Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2004
[ ] 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 # 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[ ]
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 March 31, 2004: 15,898,529
Transitional Small Business Disclosure Format (check one):
Yes [] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NORTHSTAR ELECTRONICS, INC. Consolidated Financial Statements
Three Months Ended March 31, 2004 - U.S. Dollars
Unaudited - Prepared by management
Consolidated Balance Sheets at March 31, 2004 and at December 31, 2003
Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
Consolidated Statements of Changes in Stockholders’ Equity for the Three
Months Ended
March 31, 2004
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
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. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8K
SIGNATURES.
NORTHSTAR ELECTRONICS, INC.
Consolidated Balance Sheets
U.S. Dollars
March 31 |
December 31 |
|
2004 |
2003 |
|
| ASSETS | unaudited |
audited |
| Current | ||
Cash |
$351,383 |
$613,040 |
Receivables |
188,617 |
227,444 |
Inventory and work in progress |
157,572 |
161,602 |
Prepaid expenses |
22,486 |
11,148 |
Total Current Assets |
720,058 |
1,013,234 |
Intangible asset |
38,050 |
37,285 |
Property and equipment |
129,352 |
118,956 |
Total Assets |
$887,460 |
$1,169,475 |
|
||
| LIABILITIES | ||
Current |
||
Accounts payable and accrued liabilities |
$218,009 |
$245,160 |
Loans payable |
50,000 |
50,000 |
Deferred revenue |
0 |
143,309 |
Current portion of long term debt |
110,163 |
83,527 |
| Total Current Liabilities | 378,172 |
521,996 |
| Long term debt | 568,001 |
514,192 |
| Due to Cabot Management Limited | 81,693 |
85,268 |
| Due to Director | 30,934 |
44,255 |
| Total Liabilities | 1,058,800 |
1,165,711 |
| STOCKHOLDERS’ EQUITY | ||
| 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 |
||
15,898,529 shares of common stock |
1,590 |
1,584 |
(15,838,074 December 31, 2003) |
||
| Additional paid in capital | 3,453,959 |
3,423,191 |
| Other comprehensive income (loss) | (78,943) |
(82,373) |
| Deficit | (3,547,946) |
(3,338,638) |
| Total Stockholders’ Equity (Deficit) | (171,340) |
3,764 |
| Total Liabilities and Stockholders’ Equity | $887,460 |
$1,169,475 |
NORTHSTAR ELECTRONICS, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 2004 and 2003
Unaudited
U.S.Dollars
2004 |
2003 |
|
| Sales | $397,698 |
$396,524 |
| Cost of goods sold | 166,229 |
148,913 |
| Gross margin | 231,469 |
247,611 |
| Other income | 8,428 |
524 |
239,897 |
248,135 |
|
| Expenses | ||
Salaries |
252,046 |
137,221 |
| Financial consulting |
6,200 |
90,163 |
Professional fees |
8,973 |
15,307 |
Research and development |
16,279 |
- |
Advertising and marketing |
14,014 |
15,054 |
Rent |
30,015 |
24,222 |
Investor relations |
35,751 |
22,983 |
Office |
16,708 |
13,965 |
Travel and business development |
40,647 |
14,159 |
Interest on debt |
3,306 |
8,351 |
Telephone and utilities |
10,734 |
10,691 |
Repairs and maintenance |
3,104 |
2,975 |
Amortization |
8,590 |
5,405 |
Bank charges and interest |
665 |
2,654 |
Foreign exchange |
1,837 |
- |
Transfer agent |
336 |
1,035 |
449,205 |
364,185 |
|
| Net (loss) for period | $(209,308) |
$(116,050) |
| Net (loss) per share | $(0.01) |
$(0.01) |
| Weighted average number of shares outstanding | 15,859,316 |
12,622,631 |
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Changes in Stockholders’ Equity
Three Months Ended March 31, 2004 and 2003
Unaudited
U.S. Dollars
| Shares | Amount | Additional Paid in Capital | Other Comprehensive Income | Accumulated Deficit | Total Stockholder Equity (Deficit) | |
| Balance December 31, 2003 | 15,838,074 | $1,584 | $3,423,191 | $(82,373) | $(3,338,638) | $3,764 |
| Net loss for three months | - | - | - | - | (209,308) | (209,308) |
| Currency translation adjustment | - | - | - | 3,430 | - | 3,430 |
| Issuance of common stock for services | 60,455 | 6 | 30,768 | - | - | 30,774 |
| Balance March 31, 2004 | 15,898,529 | $1,590 | $3,453,959 | $(78,943) | $(3,547,946) | $(171,340) |
NORTHSTAR ELECTRONICS, INC.
Consolidated Statement of Cash Flows
Three Months Ended March 31, 2004 and 2003
Unaudited
U.S.Dollars
2004 |
2003 |
|
| Operating Activities | ||
Net income (loss) |
$(209,308) |
$(116,050) |
Adjustments to reconcile net income (loss) to net cash used by operating activities |
||
Amortization |
8,590 |
5,405 |
Issuance of common stock for services |
30,774 |
93,574 |
Changes in operating assets and liabilities |
(161,808) |
(212,059) |
| Net cash (used) provided by operating activities | (331,752) |
(229,130) |
| Investing Activities | ||
Property and equipment |
(21,390) |
2,885 |
| Net cash (used) provided by investing activities | (21,390) |
2,885 |
| Financing Activities | ||
Issuance of common shares for cash |
- |
545,531 |
Increase (repayment) of long term debt |
86,420 |
182,597 |
Due to Cabot Management Limited |
(2,683) |
2,445 |
Advances from (repayment to) director |
10,718 |
(95,837) |
| Net cash (used) provided by financing activities | 94,455 |
634,736 |
| Effect of foreign exchange on translation | (2,970) |
(30,237) |
| Inflow (outflow) of cash | (261,657) |
378,254 |
| Cash, beginning of period | 613,040 |
117,690 |
| Cash, end of period | $351,383 |
$495,944 |
| Supplemental information | ||
Interest paid |
$3,306 |
$8,351 |
Shares issued for services |
$30,774 |
$93,574 |
Corporate income taxes paid |
$0 |
$0 |
NORTHSTAR ELECTRONICS, INC.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004
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 January 1999 merger with NTI described as follows: On
January 26, 1999 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, 2003 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 March 31, 2004 and the consolidated results of operations and the consolidated cash flows for the three months then ended. At March 31, 2004, 62% of the Company’s revenues were generated from two contracts (March 31, 2003, 73% of the Company’s revenues were generated from one contract) – the Company is continually marketing its services for follow on contracts. At March 31, 2002 the Company recorded nil revenues from contract work.
The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year.
2. COMMON STOCK
During the three months ended March 31, 2004, the following shares of common
stock were issued:
For services: 60,455 shares fairly valued at $30,774 at the market value of
those services
3. LONG TERM DEBT
| Balance due Atlantic Canada Opportunities Agency ("ACOA") December 31, 2003 | $597,719 |
| Increase in ACOA funding during the quarter | 80,445 |
| Balance due ACOA March 31, 2004 | 678,164 |
| Less current portion | 110,163 |
| $568,001 |
4. 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 $893,742 in assistance received under the Atlantic Innovation Fund. The assistance is repayable annually commencing August 1, 2005 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.
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, 2004 and March 31, 2003 prepared by management and the audited consolidated
financial statements for the twelve months ended December 31, 2003 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 business in new markets for NETMIND and for new design and contract manufacturing work in an effort to materially benefit the future business of the Company. During the quarter ended March 31, 2004 the Company improved its programming for on board 3D graphical display of trawl status information and has improved both inhouse hardware and software development systems.
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 manufacturer and a defense systems integrator.
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).
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.
Sales for NETMIND increased 43% over the same period last year but remain somewhat slower than expected. Sales have not expanded in Europe as anticipated. However, an upswing in activity over the next six months is expected.
b - The AQUACOMM Project
The AQUACOMM project is a $2.5Million in house research and development program
for the development of new, leading edge multiple application sonar technologies
and products for a variety of industries. These include defense, offshore oil
and gas, commercial fishing, oceanography, marine environment and marine transportation.
To date, the Company has expended $1,412,622 pursuant to this program. Among
the new developments from the AQUACOMM project are a general purpose acoustic
receiver, spread spectrum acoustic communications and improved sensors.
The Company intends to use its Venture Technology Business Model to maximize the success of the new AQUACOMM technologies. In this model, our core technology is invested in partnerships with established companies in the different industry sectors.
c – Defense Sonar System
The Company completed a contract to design and construct prototype sonar hardware
for a defense protection system. It is designed for the protection of navy ships,
ports and harbors. We expect that Homeland Security and Anti Terrorism will
become a major part of our business over the next five years with production
of these and other systems.
Electronic Contract Manufacturing
In the fall of 1999 we signed a contract with Lockheed Martin, Manassas, Virginia to fabricate and test control consoles for Navy submarines. This contract was successfully completed in early 2001. A follow-on contract was received and completed in the fall of 2001. Further console contracts are expected in the future. We are attempting to expand our electronic contract manufacturing business with our current customers, as well as with customers in the offshore oil and gas, transportation and communication industries.
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 defense sonar system is an example of how Systems Integration will work for us. In this project, we had four subcontractors who carried out various tasks, with Northstar bringing all the component parts together for final assembly, testing, quality control and delivery to the customer.
Results of Operations
Comparison of the three months ended March 31, 2004 with the three months ended
March 31, 2003.
Revenue for the three month period ended March 31, 2004 was $397,698 compared to $396,524 of revenue recorded during the same period of the prior year. Gross profits decreased from $247,611 (62%) in the prior period to $231,469 (58%) in the current period. The decrease was due to the fact that the project to produce sonar hardware for a defense protection system was done at a relatively low margin. The Company continues to negotiate for subsequent material contracts with Lockheed Martin and others.
The net loss for the three month period ended March 31, 2004 was $(209,308) compared to a net loss of $(116,050) for the three months ended March 31, 2003. Over this past quarter, the Company has 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 ensuing months and years.
The Company is actively attempting to secure a first contract or purchase order on the Joint Strike Fighter program in the United States, having already signed Memoranda of Interest with Lockheed Martin and four of its partner companies. As a result, travel and business development costs rose to $40,647 for the quarter from $14,159 for the comparative prior quarter ended March 31, 2003.
A significant event for the Company in this quarter was the completion of production of the third and fourth underwater intruder detection systems. The Company now expects to further expand its acoustic capabilities into military and anti terrorist applications as well as the offshore petroleum industry. We are actively pursuing contracts in these areas.
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 the Scandinavian countries. The system upgrades are being well received by our fishing industry customers and by government researchers. The upgrades resulted in research and development expenditures of $16,279 for the quarter, an increase over $nil expenditures for the comparative prior quarter ended March 31, 2003.
The Company continued on its research and development program towards extending its underwater wireless communication technology into additional applications and expended further effort in developing proposals for financing of a major product development program. This accounts for an increase in salaries to $252,046 for the three months ended March 31, 2004 compared to salaries of $137,221 for the comparative prior quarter ended March 31, 2003.
Comparison of Financial Position at March 31, 2004 with December 31, 2003
The Company’s working capital position at March 31, 2004 decreased to
$341,886 with current assets of $720,058 which are in excess of current liabilities
of $378,172. At December 31, 2003 the Company had working capital of $491,238.
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, 2003. 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 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 flows used
in the first quarter ended March 31, 2004 was $(261,657) compared to an increase
in cash of $378,254. In the prior comparative quarter the Company received $545,531
($nil in the current quarter) from equity funding and received $182,597 ($86,420
in the current quarter) from the proceeds of long term debt. As a result, operations
have used cash during the quarter, leaving cash on hand at March 31, 2004 of
$351,383 compared to cash on hand of $613,040 at December 31, 2003 and $495,944
at March 31, 2003. 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 is preparing a private placement offering pursuant to Regulations D and S with the expectation of raising up to $1,850,000. Any funds so raised are targeted for product development, marketing and general working capital. Additional government support of approximately $1,000,000 is also expected. At this time, no commitment for funding has been made to the Company.
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 a date within
90 days of the filing date of this Quarterly Report on Form 10-QSB, our chief
executive officer and chief financial officer have 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 significant changes in our internal
controls or in other factors that could significantly 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. Changes in Securities.
| Options Granted | Date | Exercise Price | Expiry Date |
| None | - | - | - |
| Common Stock Issued | Date | Consideration |
| 3,182 | January, 2004 | services valued at $3,274 |
| 57,273 | March, 2004 | services valued at $27,500 |
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.
April 30, 2004 Northstar Electronics, Inc.
(Registrant)
By: /s/ Wilson Russell
Wilson Russell, PhD, President and Principal Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO 18 W.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002, the undersigned Chief Executive Officer and chief Financial Officer,
or persons fulfilling similar functions, each certify:
(i) That the financial information included in this Quarterly Report fairly
presents in all material respects the financial condition and results of operations
of the Company as of March 31, 2004 and for the periods presented in the report;
and
(ii) That the Quarterly Report fully complies with the requirements of Sections
13(a) or 15(d) of the Securities exchange Act of 1934
By: /s/ Wilson Russell
Title: Chief Executive Officer and Chief Financial Officer
Date: April 30, 2004
302 CERTIFICATION
I, Wilson Russell, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Northstar Electronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a – 14 and 15d –
14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process, summarize
and report financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls.
6. I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 30, 2004 /s/ Wilson Russell________________
Wilson Russell, Chief Financial Officer and Director