Notes
to Interim Consolidated Financial Statements
September
30, 2017
(Amounts
expressed in US Dollars)
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1.
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NATURE
OF OPERATIONS AND PURCHASE OF TECHNOLOGY
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a)
Nature of operations
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 its 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.
b)
Purchase of Technology License
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 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 The letter of intent was superseded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 new 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 reported 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.
In
exchange for the Company acquiring the technology license from Boreas at the Closing pursuant to the Agreement (as amended by
the Amendment), the Stockholders of Boreas received an aggregate of 98,800,000 new restricted and unregistered common shares of
the Company’s common stock. Accordingly, the Boreas Stockholders now own 98.93% of the Company’s 99,865,228 outstanding
common shares. No finder’s fees were paid or consulting agreements entered into by the Company in connection with the transaction.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2017
(Amounts
expressed in US Dollars)
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1.
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NATURE
OF OPERATIONS AND PURCHASE OF TECHNOLOGY (cont’d)
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b)
Purchase of Technology License (cont’d)
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, First National Energy Corporation (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 by which the Company acquired a
territorial license to certain rights in alternative energy technology of Boreas, in exchange for a quantity of newly issued common
shares of the Company. 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.
c)
Further Purchase of Technology License
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
Company’s 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 September
30, 2017 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 consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Management
has plans to raise cash through debt offerings once the sales of the technologies begin. The 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.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2017
(Amounts
expressed in US Dollars)
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3.
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SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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a)
Basis of Presentation and Consolidation
The
unaudited interim consolidated financial statements include the accounts of First National Energy Corporation, its wholly-owned
subsidiary First National Energy (Canada) Corporation and its 99.99% owned subsidiary Pavana Power Corporation. 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, 2016. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the
financial position of the Company at September 30, 2017, the results of its operations for the three months ended September 30,
2017 and 2016, and its cash flows for the three months ended September 30, 2017 and 2016. 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 September 30, 2017 are not necessarily
indicative of results to be expected for the full year.
b)
2016 Omnibus Equity Compensation Plan
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.
As
of September 30, 2017, there was $nil of recognized expense related to non-vested stock-based compensation arrangements granted.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2017
(Amounts
expressed in US Dollars)
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4.
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LICENSES
FOR TECHNOLOGY
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2017
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2016
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Cost
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Net
Book Value
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Net
Book Value
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North
American Technology License
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$
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100
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$
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100
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$
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100
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Indian
Technology License
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$
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100
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$
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100
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$
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100
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Total
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$
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200
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$
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200
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$
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200
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Effective
February 5, 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,
Intangibles-Goodwill and Other
which states that an intangible
asset that is acquired either individually or with a group of other assets shall be initially measured based on its fair value.
As there is no active market and the future cash flows and economic viability of this intellectual property are uncertain and
cannot be measured reliably, no value was assigned to the technology.
The
future compensation to Serge Bolotov consists of:
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-
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10%
of all profits generated by sale of this technology as royalties
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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. (See also note 11)
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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 the date the memorandum of understanding was accepted as a final agreement on February 5
th
2016, Serge
Bolotov will have the right, but not the obligation, to purchase all unused assets, following ten 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 Supplemental Wind Energy Generator (“SWEG”)
Technology license for the Republic of India (“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 an underneath existing wind turbine systems. The consideration due from the Company to Boreas 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, the subsidiary 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
Notes
to Interim Consolidated Financial Statements
September
30, 2017
(Amounts
expressed in US Dollars)
On
October 28, 2016, Boreas assigned its loan receivable due from the Company to one of the Company’s shareholders. The amount
previously owed by the Company to Boreas is now owed to a shareholder of the Company. The loan to shareholder is non-interest
bearing, is due on demand and has no security or conversion features.
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7
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LOAN
PAYABLE TO DIRECTOR AND 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.
A
director of the Company has advanced monies to the Company to pay certain expenses. The advances have no interest rate and is
due on demand. The amount owing to the director was $145,331 ($125,117 in 2016).
a)
Authorized
300,000,000
Common shares, $0.001 per value
b)
Issued
99,915,228
Common shares (2016: 99,865,228 Common shares) valued at $99,815 (2016: $99,765)
In
2017, the Company offered up to 500,000 shares of common stock at a price of $0.50 per share, $.0001 par value (the “Offering”).
On January 27, 2017, in connection with the Offering, the Company issued and sold on a private placement basis, 50,000 shares
at a price of $0.50 per share for total proceeds of $25,000. Financing expenses in the amount of $5,000 pursuant to the private
placement were recorded as a reduction in additional paid-in capital.
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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10.
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COMMITMENT
AND CONTINGENCIES
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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 5% of earnings
before interest, taxes, depreciation and amortization (“EBITDA”) 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 “vendor”), the Company has the following commitments
related to the purchase:
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i.
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As
consideration for the transaction, the vendor shall be paid 10% of the profits realized by the Company or a related or assigned
party and a signing bonus of $1,000,000 to be derived from 11% of the initial profits from the intellectual property.
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ii.
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Following
completion of sufficient funding of the Company or related or assigned party, the following shall occur: the vendor will be
paid the sum of $8,000 CAD per month in cash or shares, as long as the vendor is needed as a consultant with the Company or
a related or assigned party. The Company or related or assigned party will provide research and development facility with
support staff.
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FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2017
(Amounts
expressed in US Dollars)
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iii.
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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 the vendor 100,000 common shares as compensation
for his Board of Director appointment and Director services. As at December 31, 2016, the vendor has not yet been appointed
to the Board.
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iv.
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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 the vendor 100,000 common shares as compensation
for his Board of Director appointment and for Director services. As of September 30, 2017, the vendor has not yet been appointed
to the Board.
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c)
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Effective
February 1, 2016, the Company executed an agreement with legal counsel to pay a monthly fee of $2,500 commencing February
1, 2016 with respect to legal matters of securities regulation, private placements, corporate governance, and related matters
in connection with the Company. The two parties reserve the right to terminate or withdraw from the agreement at any time.
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d)
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Pursuant
to Note 1 (b), under the Technology License and Stock Purchase Agreement signed with Boreas, the Company agreed to pay certain
future royalties to Boreas from net future revenues realized by the Company from the technology license.
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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 and the Company may consider share buybacks and
share issuances as other strategies. Debt capital is managed considering the requirement to secure liquidity and the capability
to refinance maturing debt.
On
September 30, 2017, the Company had no interest-bearing debt.
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12.
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FINANCIAL
INSTRUMENTS
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The
Company is exposed to risks that arise from its use of financial instruments. This note describes the Company’s objectives,
policies and processes for managing those risks and the methods used to measure them.
Foreign
exchange risk:
The
Company’s subsidiary conducts its activities in Canadian dollars. The Company is therefore subject to gains or losses due
to fluctuations in Canadian currency relative to the US dollar. The Company has no exposure to this given its limited activity
and assets through the year.
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, 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. The Company continues to pursue potential investees and have already secured additional equity
financing from investors subsequent to the period end.