U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
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 Identification No.
Suite # 1455 - 409 Granville Street,
Vancouver, British Columbia, Canada V6C 1T2
Address of principal executive offices
(604) 685-0364
Issuer's telephone number
Former name, former address and former fiscal year, if changed since last report
Not Applicable
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.
(1)Yes [X] No[ ] (2)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 [X]
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 July 31, 2007: 26,378,540
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
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TABLE OF CONTENTS
PAGE
Consolidated Balance Sheets at June 30, 2007 and at December 31, 2006.............F-1
Consolidated Statements of Operations for the Three and Six Month Periods Ended
June 30, 2007 and 2006............................................................F-2
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Six Months Ended June 30, 2007............................................F-3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2007 and 2006......................................................F-4
Notes to Consolidated Financial Statements........................................F-5
Item 2. Management's Discussion and Analysis or Plan of Operation.................2
Item 3. Controls and Procedures...................................................6
PART II - OTHER INFORMATION.......................................................7
Item 1.
Legal Proceedings.....................................................7
Item 2.
Changes in Securities.................................................7
Item 3.
Defaults Upon Senior Securities.......................................7
Item 4.
Submission of Matters to a Vote of Security Holders...................7
Item 5.
Other Information.....................................................7
Item 6.
Exhibits and Reports on Form 8K.......................................7
SIGNATURES........................................................................7
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHSTAR ELECTRONICS, INC
Consolidated Financial Statements
Six Months Ended June 30, 2007
U.S. Dollars - Unaudited - Prepared by management
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets
U.S. Dollars
June 30 December 31
2007 2006
unaudited audited
ASSETS
Current
Cash
$ 51,523
$ 24,300
Receivables
89,678
133,664
Inventory and work in progress
98,549
257,207
Prepaid expenses
8,088
51,975
Total Current Assets
247,838 467,146
Intangible asset 25,861 26,019
Property and equipment
48,132
48,716
Total Assets
$321,831 $541,881
LIABILITIES
Current
Accounts payable and accrued liabilities
$763,624 $817,567
Loans payable
91,040
69,428
Government assistance received in advance 17,912 87,003
Deferred revenue 10,702 192,693
Current portion of long term debt
178,475
140,232
Total Current Liabilities
1,061,753 1,306,923
Long term debt
1,216,024
914,045
Due to Cabot Management Limited
98,275
90,635
Due to Directors
265,993
170,372
Total Liabilities
2,642,045 2,481,975
STOCKHOLDERS’ EQUITY (DEFICIT)
Authorized
100,000,000 shares of common stock with a par value of $0.0001 each
20,000,000 shares of preferred stock with a par value of $0.0001 each
Common Stock issued and outstanding
25,882,400 shares
2,588 2,252
(22,519,132 December 31, 2006)
Additional paid in capital
4,621,645 4,365,236
Other comprehensive income
(loss)
(411,717)
(183,349)
Accumulated Deficit
(6,532,730) (6,124,233)
Total Stockholders’ Equity (Deficit)
(2,320,214) (1,940,094)
Total Liabilities and Stockholders’ Equity (Deficit)
$321,831 $541,881
The accompanying notes are an integral part of the interim financial statements
F-1
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Three Months and Six Months Ended June 30
Unaudited
U.S. Dollars
Three Months Six Months
2007 2006 2007 2006
Sales
$351,140 $231,190 $521,467 $685,867
Discounts - 20,666 - 60,231
Sales
net of discounts
$351,140 $210,524 $521,467 $625,636
Cost of goods sold
238,692 81,550 279,139 325,694
Gross margin
112,448 128,974 242,328 299,942
Recovery of research and development 121,688 114,962 138,893 300,391
Other income (expense)
(2,368) - 5,832 -
231,768 243,936 387,053 600,333
Expenses
Salaries
267,886 241,560 477,700 513,328
Financial consulting 26,000 20,610 78,220 51,060
Professional fees
(8,562) 51,186 (1,331) 69,736
Rent
15,299 33,718 31,221 64,814
Research and development 770 19,603
1,177 44,552
Investor relations 25,392 10,500 34,756 11,625
Office and administration
23,558 23,145 38,711 50,484
Travel and business development 44,147 30,220 57,198 82,048
Interest on debt
10,146 5,308
28,809 10,679
Telephone and utilities
12,202 14,068
24,590 26,695
Amortization
4,450
7,353
11,304 14,279
Finance fees 9,865 - 9,865 -
Transfer agent fees 1,658 - 3,330 783
Total expenses
432,811 457,271 795,550 940,083
Net loss for period
$(201,043) $(213,335) $(408,497) $(339,750)
Net loss per share
$ (0.01) $ (0.01) $ (0.02) $ (0.02)
Weighted average number of shares
outstanding 23,902,844 17,402,390 24,481,319 17,310,225
The accompanying notes are an integral part of the interim financial statements
F-2
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Six Months Ended June 30, 2007
Unaudited
U.S. Dollars
Other
Additional Compre- Accumu- Total
Paid in hensive lated Stockholder
Shares Amount Capital Income Deficit Equity
(Loss) (Deficit)
-------------------------------------------------------------------------------------
Balance
December 31,
2006
22,519,132 $2,252 $4,365,236 $(183,349) $(6,124,233) $(1,940,094)
Net loss for
six months - - - - (408,497) (408,497)
Currency
translation
adjustment -
-
-
(228,368)
- (228,368)
Issuance of
common stock:
-for services 1,363,268
136 122,359
-
- 122,495
-for cash 2,000,000 200 149,800 - - 150,000
Share issuance
costs - - (15,750) - - (15,750)
______________________________________________________________________________________
Balance
June 30,
2007
25,882,400 $2,588 $4,621,645 $(411,717) $(6,532,730) $(2,320,214)
______________________________________________________________________________________
The accompanying notes are an integral part of the interim financial statements
F-3
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Cash Flows
Six Months Ended June 30
Unaudited
U.S. Dollars
2007 2006
Operating Activities
Net(loss)
$(408,497) $(339,750)
Adjustments to reconcile net (loss)
to net cash used by operating activities
Amortization
11,304
14,279
Issuance of common stock for services
122,495 65,291
Changes in operating assets and liabilities (79,270) 211,393
Net cash (used by) operating activities (353,968) (48,787)
Investing Activity
(Addition to) property and equipment (10,452) (27,510)
Financing Activities
Issuance of common stock – net proceeds
134,250 10,300
Increase (repayment)- long term debt
243,505 (10,073)
Advances from director
89,545 23,574
Net cash provided by financing activities 467,300 23,801
Effect of foreign currency translation on cash (75,657) 17,353
Inflow (outflow) of cash
27,223 (35,143)
Cash, beginning of period
24,300 46,905
Cash, end of period
$51,523 $11,762
Supplemental information
Interest paid
$28,809 $10,679
Shares issued for services
$122,495 $65,291
Corporate income taxes paid
$ 0 $ 0
The accompanying notes are an integral part of the interim financial statements
F-4
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007
Unaudited
U.S. Dollars
1.
ORGANIZATION AND BASIS OF PRESENTATION
These 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”). All inter company balances and transactions are eliminated. 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 take over resulting in the consolidated financial statements including the results of operations of the acquired subsidiary prior to the merger.
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, 2006 Form 10-KSB.
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 June 30, 2007 and the consolidated results of operations and the consolidated cash flows for the six months then ended. For the six months ended June 30, 2007, 31% of the Company’s revenues were generated from one contract (June 30, 2006, 58% of the Company’s revenues were generated from one contract). The Company is continually marketing its services for follow on contracts.
The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year.
The accompanying 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 six months to June 30, 2007 the Company incurred a net loss of $408,497 (year to December 31, 2006: $969,286) and at June 30, 2007 had a working capital deficiency (an excess of current liabilities over current assets) of $813,915 (December 31, 2006: $839,777), including $178,475 of long term debt due within one year (December 31, 2006: $140,232).
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 2007 revenues from sales of its NETMIND system and related products. As well, the Company has been awarded a submarine control console spare-parts manufacturing contract that will result in increased revenue. These initiatives are in recognition that 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 uncertain. 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.
F-5
2.
COMMON STOCK
During the six months ended June 30, 2007 the following shares of common stock were issued:
For services: 1,363,268 shares fairly valued at $122,495, the market value of those services
For cash: 2,000,000 shares for $150,000
3.
LONG TERM DEBT
Balance due to Atlantic Canada Opportunities Agency ("ACOA")
December 31, 2006
$1,054,277
Increase in ACOA funding during the period
340,222
Balance due to ACOA June 30, 2007 1,394,499
Less current portion
178,475
$1,216,024
4.
REVENUE
Six months Six months
2007 2006
Revenue consists of: NETMIND sales $273,105 $288,064
Contract sales 248,362 397,803
Government assistance 138,893 300,391
$660,360 $986,258
5.
CONTINGENCIES
(i) The Company is a defendant in a lawsuit commenced against them in 1999 by their former master distributor. The former distributor has alleged that the Company has interfered with the ability of the former distributor to sell products. The Company has filed a counter claim for monies owing by the former distributor to the Company.
(ii) The Company is contingently liable to repay $1,997,144 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.
F-6
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 and six month periods ended June 30, 2007 and June 30, 2006 prepared by management and the audited consolidated financial statements for the twelve months ended December 31, 2006 as presented in the Form 10KSB.
Although the Company has experienced a net loss this quarter, it continues to expend considerable effort in developing new markets for NETMIND, in developing new advanced sonar products, and in securing new contracts for the contract manufacture of military/government systems, submarine command and control consoles, multi mode fiber optic cables for military fighter planes, and precision machined parts and other components for 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 (USTD), a defense electronics contract manufacturer (CM) and a defense systems integrator (DSI).
Underwater Sonar Products and Technologies
a) The NETMIND System
The Company’s first underwater sonar product based on our core technology was the NETMIND system. NETMIND’s market is the world’s commercial fishing industry and government oceanic research agencies. One of our largest customers has been the United States National Oceanic and Atmospheric Administration (NOAA).
2
NETMIND is both a conservation tool as well as an efficiency tool. Electronic sensors attached to a fishing trawl measure the height and width of the net opening, the water temperature, the depth of the net and the amount of fish caught plus other parameters. The sensor information is transmitted via a wireless communications link back to the ship.
NETMIND helps prevent over fishing and allows fishermen to catch fewer fish and still make profits. This gives regulators flexibility in reducing quotas when attempting to conserve limited fish stocks. NETMIND sales decreased from the same
period last year due to introduction and assessment delays with the new Digital Receiver Upgrades and Net Symmetry System. However, we expect revenues to rebound in the second quarter as the testing and acceptance will be completed with the respective dealers.
b) Products and Technology from The AQUACOMM Project
The Net Symmetry System is the first commercial sonar product from the Aquacomm project. It was introduced to the fishing market with initial sales coming from Spain. In addition, the first “live testing” in Ireland of the new Pair/Twin Trawl System took place. A potential substantial market exists in Ireland, Scotland and the surrounding regions.
Defense Contract Manufacturing
The Company continued the final stages of its submarine command and control console contract issued by Lockheed Martin Naval Electronics and Surveillance Systems, Manassas, Virginia. Work continued through the second quarter of 2007 and we expect to complete it during 2007. Several similar manufacturing contracts for submarine consoles are expected in 2007.
The Company, through its wholly owned subsidiary, Northstar Network Ltd., received a Master Purchase Order for the Wing Assembly Upgrade Component for the P-3 ORION aircraft from Lockheed Martin Aeronautics totaling US$6,307,191. This work extends to the year 2012 and the Company will manufacture 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. Additionally Northstar won a contract during the quarter from Lockheed Martin Canada to design, develop and build a prototype sonar system. The Company believes that production of these systems will follow the development phase.
Systems Integration
The Company is developing its approach to securing and executing large defense contracts by bringing together affiliate companies. The overall capability, which is substantial, is presented to the prime contractors.
The aforementioned P3 ORION Master Purchase Order is an example of how Systems Integration will work for us. In this project, six subcontractors will carry out various tasks, with Northstar bringing all the component parts together for testing, quality control and delivery to the customer.
3
Results of Operations
Comparison of the three and six months ended June 30, 2007 with the three and six months ended June 30, 2006:
Gross revenues from sales, miscellaneous and research and development recovery for the three month period ended June 30, 2007 were $470,460 compared to $346,152 in the comparative prior period. Gross revenues from sales, miscellaneous and research and development recovery for the six month period ended June 30, 2007 were $666,192 compared to $986,258 in the comparative prior period.
Sales revenue for the three month period ended June 30, 2007 was $351,140 compared to $231,190 of sales revenue recorded during the same period of the prior year. This comparative increase is the result of the Lockheed Martin contract. Sales revenue for the six month period ended June 30, 2007 was $521,467 comparable to $685,867 in the prior period. Gross margins decreased from $299,942 (48%) in the prior period to $242,328 (46%) in the current period. The fluctuation in the margin percentage is a result of the higher volume of NETMIND sales during the period which generate higher margins than contract sales.
The net loss for the three month period ended June 30, 2007 was $(201,043) compared to a net loss of $(213,335) for the three months ended June 30, 2006. Over this past quarter, the Company continued to invest 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 ensuing months and years.
Travel and business development costs were $57,198 for the six months and $82,048 for the comparative prior period ended June 30, 2006 as the Company attempts to increase its customer base and sales orders for NETMIND while reducing its costs.
The Company is actively pursuing contracts for its sonar capabilities in military and anti-terrorist applications as well the Company has bid on several contract manufacturing military contracts and has received a contract from Lockheed Martin for the production of submarine command and control consoles, as previously mentioned.
During the quarter the Company increased expenditures on the marketing and advertising of its NETMIND system and expanded awareness of the NETMIND system through trade shows and a growing distribution network including Ireland, Spain and Scotland. The system upgrades are being well received by our fishing industry customers and by government researchers. The Company previously received government support of $400,000 as part of a $540,000 international marketing program for the NETMIND system.
Salaries decreased to $477,700 for the six months ended June 30, 2007 compared to salaries of $513,328 for the comparative prior six months ended June 30, 2006 as the Company continued to trim costs. Cost recovery of $138,893 were down considerably from $300,391 recovered in the comparative prior period.
Comparison of Financial Position at June 30, 2007 with December 31, 2006
The Company’s working capital deficiency at June 30, 2007 remained relatively unchanged at $813,915 with current liabilities of $1,061,753 in excess of current assets of $247,838. At December 31, 2006 the Company had a working capital deficiency of $839,777.
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 financial statements at December 31, 2006. 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.
4
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 which 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 shareholder’s deficit as a result of its efforts to increase its business activity and customer base. Cash inflow in the six months ended June 30, 2007 was $27,223 compared to an outflow of cash of $(35,143) for the six months ended June 30, 2006. The Company received $467,300 during the six months to June 30, 2007 ($23,801 in the prior comparative period) from financing activities and used cash of $353,2968 in its operations during the six months ended June 30, 2007 (used $48,787 in the prior comparative six month period), leaving cash on hand at June 30, 2007 of $51,523 compared to cash on hand of $24,300 at December 31, 2006. Until the Company receives its next contract and/or increases its product sales revenue, it will be dependent upon equity and loan financings to compensate for the outflow of cash anticipated from operations.
The Company has a private placement offering pursuant to Regulations D and S with the expectation of raising capital. Any funds so raised are targeted for product development, marketing and general working capital.
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-QSB, 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.
5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
No change since previous filing.
Item 2. Changes in Securities.
Options Granted
Date Exercise Price Expiry Date
------------------------------------------------------------------------
Nil
Warrants Issued
------------------------------------------------------------------------
Nil
Common Stock Issued
Date
Consideration
-----------------------------------------------------------------------
288,000
January, 2007
services valued at $24,770
250,000 January, 2007 $12,500 cash
25,000 February, 2007 services valued at $2,250
250,000 February, 2007 $12,500 cash
187,500 March, 2007 services valued at $17,250
1,500,000 March, 2007 $125,000 cash
674,400
April, 2007 services valued at $66,240
11,702
May, 2007
services valued at $1,170
176,666
June, 2007
services valued at $10,815
6
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 and Reports on form 8-K.
(a) Exhibits
Exhibit 31.1 - Section 906 Certification of Periodic Report of the Chief Executive Officer.
Exhibit 32.1 - Section 302 Certification of Periodic Report of the Chief
(b) Form 8-K
No Form 8-K's filed.
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.
August 20, 2007 Northstar Electronics, Inc.
(Registrant)
By: /s/ Wilson Russell
Wilson Russell, PhD, President and Principal Financial Officer
7