Notes to Consolidated Financial Statements
Years Ended December 31, 2018 and 2017
(US Dollars)
1. NATURE OF OPERATIONS AND GOING CONCERN
Northstar Electronics Inc (the “Company”) was incorporated on May 11, 1998 in the state of Delaware. The Company is doing research and development on single engine aircrafts for business use.
The Company's business activities are conducted principally in Canada. However, the financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) with all figures translated into United States dollars for financial reporting purposes.
The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to continue as a going-concern and contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2018 the Company incurred a net loss of $257,946 (2017: $639,125) and had a working capital deficiency of $4,759,483 (2017: $4,784,977). Continuation as a going concern is dependent upon the ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due and ultimately upon its ability to achieve profitable operations. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. Management intends to obtain additional funding by issuing debt and equity financing.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of consolidation
The consolidated financial statements include the accounts of the Company and its controlled subsidiary, National Five Holding Ltd, which was inactive during the years ended December 31, 2018 and 2017.
b. Cash and Cash Equivalents
Cash and cash equivalents consist of commercial accounts, trust accounts and interest-bearing bank deposit. Items are considered to be cash equivalents if the original maturity is three months or less.
c. Research and development
Research and development costs are expensed to operations as incurred.
F-6
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Foreign currency translation
The functional currencies of the Company and its subsidiary were determined as the US dollar, which is the currency of their primary economic environment. Amounts incurred in Canadian dollars are translated into the functional currency as follows:
(i)
Monetary assets and liabilities at the rate of exchange in effect as at the balance sheet date;
(ii)
Non-monetary assets and liabilities at the exchange rates prevailing at the time of the acquisition of the assets or assumption of the liabilities; and
(iii)
Revenues and expenditures at rates approximating the average rate of exchange for the year.
e. Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from these estimates.
f. Income taxes
Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes in accordance with ASC 740, “Income Taxes”, which requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and for tax losses and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not.
g. Basic and diluted net loss per share
The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.
F-7
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Segments of an enterprise and related information
ASC 280, “Segment Reporting” establishes guidance for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. ASC 280 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
i. Fair value measurements
The Company adopted ASC 820, Fair Value Measurements. ASC 820 provides a definition of fair value, establishes a hierarchy for measuring fair value under generally accepted accounting principles and requires certain disclosures about fair values used in the financial statements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the primary or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
Level 1
- Quoted prices in active markets for identical assets or liabilities.
Level 2
- Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
j. Comparative figures
Certain comparative figures have been adjusted to conform to the current year’s presentation.
k. Recently adopted accounting pronouncements
Recent accounting pronouncements issued by the Financial Accounting Standards Board or other authoritative standards groups with future effective dates are either not applicable or are not expected to be significant to the financial statements of the Company.
F-8
3. FINANCIAL INSTRUMENTS
Fair values
The carrying values of accounts payable, loans payable, due to directors and legal liability approximate their fair values because of the short maturity of these financial instruments.
Interest rate risk
The Company is not exposed to significant interest rate risk due to the fixed rates of interest on its monetary assets and liabilities.
Credit risk
The Company is exposed to credit risk with respect to its cash. The Company deposits cash with a high credit quality financial institution as determined by rating agencies.
Currency risk
The Company is subject to currency risk as certain of the assets and liabilities are denominated in Canadian dollars. The exchange rate conversion to US dollars may vary from time to time.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with its financial liabilities. The Company is reliant upon related parties and share issuance as its sources of cash. The Company has received financing from related parties and share issuances in the past; however, there is no assurance that it will be able to do so in the future.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
|
|
|
|
| |
|
|
2018
|
|
2017
|
|
Accounts payable
|
$
|
259,550
|
|
$
|
500,115
|
|
Accrued liabilities
|
|
850,906
|
|
|
441,000
|
|
|
$
|
1,110,456
|
|
$
|
941,115
|
5. LOANS PAYABLE
|
|
|
|
|
| |
|
|
2018
|
|
2017
|
|
Demand loans
|
$
|
417,364
|
|
$
|
417,364
|
|
Promissory notes
|
|
8,625
|
|
|
-
|
|
Interest payable
|
|
16,927
|
|
|
16,927
|
|
|
$
|
442,916
|
|
$
|
434,291
|
The demand loans are non-interest bearing, unsecured with no fixed terms of repayment.
The promissory notes bear interest rate of 10% per annum and are convertible to the Company’s shares at the Company’s option at a price to be agreed upon both the Company and the promissory note holders.
F-9
6. RELATED PARTY TRANSACTIONS
a.
The amount of $521,074 (December 31, 2017: $424,538) due to a director of the Company has no specific terms of repayment, is non-interest bearing and unsecured.
b.
The Company accrued management fees payable of $120,000 in total to a director of the Company for his services as an officer of the Company during the year ended December 31, 2018 (2017: $105,000).
c.
The Company accrued engineering fees payable of $nil in total to a director of the Company for his services during the year ended December 31, 2018 (2017: $15,000), which are included in research and development expense.
7. LEGAL LIABILITY
During 2000 to 2008, the Company’s former subsidiaries Northstar Technical Inc. (“NTI”) and Northstar Network Ltd. (“NNL”) received funding from Atlantic Canada Opportunities Agency (“ACOA”) to fund their projects. In 2013, ACOA filed claims against NTI, NNL and the Company for repayments of advances due to events of default. The advances and interests ACOA claimed totaled $3,079,475 CAD ($2,257,255). In accordance with the agreements signed between NTI, NNL and the Company, the Company was jointly and severally liable for the obligations. Further, the claim amount bears a daily interest of CAD $358 from February 15, 2013 to settlement. During the year ended December 31, 2018, the Company accrued interest in the amount of $100,834 (2017: $100,769).
|
|
|
|
|
|
| |
|
|
2018
|
|
2017
|
|
|
Legal liability
|
$
|
2,257,255
|
|
$
|
2,454,649
|
|
|
Interest payable
|
|
598,613
|
|
|
546,822
|
|
|
|
$
|
2,855,868
|
|
$
|
3,001,471
|
8. WARRANTS
Warrant activity for the years ended December 31, 2018 and 2017 is as follows:
|
|
|
|
|
| |
|
|
Number
of
Warrants
|
|
Exercise
Price
per Share
|
|
Weighted
Average
Exercise
Price
|
|
Balance December 31, 2016
|
829,940
|
|
$0.15 - $0.75
|
|
$0.64
|
|
Issued
|
2,500,000
|
|
$0.04
|
|
$0.04
|
|
Issued
|
1,827,500
|
|
$0.05
|
|
$0.05
|
|
Balance December 31, 2017
|
5,157,440
|
|
$0.60
|
|
$0.60
|
|
Expired
|
(1,827,500)
|
|
--
|
|
--
|
|
Issued
|
14,629,208
|
|
$0.05
|
|
$0.05
|
|
Balance December 31, 2018
|
17,959,148
|
|
|
|
$0.43
|
F-10
8. WARRANTS (continued)
As at December 31, 2018 the outstanding warrants were. :
|
|
|
|
|
| |
|
|
Exercise
|
|
Number of Warrants
|
|
Expiry Date
|
Price
|
|
2018
|
|
2017
|
|
Open (1)
|
$ 0.50
|
|
389,170
|
|
389,170
|
|
Open (1)
|
$ 0.75
|
|
389,170
|
|
389,170
|
|
Open (2)
|
$ 0.25
|
|
51,600
|
|
51,600
|
|
April 20, 2019
|
$ 0.04
|
|
2,500,000
|
|
2,500,000
|
|
December 25, 2018
|
$ 0.05
|
|
--
|
|
265,000
|
|
November 7, 2018
|
$ 0.05
|
|
--
|
|
1,562,500
|
|
April 23, 2020
|
$ 0.05
|
|
645,000
|
|
--
|
|
April 23, 2020
|
$ 0.05
|
|
850,000
|
|
--
|
|
September 30, 2020
|
$ 0.05
|
|
792,103
|
|
--
|
|
September 30, 2020
|
$ 0.05
|
|
500,000
|
|
--
|
|
September 30, 2020
|
$ 0.05
|
|
11,842,106
|
|
--
|
|
Total outstanding and exercisable
|
|
|
17,959,149
|
|
5,157,440
|
|
Weighted average outstanding life of
warrants (years)
|
|
|
1.35 - Open
|
|
0.94 - Open
|
(1)
These warrants were issued in 2005. The expiry date of the warrants are six months after the closing bid price for the common stock of the Company has been over $0.65 and $1.00 per share respectively for five consecutive trading days.
(2)
These warrants were issued in 2008 and they do not have an expiry date.
9. INCOME TAXES
Income taxes vary from the amount that would be computed by applying the estimated combined statutory income tax rate (21%) for the following reasons:
|
|
|
|
|
| |
|
|
2018
|
|
2017
|
|
Loss before income taxes
|
$
|
(257,946)
|
|
$
|
(639,125)
|
|
Income tax rate
|
|
21%
|
|
|
34%
|
|
Expected income tax recovery
|
|
(54,169)
|
|
|
(217,302)
|
|
Effect from change in tax rates
|
|
1,146,861
|
|
|
--
|
|
Change in valuation allowance
|
|
(1,092,692)
|
|
|
217,302
|
|
Provision for income taxes
|
$
|
--
|
|
$
|
--
|
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
|
|
|
|
|
| |
|
|
2018
|
|
2017
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
Non-capital loss
|
$
|
1,906,790
|
|
$
|
2,999,482
|
|
Less: change in valuation allowance
|
|
(1,906,790)
|
|
|
(2,999,482)
|
|
|
$
|
--
|
|
$
|
--
|
F-11
9. INCOME TAXES (continued)
The Company's carried losses for income tax purposes are $9,079,952 which may be carried forward to apply against future income tax. The future tax benefit of these loss carry-forwards has been offset with a full valuation allowance. These losses expire as follows:
|
|
| |
|
2026
|
$
|
681,591
|
|
2027
|
|
718,441
|
|
2028
|
|
1,791,899
|
|
2029
|
|
1,039,431
|
|
2030
|
|
1,272,447
|
|
2031
|
|
1,807,955
|
|
2032
|
|
864,013
|
|
2033
|
|
102,286
|
|
2034
|
|
(297,953)
|
|
2035
|
|
(332,517)
|
|
2036
|
|
535,288
|
|
2037
|
|
639,125
|
|
2038
|
|
257,946
|
|
|
$
|
9,079,952
|
The Company has adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” - an interpretation of SFAS 109. (FIN 48), as codified in ASC 740. ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions.
The Company did not file its U.S. federal income tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations for the years ended December 31, 2007 through 2018. Failure to furnish any information with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to certain civil penalties.
The Company did not file the information reports for the years ended December 31, 2007 through 2018 concerning its interest in foreign bank accounts on TDF 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBARs”). For not complying with the FBAR reporting and recordkeeping requirements, the Company is potentially subject to civil penalties up to $10,000 for each of its foreign bank accounts.
In addition, because the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe that it owes U.S. federal income taxes in respect to any transactions that the Company or any of its subsidiaries may have engaged in through December 31, 2018. However, there can be no assurance that the IRS will agree with the position, and therefore the Company ultimately could be held liable for U.S. federal income taxes, interest and penalties.
F-12
10. COMMON STOCK
During the year ended December 31, 2018, the Company issued 28,258,416 common shares for cash of $268,405. Included in these issuances were 14,629,208 attached warrants with an exercise price of $0.05 for a period of one to two years. No value was attributed to these warrants.
During the year ended December 31, 2018, the Company issued 1,000,000 common shares for services with a fair value of $10,000. Included in this issuance were 500,000 attached warrants with an exercise price of $0.05 for a period of two years. No fair value was attributed to the warrants as the $10,000 was determined to be the fair value of the service received.
During the year ended December 31, 2017, the Company issued 2,037,206 common shares on the conversion of 31,910 preferred Class B shares for $31,910.
During the year ended December 31, 2017, the Company issued, 6,905,000 common shares for cash of $62,535. Included in subscriptions receivable is $5,035, which was received subsequent to December 31, 2017.
During the year ended December 31, 2017, the Company issued 2,750,000 common shares for services with a fair value of $29,500. Included in these issuances were 1,750,000 attached warrants with an exercise price of $0.04 per common stock for a period of two years. The fair value of warrants was determined to be $15,933 using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield - 0%, volatility - 282%, risk-free rate - 1%, and expected life - 2 years.
Preferred Shares
Issued for cash:
All classes of the preferred shares bear interest at 10% per annum paid semiannually 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 December 31, 2018, the outstanding number of preferred Classes A, B and C shares are 582,716 Class A (December 31, 2017: 582,716), 15,000 Class B (December 31, 2017: 15,000) and nil Class C (December 31, 2017: nil), respectively.
11. LOSS PER SHARE
The potentially dilutive securities that were excluded from the earnings (loss) per share calculation consist of 17,959,148 warrants (2017: 5,157,440). The warrants and any preferred share conversions would be antidilutive and therefore excluded.
F-13