6-K 1 powernova6koctober2004.htm POWERNOVA 6-K Powernova 6-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

            

FORM 6-K


REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a-16 AND 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934


For the Period       October 2004_____

File No. ___0-50630____


Powernova Technologies Corporation

 (Name of Registrant)


680 -1285  West Broadway, Vancouver, British Columbia  Canada V6H 3X8

(Address of principal executive offices)


1.

Interim Financial Statements (Unaudited) for the period ended August 31, 2004.

2.

Interim Financial Statements (Unaudited) for the period ended November 30, 2004

3.

Interim Financial Statements (Unaudited) for the period ended February 28, 2005.


Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F.         FORM 20-F  ___X__         FORM 40-F ____


Indicate by check mark whether the Registrant by furnishing the information contained in this

Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.     Yes _____       No XXX


SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 6-K to be signed on its behalf by the undersigned, thereunto duly authorized.


Powernova Technologies Corporation

(Registrant)


Dated: July 21, 2005

Signed: /s/  Stuart Lew

                    Stuart Lew

                    Chairman



PowerNova Technologies Corporation

(A Development Stage Company)

BALANCE SHEETS

August 31, 2004 and May 31, 2004

(Expressed in Canadian Dollars)

Unaudited


As at:

 

August 31, 2004

 

May 31, 2004


ASSETS


Current Assets

    

Cash………………………………………………

 

$6,421

 

$4,206

GST receivable……………………………………

 

1,447

 

1,447

Prepaid expenses………………………………….

 

900

 

900

  

8,768

 

6,553

     

Equipment ………………………………………..

 

2,094

 

2,291

Intangible assets (note 3)……………………..…..

 

216,230

 

216,230

     

Total Assets

 

$227,092

 

$225,074


LIABILITIES


Current Liabilities

    

Accounts payable…………………………………

 

$184,881

 

$186,512

Due to related parties (note 4)………………..…..

 

417,435

 

377,695

     

Total Liabilities

 

602,316

 

564,207


STOCKHOLDERS’ DEFICIENCY


Share capital  (note 5)………………………….....

 

5,591,315

 

5,591,315

Special warrants (note 5)………………………….

 

25,338

 

9,600

Share subscriptions (note 5)………………………

 

45,360

 

45,360

Deficit accumulated prior to development stage…

 

(4,446,180)

 

(4,446,180)

Deficit accumulated during development stage….

 

(1,591,057)

 

(1,539,228)

  

(375,224)

 

(339,133)

     
     

Total Liabilities and Stockholders’ Deficit

 

$227,092

 

$225,074


Nature and Continuance of Operations – Note 1

Commitments – notes 3, 4, 5, and 8


SEE ACCOMPANYING NOTES

PowerNova Technologies Corporation

(A Development Stage Company)

STATEMENTS OF OPERATIONS

For the three months ended August 31, 2004 and 2003

(Expressed in Canadian Dollars)

Unaudited



  

Three months ended  August 31,

 
  

2004

 

2003

 
      

Revenue………………………………………….

 

$0

 

$0

 
  

0

 

0

 
      

General and Administrative Expenses

     
      

Amortization…………………………………….

 

198

 

1,007

 

Bank charges & interest………………………….

 

0

 

61

 

Consulting fees (note 4)………………………….

 

47,000

 

0

 

Filing and transfer agent…………………………

 

906

 

11,183

 

Legal, accounting and audit……………………...

 

0

 

3,754

 

Office and  administration ………………………

 

571

 

531

 

Rent

 

2,700

 

6,019

 

Telephone………………………………………...

 

454

 

1,040

 

Travel and automobile

 

0

 

0

 

Wages and benefits (note 4)

 

0

 

19,292

 

GST Recovery

 

0

 

0

 
      
      

Net loss for the period………………………..

 

(51,829)

 

(42,887)

 

Deficit, development stage – beginning of period

 

(1,539,228)

 

(1,031,234)

 

Deficit, development stage – end of period

 

($1,591,057)

 

($1,074,121)

 

Loss per share

 

($0. 00)

 

($0.00)

 










SEE ACCOMPANYING NOTES

PowerNova Technologies Corporation

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

For the three months ended August 31, 2004 and 2003

(Expressed in Canadian Dollars)

Unaudited


  

Three months ended  August 31,

 
 

2004

2003

   

Operating activities

  
   

Net loss for period………………………………….

($51,829)

($42,887)

Add (deduct) amounts not effecting cash:

  

Amortization………………………………………..

198

1,007

Changes in non-cash working capital amounts:

  

GST receivable………………………..……………..

0

(954)

Subscription receivable………………..…………….

0

0

Prepaid expenses…………………………………….

0

0

Accounts payable and accrued liabilities.….………..

(1632)

20,855

Due to related parties…………………….…………..

39,740

(13,747)

   

Cash flows used in operating activities

(13,523)

(35,726)

   

Investing Activities

  
 

0

0

   

Cash flows used in investing activities

0

0

   

Financing Activities:

  

Share subscriptions received………………….…..……

0

0

Issuance of special warrants……………………………

15,738

1,380

Issuance of share capital………………………………..

0

26,691

   

Cash flows provided by financing activities

15,738

28,071

   

Increase (decrease) in cash during the period….………

2,215

(7,655)

Cash, beginning of period………………………….

4,206

11,911

Cash, end of period…………………………………

$6,421

$4,256







SEE ACCOMPANYING NOTES


PowerNova Technologies Corporation

(A Development Stage Company)

NOTES TO THE FINANCIAL STATEMENTS

August 31, 2004 and May 31, 2004

(Expressed in Canadian Dollars)


Note 1

Nature and Continuance of Operations


The Company is incorporated in British Columbia and its principal business activity is to acquire and develop certain hydrogen production technology.  The Company’s shares, which were listed on the TSX Venture Exchange (“TSX”), were suspended from trading pending the company bringing itself into compliance with the TSX’s listing requirements.  On June 20, 2003 the Company’s shares were delisted from the TSX.


The Company is a development stage company and commenced its current development stage during the year ended May 31, 2000.


These financial statements have been prepared assuming the Company will continue on a going-concern basis.  The Company has not yet commenced operations, accumulated a deficit of $6,037,237 since inception and has a net working capital deficiency of $593,548 as at August 31, 2004.  The ability of the Company to continue as a going concern depends on its ability to develop profitable operations and to continue to raise adequate financing to eliminate its working capital deficiencies and to fund its operations.   Although the Company has been successful in raising funds to date, there can be no assurance that additional funding will be available in the future.  These financial statements do not reflect adjustments to the carrying values of assets and liabilities that may be required should the Company be unable to continue as a going concern.


Note 2

Summary of Significant Accounting Policies


These financial statements have been prepared in accordance with generally accepted accounting principles in Canada and are stated in Canadian dollars.  There is no difference in all material respects with accounting principles generally accepted in the United States of America.  Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment.  Actual results may differ from these estimates.


The financial statements have, in management’s opinion, been properly prepared within the framework of the significant accounting policies summarized below:


Financial Instruments


The carrying value of the Company’s financial instruments, consisting of cash, accounts payable and accrued liabilities and amounts due to related parties approximate their carrying amounts due to the short-term maturity of these instruments.  The special warrants are stated at their issue price as they were subsequently converted to share capital.  Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.


Equipment


Equipment is recorded at cost and are amortized using the declining balance method at the following annual rates:  computer equipment – 30%; office equipment – 20%.


Intangible Assets


Intangible assets consist of the following:


a)

Website domain name, which is recorded at cost and is amortized on a straight-line basis over the useful life of 3 years.


b)

Technology rights have an indefinite life and no amortization is provided.  The technology rights are reviewed periodically for impairment in value.  An impairment loss will be recognized when the carrying value exceeds fair value.


The technology rights may be subject to prior unregistered agreements, transfers or title may be affected by undetected defects.  The Company is satisfied, however, that evidence of title to the technology rights is adequate and complete.


Foreign Currency Translation


The Company’s functional and reporting currency is the Canadian dollar.  Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date and non-monetary assets and liabilities at their applicable historical rates.  Revenues and expenses are translated at rates prevailing at the date of the transaction except for amortization, which is translated at historical rates.  Exchange gains and losses from the translation of foreign currencies are recognized in the period in which they occur.


Stock-based Compensation


Stock-based compensation is accounted for at fair value as determined by the Black-Scholes option pricing model using amounts that are believed to approximate the volatility of the trading price of the Company’s shares, the expected lives of awards of stock-based compensation, the fair value of the Company’s stock and the risk-free interest rate, as determined at the grant date.  The estimated fair value of awards of stock-based compensation are charged to expense over their vesting period, with offsetting amounts recognized as contributed surplus.  Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.


Income Taxes


The Company accounts for future tax assets and liabilities in accordance with the liability method.  Under this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax basis, and are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be settled.  When the future realization of income tax assets does not meet the test of being more likely to occur than not, a valuation allowance in the amount of the potential future benefit is taken and no net asset is recognized.

Basic and Diluted Loss Per Share


Basic earnings per share are computed by dividing the loss for the year by the weighted average number of common shares outstanding during the year.  Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock.  The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method.  Fully diluted amounts are not presented when the effects of the computations are anti-dilutive due to the losses incurred.  Accordingly, there is no difference in the amounts presented for basic and diluted loss per share.


Impairment of Long-Lived Assets


The Company evaluates the long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets used in operations may not be recoverable.  The determination of whether impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets.  If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than fair value.


Note 3

Intangible Assets


The Company has acquired the website domain name “powernova.com” for $31,322.  Technology rights represent the cost of the assignment of technology rights from the Russian Academy of Sciences to the Company.


Pursuant to an agreement effective June 2003 and amending agreements to March 2005, the Company acquired the patents pending and exclusive rights to title of the Alkane and Alkane Group Dehydrogenation with Organometallic Catalysts from two individuals who became directors of the Company.  As consideration the Company issued 20,000,000 common shares and reserved for issuance to these two directors an aggregate of 9,000,000 common shares upon the Company achieving revenues of US$10,000,000 as direct result of the commercialization of the technology rights.


The Company has recorded a cost of $216,230 for the technology right, which represents advances previously made to these directors towards the development of the technology rights.


Note 4

Related Party Transactions


The Company was charged the following by directors and a former officer during the years ended May 31:


 

2004

2003

 
    

Consulting fees

$       120,000

$       106,000

 

Wages and benefits

68,000

103,723

 
    
 

$       188,000

$       209,723

 
    


These charges were measured by the exchange amount, which is the amount agreed upon by the transacting parties.


The amounts due to related parties of consist of amounts due to directors with respect to unpaid consulting fees and advances.  These amounts are unsecured, have no specific terms of repayment and are non-interest bearing.  The Company has consulting agreements with directors of the Company requiring payment of an aggregate amount of $15,667 per month on a month to month basis.


Note 5

Share Capital


a)

Authorized:

50,000,000 common shares without par value.


b)

Issued:

40,970,175 common shares without par value were issued as at May 31, 2004.  No shares were issued during the three months ended August 31, 2004.


c)

Commitments:


Share Purchase Warrants


As at August 31, 2004, the following share purchase warrants were outstanding:


  

Weighted-Average

Exercise Price

 

Number of

Warrants

   



Balance, May 31, 2004

 

$0.54

 

3,923,775

    


Issued

 

$0.00

 

0

     
     

Balance, August 31, 2004

 

$0.54

 

3,923,775


  

Number Outstanding

 

Exercise Price

 

Expiry Date

   


 


 

Warrants

 

1,725,773

 

$1.00

 

October 9, 2006

  

2,198,002

 

$0.18

 

October 9, 2006

       
  

3,923,775

    


These warrants entitle the holders thereof the right to acquire one common share for each warrant held.


Stock Option Plan


There are no stock options issued and outstanding as at August 31, 2004 or May 31, 2004.


Special Warrants


On October 9, 2003 the Company closed its private placement of Special Warrants at $0.40 and converted the 1,725,773 Special Warrants into 1,725,773 common shares and 1,725,773 share purchase warrants which entitle the holder to purchase one common share of the Company at $1.00 per share until October 9, 2006.  


During the year ended May 31, 2004, the Company issued 24,000 Special Warrants at $0.40 per Special Warrant for proceeds of $9,600.  Each Special Warrant can be converted into one common share and a share purchase warrant entitling the holder to acquire an additional share at $0.40 per share until October 9, 2006.


During the three months ended August 31, 2004, the Company issued 40,000 Special Warrants at $0.40 per Special Warrant for proceeds of $15,738.  Each Special Warrant can be converted into one common share and a share purchase warrant entitling the holder to acquire an additional share at $0.70 per share until October 9, 2006.


 

Price per

Special

Warrant

Number of

Special

Warrants



Proceeds

    

Balance, May 31, 2002

$0.40

1,476,500

$ 590,600

 Issued

$0.40

    246,273

      98,509

    

Balance, May 31, 2003

$0.40

1,722,773

$ 689,109

 Issued

$0.40

27,000

10,980

Converted into common shares

 

(1,725,773)

 (690,489)

    

Balance, May 31, 2004

$0.40

24,000

$ 9,600

 Issued

$0.40

      40,000

     15,738

    

Balance, August 31, 2004

 

      64,000

$     9,600

Note 6

Income Taxes


Significant components of the Company’s future tax assets and liabilities, after applying enacted corporation income tax rates, are as follows:


 

2004

2003

   

Future income tax assets:

  

Non-capital losses carried forward

$

860,595

$

1,093,418

Valuation allowance for future income tax assets

(860,595)

(1,093,418)

   

Net future income tax assets

$

-

$

-


Management considers it more-likely-than-not that the loss carry forward amounts will not be utilized against future income and accordingly, a full valuation allowance has been applied.


The Company has accumulated non-capital losses totaling $2,349,210 which can be utilized to offset taxable income of future years.  These losses expire as follows:


 

2005

$

649,012

 
 

2006

496,861

 
 

2007

-

 
 

2008

429,928

 
 

2009

257,220

 
 

2010

256,309

 
 

2014

249,880

 
    
  

$

2,339,210

 


Total income tax recovery varies from the amounts that would be computed by applying the statutory income tax rate to income before income taxes for the following reasons:


 

2004

2003

   

Average statutory income tax rate

36.79%

38.79%

   

Income tax recovery on income before income taxes

$

93,139

$

102,246

Increase (decrease) in income taxes resulting from:

  

Amortization of equipment and intangible asset

(1,209)

(2,595)

Change in the valuation allowance for future income

 tax assets


(91,930)


(99,651)

   

Income tax expense

$

-

$

-


Note 7

Non-cash Transactions


Investing and financing activities that do not have a direct impact on current cash flows are excluded from the cash flow statements.  The following transactions were excluded from the statements of cash flows:

During the year ended May 31, 2004:


–

The Company issued 20,000,000 common shares pursuant to the acquisition of technology rights (Note 4).


Note 8

Commitment


The Company has a lease commitment for its office premises, which requires future minimum lease payments of $4,500.













PowerNova Technologies Corporation

(A Development Stage Company)

BALANCE SHEETS

November 30, 2004 and May 31, 2004

(Expressed in Canadian Dollars)

Unaudited


As at:

 

November 30, 2004

 

May 31, 2004


ASSETS


Current Assets

    

Cash………………………………………………

 

$648

 

$4,206

GST receivable……………………………………

 

0

 

1,447

Prepaid expenses………………………………….

 

900

 

900

  

1,548

 

6,553

     

Equipment ………………………………………..

 

1896

 

2,291

Intangible assets (note 3)……………………..…..

 

216,230

 

216,230

     

Total Assets

 

$219,674

 

$225,074


LIABILITIES


Current Liabilities

    

Accounts payable…………………………………

 

$185,319

 

$186,512

Due to related parties (note 4)………………..…..

 

459,655

 

377,695

     

Total Liabilities

 

644,974

 

564,207


STOCKHOLDERS’ DEFICIENCY


Share capital  (note 5)………………………….....

 

5,591,315

 

5,591,315

Special warrants (note 5)………………………….

 

25,338

 

9,600

Share subscriptions (note 5)………………………

 

46,670

 

45,360

Deficit accumulated prior to development stage…

 

(4,446,180)

 

(4,446,180)

Deficit accumulated during development stage….

 

(1,642,443)

 

(1,539,228)

  

(425,300)

 

(339,133)

     
     

Total Liabilities and Stockholders’ Deficit

 

$219,674

 

$225,074


Nature and Continuance of Operations – Note 1

Commitments – notes 3, 4, 5, and 8


SEE ACCOMPANYING NOTES

PowerNova Technologies Corporation

(A Development Stage Company)

STATEMENTS OF OPERATIONS

For the three and six months ended November 30, 2004 and 2003

(Expressed in Canadian Dollars)

Unaudited



  

Three months ended November 30,

 

Six months ended November 30,

  

2004

 

2003

 

2004

 

2003

         

Revenue…………………………

 

$0

 

$0

 

$0

 

$0

  

0

 

0

 

0

 

0

General and Administrative Expenses

        
         

Amortization…………….....……

 

198

 

1,007

 

396

 

2,014

Bank charges & interest ……..….

 

0

 

159

 

0

 

220

Consulting fees (note 4) ……...…

 

47,000

 

0

 

94,000

 

0

Filing and transfer agent………...

 

683

 

5,450

 

1,589

 

16,633

Legal, accounting and audit ….…

 

0

 

8,839

 

0

 

12,593

Office and  administration ……...

 

125

 

468

 

696

 

999

Rent ……………………………..

 

2,700

 

4,241

 

5,400

 

10,260

Telephone………………………..

 

680

 

1,976

 

1,134

 

3,016

Travel and automobile ………….

 

0

 

0

 

0

 

0

Wages and benefits (note 4) …….

 

0

 

0

 

0

 

19,292

GST Recovery …………………..

 

0

 

0

 

0

 

0

         

Net loss for the period ……….….

 

(51,386)

 

(22,140)

 

(103,215)

 

(65,027)

Deficit, development stage – beginning of period

 

(1,591,057)

 

(1,074,121)

 

(1,539,228)

 

(1,031,234)

Deficit, development stage – end of period

 

($1,642,443)

 

($1,096,261)

 

($1,642,443)

 

($1,096,261)

Loss per share

 

($0. 00)

 

($0.00)

 

($0.00)

 

($0.00)




SEE ACCOMPANYING NOTES

PowerNova Technologies Corporation

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

For the three and six months ended November 30, 2004 and 2003

(Expressed in Canadian Dollars)

Unaudited


  

Three months ended November 30,

 

Six months ended November 30,

  

2004

 

2003

 

2004

 

2003

Operating activities

        

Net loss for period………………………….

 

($51,386)

 

($22,140)

 

($103,215)

 

($65,027)

Add (deduct) amounts not effecting cash:

        

Amortization………………………………..

 

198

 

1,007

 

396

 

2,014

Changes in non-cash working capital amounts:

        

GST receivable………………………….….

 

1,447

 

(954)

 

1,447

 

(1,908)

Subscription receivable……………….……

 

0

 

0

 

0

 

0

Prepaid expenses………………..

 

0

 

1,008

 

0

 

1,008

Accounts payable and accrued liabilities.….………………….…………….

 

438

 

(80,950)

 

(1,194)

 

(60,095)

Due to related parties…………………….…

 

42,220

 

117,492

 

81,960

 

103,745

Cash flows used in operating activities

 

(7,083)

 

15,463

 

(20,606)

 

(20,263)

         

Investing Activities

 

0

 

0

 

0

 

0

Cash flows used in investing activities

 

0

 

0

 

0

 

0

         

Financing Activities:

        

Share subscriptions received……………….

 

1,310

 

0

 

1,310

 

0

Issuance of special warrants…….…….……

 

0

 

0

 

15,738

 

1,380

Issuance of share capital……………………

 

0

 

0

 

0

 

26,691

Cash flows provided by financing activities

 

1,310

 

0

 

17,048

 

28,071

         

Increase (decrease) in cash during the period ……………………………..……….

 

(5,773)

 

15,463

 

(3,558)

 

7,808

Cash, beginning of period …………………

 

6,421

 

4,256

 

4,206

 

11,911

Cash, end of period …………………..….…

 

$648

 

$19,719

 

$648

 

$19,719



SEE ACCOMPANYING NOTES

PowerNova Technologies Corporation

(A Development Stage Company)

NOTES TO THE FINANCIAL STATEMENTS

November 30, 2004 and May 31, 2004

(Expressed in Canadian Dollars)


Note 1

Nature and Continuance of Operations


The Company is incorporated in British Columbia and its principal business activity is to acquire and develop certain hydrogen production technology.  The Company’s shares, which were listed on the TSX Venture Exchange (“TSX”), were suspended from trading pending the company bringing itself into compliance with the TSX’s listing requirements.  On June 20, 2003 the Company’s shares were delisted from the TSX.


The Company is a development stage company and commenced its current development stage during the year ended May 31, 2000.


These financial statements have been prepared assuming the Company will continue on a going-concern basis.  The Company has not yet commenced operations, accumulated a deficit of $6,088,623 since inception and has a net working capital deficiency of $643,426 at November 30, 2004.  The ability of the Company to continue as a going concern depends on its ability to develop profitable operations and to continue to raise adequate financing to eliminate its working capital deficiencies and to fund its operations.   Although the Company has been successful in raising funds to date, there can be no assurance that additional funding will be available in the future.  These financial statements do not reflect adjustments to the carrying values of assets and liabilities that may be required should the Company be unable to continue as a going concern.


Note 2

Summary of Significant Accounting Policies


These financial statements have been prepared in accordance with generally accepted accounting principles in Canada and are stated in Canadian dollars.  There is no difference in all material respects with accounting principles generally accepted in the United States of America.  Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment.  Actual results may differ from these estimates.


The financial statements have, in management’s opinion, been properly prepared within  the framework of the significant accounting policies summarized below:


Financial Instruments


The carrying value of the Company’s financial instruments, consisting of cash, accounts payable and accrued liabilities and amounts due to related parties approximate their carrying amounts due to the short-term maturity of these instruments.  The special warrants are stated at their issue price as they were subsequently converted to share capital.  Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.


Equipment


Equipment is recorded at cost and are amortized using the declining balance method at the following annual rates:  computer equipment – 30%; office equipment – 20%.


Intangible Assets


Intangible assets consist of the following:


a)

Website domain name, which is recorded at cost and is amortized on a straight-line basis over the useful life of 3 years.


b)

Technology rights have an indefinite life and no amortization is provided.  The technology rights are reviewed periodically for impairment in value.  An impairment loss will be recognized when the carrying value exceeds fair value.


The technology rights may be subject to prior unregistered agreements, transfers or title may be affected by undetected defects.  The Company is satisfied, however, that evidence of title to the technology rights is adequate and complete.


Foreign Currency Translation


The Company’s functional and reporting currency is the Canadian dollar.  Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date and non-monetary assets and liabilities at their applicable historical rates.  Revenues and expenses are translated at rates prevailing at the date of the transaction except for amortization, which is translated at historical rates.  Exchange gains and losses from the translation of foreign currencies are recognized in the period in which they occur.


Stock-based Compensation


Stock-based compensation is accounted for at fair value as determined by the Black-Scholes option pricing model using amounts that are believed to approximate the volatility of the trading price of the Company’s shares, the expected lives of awards of stock-based compensation, the fair value of the Company’s stock and the risk-free interest rate, as determined at the grant date.  The estimated fair value of awards of stock-based compensation are charged to expense over their vesting period, with offsetting amounts recognized as contributed surplus.  Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.


Income Taxes


The Company accounts for future tax assets and liabilities in accordance with the liability method.  Under this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax basis, and are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be settled.  When the future realization of income tax assets does not meet the test of being more likely to occur than not, a valuation allowance in the amount of the potential future benefit is taken and no net asset is recognized.

Basic and Diluted Loss Per Share


Basic earnings per share are computed by dividing the loss for the year by the weighted average number of common shares outstanding during the year.  Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock.  The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method.  Fully diluted amounts are not presented when the effects of the computations are anti-dilutive due to the losses incurred.  Accordingly, there is no difference in the amounts presented for basic and diluted loss per share.


Impairment of Long-Lived Assets


The Company evaluates the long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate, in management’s judgement, that the carrying value of such assets used in operations may not be recoverable.  The determination of whether impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets.  If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than fair value.


Note 3

Intangible Assets


The Company has acquired the website domain name “powernova.com” for $31,322.  Technology rights represent the cost of the assignment of technology rights from the Russian Academy of Sciences to the Company.


Pursuant to an agreement effective June 2003 and amending agreements to March 2005, the Company acquired the patents pending and exclusive rights to title of the Alkane and Alkane Group Dehydrogenation with Organometallic Catalysts from two individuals who became directors of the Company.  As consideration the Company issued 20,000,000 common shares and reserved for issuance to these two directors an aggregate of 9,000,000 common shares upon the Company achieving revenues of US$10,000,000 as direct result of the commercialization of the technology rights.


The Company has recorded a cost of $216,230 for the technology right, which represents advances previously made to these directors towards the development of the technology rights.


Note 4

Related Party Transactions


The Company was charged the following by directors and a former officer during the years ended May 31:


 

2004

2003

 
    

Consulting fees

$

120,000

$

106,000

 

Wages and benefits

68,000

103,723

 
    
 

$

188,000

$

209,723

 
    


These charges were measured by the exchange amount, which is the amount agreed upon by the transacting parties.


The amounts due to related parties of consist of amounts due to directors with respect to unpaid consulting fees and advances.  These amounts are unsecured, have no specific terms of repayment and are non-interest bearing.  The Company has consulting agreements with directors of the Company requiring payment of an aggregate amount of $15,667 per month on a month to month basis.


Note 5

Share Capital


a)

Authorized:

50,000,000 common shares without par value


b)

Issued:

40,970,175 common shares without par value were issued as at May 31, 2004.  No shares were issued during the six months ended November 30, 2004.


c)

Commitments:


Share Purchase Warrants


As at November 30, 2004, the following share purchase warrants were outstanding:



  

Weighted-Average

Exercise Price

 

Number of

Warrants

   



Balance, May 31, 2004

 

$0.54

 

3,923,775

    


Issued

 

$0.00

 

0

     
     

Balance, November 30, 2004

 

$0.54

 

3,923,775



  

Number Outstanding

 

Exercise Price

 

Expiry Date

   


 


 

Warrants

 

1,725,773

 

$1.00

 

October 9, 2006

  

2,198,002

 

$0.18

 

October 9, 2006

       
  

3,923,775

    


These warrants entitle the holders thereof the right to acquire one common share for each warrant held.


Share Subscriptions


During the six months ending November 30, 2004, proceeds of $1,310 were received by the Company for the exercise of 7,278 share purchase warrants for which corresponding shares were not issued as at November 30, 2004.


Stock Option Plan


There are no stock options issued and outstanding as at November 30, 2004 or May 31, 2004.


Special Warrants


On October 9, 2003 the Company closed its private placement of Special Warrants at $0.40 and converted the 1,725,773 Special Warrants into 1,725,773 common shares and 1,725,773 share purchase warrants which entitle the holder to purchase one common share of the Company at $1.00 per share until October 9, 2006.  


During the year ended May 31, 2004, the Company issued 24,000 Special Warrants at $0.40 per Special Warrant for proceeds of $9,600.  Each Special Warrant can be converted into one common share and a share purchase warrant entitling the holder to acquire an additional share at $0.40 per share until October 9, 2006.


During the six months ended November 30, 2004, the Company issued 40,000 Special Warrants at $0.40 per Special Warrant for proceeds of $15,738.  Each Special Warrant can be converted into one common share and a share purchase warrant entitling the holder to acquire an additional share at $0.70 per share until October 9, 2006.


 

Price per

Special

Warrant

Number of

Special

Warrants



Proceeds

    

Balance, May 31, 2002

$0.40

1,476,500

$ 590,600

 Issued

$0.40

    246,273

      98,509

    

Balance, May 31, 2003

$0.40

1,722,773

$ 689,109

 Issued

$0.40

27,000

10,980

Converted into common shares

 

(1,725,773)

 (690,489)

    

Balance, May 31, 2004

$0.40

24,000

$ 9,600

 Issued

$0.40

      40,000

     15,738

    

Balance, November 30, 2004

 

      64,000

$     9,600



Note 6

Income Taxes


Significant components of the Company’s future tax assets and liabilities, after applying enacted corporation income tax rates, are as follows:


 

2004

2003

   

Future income tax assets:

  

Non-capital losses carried forward

$

860,595

$

1,093,418

Valuation allowance for future income tax assets

(860,595)

(1,093,418)

   

Net future income tax assets

$

-

$

-


Management considers it more-likely-than-not that the loss carry forward amounts will not be utilized against future income and accordingly, a full valuation allowance has been applied.


The Company has accumulated non-capital losses totaling $2,349,210 which can be utilized to offset taxable income of future years.  These losses expire as follows:


 

2005

$

649,012

 
 

2006

496,861

 
 

2007

-

 
 

2008

429,928

 
 

2009

257,220

 
 

2010

256,309

 
 

2014

249,880

 
    
  

$

2,339,210

 


Total income tax recovery varies from the amounts that would be computed by applying the statutory income tax rate to income before income taxes for the following reasons:


 

2004

2003

   

Average statutory income tax rate

36.79%

38.79%

   

Income tax recovery on income before income taxes

$

93,139

$

102,246

Increase (decrease) in income taxes resulting from:

  

Amortization of equipment and intangible asset

(1,209)

(2,595)

Change in the valuation allowance for future income

 tax assets


(91,930)


(99,651)

   

Income tax expense

$

-

$

-



Note 7

Non-cash Transactions


Investing and financing activities that do not have a direct impact on current cash flows are excluded from the cash flow statements.  The following transactions were excluded from the statements of cash flows:

During the year ended May 31, 2004:


–

The Company issued 20,000,000 common shares pursuant to the acquisition of technology rights (Note 4).


Note 8

Commitment


The Company has a lease commitment for its office premises, which requires future minimum lease payments of $4,500.











PowerNova Technologies Corporation

(A Development Stage Company)

BALANCE SHEETS

February 28, 2005 and May 31, 2004

(Expressed in Canadian Dollars)

Unaudited


As at:

 

February 28, 2005

 

May 31, 2004


ASSETS


Current Assets

    

Cash………………………………………………

 

$1,111

 

$4,206

GST receivable……………………………………

 

0

 

1,447

Prepaid expenses………………………………….

 

900

 

900

  

2,011

 

6,553

     

Equipment ………………………………………..

 

1,698

 

2,291

Intangible assets (note 3)……………………..…..

 

216,230

 

216,230

     

Total Assets

 

$219,939

 

$225,074


LIABILITIES


Current Liabilities

    

Accounts payable…………………………………

 

$185,319

 

$186,512

Due to related parties (note 4)………………..…..

 

506,094

 

377,695

     

Total Liabilities

 

691,413

 

564,207


STOCKHOLDERS’ DEFICIENCY


Share capital  (note 5)………………………….....

 

5,591,315

 

5,591,315

Special warrants (note 5)………………………….

 

37,338

 

9,600

Share subscriptions (note 5)………………………

 

46,670

 

45,360

Deficit accumulated prior to development stage…

 

(4,446,180)

 

(4,446,180)

Deficit accumulated during development stage….

 

(1,700,617)

 

(1,539,228)

  

(471,474)

 

(339,133)

     
     

Total Liabilities and Stockholders’ Deficit

 

$219,939

 

$225,074


Nature and Continuance of Operations – Note 1

Commitments – notes 3, 4, 5, and 8


SEE ACCOMPANYING NOTES

PowerNova Technologies Corporation

(A Development Stage Company)

STATEMENTS OF OPERATIONS

For the three and nine months ended February 28, 2005 and 2004

(Expressed in Canadian Dollars)

Unaudited


  

Three months ended February 28,

 

Nine months ended February 28,

  

2005

 

2004

 

2005

 

2004

         

Revenue…………………………

 

$0

 

$0

 

$0

 

$0

  

0

 

0

 

0

 

0

General and Administrative Expenses

        
         

Amortization…………….....……

 

198

 

1,008

 

594

 

3,022

Bank charges & interest ……..….

 

0

 

109

 

0

 

329

Consulting fees (note 4) ……...…

 

47,000

 

0

 

141,000

 

0

Filing and transfer agent………...

 

3,880

 

4,875

 

5,469

 

21,508

Legal, accounting and audit ….…

 

3,750

 

2,812

 

3,750

 

15,405

Office and  administration ……...

 

86

 

518

 

782

 

1,517

Rent ……………………………..

 

2,700

 

599

 

8,100

 

10,859

Telephone………………………..

 

560

 

1,440

 

1,694

 

4,456

Travel and automobile ………….

 

0

 

0

 

0

 

0

Wages and benefits (note 4) …….

 

0

 

10,858

 

0

 

30,150

GST Recovery …………………..

 

0

 

(2,693)

 

0

 

(2,693)

         

Net loss for the period ……….….

 

(58,174)

 

(19,526)

 

(161,389)

 

(84,553)

Deficit, development stage – beginning of period

 

(1,642,443)

 

(1,096,261)

 

(1,539,228)

 

(1,031,234)

Deficit, development stage – end of period

 

($1,700,617)

 

($1,115,787)

 

($1,700,617)

 

($1,115,787)

Loss per share

 

($0. 00)

 

($0.00)

 

($0.00)

 

($0.00)






SEE ACCOMPANYING NOTES

PowerNova Technologies Corporation

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

For the three and nine months ended February 28, 2005 and 2004

(Expressed in Canadian Dollars)

Unaudited


  

Three months ended February 28,

 

Nine months ended February 28,

  

2005

 

2004

 

2005

 

2004

Operating activities

        

Net loss for period………………………….

 

($58,174)

 

($19,526)

 

($161,389)

 

($84,553)

Add (deduct) amounts not effecting cash:

        

Amortization………………………………..

 

198

 

1,008

 

594

 

3,022

Changes in non-cash working capital amounts:

        

GST receivable………………………….….

 

0

 

1,919

 

1,447

 

11

Subscription receivable……………….……

 

0

 

0

 

0

 

0

Prepaid expenses………………..

 

0

 

0

 

0

 

1,008

Accounts payable and accrued liabilities.….………………….…………….

 

0

 

(7,594)

 

(1,194)

 

(67,689)

Due to related parties…………………….…

 

46,439

 

(9,315)

 

128,399

 

94,430

Cash flows used in operating activities

 

(11,537)

 

(33,508)

 

(32,143)

 

(53,771)

         

Investing Activities

 

0

 

0

 

0

 

0

Cash flows used in investing activities

 

0

 

0

 

0

 

0

         

Financing Activities:

        

Share subscriptions received……………….

 

0

 

15,623

 

1,310

 

15,623

Issuance of special warrants…….…….……

 

12,000

 

0

 

27,738

 

1,380

Issuance of share capital……………………

 

0

 

0

 

0

 

26,691

Cash flows provided by financing activities

 

12,000

 

15,623

 

29,048

 

43,694

         

Increase (decrease) in cash during the period ……………………………..……….

 

463

 

(17,885)

 

(3,095)

 

(10,077)

Cash, beginning of period …………………

 

648

 

19,719

 

4,206

 

11,911

Cash, end of period …………………..….…

 

$1,111

 

$1,834

 

$1,111

 

$1,834


SEE ACCOMPANYING NOTES


PowerNova Technologies Corporation

(A Development Stage Company)

NOTES TO THE FINANCIAL STATEMENTS

February 28, 2005 and May 31, 2004

(Expressed in Canadian Dollars)


Note 1

Nature and Continuance of Operations


The Company is incorporated in British Columbia and its principal business activity is to acquire and develop certain hydrogen production technology.  The Company’s shares, which were listed on the TSX Venture Exchange (“TSX”), were suspended from trading pending the company bringing itself into compliance with the TSX’s listing requirements.  On June 20, 2003 the Company’s shares were delisted from the TSX.


The Company is a development stage company and commenced its current development stage during the year ended May 31, 2000.


These financial statements have been prepared assuming the Company will continue on a going-concern basis.  The Company has not yet commenced operations, accumulated a deficit of $6,146,797 since inception and has a net working capital deficiency of $689,402 at February 28, 2005.  The ability of the Company to continue as a going concern depends on its ability to develop profitable operations and to continue to raise adequate financing to eliminate its working capital deficiencies and to fund its operations.   Although the Company has been successful in raising funds to date, there can be no assurance that additional funding will be available in the future.  These financial statements do not reflect adjustments to the carrying values of assets and liabilities that may be required should the Company be unable to continue as a going concern.


Note 2

Summary of Significant Accounting Policies


These financial statements have been prepared in accordance with generally accepted accounting principles in Canada and are stated in Canadian dollars.  There is no difference in all material respects with accounting principles generally accepted in the United States of America.  Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment.  Actual results may differ from these estimates.


The financial statements have, in management’s opinion, been properly prepared within the framework of the significant accounting policies summarized below:


Financial Instruments


The carrying value of the Company’s financial instruments, consisting of cash, accounts payable and accrued liabilities and amounts due to related parties approximate their carrying amounts due to the short-term maturity of these instruments.  The special warrants are stated at their issue price as they were subsequently converted to share capital.  Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.


Equipment


Equipment is recorded at cost and are amortized using the declining balance method at the following annual rates:  computer equipment – 30%; office equipment – 20%.


Intangible Assets


Intangible assets consist of the following:


a)

Website domain name, which is recorded at cost and is amortized on a straight-line basis over the useful life of 3 years.


b)

Technology rights have an indefinite life and no amortization is provided.  The technology rights are reviewed periodically for impairment in value.  An impairment loss will be recognized when the carrying value exceeds fair value.


The technology rights may be subject to prior unregistered agreements, transfers or title may be affected by undetected defects.  The Company is satisfied, however, that evidence of title to the technology rights is adequate and complete.


Foreign Currency Translation


The Company’s functional and reporting currency is the Canadian dollar.  Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date and non-monetary assets and liabilities at their applicable historical rates.  Revenues and expenses are translated at rates prevailing at the date of the transaction except for amortization, which is translated at historical rates.  Exchange gains and losses from the translation of foreign currencies are recognized in the period in which they occur.


Stock-based Compensation


Stock-based compensation is accounted for at fair value as determined by the Black-Scholes option pricing model using amounts that are believed to approximate the volatility of the trading price of the Company’s shares, the expected lives of awards of stock-based compensation, the fair value of the Company’s stock and the risk-free interest rate, as determined at the grant date.  The estimated fair value of awards of stock-based compensation are charged to expense over their vesting period, with offsetting amounts recognized as contributed surplus.  Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.


Income Taxes


The Company accounts for future tax assets and liabilities in accordance with the liability method.  Under this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax basis, and are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be settled.  When the future realization of income tax assets does not meet the test of being more likely to occur than not, a valuation allowance in the amount of the potential future benefit is taken and no net asset is recognized.

Basic and Diluted Loss Per Share


Basic earnings per share are computed by dividing the loss for the year by the weighted average number of common shares outstanding during the year.  Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock.  The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method.  Fully diluted amounts are not presented when the effects of the computations are anti-dilutive due to the losses incurred.  Accordingly, there is no difference in the amounts presented for basic and diluted loss per share.


Impairment of Long-Lived Assets


The Company evaluates the long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets used in operations may not be recoverable.  The determination of whether impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets.  If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than fair value.


Note 3

Intangible Assets


The Company has acquired the website domain name “powernova.com” for $31,322.  Technology rights represent the cost of the assignment of technology rights from the Russian Academy of Sciences to the Company.


Pursuant to an agreement effective June 2003 and amending agreements to March 2005, the Company acquired the patents pending and exclusive rights to title of the Alkane and Alkane Group Dehydrogenation with Organometallic Catalysts from two individuals who became directors of the Company.  As consideration the Company issued 20,000,000 common shares and reserved for issuance to these two directors an aggregate of 9,000,000 common shares upon the Company achieving revenues of US$10,000,000 as direct result of the commercialization of the technology rights.


The Company has recorded a cost of $216,230 for the technology right, which represents advances previously made to these directors towards the development of the technology rights.



Note 4

Related Party Transactions


The Company was charged the following by directors and a former officer during the years ended May 31:


 

2004

2003

 
    

Consulting fees

$

120,000

$

106,000

 

Wages and benefits

68,000

103,723

 
    
 

$

188,000

$

209,723

 
    


These charges were measured by the exchange amount, which is the amount agreed upon by the transacting parties.


The amounts due to related parties of consist of amounts due to directors with respect to unpaid consulting fees and advances.  These amounts are unsecured, have no specific terms of repayment and are non-interest bearing.  The Company has consulting agreements with directors of the Company requiring payment of an aggregate amount of $15,667 per month on a month to month basis.


Note 5

Share Capital


a)

Authorized:

50,000,000 common shares without par value


b)

Issued:

40,970,175 common shares without par value were issued as at May 31, 2004.  No shares were issued during the nine months ended February 28, 2005.


a)

Commitments:


Share Purchase Warrants


As at February 28, 2005, the following share purchase warrants were outstanding:


  

Weighted-Average

Exercise Price

 

Number of

Warrants

   



Balance, May 31, 2004

 

$0.54

 

3,923,775

    


Issued

 

$0.00

 

0

     
     

Balance, February 28, 2005

 

$0.54

 

3,923,775


  

Number Outstanding

 

Exercise Price

 

Expiry Date

   


 


 

Warrants

 

1,725,773

 

$1.00

 

October 9, 2006

  

2,198,002

 

$0.18

 

October 9, 2006

       
  

3,923,775

    


These warrants entitle the holders thereof the right to acquire one common share for each warrant held.


Share Subscriptions


During the nine months ending February 28, 2005, proceeds of $1,310 were received by the Company for the exercise of 7,278 share purchase warrants for which corresponding shares were not issued as at February 28, 2005.


Stock Option Plan


There are no stock options issued and outstanding as at February 28, 2005 or May 31, 2004.


Special Warrants


On October 9, 2003 the Company closed its private placement of Special Warrants at $0.40 and converted the 1,725,773 Special Warrants into 1,725,773 common shares and 1,725,773 share purchase warrants which entitle the holder to purchase one common share of the Company at $1.00 per share until October 9, 2006.  


During the year ended May 31, 2004, the Company issued 24,000 Special Warrants at $0.40 per Special Warrant for proceeds of $9,600.  Each Special Warrant can be converted into one common share and a share purchase warrant entitling the holder to acquire an additional share at $0.40 per share until October 9, 2006.


During the nine months ended February 28, 2005, the Company issued 70,000 Special Warrants at $0.40 per Special Warrant for proceeds of $27,738.  Each Special Warrant can be converted into one common share and a share purchase warrant entitling the holder to acquire an additional share at $0.70 per share until October 9, 2006.


 

Price per

Special

Warrant

Number of

Special

Warrants



Proceeds

    

Balance, May 31, 2002

$0.40

1,476,500

$ 590,600

 Issued

$0.40

    246,273

      98,509

    

Balance, May 31, 2003

$0.40

1,722,773

$ 689,109

 Issued

$0.40

27,000

10,980

Converted into common shares

 

(1,725,773)

 (690,489)

    

Balance, May 31, 2004

$0.40

24,000

$      9,600

 Issued

$0.40

      70,000

     27,738

    

Balance, February 28, 2005

 

      94,000

$    37,338


Note 6

Income Taxes


Significant components of the Company’s future tax assets and liabilities, after applying enacted corporation income tax rates, are as follows:


 

2004

2003

   

Future income tax assets:

  

Non-capital losses carried forward

$

860,595

$

1,093,418

Valuation allowance for future income tax assets

(860,595)

(1,093,418)

   

Net future income tax assets

$

-

$

-


Management considers it more-likely-than-not that the loss carry forward amounts will not be utilized against future income and accordingly, a full valuation allowance has been applied.


The Company has accumulated non-capital losses totaling $2,349,210 which can be utilized to offset taxable income of future years.  These losses expire as follows:


 

2005

$

649,012

 
 

2006

496,861

 
 

2007

-

 
 

2008

429,928

 
 

2009

257,220

 
 

2010

256,309

 
 

2014

249,880

 
    
  

$

2,339,210

 


Total income tax recovery varies from the amounts that would be computed by applying the statutory income tax rate to income before income taxes for the following reasons:


 

2004

2003

   

Average statutory income tax rate

36.79%

38.79%

   

Income tax recovery on income before income taxes

$

93,139

$

102,246

Increase (decrease) in income taxes resulting from:

  

Amortization of equipment and intangible asset

(1,209)

(2,595)

Change in the valuation allowance for future income

 tax assets


(91,930)


(99,651)

   

Income tax expense

$

-

$

-



Note 7

Non-cash Transactions


Investing and financing activities that do not have a direct impact on current cash flows are excluded from the cash flow statements.  The following transactions were excluded from the statements of cash flows:

During the year ended May 31, 2004:


–

The Company issued 20,000,000 common shares pursuant to the acquisition of technology rights (Note 4).


Note 8

Commitment


The Company has a lease commitment for its office premises, which requires future minimum lease payments of $4,500.