Circular prior to release to any shareholder, government body or the public, (b) review the performance and compensation package of the CEO and senior management, (c) review stock option grants and RSUs and (d) perform such other duties and tasks as shall be requested by the Board.

During 2016, the Compensation Committee met three times and reviewed Board compensation, the Company’s incentive compensation plan based on 2015 financial results and provided recommendations to the Board of Directors on compensation levels and targets of the CEO and executive management for 2017.

Also, during 2016, the Compensation Committee members periodically reviewed and approved stock option and RSU grants.

A copy of the Compensation Committee’s charter can be found on our website at www.norsat.com under Investors/Corporate Governance/ Board Mandate.

Compensation Discussion and Analysis

Based upon the review and recommendations of the Compensation Committee, the Board reviews and gives final approvals with respect to the Company’s Executive Compensation Plan, RSUs and Stock Option Plans. The Board sets the compensation of the CEO, reviews and approves management’s recommendations for compensation and bonuses for senior management and grants of RSUs and stock options. The Board is also responsible for reviewing executive management succession and development plans.

Compensation Objectives

The Company has established compensation policies to address the following objectives:

• To assist the Company to attract and retain highly qualified individuals.

• To reward employees annually for achieving financial results.

• To create among employees a sense of ownership in the Company and to align the interest of the employees with those of the shareholders.

• To create a variable component in the compensation structure or package that is linked to the
  Company’s business strategy and its ability to pay, and the employee’s ability to influence results.

• To ensure competitive compensation that is also financially affordable for the Company.

• To provide a rational methodology for incentive compensation, RSUs and stock option awards that employees understand and support.

• To attract and retain talented individuals to lead those functions important to the Company’s success.

The Company has a “results oriented” compensation plan creating a significant variable component in the compensation structure or package that is linked to key operating metrics. The

Company’s compensation plan is comprised of a combination of base salary and benefits, an annual cash incentive plan, and annual long-term equity awards. To ensure competitiveness, the Company participates in annual compensation surveys, conducted by independent consultants, of salaries, benefits and other incentive programs in the high technology industry in Canada.

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Base Salary and Benefits

Base salaries for the executives are targeted, on average at the 75th percentile of the comparator group and other relevant external market data as well as the individual’s skill performance and experience. In addition to the base salary, the Company offers a benefit package to all employees to cover group life insurance, health and dental and group retirement savings plans. Executives also receive automobile allowances.

Annual Cash Incentive Compensation Plan

The Company’s annual cash incentive compensation plan for executives is based on the compensation objectives discussed above. Payments under this plan are determined based on the Company’s performance and success in achieving specific operating targets: 50% on annual revenue targets and 50% on annual EBITDA targets. However, no bonus shall be paid if the Company is not profitable.

The cash bonuses for executives are determined as a percentage of base salary and calculated at 75% of base salary for the CEO, 50% of base salary for the CFO and 30% of base salary for the General Manager.

Annual Long-Term Equity: Restricted Share Units Award

On May 9, 2012, the shareholders of the Company approved the adoption of a Restricted Share Unit Plan (the “RSU Plan”) as part of a new long term incentive plan developed to attract and retain the Company’s employees. This RSU Plan is valid for ten years after the date of adoption. Upon vesting, the participants will receive one common share for each RSU share held. The only performance condition is the lapse of time and that the participant remains at the Company’s employment for the specified period.

Under the RSU Plan, RSUs are issued to directors, officers and employees of the Company, or its subsidiaries (“Eligible Persons”). The RSU Plan gives Eligible Persons the right to receive, at the discretion of the Board (or a committee thereof), common shares, which are not to be issued from treasury, without any monetary consideration payable to the Company. The Company has engaged a trustee to purchase the common shares on the open market, through the facilities of the TSX, in connection with the granting of RSUs to Eligible Persons, which common shares are held by the trustee until such Eligible Person’s RSUs vest. The vesting of RSUs will be subject to time-based vesting terms, conditions and restrictions, as determined by the Board (or a committee thereof) at its sole discretion. When the vesting requirements are met, each RSU will be converted into one common share held by the trustee. Generally, on termination of employment for any reason whatsoever, all unvested RSUs will be forfeited, with the exception of the circumstances described in the Termination and Change in Control Benefits section below. Upon death or total disability all unvested RSUs will immediately vest.

The RSUs are accounted for as a compensation expense under the fair value method of accounting.

In 2016, the Company has awarded a total of 45,684 (2015 – 58,016) RSUs to the Directors and senior management. 9,168 RSUs granted to the independent Directors vest over 6 and 12 month periods and 36,516 units for senior management related to fiscal 2015 performance and vest ratably over 12, 24 and 30 month periods.

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Annual Long-Term Equity: Stock Option Award

In 2015, the Company renewed its Stock Option Plan dated May 9, 2012 (the “Plan”) and it was approved at the Annual General Meeting on May 6, 2015 by ordinary resolution as required by the policies of the TSX. The terms of the Plan remain unchanged.

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

In 2016, the Company has awarded a total of 6,137 (2015 – 14,642) stock options to the senior management at an exercise price of Cdn$6.08 and a fair value of Cdn$1.69 related to fiscal 2015 performance.

Long Service: Stock Option Award

In 2011, the Company amended its compensation plan such that employees are entitled to a loyalty/long service grant of options at each fifth year anniversary with the Company.

In 2016, the Company has awarded a total of 35,000 (2015 – nil) stock options to the Directors and senior management at a weighted average exercise price of Cdn$6.28 and average fair value of Cdn$1.75 related to long service.

Pension Plan Benefits

Other than contributions to group retirement savings plans on behalf of the employees, the Company does not provide retirement benefits under defined benefit or defined contribution plans for its Named Executive Officers.

Termination and Change in Control Benefits

During 2015, the Compensation Committee of the Company engaged Towers Watson to complete a comprehensive market analysis of termination and change in control benefits for the Named Executive Officers. Based on the analysis, the Company has amended the employment agreements with each of the Named Executive Officers, as follows:

Dr. Chan’s contract may be terminated by her with 60 days written notice and she will not be entitled to any termination benefits or compensation. If the Company terminates the employment agreement with Dr. Chan without cause or Dr. Chan resigns for good reason as defined in the employment agreement, the Company will be required to pay the following amounts:

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Mr. Chin’s contract may be terminated by him with 60 days written notice and he will not be entitled to any termination benefits or compensation. If the Company terminates the employment agreement with Mr. Chin without cause or Mr. Chin resigns for good reason as defined in the employment agreement, the Company will be required to pay the following amounts:

Mr. Broom’s contract may be terminated by him with 60 days written notice and he will not be entitled to any termination benefits or compensation. If the Company terminates the employment agreement with Mr. Broom without cause or Mr. Broom resigns for good reason as defined in the employment agreement, the Company will be required to pay the following amounts:

In addition, upon termination of employment agreements by the Company, Dr. Chan, Mr. Chin and Mr. Broom are entitled to the immediate vesting of all unvested options and RSUs previously granted.

Each employment agreement contains a twelve month non-competition and non-solicitation clause. If the employment of the Named Executive Officers were terminated without just cause on December 31, 2016, the Named Executive Officers would be paid an incremental amounts as described in a), d) and e) above. Please note that termination benefits have been calculated

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based on Canadian dollars, but presented in U.S. dollars at the average rate of Cdn$1.00 equal US$0.7552.

The following table summarizes the number of employees by geographical location as at December 31:

The Company believes that its workforce is highly skilled, capable and motivated and that the relations with the Company’s employees are good. The Company’s workforce is not unionized or part of any collective labour agreement.

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Minimum Share Ownership

Effective May 5, 2015, the Company has implemented the Minimum Share Ownership Policy for the Board of Directors and certain executive officers. This policy applies to ownership of common shares excluding stock options and RSUs. The Board of Directors and executive officers are required to achieve compliance of this policy within five years based on the later date of appointment to the position or the effective date of this policy. The value per share is calculated based on the greater of market value at the date of measurement which occurs at year-end or adjusted cost base at the time the shares are acquired.

The following summarizes the requirements:

• Directors – 3 times base annual cash stipend excluding Chair and Board meeting fees at the time of measurement.

• CEO and President – 2 times base salary at the time of measurement.

• CFO – 1 time base salary at the time of measurement.

• General Manager – Exempt.

The following table sets forth the securities owned, controlled or directed by Directors and executive officers of the Company as at December 31, 2016:

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