Condensed
Notes to the Interim Consolidated Financial Statements
June
30, 2016
(Amounts
expressed in US Dollars)
1.
GENERAL
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a)
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Description
of the Business
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First
National Energy Corporation (the “Company”) was incorporated in the State of Delaware on November 16, 2000, under
the name Capstone International Corporation. On March 28, 2004, the Company changed its name to First National Power Corporation.
On February 12, 2009, the Company relocated its charter to the State of Nevada and changed its name to First National Energy Corporation.
As part of reorganization, the Company increased its authorized capital to 300 million common shares and effected a 100 for 1
reverse stock split of its issued and outstanding shares of common stock. The accompanying consolidated financial statements reflect
all share data based on the 100 for 1 reverse common stock split.
The
Company’s business purpose is the provision of wind-driven solutions for power generation. Current projects for the Company
are the completion of power generation projects from supplemental wind generation technologies.
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b)
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Purchase
of Technology License
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On
April 20, 2009, the Company entered into a preliminary letter of intent with Boreas Research Corporation (“Boreas”),
a Florida corporation, pursuant to which the Company would acquire a territorial license to Supplemental Wind Energy Generator
(“SWEG”) and certain rights in alternative energy technology of Boreas, in exchange for a quantity of newly issued
common shares of the Company. The letter of intent was superseded by a Technology License and Stock Purchase Agreement (the “Agreement”)
between the Company and Boreas that was consummated on May 25, 2009 (the “Closing”), at which time the Company issued
to the stockholders of Boreas 98,800,000 restricted and unregistered common shares of the Company and agreed to pay certain future
royalties to Boreas from net revenues realized by the Company from the technology license. The consideration issued in the transaction
was determined as a result of arm’s-length negotiations between the parties.
The
preliminary letter of intent was disclosed by the Company on Form 8-K to the Securities and Exchange Commission (“SEC”)
on April 21, 2009, and the Agreement was annexed to an information statement on Form 14-C filed with the SEC in preliminary and
definitive forms on April 22, 2009 and May 4, 2009, respectively. The definitive information statement was mailed to the Stockholders
of the Company on May 4, 2009. The Company obtained written consent to the Agreement and the transaction from the holders of 55.82%
of its issued and outstanding shares of common stock in lieu of a meeting of stockholders.
On
May 14, 2009, the Company and Boreas amended the Agreement by making and entering into a First Amendment of Technology License
and Stock Purchase Agreement (the “Amendment”), pursuant to which (1) Boreas elected, as authorized by the Agreement,
to cause the restricted and unregistered common shares of the Company due to Boreas at the Closing to be issued to the stockholders
of Boreas, and (2) the Company and Boreas agreed to reduce the number of restricted and unregistered common shares of the Company
to be issued at the closing of the transaction, from 98,915,000 shares to 98,800,000 shares.
In
exchange for the Company acquiring the technology license from Boreas at the Closing pursuant to the Agreement, as subsequently
amended, the stockholders of Boreas received an aggregate of 98,800,000 restricted and unregistered common shares of the Company’s
common stock.. No finder’s fees were paid or consulting agreements entered into by the Company in connection with the transaction.
First
National Energy Corporation
Condensed
Notes to the Interim Consolidated Financial Statements
June
30, 2016
(Amounts
expressed in US Dollars)
Prior
to the transaction, there were no material relationships between the Company and Boreas, between Boreas and the Company’s
affiliates, directors or officers, or between any associates of Boreas and the Company’s officers or directors. All of the
Company’s transaction liabilities were settled on or immediately following the Closing.
Upon
the Closing on May 25, 2009, the Company was no longer deemed to be a "shell company" as defined in Rule 12b-2 under
the Securities Exchange Act of 1934 (the "Exchange Act"). Accordingly, the Company filed an amended current report on
Form 8-K/A with the SEC on May 26, 2009, setting forth the information that would be required if the Company were filing a general
form for registration of securities on Form 10 under the Exchange Act.
On
April 18, 2011, the Company entered into a Novation Agreement (the "Novation") with all of the stockholders of Boreas,
revising the structure of the May 25, 2009 transaction. The Novation amended the Technology License and Stock Purchase Agreement
(the “Original Agreement”) to substitute the stockholders of Boreas as the licensor under the Original Agreement.
Accordingly,
as of June 30, 2016, the Boreas stockholders own 99.13% of the Company’s 99,665,228 outstanding shares .
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c)
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Further
Purchase of Technology License from Pavana
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On
March 22, 2010, Pavana Power Corporation (“Pavana”), a Nevada corporation, the Company’s 99.9% owned subsidiary,
acquired an exclusive territorial 25 year license for the Republic of India (“India”), from Boreas, pursuant to which
the Company’s subsidiary acquired technology rights for India in the technology of Boreas that maximizes the energy productivity
of existing wind turbines by capturing energy that flows through and underneath existing wind turbine systems. The consideration
due from the Company’s subsidiary to Boreas for the license is a deferred cash payment of $600,000, and a future royalty
equal to 5% of the subsidiary’s “EBITDA” (earnings before interest, taxes, depreciation and amortization) from
exploitation of the acquired license.
The
transaction between related corporations was valued at the amount of the monetary consideration that was provided to Boreas.
2.
GOING CONCERN
The
Company’s interim consolidated financial statements are prepared using accounting principles generally accepted in the United
States of America and applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities
in the normal course of business. However, the Company has not generated any revenues from its planned principal operations through
June 30, 2016 and has recorded losses since inception, has negative working capital, has yet to achieve profitable operations
and expects further losses in the development of its business. There can be no assurance that the Company will have adequate capital
resources to fund planned operations or that any additional funds will be available to the Company when needed, or if available,
will be available on favorable terms in the amounts required by the Company. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The interim consolidated financial statements do not include any adjustments
that might result from this uncertainty.
First
National Energy Corporation
Condensed
Notes to the Interim Consolidated Financial Statements
June
30, 2016
(Amounts
expressed in US Dollars)
Management
has plans to raise cash through debt offerings once the sales of the technologies begin. The personnel, facilities and equipment
required for successfully completing the business model have been identified but until the resources are available, have not been
acquired or engaged. In the period prior to the onset of operations, the Company will undertake to raise further cash through
further capital offerings. There is no assurance that the Company will be successful in raising additional capital.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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a)
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Basis
of Presentation and Consolidation
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The
interim consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary First National Energy
(Canada) Corporation and its majority owned subsidiary. All material inter-company amounts have been eliminated.
The
accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and with the instructions to Form
10-Q and Article 8-03 of Regulation S-X related to smaller reporting companies.
The
unaudited interim consolidated financial statements should be read in conjunction with the financial statements and Notes thereto
together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s
annual report on Form 10-K for the year ended December 31, 2015. In the opinion of management, the accompanying interim consolidated
financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position
of the Company at June 30, 2016, the results of its operations for the three months ended June 30, 2016 and 2015, and its cash
flows for the three months ended June 30, 2016 and 2015. In addition, some of the Company’s statements in its quarterly
report on Form 10-Q may be considered forward-looking and involve risks and uncertainties that could significantly impact expected
results. The results of operations for the three months ended June 30, 2016 are not necessarily indicative of results to be expected
for the full year.
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b)
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2016
Omnibus Equity Compensation Plan
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On
February 1, 2016, the Board of Directors approved the 2016 Omnibus Equity Compensation Plan (“Stock Option Plan”)
for employees and non-employees. The Stock Option Plan reserves up to five million shares of common stock for issuance.
All
awards granted to employees and non-employees after February 1, 2016 are valued at fair value by using the Black-Scholes option
pricing model and recognized on a straight line basis over the service periods of each award. The Company accounts for equity
instruments issued in exchange for the receipt of goods or services from other than employees using the estimated fair market
value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable.
The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or services.
If
there is a modification of the terms of an award, either by repricing or extending the expiry of the award, the award is re-measured.
If the modification results in an increase in the fair value of the new award as compared to the old award immediately prior to
the modification, the excess fair value is recognized as compensation expense.
First
National Energy Corporation
Condensed
Notes to the Interim Consolidated Financial Statements
June
30, 2016
(Amounts
expressed in US Dollars)
As
of June 30, 2016, there was $nil of recognized expense related to non-vested stock-based compensation arrangements granted.
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4.
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LICENSES
FOR TECHNOLOGY
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2016
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2015
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Cost
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Accumulated
Amortization
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Net
Book Value
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Net
Book Value
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North
American Technology License
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$
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100
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$
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-
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$
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100
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$
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100
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Indian
Technology License
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100
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-
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100
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100
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$
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200
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$
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-
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$
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200
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$
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200
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Effective
February 16, 2016, the Company acquired VAWT/VRTB/Bolotov Rotor wind turbine technology (“Technology”) from Bolotov
and affiliates (“Serge Bolotov”). The technical and intellectual property were designed, patented, developed and manufactured
by Serge Bolotov.
The
Company valued this technology under the guidance of ASC 350. The purchase consideration is based on the future economic viability
of this intellectual property which on the date of acquisition cannot be measured reliably. In accordance with ASC 350, because
there are no upfront cash consideration for this intellectual property, hence the Company has recorded the technology at a nominal
value of $1.
The
future compensation to Serge Bolotov consists of;
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●
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10%
of all royalties for all revenues generated by sale of this technology.
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●
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A
purchase bonus of $1,000,000 to be paid out of 11% of the net profits from the intellectual property.
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(See
also note 10 (b))
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In the event the Company or a related
or assigned party does not use the assets transferred in the transaction within a period of 3 years from either the date the memorandum
is accepted as a final agreement or the date of a Definitive Agreement, the Bolotov will have the right, but not the obligation,
to purchase all unused assets, following ten (10) days written notice to the Company or a related or assigned party for the amount
of US $5,000
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6.
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LOAN
PAYABLE TO RELATED PARTY
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On
March 22, 2010, the Company acquired an exclusive territorial 25 year SWEG Technology license for India, from Boreas. The stockholders
of Boreas hold a controlling interest in the Company. The technology of Boreas maximizes the energy productivity of existing wind
turbines by capturing energy that flows through and underneath existing wind turbine systems. The consideration due from the Company
to Boreas for the license was a deferred cash payment of $600,000, and a future royalty equal to 5% of the subsidiary’s
“EBITDA” (earnings before interest, taxes, depreciation and amortization) from exploitation of the acquired license.
On
November 8, 2010, Pavana Power Corporation paid Boreas $60,000 as a payment due under the India technology license agreement,
leaving a balance of cash consideration due of $540,000. The remaining debt is non-interest bearing and is due on demand.
First
National Energy Corporation
Condensed
Notes to the Interim Consolidated Financial Statements
June
30, 2016
(Amounts
expressed in US Dollars)
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7.
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RELATED
PARTY TRANSACTIONS
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Transactions
with related parties are incurred in the normal course of business and are measured at the exchange amount which is the amount
of consideration established by and agreed to by the related parties.
In
2010, the Company’s majority owned subsidiary Pavana Power Corporation, purchased the Indian license to the SWEG technology
from Boreas, which is related by virtue of common control. (See note 1 (c)).
A
director of the Company has advanced monies to the Company to pay certain expenses. The advances are non-interest bearing and
are due on demand. The amount owing to the director was $119,917 ($110,234 – 2015).
The
Company, after reviewing its operating systems, has determined that it has no reportable segment and geographic segment. The Company’s
operations are all related to the provision of wind-driven solutions for power generation. All assets of the business are located
in the United States of America.
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9.
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FAIR
VALUE MEASUREMENTS
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The
Company follows ASC 820-10, “Fair Value Measurements and Disclosures” (ASC 820-10), which among other things, defines
fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability
category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been
established, which prioritizes the inputs used in measuring fair value as follows:
●
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities
at the measurement date.
Fair
valued assets that are generally included in this category are cash and cash equivalents comprised of money market funds, restricted
cash and short-term investments.
●
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly
observable for the asset or liability through correlation with market data at the measurement date and for the duration of the
instrument’s anticipated life.
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Level 3—Inputs reflect management’s best estimate of what market participants would
use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique
and the risk inherent in the inputs to the model.
At
June 30, 2016, the only asset measured at fair value using level 1 of the three fair value hierarchy tiers described above was
cash of $1,059 ($1,937 – 2015) and accounts payable and accrued liabilities of $21,269 ($47,853 – 2015), loan payable
to director and loan payable to related party are measured using amortized cost at level 2. The Company did not have any fair
value assets or liabilities classified as level 3.
First
National Energy Corporation
Condensed
Notes to the Interim Consolidated Financial Statements
June
30, 2016
(Amounts
expressed in US Dollars)
Liquidity
risk:
The
Company monitors its liquidity position regularly to assess whether it has the funds necessary to fulfill planned commitments
on its alternative energy technology or viable options are available to fund such commitments from new equity issuance or alternative
sources such as debt financing. However, as a development stage company and without significant internally generated cash flow,
there are inherent liquidity risks, including the possibility that additional financing may not be available to the Company, or
that actual development expenditures may exceed those planned. The current uncertainty in global markets could have an impact
on the Company’s future ability to access capital on terms that are acceptable to the Company. The Company has so far been
able to raise the required financing to meet its obligations on time.
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a)
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Pursuant to Note 1 (c), under
the Technology License purchased by Pavana, the Company has a commitment for royalties
at the rate of 5% for all revenues derived by Pavana using this technology.
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b)
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Pursuant to the purchase of
intellectual property from Serge Bolotov, the Company has a commitment for royalties
at the rate of 10% for all revenues generated by the sale of this technology and a purchase
bonus of $1,000,000 to be paid out of 11% of the net profits from the intellectual property.
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c)
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Following
completion of sufficient funding of the Company or related or assigned party, the following
shall occur
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a.
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Serge
Bolotov will be paid the sum of Cdn $8,000 per month in cash or shares, as long as Bolotov
is needed to consult with the Company or a related or assigned party
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b.
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The
Company or related or assigned party will provide research and development facility with
support staff.
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d)
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The
Company or a related or assigned party will act to appoint Serge Bolotov as a member
of the Board of Directors. Upon successful appointment to the Board, the Company or a
related or assigned party will issue Bolotov 100,000 common shares in consideration for
his Board of Director appointment.
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The
Company’s capital management objective is to secure the ability to continue as a going concern and to optimize the cost
of capital in order to enhance value to shareholders. As part of this objective the Company seeks to maintain access to loan and
capital markets at all times. The Board of Directors reviews the capital structure of the Group on a regular basis.
Capital
structure and debt capacity are taken into account when deciding new investments. Practical tools to manage capital include application
of dividend policy, share buybacks and share issuances. Debt capital is managed considering the requirement to secure liquidity
and the capability to refinance maturing debt.
The
Group’s internal capital structure is reviewed on a regular basis with an aim to optimize the structure e.g. by applying
internal dividends and equity adjustments. Net investment in foreign entities is monitored and the Company has the intent to hedge
related translation risk.
As
at the date of these financial statements the Company does not have any interest-bearing debt.