FNEC First National Energy Corp (PK)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Plan of Operation in the Next Twelve Months

Product Development

Subject to our financial constraints, we intend to continue the development and refinement of our approach to the market. Our focus is on developing a single product line the Supplementary Wind Energy Generation Unit, and to bundle it with other services including installation and maintenance, to make the acquisition of the bundle more attractive than just an additional source of revenue.

We plan to hone the design of a unique supplemental new wind turbine system over the next nine to twelve months, by upgrading and finalizing our existing designs. The resulting cost of energy should, therefore, be significantly lower than traditional wind power systems. These design and performance features to be developed and utilized in production models of our supplemental wind energy systems should further enhance our leadership position in technology development in the small wind power industry.

We believe that there is currently no or limited competition in the markets we plan to pursue, and there is an increasing demand due to the rising levels of installed wind energy capacity worldwide.

We will strive to achieve rapid growth through strategic alliances with existing wind energy service providers, with a view to bundling our products with products and services already being provided to existing wind energy facilities by such potential strategic partners.

Locate Suitable Administrative and Assembly Facilities

We plan to move to a new facility in fiscal 2016 in order to accommodate our operations and plans for expansion. We are currently seeking office and assembly/test space where we can perform testing and final assembly of our supplemental wind energy systems. Our site selection criteria will include available tax credits and incentives.

We expect to rely on outside manufacturing partners for the manufacturing of all key system components. We plan to then perform final assembly, test, and packaging internally at our facilities. No one manufacturing partner will provide all components, thus allowing us to better ensure our protection of our intellectual property and trade secrets. We plan to create a highly efficient assembly facility with sufficient space to accommodate our expansion plans. We feel that our cost of manufacturing will decrease drastically as we utilize common processes and suppliers. We also intend to implement a quality assurance program and promote communication with design engineers to identify possible enhancements of our products as the manufacturing process evolves.

We further believe that with higher volume, better purchasing, and improved manufacturing outsourcing, we could significantly reduce our anticipated cost of goods. We view continuous improvement in quality and cost as a key priority for long term success.

Sales and Distribution Strategy

Our goal is for our supplemental wind energy systems to become leading products in the wind power marketplace in North America and internationally. In order to achieve our goal, we intend to increase awareness of our products with potential customers, who we anticipate will primarily be those who operate or are planning the development of significant wind energy resources. We expect, but cannot guarantee, that large industry participants will be a significant market. 

Our goal is to retain ownership of our installed products, dividing the energy output with the host facility in return for a license to locate our turbine assemblies on their turbine poles and sell the power produced by our assemblies through the host’s interconnection and sale arrangements with transmission providers and power purchasers. However, we will also be seeking facilities that will do a sale-leaseback for the SWEG unit, allowing the lender to take advantage of any government incentives for investments in green energy products.

Our intent is to produce and ship 25 supplemental wind energy systems during the fiscal year ending December 31, 2016. At present we expect that it will take us approximately 8 weeks to build and ship a system after our design and specifications are finalized. Our goal is to reduce this time to 3 weeks from contract to installation. No assurances can be provided that we will meet our objectives.

North America

North American revenues are expected to benefit from the increasing availability of incentive programs and higher energy costs. With a high-quality line of wind turbine assemblies and an aggressive program of industry affiliations and promotion, we plan to establish and then expand our North American network of revenue producing locations. This strategy offers the potential for rapid revenue growth with strategic partners which have well-established relationships with potential customers.

We intend to promote brand name recognition for our products in the industry. Initial advertising may occur through industry publications and attendance at targeted trade shows. We expect the message that our supplemental wind energy systems provide stable and reliable outputs, particularly if bundled with high quality maintenance and repair services, will receive a strong response.

Strategic partners are an important aspect in our sales and distribution strategy. Potential partners include companies that build and maintain large-scale wind energy farms throughout North America, who provide a vital link to potential end users of renewable energy equipment and are well placed to recommend our products, particularly if bundled with services already being provided by such partners to such end users.

We have identified several potential strategic partners that are interested in adding the marketing and possible bundling of our supplemental wind energy systems to their operations.

International - Beyond North America

We intend to develop our international marketing beyond North America in stages. The first stage will utilize an additional license of our proprietary technology for a specific foreign market with a vibrant and expanding wind energy market, to be followed by establishing a joint venture relationship with a strategic partner in the foreign market. The research, planning, and relationship-building to support the extension of our business to the first such foreign market will begin in the fiscal 2016 year. Over time, we expect to replicate this strategy sequentially in other foreign markets, and may possibly partner with manufacturers in such foreign markets to reduce costs.

Sales Personnel

At present our sales staff consists of our management. We expect to hire additional employees over the next twelve months, including a management level operations director.

Sergey Bolotov and affiliates

On February 3, 2016, the Company entered into a Memorandum of Understanding with Sergey Bolotov and affiliates. Sergey Bolotov designed, patented, developed, and manufactured the VAWT/VRTB/Bolotov Rotor wind turbine and agreed to transfer all technical and intellectual related property related to the VAWT/VRTB/Bolotov Rotor wind turbine to the Company. In addition, Sergey Bolotov agreed to assign all patents, designs, drawings, blueprints, plans, images, promotional material, websites, and anything else that could be useful in marketing and distributing the VRTB technology (collectively, the “Assets”).

As compensation for the Assets, Sergey Bolotov will be paid ten percent (10%) of the Company profits arising from the Assets and realized by the Company, provided that Sergey Bolotov continues to consult with the Company. In addition, Sergey Bolotov will receive a signing bonus of One Million Dollars ($1,000,000) solely derived from Eleven percent (11%) of the initial profits realized by the Company from the Assets. Further, Sergey Bolotov will be appointed as a member of the Board of Directors and will be issued One Hundred Thousand shares of Company common stock upon such appointment. As of the date of this filing, Mr. Bolotov has not been appointed. Subsequently, Sergey Bolotov will consult with the Company and, upon the Company receiving sufficient funding, Sergey Bolotov will receive a consulting fee of Eight Thousand Dollars ($8,000 Canadian) monthly as well research and development facility with support staff.

On February 5, 2016, pursuant to the terms and conditions of the Memorandum of Understanding, the Company and Sergey Bolotov agreed to accept the Memorandum of Understanding as binding and the Board of Directors of the Company ratified the Memorandum of Understanding as binding on February 9, 2016.

Expenses

We estimate the costs to implement our business strategy over the following twelve months to be:

Significant Equipment

The Company plans to purchase approximately $75,000 in capital equipment over the next twelve months, including various tenant improvements, a forklift to support our assembly operations, materials for assembly jigs, and various electronic and mechanical testing devices.

Development Costs.

As more particularly described in Note 3(c) of the accompanying financial statements, the Company is expensing development costs, rather than capitalizing them, until the Company has a reasonable expectation of revenues.

On May 25, 2009, the Company acquired technology license rights valued at $100 (as restated) in exchange for 98,800,000 new restricted shares of the Company’s common stock, which were issued as more particularly described in Note 1(b) of the accompanying consolidated financial statements.

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 Research Corporation (‘Boreas”, the stockholders of whom hold controlling interests in the Company), 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 was a deferred cash payment of $600,000, and a future royalty equal to 5% of Pavana’s “EBITDA” (earnings before interest, taxes, depreciation and amortization) from exploitation of the acquired license.

On November 8, 2010, Pavana paid Boreas $60,000 as a payment due under the India technology license agreement, leaving a cash consideration due of $540,000. The remaining debt is non-interest bearing and are due on demand.

In accordance with Topic ASC 850, Pavana recorded the acquisition of the Supplementary Wind Energy Generator (SWEG) technology license for the geographical territory of India, at the carrying amount of the license technology acquired which was $100 and the balance of the cash consideration of $599,900 was accounted for as additional paid in capital.

The Company does not anticipate paying dividends in the foreseeable future.

At present, the Company lacks sufficient capital resources to fund operations and business plan for the next twelve months. The Company intends to obtain business capital through the use of private equity fundraising or shareholder loans. If the Company is not able to secure additional funding, the implementation of its business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all. The plan is that, in time, the primary source of capital for our business model will be revenue from the sale of power produced by installed products.

The Registrant has incurred net losses: ($22,612) for the fiscal year ended December 31, 2015 and ($12,092) for the fiscal year ended December 31, 2014. At December 31, 2015, the Registrant had an accumulated deficit of ($899,087) (2014: ($876,475). This raises substantial doubt about the Registrant’s ability to continue as a going concern.

Risk Factors Associated with Plan of Operation

(A) LIMITED PRIOR OPERATIONS, HISTORY OF OPERATING LOSSES, AND ACCUMULATED DEFICIT MAY AFFECT ABILITY OF REGISTRANT TO SURVIVE.

The Registrant has had limited prior operations to date. Since the Registrant’s principal activities recently have been limited to seeking new business ventures, it has no recent record of any revenue producing operations. Consequently, there is only a limited operating history upon which to base an assumption that the Registrant will be able to achieve its business plans. In addition, the Registrant has only limited assets. As a result, there can be no assurance that the Registrant will generate significant revenues in the future; and there can be no assurance that the Registrant will operate at a profitable level.

Accordingly, the Registrant’s prospects must be considered in light of the risks, expenses and difficulties frequently encountered in connection with the establishment of a new business.

The Registrant has incurred net losses: ($22,612) for the fiscal year ended December 31, 2015 and ($12,092) for the fiscal year ended December 31, 2014. At December 31, 2015, the Registrant had an accumulated deficit of ($899,087) (2014: ($876,475). This raises substantial doubt about the Registrant’s ability to continue as a going concern.

As a result of the fixed nature of many of the Registrant’s expenses, the Registrant may be unable to adjust spending in a timely manner to compensate for any unexpected delays in the development of the Registrant’s business or any capital raising or revenue shortfall. Any such delays or shortfalls will have an immediate adverse impact on the Registrants business, operations and financial condition.

(B) NEED FOR ADDITIONAL FINANCING MAY AFFECT OPERATIONS AND PLAN OF BUSINESS.

The working capital requirements associated with any adopted plan of business of the Registrant may be significant. The Registrant anticipates, based on currently proposed assumptions relating to its operations (including with respect to costs and expenditures and projected cash flow from operations), that it must seek financing to continue its operations (an amount which is as yet to be determined). However, such financing, when needed, may not be available, or on terms acceptable to management. The ability of the Registrant to continue as a going concern is dependent on additional sources of capital and the success of the Registrant’s business plan. The Registrant’s independent accountant audit reports included in this Form 10K includes a substantial doubt paragraph regarding the Registrant’s ability to continue as a going concern.

If funding is insufficient at any time in the future, the Registrant may not be able to take advantage of business opportunities or respond to competitive pressures, or may be required to reduce the scope of its planned product development and marketing efforts, any of which could have a negative impact on its business, operating results and financial condition. In addition, insufficient funding may have a material adverse effect on the Registrant’s financial condition, which could require the Registrant to:

To the extent that the Registrant raises capital through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on the Registrant’s operations. Regardless of whether the Registrant’s cash assets prove to be inadequate to meet the Registrant’s operational needs, the Registrant may seek to compensate providers of services by issuance of stock in lieu of cash, which will also result in dilution to existing shareholders.

(C) LOSS OF ANY OF CURRENT MANAGEMENT COULD HAVE AN ADVERSE IMPACT ON BUSINESS AND PROSPECTS OF THE REGISTRANT.

The Registrant’s success is dependent upon the hiring and retention of key personnel. None of the officers or directors has any employment or noncompetition agreement with the Registrant. Therefore, there can be no assurance that these personnel will remain employed by the Registrant. Should any of these individuals cease to be affiliated with the Registrant for any reason before qualified replacements could be found, there could be material adverse effects on the Registrant’s business and prospects.

In addition, all decisions with respect to the management of the Registrant will be made exclusively by the officers and directors of the Registrant. Investors will only have rights as stockholders to make decisions which affect the Registrant. The success of the Registrant, to a large extent, will depend on the quality of the directors and officers of the Registrant. Accordingly, no person should invest in the shares unless they are willing to entrust all aspects of the management of the Registrant to its officers and directors.

(D) POTENTIAL CONFLICTS OF INTEREST MAY AFFECT ABILITY OF OFFICERS AND DIRECTORS TO MAKE DECISIONS IN THE BEST INTERESTS OF REGISTRANT.

The officers and directors of the Registrant have other interests to which they devote time, either individually or through partnerships and corporations in which they have an interest, hold an office, or serve on boards of directors, and each will continue to do so notwithstanding the fact that management time may be necessary to the business of the Registrant. As a result, certain conflicts of interest may exist between the Registrant and its officers and/or directors which may not be susceptible to resolution.

In addition, conflicts of interest may arise in the area of corporate opportunities which cannot be resolved through arm’s length negotiations. All of the potential conflicts of interest will be resolved only through exercise by the directors of such judgment as is consistent with their fiduciary duties to the Registrant. It is the intention of management, so as to minimize any potential conflicts of interest, to present first to the board of directors of the Registrant, any proposed investments for its evaluation.

(E) LIMITATIONS ON LIABILITY, AND INDEMNIFICATION, OF DIRECTORS AND OFFICERS MAY RESULT IN EXPENDITURES BY REGISTRANT.

The Registrant’s Articles of Incorporation contain provisions authorizing the Registrant to eliminate, to the fullest extent permitted by the Nevada Revised Statutes, as in effect from time to time, the personal liability of directors, officers and employees of the Registrant for monetary damages arising from claims of a breach of their fiduciary duties to the Registrant. Any limitation on the liability of any director, or indemnification of directors, officer, or employees could result in substantial expenditures being made by the Registrant in covering any liability of such persons or in indemnifying them.

(F) ABSENCE OF CASH DIVIDENDS MAY AFFECT INVESTMENT VALUE OF REGISTRANT’S STOCK.

The board of directors of the Registrant does not anticipate paying cash dividends on the common stock for the foreseeable future and intends to retain any future earnings to finance the growth of the Registrant’s business. Payment of dividends, if any, will depend, among other factors, on earnings, capital requirements and the general operating and financial conditions of the Registrant as well as legal limitations on the payment of dividends out of paid-in capital.

(G) NONCUMULATIVE VOTING MAY AFFECT ABILITY OF SOME SHAREHOLDERS TO INFLUENCE MANGEMENT OF REGISTRANT.

Holders of the shares of common stock of the Registrant are not entitled to accumulate their votes for the election of directors or otherwise. Accordingly, the holders of a majority of the shares present at a meeting of shareholders will be able to elect all of the directors of the Registrant, and the minority shareholders will not be able to elect a representative to the Registrant’s board of directors.

(H) NO ASSURANCE OF CONTINUED PUBLIC TRADING MARKET AND RISK OF LOW PRICED SECURITIES MAY AFFECT MARKET VALUE OF REGISTRANT’S STOCK.

There has been only a limited public market for the common stock of the Registrant. The common stock of the Registrant is currently quoted on the Over-The-Counter Bulletin Board. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the market value of the Registrant’s securities. In addition, the common stock is subject to the low-priced security or so called “penny stock” rules that impose additional sales practice requirements on broker-dealers who sell such securities. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally, according to regulations adopted by the Securities and Exchange Commission, any equity security that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. The regulations governing low-priced or penny stocks sometimes limit the ability of broker-dealers to sell the Registrant’s common stock and thus, ultimately, the ability of the investors to sell their securities in the secondary market.

(I) FAILURE TO MAINTAIN MARKET MAKERS MAY AFFECT VALUE OF REGISTRANT’S STOCK.

If the Registrant is unable to maintain National Association of Securities Dealers, Inc. member broker/dealers as market makers, the liquidity of the common stock could be impaired, not only in the number of shares of common stock which could be bought and sold, but also through possible delays in the timing of transactions, and lower prices for the common stock than might otherwise prevail. Furthermore, the lack of market makers could result in persons being unable to buy or sell shares of the common stock on any secondary market. There can be no assurance the Registrant will be able to maintain such market makers.

(J) SALE OF SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE MARKET PRICE.

If a substantial number of the shares of common stock of the Registrant that have been issued in reliance on Rule 144 under the Securities Act of 1933 were sold under Rule 144 or a registered offering, the market price of the common stock could be adversely affected.

CRITICAL ACCOUNTING POLICIES.

The Securities and Exchange Commission has issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company’s most critical accounting policies include the use of estimates in the preparation of financial statements. The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results the Company reports in its financial statements.

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates these estimates, including those related to revenue recognition and concentration of credit risk. The Company bases its estimates on historical experience and on various other assumptions that is believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.