Borealis Exploration Limited Interim Management Report for the Three Months Ended 31 December 2015 -

Avto Metals, Cool Chips and Power Chips

On 18 November 2013, Cool Chips plc and Power Chips plc announced that their Avto Metals technology (see below) to enhance the emission of electrons from surfaces was validated in a series of independent tests. The significance of enhancing the emissions of electrons from surfaces is that it allows quicker and more effective chemical reactions in materials, which, in turn, has applications in power production, thermal management, drug delivery and in virtually every industrial process. Learning how to control the emission of electrons with consistency and in different scenarios is the key to monetizing this technology. This is the current focus of the management of these companies.

The patented proprietary technology, called Avto Metals, reduces the work function of materials including metals and semiconductors. Work function is a measure of the energy required to remove an electron from a material. By reducing the work function barrier, electrons can escape more readily. This technology allows, for example, the design and building of more efficient thermionic/thermoelectric converters and better thermal management devices and possibly has use in many other industrial processes.

The new technology results from the discovery that quantum interference, which reduces quantum state density at a material's surface, can be achieved on a macroscopic scale. Simply by modifying the surface texture of a material in precise ways, using methods commonly applied in the manufacture of semiconductor devices, engineers should be able to exploit this Avto Effect and transform existing materials into materials with precisely-engineered properties for many new applications. When the Avto Effect is fully understood, Cool Chips plc and Power Chips plc could possibly be able to custom design work functions for multiple different applications.

Tests completed in November 2013, December 2015 and January 2016, conducted on silicon wafers with a nanoscale line pattern, covering millimeter-scale test pads and forming a surface texture to demonstrate the Avto Effect, showed significant and consistent reductions in work function. Results were in line with prior tests using surfaces of several metals. This work on the science and the technology has been ongoing for more than 15 years. More than 40 issued patents cover both the basic technology and many applications. We are also working on additional patents that are expected to enhance our intellectual property protection.

The steps forward to commercialization are not trivial and obviously high value products will be the first developed. Commercialization is now possible because of the tremendous advances in semiconductor technology in the last decade, which made possible the building of the required Avto Metal structures in a major university laboratory. When the Avto Metals work began over 15 years ago, the world simply did not have the required nanoscale technology to either build or confirm the underlying Avto Metals science.

After scaling to larger dimensions, the technology should enable large cost and efficiency improvements in electrical power generation and refrigeration. The power generation technology, called Power Chips, should revolutionize electrical power generation across virtually all applications. For example, adding Power Chips to extract heat that is now wasted in conventional power plants should be able to increase power generation by up to 20% with no change in fuel consumption or emissions. Power Chips should make possible safe, efficient distributed power, enabling buildings or factories to cogenerate their own electricity from waste heat or geothermal sources. In automobiles and other vehicles, for example, Power Chips may replace the alternator, reducing the mechanical load on the engine and thereby increasing the efficiency of internal combustion engines and hybrids.

The cooling technology derived from the Avto Effect, called Cool Chips, should similarly reduce the cost and increase the efficiency of most cooling or refrigeration systems. It requires no moving parts or motors, produces no chemical emissions, and can be miniaturized for use in micro-electronic applications.

Borealis is in discussions at present to obtain the necessary funding to bring at least one Power Chip and one Cool Chip product to market. Additionally, Borealis has caused its subsidiary, Chorus Motors, to transfer 36,000 shares of WheelTug plc for US$126 per share. WheelTug plc shares are now being sold at US$180 share, which translates into a little less than US$2 million in net spendable funds.

There can be no assurance that such an amount will be sufficient to produce a marketable product, that any funding discussions will be successful or that the ongoing work will produce any marketable products.

Faraway plc and Roche Bay plc

Faraway plc owns 100% of 10,350 acres of Government of Canada long-term renewable leases near Freuchen Bay, Melville Peninsula, Nunavut, Canada, and is working on arranging for their future development. Due to the downturn in the mineral resource markets, the directors of Faraway plc took the decision to impair the resource by $221,426 so that the asset is now carried at a nominal value of $1.

Roche Bay plc is a mineral assets holding company that owns extensive mineral interests on the Melville Peninsula in Nunavut, Canada. Roche Bay is working on developing these assets. Due to the downturn in the mineral resource market, the directors of Roche Bay plc took the decision to impair the resource by $1,789,548 so that the asset is now carried at a nominal value of $1.

Roche Bay plc purchased 36,000 shares of WheelTug plc from Chorus Motors plc for $126 per share. The current share price of WheelTug plc is $180 (based on recent sales made by Chorus Motors plc). No assurances are offered that this price would be achieved by any shareholder of WheelTug selling its shares in privately negotiated transactions.

Significant changes to key financial information

The significant changes to the Group’s consolidated financial data and operating results during or subsequent to the period covered by the audited Consolidated Financial Statements are:

For the Nine months ended 31 December 2015

Borealis spent US$2,739,607 on its operations for the nine months ended 31 December 2015 and US$2,106,701 for the same period in 2014. This amounts to a US$632,806 increase in operating expenditure in the nine months ended 31 December 2015 versus the same period in 2014.

For the nine months ended 31 December 2015, Borealis incurred US$890,233 in administrative expenses, US$57,716 in corporate fees, US$241,899 in legal fees, US$181,644 in rent and US$55,833 in travel in the compared to administrative expenses of US$1,516,298, US$42,312 in corporate fees, US$145,773 in legal fees, US$218,902 in rent and US$135,256 in travel in the same period in 2014. The changes in the foregoing expenses in the nine months ended 31 December 2015 over the same period in 2014 are attributable to a different focus in the various activities in the business of the Borealis family of companies. The decrease in administrative expenses is essentially the result of a more conservative accounting policy employed in the treatment of development expenditure over the respective periods. The increase in legal fees is primarily attributable to legal expenses related to the mining interests. The reduction in travel expenses in the nine months ended on 31 December 2015, is in line with less travel on behalf of Borealis.

In the nine months ended 31 December 2015, Borealis spent US$1,173,701 on compensation to directors and officers versus US$1,363,525 in the same period in 2014.

In the nine months ended 31 December 2015, Borealis incurred and capitalised development expenses amounting to US$1,114,050 relating to the Chorus Motors/WheelTug technology compared to US$1,086,712 in the same period in 2014.

For the nine months ended 31 December 2015, the accumulated loss carried forward for Borealis was US$24,747,048 compared to US$26,108,208 for the same period in 2014. The decrease in accumulated loss carried forward in the nine months ended 31 December 2015 versus the same period in 2014 is attributable to profits on sale of shares of the subsidiaries as well as reversals of various contingencies exceeding the operating costs of the family of companies.

In the nine months ended 31 December 2015, the Borealis family of companies sold no marketable securities of the Borealis family of companies to third-parties versus US$122,458 in the same period in 2014. The reason for no such sales during this period is entirely due to the very poor prevailing market conditions.

For the nine months ended on 31 December 2015, intangible assets increased to US$13,542,426 from US$12,403,000 for the same period in 2014. Intangible assets consist of (i) patents and (ii) the capitalization of Chorus Motors and WheelTug research and development expenses. The increase in the nine months ended 31 December 2015 was attributable to more development work on the Chorus/WheelTug project and the registration of additional patents.