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 September 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 #
Suite # 1455 - 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 [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 October 30, 2007: 27,657,081
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
INDEX
PART I
FINANCIAL INFORMATION......................................................1
Item 1. Financial Statements...........................................................1
Northstar Electronics, Inc.
Consolidated Interim Financial Information, Unaudited
Nine Months Ended September 30, 2007 U.S. Dollars......................................1
Consolidated Balance Sheets at September 30, 2007 and at December 31, 2006.............1
Consolidated Statements of Operations for the Three and Nine Month Periods Ended
September 30, 2007 and 2006..........................................................2
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Nine
Months Ended September 30, 2007......................................................3
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2007
and 2006.............................................................................4
Notes to Consolidated Financial Information............................................5
Item 2. Management's Discussion and Analysis or Plan of Operation......................7
Item 3. Controls and Procedures........................................................10
PART II
OTHER INFORMATION..........................................................11
Item 1. Legal Proceedings..............................................................11
Item 2. Changes in Securities..........................................................11
Item 3. Defaults Upon Senior Securities................................................11
Item 4. Submission of Matters to a Vote of Security Holders............................12
Item 5. Other Information..............................................................12
Item 6. Exhibits and Reports on Form 8K................................................12
SIGNATURES.............................................................................12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets
U.S. Dollars
September 30 December 31
2007 2006
Unaudited
ASSETS
Current
Cash
$91,856
$24,300
Receivables
507,093 133,664
Inventory and work in progress
92,382
257,207
Prepaid expenses
44,422 51,975
Total Current Assets
735,753 467,146
Inventories and costs relating to long
term contracts in process 88,084 0
Intangible assets 26,019 26,019
Property and Equipment
59,441
48,716
Total Assets
$909,297 $541,881
LIABILITIES
Current
Accounts payable and accrued liabilities
$1,082,120 $817,567
Loans payable
109,268 69,428
Government assistance received in advance 105,424 87,003
Deferred revenue 1,800 192,693
Current portion of long term debt
124,440 140,232
Total Current Liabilities
1,423,052 1,306,923
Long Term Debt
1,464,972 914,045
Due to Cabot Management Limited
104,503
90,635
Due to Directors
208,077 170,372
Total Liabilities
3,200,604 2,481,975
STOCKHOLDERS' DEFICIT
Common Stock
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
Issued and outstanding
26,903,540 shares of common stock
2,690 2,252
(22,519,132 December 31, 2006)
Additional Paid in Capital
4,709,068 4,365,236
Other Comprehensive loss
(424,730)
(183,349)
Accumulated deficit
(6,578,335) (6,124,233)
Total Stockholders' Deficit
(2,291,307) (1,940,094)
Total Liabilities and Stockholders' Deficit $909,297 $541,881
The accompanying notes are an integral part of the financial statements
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NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30
Unaudited
U.S. Dollars
Three Months Nine Months
2007 2006 2007 2006
Sales $682,033 $356,385 $1,203,500 $1,042,252
Discounts 0 29,215 0 89,446
Sales net of discounts
682,033 327,170 1,203,500 952,806
Cost of goods sold
243,742 145,025 479,423 470,719
Gross margin
438,291 182,145 724,077 482,087
Other income (expense)
(5,832) 9,604 0 9,604
Recovery of research and development 12,027 47,143 107,462 347,534
444,486 238,892 831,539 839,225
Operating Expenses
Salaries
281,170 240,096 758,870 753,424
Consulting 33,533 1,500 111,753 52,560
Professional fees
30,337 14,722 29,006 84,458
Investor relations 995 22,787 35,751 34,412
Finance fees 13,125 0 22,990 0
Rent
39,875 26,414 71,096 91,228
Research and development 364 18,998 1,541 63,550
Office
55,749 21,462 109,460 71,946
Travel and business development 18,862 17,412 76,060 99,460
Interest on debt 9,560 20,993 23,369 31,672
Heat, light and telephone
51 8,604
24,641 35,299
Amortization
5,842
6,769
17,146 21,048
Transfer agent 628 649 3,958 1,432
Total operating expenses 490,091 400,406 1,285,641 1,340,489
Net income (loss) for the period $ (45,605)$(161,514) $(454,102) $(501,264)
Net loss per share
$(0.00) $(0.01) $(0.02) $(0.03)
Weighted average number of shares
outstanding 26,357,944 19,340,780 25,147,299 17,994,515
The accompanying notes are an integral part of the financial statements
2
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Nine Months Ended September 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
nine months - - - - (454,102) (454,102)
Currency
translation
adjustment -
-
-
(241,381)
- (241,381)
Issuance of
common stock:
-for services 2,384,408
238 209,782
-
- 210,020
-for cash 2,000,000 200 149,800 - - 150,000
Share issuance
costs - - (15,750) - - (15,750)
__________________________________________________________________________________
Balance
September 30,
2007
26,903,540 $2,690 $4,709,068 $(424,730) $(6,578,335) $(2,291,307)
__________________________________________________________________________________
The accompanying notes are an integral part of the interim financial statements
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NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2007
Unaudited
U.S. Dollars
September 30
2007 2006
Operating Activities
Net (loss)
$(454,102) $ (501,264)
Adjustments to reconcile net (loss)
to net cash used by operating activities
Amortization
17,146
21,048
Issuance of common stock for services
210,020 86,041
Changes in operating assets and liabilities (229,972) (25,587)
Net cash (used by) operating activities (456,908) (419,762)
Investing Activity
Recovery (acquisition) of property and equipment (16,466) -
Financing Activities
Issuance of common stock for cash - net
134,250 252,269
Increase of long term debt
357,751 100,275
Due to Cabot Management Limited
- -
Advances from (repayment to) director
27,042 14,265
Net cash provided by financing activities 519,043 366,809
Effect of foreign currency translation on cash
21,887 27,844
Inflow (outflow) of cash
67,556 (25,109)
Cash, beginning of period
24,300 46,905
Cash, end of period
$91,856 $21,796
Supplemental information
Interest paid
$ 23,369 $31,672
Shares issued for services
$210,020 $86,041
Corporate income taxes paid
$ 0
$ 0
The accompanying notes are an integral part of the financial statements
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NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Information
Nine Months Ended September 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. (“NN”). 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 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 September 30, 2007 and the consolidated results of operations and the consolidated cash flows for the three and nine months then ended. For the nine months ended September 30, 2007, 46% of the Company’s sales revenues were generated from one customer (at September 30, 2006, 42% of the Company’s revenues were generated from one customer). The Company is continually marketing its services for follow on contracts.
The results of operations for the three and nine months ended September 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 nine months to September 30, 2007 the Company incurred a net loss of $454,102(year to December 31, 2006: $969,286) and at September 30, 2007 had a working capital deficiency (an excess of current liabilities over current assets) of $687,299 (December 31, 2006: $839,777), including $124,440 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.
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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.
2. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Included in accounts payable at September 30, 2007 is $90,291 owing to a director of the Company for past technical consulting.
3. LONG TERM DEBT
Balance due Atlantic Canada Opportunities Agency ("ACOA")
December 31, 2006
$1,054,277
Increase in ACOA funding during the period
535,135
Balance due to ACOA September 30, 2007 1,589,412
Less current portion
124,440
$1,464,972
4. COMMON STOCK
During the nine months ended September 30, 2007 the following shares of common stock were issued:
For services:
2,384,408 shares fairly valued at $210,020, the market value of those services
For cash:
2,000,000 shares for $150,000
5. REVENUE
Nine months 2007 Nine months 2006
Revenue consists of: NETMIND sales $649,570 $451,436
Contract sales 553,930 590,816
Government assistance 107,462 347,534
Miscellaneous 0 9,604
$1,310,962 $1,399,390
6. 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.
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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 nine month periods ended September 30, 2007 and September 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 small net loss this quarter, it has clearly reflected positive growth in product sales (NETMIND) and continues to expend effort in developing new markets, in developing new advanced sonar products and securing new contracts for the contract manufacture of military/government systems, submarine command and control consoles 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).
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NETMIND is both a conservation tool as well as an efficiency tool. Its use 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 increased by 238% from the previous quarter. This was attributed to a re-focusing of marketing programs to specific dealers and specific territories, and second, to new product features.
b) Products and Technology from The AQUACOMM Project
As indicated, the NETMIND sales increase was particularly due to the Net Symmetry System and the Digital Receiver upgrades, products of the Aquacomm project. These products were predominately sold to our new dealers in the Baltic Sea area and established dealers in Ireland and Spain.
Defense Contract Manufacturing
The Company completed a small submarine command and control console, “Spares” contract issued by Lockheed Martin Naval Electronics and Surveillance Systems, Manassas, Virginia. Several new manufacturing contracts for submarine consoles are expected in 2008.
The Company, through its wholly owned subsidiary, Northstar Network Ltd., continued work on the Master Purchase Order for the Wing Assembly Upgrade Component for the P-3 ORION aircraft from Lockheed Martin Aeronautics. Additional staff, sub-contractors and facilities were completed and production on components began this quarter. With setup costs removed in following quarters, profitability should improve with increased production. Full contract production for the Master Purchase Orders is US$6,307,191 with the work extending to the year 2012.
Comprehensive design work commenced on the $700,000 prototype sonar system for Lockheed Martin Canada. The Company believes that production of these systems will follow the development phase expected to end in April 2008.
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 P-3 ORION Master Purchase Order is an example of how Systems Integration works for the Company. In this project, five subcontractors are carrying out various tasks, with Northstar bringing all the component parts together for testing, quality control and delivery to the customer.
Results of Operations
Comparison of the three and nine months ended September 30, 2007 with the three and nine months ended September 30, 2006:
Gross revenues from sales, miscellaneous and research and development recovery for the three months ended September 30, 2007 were $688,228 compared to $413,132 in the comparative prior three month period. Gross revenues from sales, miscellaneous income and research and development recovery for the nine months ended September 30, 2007 were $1,310,962 compared to $1,399,390 in the comparative prior nine month period.
Sales revenue for the three months ended September 30, 2007 was $682,033 compared to $356,385 of sales revenue recorded during the same period of the
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prior year. This comparative increase is the result of the contracts currently in place. Sales revenue for the nine months ended September 30, 2007 was $1,203,500 comparable to $1,042,252 in the comparative prior period. The increase is attributable to the contracts commenced during the nine months. Gross margins increased from $482,087 (46%) in the prior nine month period to $724,077 (60%) in the current period due to the increase in NETMIND sales which generate a higher margin.
The net loss for the three months ended September 30, 2007 was $(45,605) compared to a net loss of $(161,514) for the three months ended September 30, 2006. During the quarter the Company continued work on contracts from Lockheed Martin and 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.
Travel and business development costs were $76,060 for the nine months ended September 30, 2007 compared to $99,460 for the period ended September 30, 2006 as the Company attempts to reduce costs but maintain its efforts to expand both contract and NETMIND sales.
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, as previously mentioned, is working on current contracts from Lockheed Martin.
During the quarter the Company decreased expenditures on salaries and overheads while expanding market awareness of the NETMIND system through trade shows and a growing distribution network including Ireland and Spain. The system upgrades are being well received by our fishing industry customers and by government researchers. During the previous year the Company received approval for funding of $400,000 USD as part of a $540,000 USD international marketing campaign for the NETMIND system.
The Company continued on its research and development program at a reduced pace towards extending its underwater wireless communication technology into new products. Salaries remained relatively constant at $758,870 for the nine months ended September 30, 2007 compared to salaries of $753,424 for the comparative prior nine months ended September 30, 2006.
Comparison of Financial Position at September 30, 2007 with December 31, 2006
The Company’s working capital deficiency at September 30, 2007 decreased to $687,299 with current liabilities of $1,423,052 in excess of current assets of $735,753. 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.
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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 nine months ended September 30, 2007 was $67,556 compared to an outflow of cash of $(25,109) for the nine months ended September 30, 2006. The Company received $519,043 during the nine months to September 30, 2007 ($252,269 in the prior comparative period) from financing activities and used cash of $456,908 in its operations during the nine months ended September 30, 2007 (used $366,809 in the prior comparative nine month period), leaving cash on hand at September 30, 2007 of $91,856 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) for the end of the period covered by this report, being September 30, 2006, 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.
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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
192,000
July 11, 2007
services valued at $15,360
304,140
July 26, 2007
services valued at $32,790
525,000
September 18, 2007 services valued at $39,375
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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.
No change since previous filing.
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.
November 19, 2007 Northstar Electronics, Inc.
(Registrant)
By: /s/ Wilson Russell
Wilson Russell, PhD, President and Principal Financial Officer
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