U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM N/A to N/A
333-90031
Commission file number
NORTHSTAR ELECTRONICS, INC.
Exact name of small business issuer as specified in its charter
DELAWARE
State or other jurisdiction of organization
#33-0803434
IRS Employee incorporation or Identification No.
SUITE # 410- 409 GRANVILLE STREET,
VANCOUVER, BRITISH COLUMBIA, CANADA V6C 1T2
Address of principal executive offices
(604) 685-0364
Issuer's telephone number
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES[X] No[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated filer"
and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
[ ]Large accelerated filer [ ]Accelerated filer [X]NON-ACCELERATED FILER
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [ ]Yes [X]NO
Applicable only to issuers involved in bankruptcy proceedings during the preceding five
years:
Check whether the registrant filed all documents and reports required to be filed by Section
12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan
confirmed by a court.
Yes[] No[] NOT APPLICABLE
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common equity, as
of the latest practicable date.
COMMON SHARES AS OF MAY 20, 2011: 38,718,452
Transitional Small Business Disclosure Format (check one):
Yes[] NO[X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED - PREPARED BY MANAGEMENT
NORTHSTAR ELECTRONICS, INC. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2011 and at December 31, 2010
Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended March 31, 2011
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets - U.S. Dollars
(US Dollars)
March 31 December 31
2011 2010
UNAUDITED Audited
-----------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 9,758 $ 135,311
Accounts receivable 44,856 51,088
Inventory 197,179 121,311
Prepaid expenses 17,984 7,967
-------------------------------
269,777 315,677
DEFERRED CONTRACT COSTS 53,814 56,977
INTANGIBLE ASSET 12,161 12,120
EQUIPMENT 42,989 44,920
-------------------------------
$ 378,741 $ 429,694
===============================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 2,112,898 $ 1,969,659
Loans payable 665,513 580,830
Due to Cabot Management Limited 55,233 55,049
Due to Directors 1,066,833 1,208,265
Deferred revenue 35,242 34,883
Current portion of long-term debt (note 3) 1,120,446 1,318,587
-------------------------------
5,056,165 5,167,273
LONG-TERM DEBT (note 3) 971,033 706,393
-------------------------------
6,027,198 5,873,366
-------------------------------
STOCKHOLDERS' DEFICIT
Authorized:
100,000,000 Common shares with a par value of $0.0001 each
20,000,000 Preferred shares with a par value of $0.0001 each
Issued and outstanding:
38,383,452 Common shares (36,143,942 - December 31, 2010) 3,838 3,614
488,586 Preferred series A shares (488,586 - December 31, 2010) 409,299 409,299
ADDITIONAL PAID-IN CAPITAL 6,096,619 5,764,443
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (604,822) (649,153)
ACCUMULATED DEFICIT (11,553,391) (10,972,175)
-------------------------------
(5,648,457) (5,443,972)
-------------------------------
$ 378,741 $ 429,694
===============================
See notes to the consolidated financial statements
Nature of operations and going concern (note 1) Contingent liabilities (note 5)
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 2011 and 2010
Unaudited
U.S.Dollars
2011 2010
-----------------------------
Revenue - note 4 $ 183,975 $1,277,583
Cost of goods sold 90,844 989,838
-----------------------------
Gross margin 93,131 287,745
Other income 12,396 7,122
-----------------------------
105,527 294,867
------------------------------
Expenses
Salaries 239,306 216,923
Financial consulting 0 1,500
Finance fees 0 30,961
Professional fees 3,028 7,906
Management and administration fees 45,000 45,000
Stock based compensation 102,000 0
Rent 34,690 35,365
Investor relations 10,900 6,750
Office 12,621 37,717
Travel and business development 0 15,352
Interest on debt 211,079 17,961
Telephone and utilities 6,818 7,211
Amortization 15,903 4,880
Foreign exchange 534 (8,389)
Bad debts 4,864 0
-----------------------------
686,743 419,137
------------------------------
Net (loss) for period $ (581,216) $ (124,270)
------------------------------
Net (loss) per share $(0.02) $(0.01)
Weighted average number of shares outstanding 36,662,616 32,851,179
See notes to the consolidated financial statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 2011
Unaudited
U.S. Dollars
Other
Additional Compre- Accumu- Total
Paid in hensive lated Stockholder
Shares Amount Capital Income Deficit Equity (Deficit)
---------------------------------------------------------------------------------------------------
Balance
December 31,
2010 36,143,942 $3,614 $5,764,443 $(649,153) $(10,972,175) $(5,853,271)
Net loss for
three months - - - - (581,216) (581,215)
Currency
translation
adjustment - - - 44,331 - 44,331
Issuance of
common stock:
- for loans 1,111,112 111 199,889 200,000
- for cash 150,000 15 14,985 - - 15,000
- for services 978,398 98 117,302 - - 117,400
-------------------------------------------------------------------------------------------------
Balance
March 31,
2011 38,383,452 $3,838 $6,096,619 $(604,822) $(11,553,391)$(6,057,755)
------------------------------------------------------------------------------------
Series A shares of preferred stock -balance December 31, 2010 409,299
Series A shares of preferred stock - converted -
Series A shares of preferred stock - subscribed -
-------
Total stockholders' equity (deficit) March 31, 2011 $(5,648,456)
-----------------------------------------------------------------------------------------------
See notes to the consolidated financial statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2011 and 2010
Unaudited
U.S.Dollars
2011 2010
-----------------------
Operating Activities
Net income (loss) $(581,216) $(124,270)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Amortization 2,085 4,880
Issuance of common stock for services 117,400 32,191
Changes in operating assets and liabilities 134,247 89,417
-----------------------------
Net cash (used) provided by operating activities (327,484) 2,218
-----------------------------
Investing Activities
Property and equipment - 860
-----------------------------
Net cash (used) provided by investing activities - 860
-----------------------------
Financing Activities
Issuance of common shares for cash (net of costs) 15,000 250,000
Loans payable 107,370 -
Increase (repayment) of long term debt 59,686 (221,665)
Advances from (repayment to) directors 11,841 (50,778)
-----------------------------
Net cash (used) provided by financing activities 193,897 (22,443)
-----------------------------
Effect of foreign exchange on translation 8,034 3,446
-----------------------------
Inflow (outflow) of cash (125,553) (15,919)
Cash, beginning of period 135,311 108,486
-----------------------------
Cash, end of period $ 9,758 $ 92,567
-----------------------------
Supplemental information
Interest paid $109,079 $78,717
Shares issued for services $117,400 $24,500
Shares issued to settle director's loan $200,000 $0
Corporate income taxes paid $0 $0
See notes to the consolidated financial statements
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011
Unaudited
U.S. Dollars
1. NATURE OF OPERATIONS AND ABILITY TO CONTINUE AS A GOING CONCERN
These consolidated financial statements include the accounts of Northstar
Electronics, Inc. ("the Company") and its wholly owned subsidiaries Northstar
Technical Inc. ("NTI") and Northstar Network Ltd. ("NNL"). The Company was
incorporated May 11, 1998 in the State of Delaware and had no operations other
than organizational activities prior to the January 2000 merger with NTI described
as follows: On January 26, 2000 the Company completed the acquisition of 100% of
the shares of NTI. The Company, with the former shareholders of NTI receiving a
majority of the total shares then issued and outstanding, effected the merger
through the issuance of 4,901,481 shares of common stock from treasury. The
transaction has been accounted for as a reverse takeover resulting in the
consolidated financial statements including the results of operations of the
acquired subsidiary prior to the merger. All intercompany balances and
transactions are eliminated.
The Company's business activities are conducted principally in Canada but these
financial statements are prepared in accordance with accounting principles
generally accepted in the United States with all figures translated into United
States dollars for reporting purposes.
These unaudited consolidated interim financial statements have been prepared by
management in accordance with accounting principles generally accepted in the
United States for interim financial information, are condensed and do not include
all disclosures required for annual financial statements. The organization and
business of the Company, accounting policies followed by the Company and other
information are contained in the notes to the Company's audited consolidated
financial statements filed as part of the Company's December 31, 2010 Form 10-K
and amendments.
In the opinion of the Company's management, this consolidated interim financial
information reflects all adjustments necessary to present fairly the Company's
consolidated financial position at March 31, 2011 and the consolidated results of
operations and the consolidated cash flows for the three months then ended. For
the three months ended March 31, 2011, 100% of the Company's revenues were
generated from contracts with two major customers. The Company is continually
marketing its services for new and follow-on contracts.
The results of operations for the three months ended March 31, 2011 are not
necessarily indicative of the results to be expected for the entire fiscal year.
The accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. During
the three months to March 31, 2011 the Company incurred a net loss of $581,216 and
at March 31, 2011 had a working capital
deficiency (an excess of current liabilities over current assets) of $4,786,388
(December 31, 2010: $4,851,596), including $1,120,446 of long term debt due within
one year (December 31, 2010: $1,318,587). Management has undertaken initiatives
for the Company to continue as a going concern; for example: the Company is
negotiating to secure an equity financing in the short term and is in discussions
with several financing firms. The Company also expects to increase contract
revenues. The Company continues to seek manufacturing assembly contracts to
increase revenue. These initiatives are in recognition that in order for the
Company to continue as a going concern it must generate sufficient cash flow to
cover its obligations and expenses. In addition, management believes these
initiatives can provide the Company with a solid base for profitable operations,
positive cash flows and reasonable growth. Management is unable to predict the
results of its initiatives at this time. Should management be unsuccessful in its
initiative to finance its operations the Company's ability to continue as a going
concern is not certain. These financial statements do not give effect to any
adjustments to the amounts and classifications of assets and liabilities which
might be necessary should the Company be unable to continue its operations as a
going concern.
2. SHARE CAPITAL
COMMON STOCK
During the three months ended March 31, 2011 the following shares of common stock
were issued:
For services: 978,398 shares fairly valued at $117,400 - the market value of those
services
For cash: 150,000 shares fairly valued for cash of $15,000.
For conversion of loans: 1,111,112 fairly valued at $200,000
PREFERRED STOCK
Issued for cash:
408,000 series A shares of preferred stock for $342,772 (inclusive of 100,000
preferred shares for $90,000 received during the three months ended March 31, 2010
and 80,586 preferred shares for $66,527 received during the three months ended
September 30, 2010). The preferred shares bear interest at 10% per annum paid semi
annually not in advance and are convertible to shares of common stock of the
Company after two years from receipt of funds at a 20% discount to the then
current market price of the Company's common stock. The preferred shares may be
converted after six months and before two years under similar terms but with a 15%
discount to market. At March 31, 2011 the Company had received $409,299 for
488,586 preferred shares.
3. LONG TERM DEBT
Balance owing December 31, 2010 $2,024,980
Increase 66,499
Effect of foreign exchange on translation to US -
----------
Balance due March 31, 2011 2,091,479
Less current portion (1,120,446)
----------
$ 971,033
----------
4. REVENUE
Three months 2011 Three months 2010
Revenue consists of:
Product sales $ 0 $ 0
Contract sales 183,975 1,277,583
Government assistance 0 0
Other 12,396 7,122
---------- ----------
$ 196,371 $ 1,284,705
---------- ----------
5. CONTINGENCIES
(i) The Company is contingently liable to repay $2,294,755 in assistance
received under the Atlantic Innovation Fund. The assistance is repayable annually
at the rate of 5% of gross revenues from sales of products resulting from the
Aquacomm research and development project. Gross revenues are to be calculated for
the fiscal year immediately preceding the due date of the respective payment.
Repayment is to continue until the assistance is repaid in full. At March 31, 2011
the Company has accrued $160,595 as repayable.
6. NEW ACCOUNTING PRONOUNCEMENTS
Management does not believe that any recently issued but not yet effective
accounting pronouncements if currently adopted would have a material effect on
the accompanying consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial information for the three month periods ended
March 31, 2011 and March 31, 2010 prepared by management and the audited
consolidated financial statements for the twelve months ended December 31, 2010 as
presented in the Form 10K as filed.
Although the Company has experienced a net loss this quarter, it continues to
expend effort to secure additional contracts for the manufacture and assembly of
military/government systems, submarine command and control consoles, sonar
systems, precision, machined parts and other components for aerospace and defense
systems.
The Company believes that its overall business prospects look promising and
anticipates increased revenues in the near to medium future.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this report and elsewhere (such as in other filings by the
Company with the Securities and Exchange Commission ("SEC"), press releases,
presentations by the Company of its management and oral statements) may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates,"
and "should," and variations of these words and similar expressions, are intended
to identify these forward-looking statements. Actual results may materially differ
from any forward-looking statements. Factors that might cause or contribute to
such differences include, among others, competitive pressures and constantly
changing technology and market acceptance of the Company's products and services.
The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements, which may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
THE COMPANY'S SERVICES
The Company, through its subsidiaries is an underwater sonar technology developer,
a defense electronics contract manufacturer (CM) and a defense systems integrator
(DSI).
UNDERWATER SONAR PRODUCTS AND TECHNOLOGIES
A) PROJECT X
The Company previously developed, under contract to Lockheed Martin Canada, a specialized
underwater sonar system and built a prototype unit. Further contract work on this
program is anticipated in 2011.
B) DEFENSE SONAR SYSTEMS
The Company was previously a subcontractor on Lockheed Martin's anti-terrorism Swimmer
Detection System (SDS). The SDS is a wide band high frequency sonar system
designed specifically to detect and classify underwater terrorist threats. The
design and technology is applicable to innovative military sonar products.
DEFENSE CONTRACT MANUFACTURING
The Company, with its updated facilities, completed further details and reviews
for prospective new submarine console work from Lockheed Martin Manassas MS2,
expects awarding of the contract during this business quarter.
The Company's wholly owned subsidiary, Northstar Network Ltd., continued work on
the original Master Purchase Order for the Wing Assembly Upgrade Components for
the P-3 ORION aircraft from Lockheed Martin Aeronautics and is presently preparing
to start work on the recent $9.1M addition to the Master Purchase Order. The
Company is manufacturing components for new production service life extension kits
for this Lockheed Martin Service Life Extension Program. These components will
add more than 15,000 flying hours to each aircraft, representing 15 to 20
additional years of service for this critical maritime patrol and reconnaissance
resource.
In addition to the P3 Project, work continued with some delays for the
manufacture/assembly of the new Machine Control Consoles and new Trainer Consoles
for L3 Communication MAPPS Ltd. for the Canadian Navy Frigate Upgrade program.
Over 60 units are being delivered under this contract. The delays were a result of
the Company's lack of sufficient working capital in the quarter which is presently
improving.
SYSTEMS INTEGRATION
The Company continues to enhance its approach to securing and executing large
defense contracts by bringing together affiliate companies. The overall affiliate
capability, which is substantial, is presented to the prime contractors. Marketing
efforts continue in this area to broaden our exposure for manufacturing
opportunities.
The aforementioned P3 ORION Master Purchase Order and the L3 Communications MAPPS
Ltd. contract are examples of how Systems Integration works for us. In these
projects, six subcontractors carry out various tasks, with Northstar bringing all
component parts together for engineering, testing, quality control and delivery to
the customer.
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2011 with the three months ended
March 31, 2010.
Revenue from sales for the three month period ended March 31, 2011 was $183,975
compared to $1,277,583 of revenue from sales recorded during the same period of
the prior year. Gross profits decreased from $287,745 (23% of sales) in the prior
period to $93,131 (50% of Sales) in the current period. The decrease was due to
the fact that the Company had a shortage of working capital and could not fund its
contract work. The gross profit percentage increase is due to the type of contract
work performed.
The net loss for the three-month period ended March 31, 2011 was $581,216 compared
to a net loss of $124,270 for the three months ended March 31, 2010. The increase
in net loss was in part due to additional staffing required to maintain contract
work on a standby basis ahead of revenue billing. As well, over this past quarter,
the Company invested considerable resources in seeking out additional and future
contract manufacturing opportunities and is confident that the efforts will return
positive results to the Company over the remainder of 2011. Another contributing
factor to the increase in loss for the quarter was interest accrued on government
loans, contingencies and on trade payables.
Subsequent to March 31, 2011 purchase orders valued at approximately $2.4M were
received on the Company's contract with Lockheed Martin for the P-3 aircraft
refurbishment program.
COMPARISON OF FINANCIAL POSITION AT MARCH 31, 2011 WITH MARCH 31, 2010
The Company's working capital deficiency increased at March 31, 2011 to $4,786,388
with current liabilities of $5,056,165 which are in excess of current assets of
$269,777. At December 31, 2010 the Company had a working capital deficiency of
$4,851,596.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various accounting policies that govern the application of
accounting principles generally accepted in the United States of America in the
preparation of our financial statements. Our significant accounting policies are
described in the footnotes to
our annual financial statements at December 31, 2010. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on our knowledge of current events and actions
it may undertake in the future, they may ultimately differ from actual results.
Certain accounting policies involve significant judgments and assumptions by us
and have a material impact on our financial condition and results. Management
believes its critical accounting policies reflect its most significant estimates
and assumptions used in the presentation of our financial statements. Our critical
accounting policies include revenue recognition, accounting for stock based
compensation and the evaluation of the recoverability of long-lived and intangible
assets. We do not have off-balance sheet arrangements, financings or other
relationships with unconsolidated entities or other persons, also known as
"special purpose entities".
LIQUIDITY AND CAPITAL RESOURCES
The Company has increased its shareholders' deficit as a result of its efforts to
increase its business activity and customer base. Cash outflow for the first
quarter ended March 31, 2011 was $(125,553) compared to an outflow of cash of
$(15,919) in the comparative prior quarter March 31, 2010. In the quarter, the
Company received $15,000 ($275,000 in the comparative prior quarter) from equity
funding and received $nil (received $nil in the comparative quarter) long term
debt leaving cash on hand at March 31, 2011 of $9,758 compared to cash on hand of
$135,311 at December 31, 2010 and $92,567 at March 31, 2010. Until the Company
receives revenues from new contracts and/or increases in product sales revenue, it
will be dependent upon equity and loan financings to compensate for the outflow of
cash anticipated from operations.
The Company is preparing a private placement preferred share offering pursuant to
Regulations D and S with the expectation of raising up to $3,200,000. Any funds so
raised are targeted for contract financing, product development, facilities,
marketing and general working capital. At this time, no commitment for funding has
been made to the Company.
The Company's continued operations are dependent upon obtaining revenues from
outside sources or raising additional funds through debt or equity financing.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Based on the evaluation of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of the date of this Quarterly Report on Form 10-Q, our chief executive
officer and chief financial officer has concluded that our disclosure controls and
procedures are designed to ensure that the information we are required to disclose
in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and are operating in an effective manner.
(b) Changes in internal controls
There were no changes in our internal controls or in other factors that could
affect these controls subsequent to the date of their most recent evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No change since previous filing.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Options Granted Date Exercise Price Expiry Date
-----------------------------------------------------------------------
Nil
Warrants Issued
During the three month period ended March 31, 2011 the Company issued nil share
purchase warrants.
Common Stock Issued Date Consideration
---------------------------------------------------------------------------------
150,000 February, 2011 cash of $15,000
328,398 February, 2011 services valued at $39,400
650,000 March, 2011 services valued at $78,000
1,111,112 March, 2011 repayment of $200,000 loan from Director
Preferred Stock Subscribed
nil
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No change since previous filing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No change since previous filing.
ITEM 5. OTHER INFORMATION.
No change since previous filing
ITEM 6. EXHIBITS
No change since previous filing.
Exhibit 31.1-CEO/CFO Certification
Exhibit 32.1-CEO/CFO Certification
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 20, 2011 Northstar Electronics, Inc.
(Registrant)
By: /s/ Wilson Russell
------------------------
Wilson Russell, PhD, President and Chief Financial Officer