Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
|
1.
|
NATURE
OF OPERATIONS AND PURCHASE OF TECHNOLOGY
|
a)
Nature of operations
First
National Energy Corporation (the “Company”) was incorporated in the State of Delaware on November 16, 2000.
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 The letter of intent was superseded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 98.60% of the Company’s 100,225,228 outstanding
common shares. No finder’s fees were paid or consulting agreements entered into by the Company in connection with the transaction.
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.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
|
1.
|
NATURE
OF OPERATIONS AND PURCHASE OF TECHNOLOGY (cont’d)
|
b)
Purchase of Technology License (cont’d)
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 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
September 30, 2018 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.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
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.
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
a)
Basis of presentation and Consolidation
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, 2017. 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, 2018, the results of its operations for the six months ended September 30,
2018 and 2017, and its cash flows for the six months ended September 30, 2018 and 2017. 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 six months ended September 30, 2018 are not necessarily
indicative of results to be expected for the full year.
The
preparation of financial statements for any period involves the use of estimates as the precise determination of assets and liabilities,
and revenues and expenses, depends on future events. Actual amounts may differ from these estimates. Significant estimates include
the valuation of allowances for deferred tax assets.
The
Company’s financial instruments consist of cash, accounts payable and accrued liabilities, and loans payable to related
party and to director. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant
interest, or credit risks arising from these financial instruments. The fair values of these financial instruments approximate
their carrying values due to the relatively short period to maturity for these instruments.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
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.
●
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.
●
Level 3—Unobservable 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.
Assets
and liabilities measured at fair value as of September 30, 2018 and December 31, 2017 are classified below based on the three
fair value hierarchy tiers described above:
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Cash
|
|
|
11
|
|
|
|
11
|
|
|
|
644
|
|
|
|
644
|
|
|
Accounts
payable and accrued liabilities
|
|
|
41,181
|
|
|
|
41,181
|
|
|
|
36,118
|
|
|
|
36,118
|
|
|
Loan
payable to director
|
|
|
156,169
|
|
|
|
156,169
|
|
|
|
149,716
|
|
|
|
149,716
|
|
|
Loan
payable to related party
|
|
|
540,000
|
|
|
|
540,000
|
|
|
|
540,000
|
|
|
|
540,000
|
|
Cash
has been measured using Level 1 of the fair value hierarchy. Accounts payable and accrued liabilities, loans payable to related
party and director have been measured using Level 3 of the fair value hierarchy.
The
Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. The Company provides a valuation allowance for deferred
tax assets for which it does not consider realization of such assets likely.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Net
operating loss carry-forwards and other deferred tax assets are reviewed annually for recoverability, and, if necessary, are recorded
net of a valuation allowance.
Comprehensive
loss includes all changes in equity during a period from non-owner sources.
Intangible
assets include the technology licenses which are amortized over the estimated useful life of 10 years on a straight- line basis.
However, since these licenses were previously written down to a nominal value, no amortization was recognized during the period
for accounting purposes.
Basic
loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted
loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus common stock
equivalents (if dilutive). As of September 30, 2018, there were no common stock equivalents.
|
h)
|
Stock-Based
Compensation
|
The
Company accounts for equity instruments issued in exchange for the receipt of goods or services from parties other than employees
using the estimated fair market value of the consideration received or 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. As of
September 30, 2018, the unrecognized expense related to stock-based compensation, and stock -based compensation expense relating
to all employees and non-employees were $nil and $nil for the 6-month periods ended September 30, 2018 and 2017 respectively.
The
parent Company maintains its books and records in U.S. dollars which is its functional and reporting currency. One of the Company’s
operating subsidiary is a foreign private company and maintains its books in Canadian dollars (the functional currency). The subsidiary’s
financial statements are converted to US dollars for consolidation purposes. The translation method used is the current rate method,
where the functional currency of the subsidiary is the foreign currency. Under the current rate method all assets and liabilities
are translated at the current rate, stockholders’ equity is translated at historical rates and revenues and expenses are
translated at average rates for the year. Due to the dormant status of the wholly owned subsidiary, there have been no adjustments
for the past years.
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
j)
Non-controlling Interest
Non-controlling
interests in the Company’s subsidiaries are recorded in accordance with the provisions of ASC 810 and are reported as a
component of equity, separate from the Company’s equity.
k)
Recent Accounting Pronouncements
FASB
ASU 2017-11 “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815)” - In July 2017, the FASB issued 2017-11. The guidance eliminates the requirement to consider “down round”
features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s
own stock. Our warrants issued with our convertible notes are treated as derivative instruments, because they include a “down
round” feature. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within
those years, with early adoption permitted. Early adoption of this guidance could have a significant impact on our financial statements,
as it would effectively eliminate the warrant derivative liability and the gain or loss from changes in the fair value of the
warrant derivative liability. We do not expect this ASU to have a significant impact on our consolidated financial statements
and related disclosures.
FASB
ASU 2017-09 “Scope of Modification Accounting (Topic 718)” - In May 2017, the FASB issued 2017-09. The guidance clarifies
the accounting for when the terms of a share-based award are modified. The ASU is effective for annual reporting periods beginning
after December 15, 2017, and for interim periods within those years, with early adoption permitted. This new guidance would only
impact our consolidated financial statements if, in the future, we modified the terms of any of our share-based awards.
FASB
ASU2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.118” – In March 2018,
the amendments provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Cuts
and Jobs Act, and also require any provisional amounts or subsequent adjustments to be included in net income. Additionally, ASU
2018-05 discusses required disclosures that an entity must make with regard to the Tax Reform Act. ASU2018-05 is effective immediately
as new information is available to adjust provisional amounts that were previously recorded. We do not expect this ASU to have
a significant impact on our consolidated financial statements and related disclosures.
4.
LICENSES FOR TECHNOLOGY
Licenses
are recorded at carrying amount. No amortization was recorded during the year.
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Cost
|
|
|
Net
Book Value
|
|
|
Net
Book Value
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
North American
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology License
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
Indian Technology
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
License
|
|
|
200
|
|
|
|
200
|
|
|
|
200
|
|
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
5.
LOAN PAYABLE TO RELATED PARTY
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 through their controlling interest in First National Energy Corporation. 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 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 Pavana 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.
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.
6.
CAPITAL STOCK
a)
Authorized
300,000,000
Common shares, $0.001 per value
b)
Issued
100,225,228
Common shares (2017: 100,195,228 Common shares) valued at $100,125 (2017: $100,195)
7.
INTANGIBLE ASSET
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:
|
|
-
|
10%
of all profits generated by sale of this technology as royalties
|
|
|
-
|
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)
|
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
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.
8.
LOAN PAYABLE TO DIRECTOR AND RELATED PARTY TRANSACTIONS
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 are non-interest bearing and
is due on demand. The amount owing to the director was $156,169 ($149,716 in 2017).
9.
SEGMENT DISCLOSURE
The
Company, after reviewing its reporting systems, has determined that it has one 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.
10.
COMMITMENT AND CONTINGENCIES
|
a)
|
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.
|
|
|
|
|
b)
|
Pursuant
to the purchase of intellectual property from Serge Bolotov (the “vendor”), the Company has the following commitments
related to the purchase:
|
|
|
i.
|
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.
|
|
|
|
|
|
|
ii.
|
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.
|
|
|
|
|
|
|
iii.
|
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 September 30, 2018 the vendor has not yet been appointed
to the Board.
|
FIRST
NATIONAL ENERGY CORPORATION
Notes
to Interim Consolidated Financial Statements
September
30, 2018
(Amounts
expressed in US Dollars)
|
|
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.
At the time of filing, the Company is delinquent in their payments.
|
|
|
|
|
d)
|
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.
|
11.
CAPITAL MANAGEMENT
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. No share buybacks have occurred or are currently contemplated. Debt capital is managed considering
the requirement to secure liquidity and the capability to refinance maturing debt.
On
September 30, 2018 the Company had no interest-bearing debt.
12.
FINANCIAL INSTRUMENTS
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.
13.
2017 OMNIBUS EQUITY COMPENSATION PLAN
In
February 2017, the Company adopted the 2017 Omnibus Equity Compensation Plan. 5,000,000 shares of common stock were reserved pursuant
to the Omnibus Equity Compensation Plan. As at September 30, 2018, the Company has issued 30,000 shares of common stock under
this plan.