UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

Amendment No. 1

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ________________.

 

Commission File Number: 333-62588

 

FIRST NATIONAL ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada   66-0349372
(State or other jurisdiction of
incorporation or organization) 		  (I.R.S. Employer
Identification No.)

 

44 Greystone Crescent, Georgetown, Ontario Canada L7G 1G9

(Address of principal executive offices) (Zip Code)

 

(416) 918-6987

(Registrant’s telephone number, including area code)

 

 

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ X ] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ] (do not check if a smaller reporting company)   Smaller reporting company [ X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [ X ]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of May 13, 2016, there were 99,865,228 common shares issued and outstanding.

 

Transitional Small Business Disclosure Format Yes [  ] No [X]

 

 

 

 

 

 

EXPLANATORY NOTE: This Amended Quarterly Report on Form 10-Q is being filed for the purpose of revising certain financial statement footnotes which were inadvertently omitted from the Form 10-Q filing, as the Company filed the Quarterly Report on Form 10-Q prior to the independent auditors completing their review. The Company has made these revisions and received confirmation of the completion of the review by the independent auditors. In all other material respects this Quarterly Report on Form 10-Q is unchanged from the Quarterly Report on Form 10-Q filed by the Company on May 16, 2016.

 

 

 

 

Index

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
       
  ITEM 1. Financial Statements 5
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
  ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 17
  ITEM 4. Controls and Procedures 18
       
PART II. OTHER INFORMATION  
       
  ITEM 1. Legal Proceedings 18
  ITEM 1A. Risk Factors 18
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
  ITEM 3. Defaults Upon Senior Securities 24
  ITEM 4. Mine Safety Disclosures 24
  ITEM 5. Other Information 24
  ITEM 6. Exhibits 25
       
  SIGNATURES 26
     
EX-31.01 Management Certification  
     
EX-32.01 Sarbanes-Oxley Act  

 

  Page 3  
 

 

First National Energy Corporation

Interim Consolidated Financial Statements

March 31, 2016

(Amounts expressed in US Dollars)

 

 

  Page 4  
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Index

 

Interim Consolidated Balance Sheets as at March 31, 2016 and December 31, 2015   6
     
Interim Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and March 31, 2015   7
     
Interim Consolidated Statements of Stockholders’ Deficiency for the three months ended March 31, 2016 and year ended December 31, 2015   8
     
Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and March 31, 2015   9
     
Condensed notes to Interim Consolidated Financial Statements   10-14

 

  Page 5  
 

 

FIRST NATIONAL ENERGY CORPORATION

Interim Consolidated Balance Sheets

As of March 31, 2016 and December 31, 2015

(Amounts expressed in US Dollars)

 

    March 31 2016     December 31 2015  
    (unaudited)     (audited)  
    $     $  
ASSETS                
CURRENT ASSETS                
Cash     1,287       1,937  
                 
Total Current Assets     1,287       1,937  
LICENSE FOR TECHNOLOGY (Note 4)     200       200  
INTANGIBLE (Note 5)     1       -  
                 
Total Assets     1,488       2,137  
                 
LIABILITIES                
CURRENT LIABILITIES                
Accounts payable and accrued liabilities     41,122       47,853  
Loan payable to director (Note 7)     128,708       110,234  
Loan payable to Boreas Research Corporation (Note 6)     540,000       540,000  
      709,830       698,087  
                 
Going Concern (Note 2)                
Related Party Transaction (Note 7)                
Commitment (Note 10)                
                 
STOCKHOLDERS’ DEFICIENCY                
Capital Stock ($.001 par value, 300,000,000 common shares authorized, 99,865,228 issued and outstanding as of March 31, 2016 and December 31, 2015     99,765       99,765  
Additional paid-in Capital     103,329       103,329  
Accummulated other comprehensive loss     (10 )     (10 )
Deficit Accumulated during the development stage     (911,479 )     (899,087 )
Non-controlling interest     53       53  
                 
Total FNEC Stockholders' Deficit     (708,342 )     (695,950 )
                 
      (708,342 )     (695,950 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY     1,488       2,137  

 

The accompanying notes form an integral part of these Interim Consolidated Financial Statements

 

  Page 6  
 

 

FIRST NATIONAL ENERGY CORPORATION

Interim Consolidated Statements of Operations and Comprehensive Loss

For the three months ended

(Amounts expressed in US Dollars)

 

    March 31, 2016     March 31, 2015  
    (unaudited)     (unaudited)  
    $     $  
REVENUE     -       -  
                 
EXPENSES                
General and administrative expenses     12,392       -  
TOTAL OPERATING EXPENSES     12,392       -  
LOSS BEFORE INCOME TAX     (12,392 )     -  
Income taxes     -       -  
NET LOSS     (12,392 )     -  
                 
Net loss attributable to non-controlling interest     -       -  
                 
Net loss attributable to FNEC Stockholders     (12,392 )     -  
                 
Loss per share, basic and diluted   $ (0.00 )   $ -  
                 
Weighted average common shares outstanding     99,865,228       99,865,228  
                 
COMPREHENSIVE LOSS                
NET LOSS INCLUDING NONCONTROLLING INTEREST     (12,392 )     -  
Foreign exchange translation adjustment for the period     -       -  
                 
Other Comprehensive Loss     (12,392 )     -  
                 
Comprehensive Loss attributable to non-controlling interest     -       -  
Comprehensive Loss attributable to FNEC Stockholders     (12,392 )     -  

 

The accompanying notes form an integral part of these Interim Consolidated Financial Statements

 

  Page 7  
 
 

FIRST NATIONAL ENERGY CORPORATION

Interim Consolidated Statements of Changes in Stockholders’ Deficiency

For the three months ended March 31, 2016 and the year ended December 31, 2015

(Amounts expressed in US Dollars)

 

    Common stock - number of shares     Common stock - dollar amount at par value     Additional paid-in capital     Accumulated Deficit     Accumulated other comprehensive loss     Non-controlling interests     Total stockholders' deficit  
          $     $     $     $     $     $  
Balance as of December 31, 2014 (audited)     99,865,228       99,765       103,329       (876,475 )     (10 )     53       (673,338 )
                                                         
Net Loss for the year     -       -       -       (22,612 )     -       -       (22,612 )
                                                         
Balance as of December 31, 2015 (audited)     99,865,228       99,765       103,329       (899,087 )     (10 )     53       (695,950 )
                                                         
Net Loss for the Period     -       -       -       (12,392 )     -       -       (12,392 )
                                                         
Balance as of March 31, 2016 (unaudited)     99,865,228       99,765       103,329       (911,479 )     (10 )     53       (708,342 )

 

The accompanying notes form an integral part of these Interim Consolidated Financial Statements

 

  Page 8  
 

 

FIRST NATIONAL ENERGY CORPORATION

Interim Consolidated Statements of Cash Flows

For the three months ended

(Amounts expressed in US Dollars)

 

    March 31, 2016     March 31, 2015  
    (unaudited)     (unaudited)  
    $     $  
CASH FLOWS FROM OPERATING ACTIVITIES                
                 
Net loss     (12,392 )     -  
Adjustments for items not affecting cash                
Increase in accounts payable and accrued liabilities     (6,731 )     -  
                 
Net cash used in operating activities     (19,123 )     -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
                 
Loan from Director     18,474       -  
Purchase of Intangible (Note 5)     (1 )     -  
                 
Net cash provided by financing activities     18,473       -  
                 
NET INCREASE (DECREASE) IN CASH     (650 )     -  
                 
Cash, beginning of period     1,937       2,237  
                 
 CASH, END OF PERIOD     1,287       2,237  
                 
SUPPLEMENTARY DISCLOSURE                
                 
INCOME TAXES PAID                
      -       -  
INTEREST PAID                
      -       -  

 

The accompanying notes form an integral part of these Interim Consolidated Financial Statements

 

  Page 9  
 

 

First National Energy Corporation

Condensed notes to Interim Consolidated Financial Statements

March 31, 2016

(Amounts expressed in US Dollars)

1. GENERAL

 

a) Description of the Business

 

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.

 

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 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 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.

 

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 new 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 new 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 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 99.13% of the Company’s 99,665,228 outstanding 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.

 

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.

 

  Page 10  
 

 

First National Energy Corporation

Condensed notes to Interim Consolidated Financial Statements

March 31, 2016

(Amounts expressed in US Dollars)  

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 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 from Pavana

 

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 March 31, 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.

 

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

 

a) Basis of Presentation and Consolidation

 

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.

 

  Page 11  
 

 

First National Energy Corporation

Condensed notes to Interim Consolidated Financial Statements

March 31, 2016

(Amounts expressed in US Dollars)  

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 March 31, 2016, the results of its operations for the three months ended March 31, 2016 and 2015, and its cash flows for the three months ended March 31, 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 March 31, 2016 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 March 31, 2016, there was $nil of recognized expense related to non-vested stock-based compensation arrangements granted.

 

4. LICENSES FOR TECHNOLOGY

 

    2016     2015  
    Cost     Accumulated Amortization     Net Book Value     Net Book Value  
                         
North American Technology License   $ 100     $ -     $ 100     $ 100  
Indian Technology License     100       -       100       100  
    $ 200     $ -     $ 200     $ 200  

 

5. INTANGIBLE ASSET

 

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;

 

  ● 10% of all royalties for all revenues generated by sale of this technology.
     
  ● A purchase bonus of $1,000,000 to be paid out of 11% of the net profits from the intellectual property.
    (See also note 10 (b))

 

  Page 12  
 

 

First National Energy Corporation

Condensed notes to Interim Consolidated Financial Statements

March 31, 2016

(Amounts expressed in US Dollars) 

6. LOAN PAYABLE TO RELATED PARTY

 

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 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 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, 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.

 

7. 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.

 

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 $128,708 ($110,234 – 2015).

 

8. SEGMENTED INFORMATION

 

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.

 

9. FAIR VALUE MEASUREMENTS

 

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.

 

● 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.

 

  Page 13  
 

 

First National Energy Corporation

Condensed notes to Interim Consolidated Financial Statements

March 31, 2016

(Amounts expressed in US Dollars)  

At March 31, 2016, the only asset measured at fair value using level 1 of the three fair value hierarchy tiers described above was cash of $1,287 ($1,937 – 2015) and accounts payable of $41,122 ($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.

 

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.

 

10. COMMITMENT

 

  a) 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.
     
  b) 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.

 

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. 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.

 

  Page 14  
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” are to the Company, unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited condensed interim financial statements and the accompanying related notes included in this quarterly report and our audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission.

 

Cautionary Statement Regarding Forward-Looking Statements

 

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Any such forward-looking statements would be contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of regulation. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in greater detail in “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits to the report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Unless otherwise indicated or the context otherwise requires, all references in this Form 10-Q to “we,” “us,” “our,” “our company,” “U. S. Stem Cell, Inc.” or the “Company” refer to U.S. Stem Cell, Inc. and its subsidiaries.

 

Description of Business

 

Business Development

 

We were incorporated as Capstone International Corporation on November 16, 2000, in the state of Delaware, and our shares were registered with the Securities and Exchange Commission on Form SB-2 as SEC File No. 333-62588, filed on June 8, 2001. Our name was changed to “First National Power Corporation” on January 28, 2004, and was changed again to “First National Energy Corporation” on February 12, 2009, at which time we effected a reverse stock split, adopted a holding company structure, and relocated our corporate charter from Delaware to Nevada as part of the reorganization described in the next succeeding paragraph.

 

As described in the definitive information statement on Form DEF 14-C filed with the Securities and Exchange Commission on December 22, 2008, and pursuant to the approval of our board of directors and a majority of its stockholders, on February 12, 2009, we effected a reorganization which had the effect of (1) implementing a reverse stock split of its issued and outstanding common shares at the rate of 100 to 1, thereby reducing the number of issued and outstanding common shares at that time from 76,522,760 to 765,228, with no effect on the number of authorized common shares; (2) merging our company with and into First National Power Corporation, a Nevada corporation and a wholly-owned indirect (second tier) subsidiary of our company , such that First National Energy Corporation, a Nevada corporation and a wholly-owned direct (first tier) subsidiary of our company, succeeded as a successor issuer of its registered securities and continued our business for all purposes; (3) exchanging each issued and outstanding share on the record date (and after giving effect to the reverse stock split described above) into one new common share of the successor issuer ; (4) re-domesticating the our charter from the State of Delaware to the State of Nevada; (5) increasing the authorized capital from 100 million common shares to 300 million common shares; (6) changing our name from “First National Power Corporation” to “First National Energy Corporation”; and (7) changing our stock symbol from FNPR to FNEC.

 

On April 20, 2009, we acquired a territorial license to certain rights in alternative wind energy technology in exchange for 98,800,000 newly issued common shares, which resulted in a change in control. We valued the technology license received in such transaction at $1,855,605 after consulting with an outside valuation expert.

 

  Page 15  
 

 

On April 18, 2011, we entered into a Novation Agreement (the “Novation”) with all of the stockholders of Boreas Research Corporation (“Boreas”), a Florida corporation, revising the structure of the April 20, 2009 transaction by which we acquired a territorial license to certain rights in alternative energy technology of Boreas, in exchange for 98,800,000 of our common shares as disclosed above. The Novation amended the 2009 agreement to substitute the stockholders of Boreas as the licensor under the original 2009 agreement.

 

In addition, we acquired technology rights to an additional territory for the licensed technology through a wholly-owned subsidiary, Pavana Power Corporation.

 

Business of Issuer

 

Since acquiring the technology license described above, our management has expended significant time seeking sources of capital to implement our business plan, which is primarily designed to exploit the licensed technology throughout the United States and Canada for commercial gain. In addition, we have acquired technology rights to an additional territory for the licensed technology. Management is also evaluating other alternatives in order to improve our financial condition, including merger and acquisition opportunities. There is no assurance that we will be successful in raising capital or closing any such merger or acquisition transactions.

 

Except as described above and as more particularly described in our accompanying interim financial statements, there have been no other material changes in our financial condition from the end of the preceding fiscal year to the date of the interim balance sheet provided herein, nor have there been any other material changes in the registrant’s financial condition during the period ending on the date of the interim balance sheet provided herein and commencing on the corresponding interim date of the preceding fiscal year. Except as described above and as more particularly described in our accompanying interim financial statements, there have been no material changes in our results of operations with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year.

 

Critical Accounting Policies and Estimates

 

The interim consolidated financial statements of our company are prepared in accordance with accounting principles generally accepted in the United States of America. The amounts of assets, liabilities, revenues and expenses reported in our interim consolidated financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the interim consolidated financial statements are derived from prior experience, statistical analysis and professional judgments. Actual results may differ significantly from these estimates and assumptions.

 

Management considers an estimate to be critical if it is material to the financial statements and it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate are reasonably likely to occur from period to period.

 

Plan of Operation

 

Since acquiring the technology license described above, our management has expended significant time seeking sources of capital to implement its business plan, which is primarily designed to exploit the licensed technology throughout the United States and Canada for commercial gain. In addition, we have acquired technology rights to an additional territory for the licensed technology through Pavana Power Corporation, a Nevada corporation, a wholly-owned subsidiary that was organized on April 21, 2011.. There is no assurance that the Registrant will be successful in raising capital or closing any such merger or acquisition transactions.

 

Results of Operations

 

Three Months Ended March 31, 2016, compared to the Three Months Ended March 31, 2015

 

Assets

Cash with a balance of $1,287

Licensed technology assets, net of amortization, were unchanged at $200

Intangible recognized at a nominal amount of $1

 

  Page 16  
 

 

Revenues

 

We did not generate any operating revenues in the three months ended March 31, 2016.

 

Costs and Expenses

 

Amortization of Acquired Technology

 

There was no amortization of our technology assets during the three months ended March 31, 2016, as compared to $-0- during the comparable period in 2015.

 

General and Administrative

 

Operating expenses increased to $12,392 during the three months ended March 31, 2016, as compared to $-0- during the comparable period in 2015. This increase was primarily due to an increase in administrative and regulatory filing expenses.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $1,287 at March 31, 2016, compared to $1,937 at December 31, 2015.

 

Net cash used in operating activities was $19,123 for the three months ended March 31, 2016 compared to $-0- during the comparable period in 2015.

 

We generated $18,473 from financing activities during the three months ended March 31, 2016 relatively compared to $-0-during the comparable period in 2015 due to additional funding by a director.

 

We are a development stage company and have not generated any operating revenues as of March 31, 2016. In addition, we will continue to incur net losses and cash flow deficiencies from operating activities for the foreseeable future.

 

Based on its cash flow projections, we will need additional financing to carry out its planned business activities and complete its plan of operations through December 31, 2016. At the Company’s present level of activities, the Company’s cash and cash equivalents are considered insufficient and this draws a substantial doubt as to the Company’s ability to continue as a going concern.

 

Much of our ability to raise additional capital or secure a strategic collaboration for the financing of our continued operations and product development will depend substantially on the successful outcome of our efforts to negotiate joint venture with wind power industry participants, the results of which will not be available until sometime later in the current fiscal year. We are also currently seeking to raise funds through corporate collaboration and sub-licensing arrangements in connection with its ongoing and long-term operations. Management does not know whether additional financing will be available when needed or, if available, will be on acceptable or favorable terms to it or its stockholders.

 

The Company’s independent registered public accounting firm expressed substantial doubt about the Company’s ability to continue as a going concern in the audit report on the Company’s audited financial statements for the fiscal year ended December 31, 2015 included in the 2015 10-K and in the footnotes to these unaudited financial statements for the quarter ended March 31, 2016.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required under Regulation S-K for “smaller reporting companies.”

 

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Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

As of March 31, 2016, the Registrant carried out an evaluation of the effectiveness of the Registrant’s disclosure controls and procedures (as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934) under the supervision and with the participation of the Registrant’s chief executive and chief financial officer. Based on and as of the date of such evaluation, the aforementioned officer has concluded that the Registrant’s disclosure controls and procedures were not effective.

 

The Registrant also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to monitor its effectiveness.

 

Changes In Internal Control Over Financial Reporting

 

During the interim period ended March 31, 2016, there were no changes to this system of internal controls or in other factors that could significantly affect those controls.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Registrant is not a party to any pending or threatened legal proceedings.

 

Item 1A. Risk Factors

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this Quarterly Report on Form 10-Q and other documents we file with the SEC. If any of the following risks actually occur, our business, financial condition or operating results could suffer. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us and we caution that this list of risk factors may not be exhaustive. Our business is also subject to general risks and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions, a global economic slowdown, geopolitical events, changes in laws or accounting rules, fluctuations in interest rates, terrorism, international conflicts, natural disasters or other disruptions of expected economic or business conditions. We operate in a continually changing business environment, and new risk factors emerge from time to time which we cannot predict. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.

 

FIRST NATIONAL ENERGY CORPORATION IS A DEVELOPMENT STAGE COMPANY WITH A LIMITED OPERATING HISTORY THAT MAKES IT IMPOSSIBLE TO RELIABLY PREDICT FUTURE GROWTH AND OPERATING RESULTS.

 

The Company has not demonstrated that it can:

 

  ● manufacture products in a manner that will enable it to be profitable;
     
  ● establish many of the business functions necessary to operate, including sales, marketing, manufacturing, administrative and financial functions;
     
  ● establish appropriate financial controls;
     
  ● respond effectively to competitive pressures; or
     
  ● raise the capital necessary to implement its business plan.

 

  Page 18  
 

 

FIRST NATIONAL ENERGY CORPORATION HAS INCURRED OPERATING LOSSES SINCE INCEPTION.

 

Since its inception in 2000, the Company has incurred losses every quarter. The extent of the Company’s future operating losses and the timing of profitability are highly uncertain, and it may never achieve or sustain profitability. The Company has incurred a net loss for the Three months ended March 31, 2016 of $12,392. At March 31, 2016, the Company had an accumulated deficit from inception of $890,558. The Company anticipates that it will continue to incur operating losses for the foreseeable future and it is possible that the Company will never generate substantial revenues from its products.

 

THE COMPANY’S FUTURE CAPITAL NEEDS ARE UNCERTAIN. THE COMPANY WILL NEED TO RAISE ADDITIONAL FUNDS NOW AND IN THE FUTURE AND THESE FUNDS MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS OR AT ALL.

 

The Company believes that its current cash will not be sufficient to meet projected operating requirements for at least the next 3 months and it is therefore necessary that the Company will need to seek additional funds from public and/or private stock offerings, borrowings under credit lines or other sources. The Company’s capital requirements will depend on many factors, including:

 

  ● the revenues generated by products that it manufactures;
     
  ● the costs required to develop its manufacturing processes;
     
  ● the expenses it incurs in manufacturing and placing its products;
     
  ● the costs associated with any expansion of its business;
     
  ● the costs associated with capital expenditures; and
     
  ● the number and timing of any acquisitions or other strategic transactions.

 

As a result of these factors, the Company will need to raise additional funds, and these funds may not be available on favorable terms, or at all. Furthermore, if the Company issues equity or debt securities to raise additional funds, its existing shareholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of its existing shareholders. If the Company cannot raise funds on acceptable terms, it may not be able to develop or enhance its products, execute its business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated counterparty requirements.

 

THE COMPANY’S SUCCESS WILL DEPEND ON ITS ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL AND TECHNICAL STAFF.

 

The Company believes future success will depend on its ability to manage its growth successfully, including attracting and retaining skilled personnel for its manufacturing and site maintenance operations. Hiring qualified management and technical personnel may be difficult. If the Company fails to attract and retain personnel, particularly management and technical personnel, it may not be able to succeed in its planned operations.

 

Our executive officers, board of directors and key employees are crucial to our business, and we may not be able to recruit, integrate and retain the personnel we need to succeed.

 

Our success will depend upon a number of key management, sales, technical and other critical personnel, including our executive officers, our board of directors and key employees with expertise in the industry. The loss of the services of any key personnel, or our inability to attract, integrate and retain highly skilled technical, management, sales and marketing personnel could result in significant disruption to our operations, including our inability or limited success in locating new sites, effectiveness of sales efforts, quality of customer service, and completion of our initiatives, including growth plans and the results of our operations. Any failure by us to find suitable replacements for our key senior management may be disruptive to our operations. Competition for such personnel in the technology industries is intense, and we may be unable to attract, integrate and retain such personnel successfully.

 

We may have to depend on outside advisors for some of our primary business operations.

 

To supplement the business experience of our officers and directors, we may be required to employ accountants, technical experts, appraisers and attorneys or engage other consultants or advisors. The selection of any such advisors will be made by our directors and officers without any input from shareholders. Furthermore, it is anticipated that such persons may be engaged on an “as needed” basis without a continuing fiduciary or other obligation to us. In the event management considers it necessary to hire outside advisors, they may elect to hire persons who are affiliates, if they are able to provide the required services.

 

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IF THE COMPANY DOES NOT EFFECTIVELY MANAGE ITS GROWTH, ITS BUSINESS RESOURCES MAY BECOME STRAINED AND ITS RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.

 

The Company expects to rapidly increase its employee base proportionate to expansion of its manufacturing capabilities. This may provide challenges to the Company’s organization and may strain its management and operations. The Company may misjudge the amount of time or resources that will be required to effectively manage any anticipated or unanticipated growth in its business or it may not be able to attract, hire and retain sufficient personnel to meet its needs. If the Company cannot scale its business appropriately, maintain control over expenses or otherwise adapt to anticipated and unanticipated growth, its business resources may become strained, it may not be able to deliver contracted products in a timely manner and its results of operations may be adversely affected.

 

THE COMPANY MAY BE SUBJECT TO POTENTIAL PRODUCT LIABILITY AND OTHER CLAIMS AND IT MAY NOT HAVE THE INSURANCE OR OTHER RESOURCES TO COVER THE COSTS OF ANY SUCCESSFUL CLAIM.

 

Defects in the Company’s products could subject it to potential product liability claims for damage to property or personal injuries. The Company’s product liability insurance, if available at reasonable cost, may not be adequate to cover future claims. Product liability insurance is expensive and, in the future, may not be available on terms that are acceptable to the Company, if it is available to it at all. Plaintiffs may also advance other legal theories supporting their claims that the Company’s products or actions resulted in some harm. A successful claim brought against the Company in excess of its insurance coverage could significantly harm its business and financial condition.

 

RISKS RELATED TO CAPITAL STRUCTURE

 

THERE IS NO ASSURANCE OF AN ESTABLISHED PUBLIC TRADING MARKET.

 

Although the Company’s common stock is quoted on the OTC Pink Sheets, a regular trading market for the securities may not be sustained in the future. The OTC Pink Sheets is an inter-dealer, over-the-counter market that provides significantly less liquidity than other exchanges. Quotes for stocks included on the OTC Pink Sheets are not listed in the financial sections of newspapers as are those for other major exchanges. Therefore, prices for securities traded solely on the OTC Pink Sheets may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price. Market prices for the Company’s common stock will be influenced by a number of factors, including:

 

  ● the issuance of new equity securities pursuant to its recent issuance of shares for a technology license, or a future offering;
     
  ● changes in interest rates;
     
  ● competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
     
  ● variations in quarterly operating results;
     
  ● changes in financial estimates by securities analysts;
     
  ● the depth and liquidity of the market for the Company’s common stock;
     
  ● investor perceptions of the Company and the alternative energy industry generally; and
     
  ● general economic and other national conditions.

 

THE COMPANY’S COMMON STOCK IS CONSIDERED A “PENNY STOCK.”

 

The Company’s common stock is considered to be a “penny stock” since it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted on the NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than Three years, or with average revenues of less than $6.0 million for the past Three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis

 

  Page 20  
 

 

BROKER-DEALER REQUIREMENTS MAY AFFECT TRADING AND LIQUIDITY.

 

Section 15(g) of the Exchange Act and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.

 

Potential investors in the Company’s common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.” Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of the Company’s common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

 

FOLLOWING THE COMPANY’S TECHNOLOGY LICENSE TRANSACTION, THE PRINCIPAL SHAREHOLDERS OF THE LICENSOR HAVE SIGNIFICANT INFLUENCE OVER THE COMPANY.

 

The officers, directors and insiders of the Company beneficially own, in the aggregate, 86.42% of the Company’s outstanding voting stock. As a result, the principal shareholders of Boreas Research Corporation, the Company’s technology licensor, will possess significant influence over the Company, giving them the ability, among other things, to elect a majority of the Company’s Board of Directors and to approve significant corporate transactions. Such stock ownership and control may also have the effect of delaying or preventing a future change in control of the Company, impeding an acquisition, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.

 

THE COMPANY DOES NOT FORESEE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE.

 

We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. The Company has not paid any dividends since its inception.

 

ANTICIPATED LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s management anticipates that substantial additional capital will be required to implement its business plan. However, there can be no assurance that management will be successful in raising such necessary additional capital. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders will be reduced, shareholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of our common stock. There can be no assurance that additional financing will be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to implement our business plan, fund expansion, take advantage of unanticipated acquisition opportunities, develop or enhance services or products or respond to competitive pressures. Such inability could harm the Company’s business, results of operations and financial condition.

 

RISKS RELATED TO WIND ENERGY INDUSTRY

 

We have a limited operating history and we have not demonstrated that we can develop, market, install and manage our licensed supplemental energy generating systems on a large scale.

 

We have a limited history of managing supplemental energy generating systems and limited data upon which you can evaluate our business. Our prospects for success must be considered in the context of a new company in a developing industry. The risks we face include developing and acquiring successful relationships with large scale wind farms, reliance on third parties, operating in a competitive environment in which electricity rates will be set by the operation of market forces and regulatory constraints, uncertain performance of our supplemental energy generating systems, financing our business and meeting the challenges of the other risk factors described herein. If we are unable to address all of these risks, our business, results of operations and financial condition may suffer.

 

  Page 21  
 

 

The revenues generated by wind farms depend on market prices of energy in competitive wholesale energy markets. Market prices for both energy and capacity are volatile and depend on numerous factors outside our control including economic conditions, population growth, electrical load growth, government and regulatory policy, weather, the availability of alternate generation and transmission facilities, balance of supply and demand, seasonality, transmission and transportation constraints and the price of natural gas and alternative fuels or energy sources. The wholesale power markets are also subject to market regulation by the Federal Energy Regulatory Commission, independent system operators, and regional transmission operators which can impact market prices for energy and capacity sold in such markets, including by imposing price caps, mechanisms to address price volatility or illiquidity in the markets or system instability and market power mitigation measures. We cannot assure you that market prices will be at levels that enable us to operate profitably or as anticipated. A decline in electricity or capacity market prices below anticipated levels could have a material adverse impact on our revenues or results of operations. In markets where wind farms qualify to receive capacity payments, it is typical that only a portion of the wind farm’s capacity is eligible to receive capacity payments. This portion is typically based on the previous year’s average net capacity factor during peak periods. In addition, changes to regulatory policy or market rules regarding the qualification of wind generation as a capacity resource could limit or eliminate a wind farm’s ability to receive payments for its generating capacity.

 

The governments of the United States and Canada may not extend or may decrease existing tax incentives for renewable energy, including wind energy, which would have an adverse impact on our development strategy.

 

Tax incentives applicable to the wind energy industry currently in effect include the production tax credit (“PTC”) and accelerated tax depreciation for certain assets of wind farms. The current version of the PTC provides the owner of a wind turbine with a credit against its federal income tax obligations based on the amount of electricity generated by the wind turbine. The accelerated depreciation for certain assets of wind farms provides for a five-year depreciable life for these assets, rather than the 15 to 25 year depreciable lives of many non-renewable energy assets. We also cannot assure you that the tax laws providing for accelerated depreciation of wind farm assets will not be modified, amended or repealed in the future. If the current tax incentives are not extended or renewed, or are extended or renewed at a lower rate, financing options for wind farms may be reduced and development plans for additional wind farms could be adversely affected, thereby severely restricting the number of potential sites for the Company’s products.

 

Tax equity investors have limited funds, and wind energy producers compete with other renewable energy producers for tax equity financing. In the current rapidly expanding market, the cost of tax equity financing may increase and there may not be sufficient tax equity financing available to meet the total demand in any year. In addition, one or more current tax equity investors may decide to withdraw from this market thereby depleting the pool of funds available for tax equity financing. Alternative financing will be more expensive and there may not be sufficient liquidity in alternate financial markets. As a result, development of additional wind farms and the Company’s growth potential would both be adversely affected.

 

The performance of wind farms and, by extension, the Company’s products, is dependent upon meteorological and atmospheric conditions that fluctuate over time. The production of electricity generated by our supplemental wind energy systems will be the source of substantially all of our revenues. As a result, our results of operations will be highly dependent on meteorological and atmospheric conditions.

 

Operational factors may reduce energy production from the Company’s supplemental wind energy generation systems below projections, causing a reduction in revenue. The amount of electricity generated depends upon many factors in addition to the quality of the wind resources, including but not limited to turbine performance, aerodynamic losses resulting from wear on the wind turbine, degradation of other components, icing or soiling of the blades and the number of times an individual turbine or an entire wind farm may need to be shut down for maintenance or to avoid damage due to extreme weather conditions. In addition, conditions on the electrical transmission network can impact the amount of energy a wind farm can deliver to the network. We cannot assure you that any of our supplemental wind energy generation systems will meet energy production expectations in any given time period.

 

  Page 22  
 

 

As with all power generation facilities, operation of our supplemental wind energy generation systems will involve operating risks, including:

 

  ● our possible inability to achieve the output and efficiency levels for our supplemental wind energy generation systems that we have projected; and
     
  ● shutdown due to a breakdown or failure of equipment or processes, violation of permit requirements (whether through operations or change in law), operator error or catastrophic events such as fires, explosions, floods or other similar occurrences affecting us, our supplemental wind energy generation systems or third parties upon which our business may depend.

 

The occurrence of one or more of these events could significantly reduce revenues expected to be produced by our supplemental wind energy generation systems or significantly increase the expenses of our supplemental wind energy generation systems, thereby adversely affecting our business, results of operations and financial condition.

 

Our financial projections assume that we will be able to operate our supplemental wind energy generation systems nearly continually and we may have trouble meeting our obligations if we are not successful.

 

We will need to achieve high levels of availability and dispatch for our supplemental wind energy generation systems to operate profitably. We operate under the assumption that we will achieve high levels of availability and dispatch in developing the revenue figures included in our financial projections. However, developments could affect the dispatch rate of our supplemental wind energy generation systems, including the following:

 

  ● equipment problems or other problems which affect the ability of our supplemental wind energy generation systems to operate;
     
  ● implementation of additional or more stringent environmental compliance measures; or
     
  ● the market introduction of new and competing products which may be more efficient and cost effective than our supplemental wind energy generation systems.

 

Changes in energy laws or regulations or interpretations of these laws or regulations could result in increased compliance costs or result in additional expenditures for us. Failure by us to comply or failure to satisfy requirements could also subject us to the imposition of penalties and fines. Governmental laws, regulations and policies applicable to alternative energy sources are currently subject to modifications and are expected to continue to evolve. Resulting laws and policies may restrict the structuring of the sales of the power generated by wind farms. Federal law regulates wholesale sales of electricity and the transmission of electricity in interstate commerce by public utilities. We cannot predict whether federal or state governmental entities or regulatory authorities will adopt new laws or regulations or modify existing laws affecting the generation and/or transmission of electricity, or the ability of our counterparty wind farm operators to comply with them. Such new laws or regulations could have a material adverse impact on our business, results of operations or financial condition.

 

Various state governments may not extend or may decrease incentives for renewable energy, including wind energy, which would have an adverse impact on our development strategy.

 

Various types of incentives which support the sale of electricity generated from wind energy presently exist in regions where we plan to market, install and operate our products on existing wind farms. We cannot assure you that governmental support for alternative energy sources will continue at current levels or that the wind farms we partner with will qualify for such incentives. Any decrease in such state-level incentives could have an adverse impact on our development strategy.

 

We depend on our ability to locate and develop new sources of wind power in a timely and consistent manner, and failure to do so would adversely affect our operations and financial performance.

 

Our success in the industry requires additional and continuing development to become and remain competitive. We expect to continue to make substantial investments in development activities. Our future success will depend, in part, on our ability to continue to locate additional wind power sites. This development activity will require continued investment in order to maintain and grow our market position. We may experience unforeseen problems in our development endeavors. We may not achieve widespread market acceptance of our supplemental wind energy generation systems. These factors could materially affect our ability to forecast operations and negatively affect our stock price, results of operations, cash flow and financial condition.

 

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The number of desirable sites available for successful wind farms is limited, and our inability to successfully negotiate for access with the owners and operators of such sites would limit our ability to implement our development strategy.

 

We are a small company, and we will be operating in a highly competitive market, and this competition may accelerate in the future. Potential competitors have, or may have, substantially greater financial, marketing or technical resources, and in some cases, greater name recognition and experience than we have. Such potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, and may also be able to devote greater resources to the development and promotion of supplemental wind energy generation systems than we can. Potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of our prospective counterparties. It is possible that new competitors or alliances among potential competitors may emerge and rapidly gain significant market share. This would in turn reduce our market share, reduce our overall revenues and require us to invest additional funds in new technology development. If we cannot compete successfully against competitors, this will have a negative impact on our business, financial condition, results of operations and cash flow.

 

We will depend on electric transmission facilities owned and operated by third parties to deliver the electricity that we sell. We will typically connect to transmission networks through the facilities owned and controlled by our counterparty wind farm owners and operators. The capacity of the local transmission network may be limited or constrained, and the owner of the network may not allow us to interconnect our supplemental wind energy system without first constructing any necessary system upgrades. Many wind farms are located in remote areas with limited transmission networks where intense competition exists for access to, and use of capacity on, the existing transmission facilities. We cannot assure you that we will obtain sufficient network connections for all future installations within planned timetables and budgetary constraints.

 

Our counterparty wind farm owners and operators are required to meet certain technical specifications in order to be connected to the transmission network. If any wind farm does not meet, or ceases to comply with, these specifications, we will not be able to connect, to or remain connected, to the transmission network. We may also incur liabilities and penalties, including disconnection from the network, if the transmission of electricity by one or more of such host wind farms does not comply with applicable technical requirements. In the interconnection agreements between wind farms and the applicable transmission owner or operator, the transmission owner or operator retains the right to interrupt or curtail transmission deliveries as required in order to maintain the reliability of the transmission network. We cannot assure you that the Company will not be adversely impacted by any such interruption or curtailment.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

The Registrant has not sold any unregistered equity securities during the period covered by this report.

 

Item 3. Defaults Upon Senior Securities. Not Applicable.

 

There were no defaults upon senior securities during the period ended March 31, 2016.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits.

 

Exhibit No.   Document
     
2.1 (7)   Memorandum of Understanding between First National Energy Corporation and Serge Bolotov, dated February 3, 2016, accepted as binding February 5, 2016.
     
3.1(1)   Articles of Incorporation
     
3.2 (4)   Articles of Incorporation (Nevada)
     
3.2(1)   Bylaws
     
4.1(2)    2005 Stock Incentive Plan For Employees And Consultants (2)
     
4.2(8)   2016 Omnibus Equity Compensation Plan
     
10.1(3)   Letter of Intent with Boreas Research Corporation, dated April 17, 2009
     
10.2(4)   First Amendment Of Technology License And Stock Purchase Agreement with Boreas Research Corporation, dated May 14, 2009
     
10.3(5)   Novation Agreement with Boreas Research Corporation, dated April 18, 2011.
     
14.1 (6)   Financial Code of Ethics
     
31.1*   Sect. 302 Certification Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2*   Sect. 302 Certification Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Sect.
     
32.1*   Sect. 906 Certification Statement of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
     
32.2*   Sect. 906 Certification Statement of the Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

 

(1) Incorporated by reference to the Company’s Form SB-2 filed on June 8, 2001.
(2) Incorporated by reference to the Company’s Form S-8, filed April 11, 2005.
(3) Incorporated by reference to the Company’s Form 8-K, filed April 21, 2009.
(4) Incorporated by reference to the Company’s Form 8-K, filed May 26, 2009.
(5) Incorporated by reference to the Company’s Form 8-K, filed April 20, 2011.
(6) Incorporated by reference to Exhibit 19 in the Company’s Form 10-K, filed March 16, 2012.
(7) Incorporated by reference to the Company’s Form 8-K, filed February 16, 2016.
(8) Incorporated by reference to the Company’s Form S-8, filed February 23, 2016.

 

* Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FIRST NATIONAL ENERGY CORPORATION
   
Dated: May 24, 2016 /s/ Gregory Sheller
  Gregory Sheller, Chief Executive Officer

 

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