ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this annual report on Form 10-Q contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to consummate a merger or business combination, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this annual report in its entirety, including but not limited to our financial statements and the notes thereto. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Description of Business
Business Development
First National Energy Corporation (the “Registrant”) was incorporated as Capstone International Corporation on November 16, 2000, in the state of Delaware, and has a class of shares registered with the Securities and Exchange Commission on Form SB-2 as SEC File No. 333-62588, filed on June 8, 2001. The Registrant’s 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 the Registrant effected a reverse stock split, adopted a holding company structure, and relocated its 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 the Registrant’s board of directors and a majority of its stockholders, on February 12, 2009, the Registrant effected a reorganization pursuant to that certain Agreement and Plan of Merger to Form Holding Company, dated as of December 10, 2008 (a true and complete copy of which is included in the Form DEF 14-C information statement described above)
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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 from 76,522,760 to 765,228, with no effect on the number of authorized common shares; (2) merging the Registrant with and into First National Power Corporation, a Nevada corporation and a wholly-owned indirect (second tier) subsidiary of the Registrant, such that First National Energy Corporation, a Nevada corporation and a wholly-owned direct (first tier) subsidiary of the Registrant, succeeded the Registrant as a successor issuer of its registered securities, pursuant to Rule 12g-3 under the Securities Exchange Act of 1934, and continued the business of the Registrant for all purposes; (3) exchanging each issued and outstanding share of the Registrant (bearing CUSIP number 32113F 10 3) on the record date (and after giving effect to the reverse stock split described above) into one new common share of the successor issuer (bearing CUSIP number 321129 108); (4) shifting the Registrant’s charter from the State of Delaware to the State of Nevada; (5) increasing the authorized capital of the Registrant from 100 million common shares to 300 million common shares; (6) changing the Registrant’s name from “First National Power Corporation” to “First National Energy Corporation”; and (7) changing the Registrant’s stock symbol from FNPR to FNEC.
On April 20, 2009, the Registrant acquired a territorial license to certain rights in alternative wind energy technology in exchange for 98,800,000 newly issued common shares of the Registrant, which resulted in a change in control of the Registrant. The Registrant valued the technology license received in such transaction at $1,855,605 after consulting with an outside valuation expert.
In addition, the Registrant has acquired technology rights to an additional territory for the licensed technology, and intends to exploit such rights through a newly formed and 99.9% owned subsidiary [see Note 1(c) of accompanying interim financial statements].
Business of Issuer
Since acquiring the technology license described above, management of the Registrant 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, the Registrant has acquired technology rights to an additional territory for the licensed technology, and intends to exploit such rights through a newly formed and 99.9%-owned subsidiary [see Note 1(c) of accompanying interim financial statements]. The Registrant is also evaluating other alternatives in order to improve the Registrant's financial condition, including merger and acquisition opportunities. There is no assurance that the Registrant will be successful in raising capital or closing any such merger or acquisition transactions.
Except as described above and as more particularly described in the Registrant’s accompanying interim financial statements, there have been no other material changes in the registrant’s 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 the Registrant’s accompanying interim financial statements, there have been no material changes in the registrant's 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 consolidated financial statements of the 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 the Company’s financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the financial statements are derived from prior experience, statistical analysis and professional judgments. Actual results may differ significantly from these estimates and assumptions.
The Company 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, management of the Registrant 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, the Registrant has acquired technology rights to an additional territory for the licensed technology, and intends to exploit such rights through Pavana Power Corporation, a Nevada corporation, a newly formed and 99.9% owned subsidiary that was organized on April 21, 2010 [see Note 1(c) of accompanying interim financial statements]. The Registrant is also evaluating other alternatives in order to improve the Registrant's financial condition, including merger and acquisition opportunities. There is no assurance that the Registrant will be successful in raising capital or closing any such merger or acquisition transactions.
Results of Operations
Nine Months Ended September 30, 2010, compared to the Nine Months Ended September 30, 2009
Assets
Licensed technology assets, net of amortization, increased from $1,725,967 at December 31, 2009, to $2,156,797, as a result of a reduction of $169,170 through amortization and an increase of $600,000 through the acquisition of an additional technology license more particularly described in Note 1(c) of the accompanying financial statements.
Revenues
The Company did not generate any operating revenues in the nine months ended September 30, 2010 or in the nine months ended September 30, 2009.
Costs and Expenses
Amortization of Acquired Technology
Amortization of the Company’s technology assets increased by $91,853 during the nine months ended September 30, 2010 to $169,170 as compared to $77,137 during the comparable period in 2009. The expense for the current year is higher than in the previous period because of additional license purchases during the current period.
Amortization for the next 5 years is estimated to be as follows:
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2010
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$
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61,390
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* For the 4th quarter of 2010
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2011
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245,561
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2012
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245,561
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2013
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245,561
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2014
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245,561
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$
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1,043,634
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General and Administrative
General and administrative expenses decreased to $23,430 during the nine months ended September 30, 2010, as compared to $67,821 during the comparable period in 2009. This decrease was primarily due to a difference in the nonrecurring professional fees and filing fees incurred in the prior period in anticipation of the Company’s reorganization as more particularly described above.
Liquidity and Capital Resources
Cash and cash equivalents were $105,216 at September 30, 2010, compared to $36,730 at December 31, 2009.
The Company is a development stage company and has not generated any operating revenues as of September 30, 2010. In addition, the Company will continue to incur net losses and cash flow deficiencies from operating activities for the foreseeable future.
Based on its cash flow projections, the Company will need additional financing to carry out its planned business activities and complete its plan of operations through December 31, 2010. At the Company’s present level of activities, the Company’s cash and cash equivalents are believed, at this time, to be sufficient to fund its operations only into the fourth quarter of this current fiscal year. Accordingly, there is substantial doubt as to the Company’s ability to continue as a going concern by the end of its current fiscal year.
Much of the Company’s ability to raise additional capital or secure a strategic collaboration for the financing of its continued operations and product development will depend substantially on the successful outcome of its efforts to negotiate joint venture with wind power industry participants. The Company is currently seeking to raise funds through corporate collaboration and sub-licensing arrangements in connection with its ongoing and long-term operations. The Company 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, 2009 included in the 2009 10-K.
Net cash used in operating activities was ($31,514) for the nine months ended September 30, 2010 as compared to ($44,576) during the comparable period in 2009. The decrease in net cash used in operations was primarily due to a difference in the nonrecurring professional fees and filing fees incurred in the prior period in anticipation of the Company’s reorganization as more particularly described above.
During the 9-month period ended September 30, 2010, the Company raised $100,000 through the sale of a minority position in a subsidiary. There were no financing activities during the nine months ended September 30, 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
(Not applicable)
ITEM 4. CONTROLS AND PROCEDURES.
As of September 30, 2010, 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. During the interim period ended September 30, 2010, 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of security holders during the period covered by this report.
ITEM 5.
OTHER INFORMATION.
(Not Applicable)
ITEM 6. EXHIBITS.
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Exhibit No.
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Document
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Sect. 302 Certification Statement of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Sect. 906 Certification Statement of the Principal Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
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Filed herewith
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.
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FIRST NATIONAL ENERGY CORPORATION
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Dated: October 25, 2010
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/s/
Gregory Sheller
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Gregory Sheller,
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Chief Executive Officer
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