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EX-32.1 - CERTIFICATION - NORTHSTAR ELECTRONICS INCex321.txt
EX-31.1 - CERTIFICATION - NORTHSTAR ELECTRONICS INCex311.txt



                                                                                 

                          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