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PART
I. FINANCIAL INFORMATION
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ITEM
1. FINANCIAL STATEMENTS
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NNRF,
INC. AND SUBSIDIARIES
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(A
Development Stage Company)
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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(UNAUDITED)
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June
30
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December
31,
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2007
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2006
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ASSETS
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Current
Assets
|
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|
|
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|
|
Cash
|
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$
|
125,583
|
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$
|
130,249
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|
|
Prepaid
expenses
|
|
|
366,061
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|
|
6,249
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|
Total
Current Assets
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491,644
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|
136,498
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|
Furniture
and Equipment,
net
of accumulated depreciation
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of
$4,015 at June
30, 2007, and $3,415 at December 31, 2006
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8,842
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9,442
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Deferred
loan costs,
net
of accumulated amortization of $66,579
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at
December 31,
2006
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-
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307,881
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Investment
in ATOLL,
at
cost
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4,566,250
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1,166,250
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Total
Assets
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$
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5,066,736
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$
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1,620,071
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
Liabilities
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Accrued
expenses
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$
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141,973
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$
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133,128
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Management
fee payable
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183,348
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271,625
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Accrued
interest
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1,842
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56,584
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Shareholder
advances
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39,041
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39,041
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Total
Current Liabilities
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366,204
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500,378
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Long-Term
Convertible Notes Payable,
net
of unamortized discounts
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of
$1,165,617 at
December 31, 2006
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-
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783,883
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Total
Liabilities
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366,204
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1,284,261
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Stockholders'
Equity
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Class
A Preferred Stock - $0.001 par value; 5,000,000 shares
authorized;
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none
outstanding
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-
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-
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Class
B Preferred Stock - $0.001 par value; 5,000,000 shares
authorized;
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none
outstanding
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-
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-
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Common
stock - $0.001 par value; 100,000,000 shares authorized;
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44,474,959
shares
at June 30, 2007, and 33,529,406 shares
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at
December 31,
2006
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44,475
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33,529
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Additional
paid-in capital
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28,068,652
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12,787,497
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Deficit
accumulated during the development stage
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(23,401,858
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)
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(12,482,048
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)
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Accumulated
other comprehensive loss
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(10,737
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)
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(3,168
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)
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Total
Stockholders' Equity
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4,700,532
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335,810
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Total
Liabilities and Stockholders' Equity
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$
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5,066,736
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$
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1,620,071
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NNRF,
INC. AND SUBSIDIARIES
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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For
the Period from
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August
25, 2005
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For
the Three Months Ended
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For
the Six Months Ended
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(Date
of Inception)
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June
30,
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June
30,
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through
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2007
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2006
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2007
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2006
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June
30, 2007
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Sales
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$
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-
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$
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-
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$
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-
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$
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3,434
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$
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5,343
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Cost
of Sales
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-
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-
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-
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784
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1,615
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Gross
Profit
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-
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-
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-
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2,650
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3,728
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Operating
Expenses
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General
and administrative expenses
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2,109,024
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3,346,492
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6,127,529
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3,534,688
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13,534,976
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Foreign
currency exchange loss
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-
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1,759
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-
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1,855
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5,845
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Total
Operating Expenses
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2,109,024
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3,348,251
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6,127,529
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3,536,543
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13,540,821
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Operating
Loss
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(2,109,024
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)
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(3,348,251
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)
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(6,127,529
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)
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(3,533,893
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)
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(13,537,093
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)
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Interest
Expense
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(4,402,897
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)
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-
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(4,792,281
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)
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-
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(9,864,765
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)
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Net
Loss
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$
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(6,511,921
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)
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$
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(3,348,251
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)
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$
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(10,919,810
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)
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$
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(3,533,893
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)
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$
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(23,401,858
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)
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Basic
and Diluted Loss per Share
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$
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(0.17
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)
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$
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(0.14
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)
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$
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(0.30
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)
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$
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(0.15
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)
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Basic
and Diluted Weighted-Average
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Common
Shares
Outstanding
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38,637,940
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24,148,143
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36,525,989
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23,155,407
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The
accompanying notes are an integral part of these
condensed consolidated financial statements.
NNRF,
INC. AND SUBSIDIARIES
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
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Deficit
|
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Accumulated
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Accumulated
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During
the
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Other
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Common
Stock
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Paid-in
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Development
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Comprehensive
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Stockholders'
|
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Shares
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Amount
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Capital
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Stage
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|
Loss
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Equity
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Balance
- December 31, 2006
|
33,529,406
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|
33,529
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|
12,787,497
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|
(12,482,048
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)
|
|
(3,168
|
)
|
|
335,810
|
|
|
Net
loss
|
-
|
|
-
|
|
-
|
|
(10,919,810
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)
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-
|
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|
(10,919,810
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)
|
|
Foreign
currency translation adjustment
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-
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|
-
|
|
-
|
|
-
|
|
|
(7,569
|
)
|
|
(7,569
|
)
|
|
Comprehensive
Loss
|
|
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|
|
|
|
|
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(10,927,379
|
)
|
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Issuance
of common stock for cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
2007 - $0.75 per share
|
44,334
|
|
44
|
|
33,206
|
|
-
|
|
|
-
|
|
|
33,250
|
|
|
Issuance
of commons stock for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
in
ATOLL: March 2007 - $0.60 per share
|
4,000,000
|
|
4,000
|
|
2,396,000
|
|
-
|
|
|
-
|
|
|
2,400,000
|
|
|
Issuance
of common stock for services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
2007 - $0.79 per share
|
50,000
|
|
50
|
|
39,450
|
|
-
|
|
|
-
|
|
|
39,500
|
|
|
March
2007 - $1.37 per share
|
2,500
|
|
3
|
|
3,422
|
|
-
|
|
|
-
|
|
|
3,425
|
|
|
March
2007 - $1.79 per share
|
20,000
|
|
20
|
|
35,780
|
|
-
|
|
|
-
|
|
|
35,800
|
|
|
May
2007 - $5.45 per share
|
250,000
|
|
250
|
|
1,362,250
|
|
-
|
|
|
-
|
|
|
1,362,500
|
|
|
June
2007 - $5.15 per share
|
50,000
|
|
50
|
|
257,450
|
|
-
|
|
|
-
|
|
|
257,500
|
|
|
Issuance
of common stock for conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt;
June 2007 - $0.75 per share
|
6,266,667
|
|
6,267
|
|
4,693,733
|
|
-
|
|
|
-
|
|
|
4,700,000
|
|
|
Issuance
of common stock for accrued
|
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|
|
|
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|
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|
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interest
and additional interest;
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
June
2007 - $5.35 per share
|
262,052
|
|
262
|
|
1,401,717
|
|
-
|
|
|
-
|
|
|
1,401,979
|
|
|
Warrants
issued to placement agent
|
-
|
|
-
|
|
824,394
|
|
-
|
|
|
-
|
|
|
824,394
|
|
|
Beneficial
conversion feature and allocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value
of warrants related to convertible
debt
|
-
|
|
-
|
|
741,187
|
|
-
|
|
|
-
|
|
|
741,187
|
|
|
Stock-based
compensation
|
-
|
|
-
|
|
3,492,566
|
|
-
|
|
|
-
|
|
|
3,492,566
|
|
|
Balance
- June 30, 2007
|
44,474,959
|
$
|
44,475
|
$
|
28,068,652
|
$
|
(23,401,858
|
)
|
$
|
(10,737
|
)
|
$
|
4,700,532
|
|
The
accompanying notes are an integral part of these
condensed consolidated financial statements.
NNRF,
INC. AND SUBSIDIARIES
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
For
the Period from
|
|
|
|
|
|
|
|
|
August
25, 2005
|
|
|
|
|
For
the Six Months Ended
|
|
(Date
of Inception)
|
|
|
|
|
June
30,
|
|
through
|
|
|
|
|
2007
|
|
2006
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,919,810
|
)
|
$
|
(3,533,893
|
)
|
$
|
(23,401,858
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
600
|
|
|
1,180
|
|
|
4,015
|
|
|
Amortization
of
loan costs and debt discount
|
|
|
3,421,644
|
|
|
-
|
|
|
3,727,477
|
|
|
Common
stock issued
for interest and services
|
|
|
2,904,165
|
|
|
3,147,000
|
|
|
13,412,917
|
|
|
Stock-based
compensation related to option issuance
|
|
|
3,492,566
|
|
|
-
|
|
|
3,492,566
|
|
|
Changes
in assets and liabilities, net of effects
|
|
|
|
|
|
|
|
|
|
|
|
from acquisition of Stafford Energy:
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
-
|
|
|
-
|
|
|
3,559
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
7,718
|
|
|
33,035
|
|
|
Prepaid
expenses
and other current assets
|
|
|
(360,881
|
)
|
|
(11,923
|
)
|
|
(367,130
|
)
|
|
Accrued
expenses
|
|
|
55,894
|
|
|
276,821
|
|
|
681,839
|
|
|
Net
Cash Used in
Operating Activities
|
|
|
(1,405,822
|
)
|
|
(113,097
|
)
|
|
(2,413,580
|
)
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
-
|
|
|
(1,044
|
)
|
|
(12,857
|
)
|
|
Purchase
of investment in Atoll
|
|
|
(1,000,000
|
)
|
|
-
|
|
|
(2,166,250
|
)
|
|
Cash
acquired in acquisition of Stafford Energy
|
|
|
-
|
|
|
5,754
|
|
|
5,703
|
|
|
Net
Cash Used in
Investing Activities
|
|
|
(1,000,000
|
)
|
|
4,710
|
|
|
(2,173,404
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from shareholder advances
|
|
|
-
|
|
|
106,091
|
|
|
344,163
|
|
|
Proceeds
from issuance of convertible notes payable
|
|
|
2,367,935
|
|
|
-
|
|
|
4,022,565
|
|
|
Proceeds
from issuance of common shares
|
|
|
33,250
|
|
|
-
|
|
|
349,118
|
|
|
Cash
Flows from Financing Activities:
|
|
|
2,401,185
|
|
|
106,091
|
|
|
4,715,846
|
|
|
Effect
on Exchange Rate Changes on Cash
|
|
|
(29
|
)
|
|
-
|
|
|
(3,279
|
)
|
|
Net
Change in Cash
|
|
|
(4,666
|
)
|
|
(2,296
|
)
|
|
125,583
|
|
|
Cash
at Beginning of Period
|
|
|
130,249
|
|
|
26,893
|
|
|
-
|
|
|
Cash
at End of Period
|
|
$
|
125,583
|
|
$
|
24,597
|
|
$
|
125,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for additional investment in ATOLL
|
|
$
|
2,400,000
|
|
$
|
-
|
|
|
|
|
|
Conversion
of liabilities to equity
|
|
$
|
4,869,539
|
|
$
|
3,000
|
|
|
|
|
|
Purchase
of Stafford Energy, net of cash acquired
|
|
$
|
-
|
|
$
|
136,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
condensed consolidated financial statements.
NNRF
Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
- Nucon,
Inc.
(“Nucon”)
was
organized on August 25, 2005, under the laws of the State of Nevada. On May
23,
2006, Stafford Energy, Inc. a Nevada corporation, (“Stafford”), acquired 100% of
the issued and outstanding common stock of Nucon from the Nucon shareholders
in
exchange for the issuance of 22,500,000 shares of common stock. The Nucon
shareholders received a majority of the common stock of Stafford; accordingly,
the reorganization of Nucon into Stafford was accounted for as the
recapitalization of Nucon at historical cost. The accompanying consolidated
financial statements include the historical operations of Nucon and have been
restated on a retroactive basis to reflect the 22,500,000 shares of Stafford’s
common stock issued to the Nucon shareholders for all periods presented. In
connection with the recapitalization of Nucon, Stafford changed its name to
Nucon-RF, Inc. On July 19, 2007, Nucon-RF, Inc. changed its name to NNRF, Inc.
(“NNRF”). All references herein to
NNRF
or the
Company refer to Nucon, Inc. prior to May 23, 2006 and to Nucon-RF, Inc. and
subsidiaries thereafter.
In
2007,
the Company formed OOO Nucon-RUS (“Nucon-RUS”), a limited liability company
under the laws of the Russian Federation. Nucon-RUS is a wholly owned subsidiary
of
NNRF
.
In
January 2007, Nucon-RUS became fully accredited to do business in the Russian
Federation by the Russian Ministry of Justice.
Interim
Financial Statements
- The
accompanying unaudited consolidated financial statements are condensed and,
therefore, do not include all disclosures normally required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the Company's annual financial statements
for
the year ended December 31, 2006 included in the Company’ Form 10-SB. In the
opinion of management, all adjustments have been made and consist of normal
recurring items necessary to present fairly the Company’s financial position,
and the results of operations and cash flows in accordance with accounting
principles generally accepted in the United States of America. The results
of
operations presented for the six months ended June 30, 2007 are not necessarily
indicative of the results to be expected for the year ending December 31, 2007.
Nature
of Operations
-
NNRF
is a
development stage company who’s planned principal operations have not commenced.
NNRF
plans to
market
products, technologies, technical and engineering services to government and
private sector clients in the Russian Federation, European and Asian markets
to
enable the clients to manage high-end environmental impacts. NNRF intends to
a
cquire
manufacturing facilities, technical support companies and proprietary
technologies to enable it to manufacture its planned products and to provide
its
planned technical and engineering services. To date, NNRF has had no sales
or
revenue from its planned environmental impact services business.
The
Company’s only sales have been through its subsidiary, Abucco, which has
realized very limited sales of its wireless technology products to customers
in
Canada. These limited operations are not part of the Company’s planned principal
business. The wireless technology operations amounted to less than 10% of the
losses of the Company for each period presented; accordingly, segment
information is not presented herein.
Use
of Estimates
- The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. These same estimates may
affect the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual amounts and results could differ from those
estimates.
Basic
and Diluted Loss Per Common Share
-
Basic
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding during the period. Diluted loss per share is
computed by dividing net loss by the weighted-average number of common shares
and dilutive potential common shares that were outstanding during the period.
For the three and six months ended the Company excluded 3,711,667 in stock
warrants and 5,821,667 in stock options from the calculation of diluted loss
per
share as the effects would be anti-dilutive. There were no dilutive securities
outstanding at June 30, 2006.
NOTE
2 - BUSINESS CONDITION
The
Company is in the development stage as of June 30, 2007. To date the Company
had
generated limited revenues from sales of Abucco’s wireless technology products.
At June 30, 2007 and December 31, 2006 the Company has generated no revenue
from
its planned
environmental-impact
products
and services. Through June 30, 2007, the Company had accumulated losses of
$23,401,858 and used $2,413,580 of cash in operating activities since inception.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or
the amount of liabilities that might be necessary should the Company be unable
to continue as a going concern.
The
Company's ability to continue as a going concern depends on its ability to
acquire
manufacturing
facilities, technical support companies and proprietary technologies
for its
core business, to generate sufficient revenue and cash flows to meet the
Company’s obligations and to obtain additional financing as may be required to
fund operations. Management’s plans include generating income from the Company’s
existing licensed technologies and from dividend income from ATOLL to permit
the
Company to generate sufficient income and cash flow to continue as a going
concern. There is no assurance these plans will be realized.
NOTE
3 - ACQUISITION OF STAFFORD ENERGY, INC.
Prior
to
the reorganization of
NNRF
,
Stafford had 359,500 shares of common stock outstanding. The reverse acquisition
of Stafford was recognized by
NNRF
as the
constructive issuance of the 359,500 shares of common that remained outstanding.
The consolidated financial statements include the operations of Stafford and
its
wholly owned subsidiary, Abucco Technologies, Inc., from May 23, 2006. At the
date of acquisition, Stafford was a development stage enterprise; therefore,
the
shares constructively issued to the Stafford shareholders were recognized at
the
fair value of net liabilities assumed on the date of the acquisition. The net
liabilities assumed consisted of the following:
|
Cash
|
$
|
5,703
|
|
|
Trade
accounts receivable
|
|
33,307
|
|
|
Inventory
|
|
3,584
|
|
|
Accounts
payable
|
|
(59,492
|
)
|
|
Accrued
liabilities
|
|
(82,285
|
)
|
|
Advances
from shareholders
|
|
(37,000
|
)
|
|
Net
Liabilities Assumed
|
$
|
(136,183
|
)
|
NOTE
4 - INVESTMENT IN ZAO ELECTRO MACHINERY BUILDING PLANT ATOLL
At
December 31, 2006, the Company had acquired 13.25% of the equity interests
of
Zao Electro Machinery Building Plant Atoll (“ATOLL”), a Russian company for
$1,166,250. In March 2007, the Company acquired an additional 36.75% interest
for $1,000,000 in cash payments and the issuance of 4,000,000 shares of the
Company’s common stock valued at $2,400,000 or $0.60 per share, which was equal
to the closing price of the common stock on the date of the transaction. The
remaining 50% ownership of ATOLL is concentrated among a very small group of
shareholders. Due to this concentration and the nature of the industry that
ATOLL operates in, the Company, at this time is unable to influence significant
control. Accordingly, the investment in ATOLL will continue to be recognized
at
the lower of cost or fair value in accordance with Financial Accounting
Standards Board (“FASB”) Interpretation 35
“Criteria
for Applying the Equity Method of Accounting for Investments in Common
Stock.”
The 50%
ownership of ATOLL has been recorded at cost of $4,566,250.
ATOLL
is
a manufacturing and research facility established to develop, manufacture and
sell products designated for nuclear facilities such as nuclear power plants.
The Company has evaluated its investment in ATOLL and concluded that the
investment was not impaired at June 30, 2007.
NOTE
5 - CONVERTIBLE NOTES PAYABLE
$1,949,500
Convertible Notes
From
July
through December 2006, the Company issued $1,949,500 of 8% convertible notes
payable and 974,750 warrants in a private placement offering for $1,654,630,
net
of a 13% cash commission paid to the placement agent of $294,870. The placement
agent was also issued 259,935 warrants. The warrants issued to the note holders
are exercisable for two years from the date issued at $1.50 per share; the
warrants issued to the placement agent are exercisable through June 30, 2011
at
$0.75 per share. The notes are due two years from the date of issuance and
are
convertible into common stock as follows: (A) at $0.75 per share at any time
prior to the shares of the Company’s common stock being quoted on the
Over-the-Counter Bulletin Board (“OTCBB”); (B) for a period of 90 days from the
date the shares of the Company’s common stock are quoted on the OTCBB, at the
lesser of a 25% discount to the closing price on the business day preceding
the
date of conversion or $1.00 with a floor of $0.75 per share: or (C) thereafter,
at the greater of a 25% discount to the closing price on the business day
preceding the date of conversion or $0.75 per share.
The
fair
value of the warrants was determined by the Black-Scholes option pricing model
using the following weighted-average assumptions: volatility of 255%, risk-free
interest rate of 4.86%, dividend yield of 0% and a term of 2.60 years. The
fair
value of the placement agent warrants was $240,810 and the fair value of the
warrants issued to the note holders was $831,013. Based on the effective
conversion price of the convertible notes payable, the note holders received
a
beneficial conversion option of $829,660.
The
net
proceeds were allocated between the convertible notes payable and the warrants
issued to the note holders based on their relative fair values and resulted
in
$544,629 being allocated to the convertible notes payable (before $374,460
of
capitalized deferred loan costs), $413,992 allocated to the warrants issued
to
the note holders, $240,810 allocated to the warrants issued to the placement
agent and $829,660 allocated to the beneficial conversion option. The resulting
discount to the convertible notes payable of $1,404,871 and the deferred loan
costs are being amortized over the term of the convertible notes.
$2,750,500
Convertible Notes
In
February and March 2007, the Company issued $2,750,500 of 8% convertible notes
payable and 1,375,250 warrants (exercisable at $1.50 per share) in a private
placement offering for $2,367,935, net of a 13% cash commission plus expenses
paid to the placement agent of $382,565. The placement agent was also issued
601,732 warrants exercisable at $0.75 per share and 500,000 warrants exercisable
at $0.10 per share. The warrants issued to the note holders are exercisable
for
two years from the date issued and the warrants issued to the placement agent
are exercisable for five years from the date of issuance.
The
notes
are due two years from the date of issuance and are convertible into common
stock as follows: (A) at $0.75 per share at any time prior to the shares of
the
Company’s common stock being quoted on the Over-the-Counter Bulletin Board
(“OTCBB”); (B) for a period of 90 days from the date the shares of the Company’s
common stock are quoted on the OTCBB, at the lesser of a 25% discount to the
closing price on the business day preceding the date of conversion or $1.00
with
a floor of $0.75 per share: or (C) thereafter, at the greater of a 25% discount
to the closing price on the business day preceding the date of conversion or
$0.75 per share.
The
fair
value of the warrants was determined by the Black-Scholes option pricing model
using the following weighted-average assumptions: volatility of 241%, risk-free
interest rate of 4.77%, dividend yield of 0% and a term of 3.08 years. The
fair
value of the placement agent warrants was $824,394 and the fair value of the
warrants issued to the note holders was $824,343. Based on the effective
conversion price of the convertible notes payable, the note holders received
a
beneficial conversion option of $386,560.
The
net
proceeds were allocated between the convertible notes payable and the warrants
issued to the note holders based on their relative fair values and resulted
in
$1,732,009 being allocated to the convertible notes payable (before $928,055
of
capitalized deferred loan costs), $353,027 allocated to the warrants issued
to
the note holders, $824,394 allocated to the warrants issued to the placement
agent and $386,560 allocated to the beneficial conversion option. The resulting
discount to the convertible notes payable of $1,018,491 and the deferred loan
costs are being amortized over the term of the convertible notes.
Conversion
of Convertible Notes
In
total,
the Company issued $4,700,000 of 8% convertible notes, 2,350,000 subscriber
warrants, and 1,361,667 placement agent warrants. On June 18, 2007, 8%
convertible notes of $4,700,000 and accrued interest of $196,539 were converted
into 6,528,719 shares of common stock, a conversion rate of $0.75 per share.
On
the date of conversion, the closing market price of the Company’s common stock
was $5.35. Since the accrued interest was converted at a rate lower than the
fair value, the Company recorded the per share difference of $4.60 (totaling
$1,205,440) as additional interest expense. In addition, at the time of
conversion, the Company amortized the remaining discounts on the convertible
notes of $1,960,634 and the remaining deferred loan costs of $1,158,442 to
interest expense. During the six months ended June 30, 2007, the Company
recognized $2,184,108 in amortization of the discounts and $1,237,536 in
amortization of the deferred loan costs as interest expense. During the three
months ended June 30, 2007, the Company recognized $3,197,170 in amortization
of
the discounts and deferred loan costs as interest expense.
NOTE
8 - STOCKHOLDERS’ EQUITY
Issuance
of Common Stock for Cash
-
From
January through March 31, 2007, the Company issued 44,334 common shares for
$33,250 of cash at $0.75. These issuances for cash were to unrelated individuals
and entities.
2007
Issuances of Common Stock for Settlement of Payables and Services
-
In
February 2007, the Company issued 50,000 common shares to one individual for
services rendered to the Company. The shares were valued at $0.79 per share,
which was the fair value of the shares on the date of issuance and resulted
in
the recognition of $39,500 of compensation for services during the six months
ended June 30, 2007. The 50,000 shares of common stock were issued for investor
relations services. The 50,000 shares of common stock vested fully upon grant
and there were no future performance requirements.
In
March
2007, the Company issued 2,500 common shares to a consultant for services
rendered to the Company. The shares were valued at $1.37 per share, which was
the fair value of the shares on the date of issuance and resulted in the
recognition of $3,425 of compensation for services during the six months ended
June 30, 2007. The 2,500 shares of common stock were issued for consulting
services. The 2,500 shares of common stock vested fully upon grant and there
were no future performance requirements.
In
March
2007, the Company issued 20,000 common shares to a consultant for services
rendered to the Company. The shares were valued at $1.79 per share, which was
the fair value of the shares on the date of issuance and resulted in the
recognition of $35,800 of compensation for services during the six months ended
June 30, 2007. The 20,000 shares of common stock were issued for consulting
services. The 20,000 shares of common stock vested fully upon grant and there
were no future performance requirements.
In
May
2007, the Company issued 250,000 common shares to a consultant for services
rendered to the Company. The shares were valued at $5.45 per share, which was
the fair value of the shares on the date of issuance and resulted in the
recognition of $1,362,500 of compensation for services during the three and
six
months ended June 30, 2007. The 250,000 shares of common stock were issued
for
consulting services. The 250,000 shares of common stock vested fully upon grant
and there were no future performance requirements.
In
June
2007, the Company issued 50,000 common shares to a consultant for services
rendered to the Company. The shares were valued at $5.15 per share, which was
the fair value of the shares on the date of issuance and resulted in the
recognition of $257,500 of compensation for services during the three and six
months ended June 30, 2007. The 50,000 shares of common stock were issued for
consulting services. The 50,000 shares of common stock vested fully upon grant
and there were no future performance requirements.
NOTE
10 - STOCK OPTIONS
Effective
March 1, 2007, the Company implemented the 2007 Stock Option and Incentive
plan
(“Plan”). The Plan allows the Company to grant to employees, officers, directors
and consultants stock options and bonuses in the form of stock and options.
Under the Plan, the Company can grant awards for the purchase of up to 6,000,000
shares of common stock in the aggregate, including incentive and non-qualified
stock options.
On
March
1, 2007, the Company issued non-qualified options to purchase 5,821,667 shares
of common stock, exercisable at $0.75 per share to officers, directors and
consultants. These options vested upon issuance and expire in ten years. The
options were valued at $3,492,566 as determined by using the Black-Scholes
option pricing model with the following assumptions: volatility of 240%,
risk-free interest rate of 4.56%, dividend yield of 0% and a term of 10.0 years.
The
expected volatility is based on the historical price volatility of our common
stock. The risk-free interest rate represents the U.S. Treasury bill rate for
the expected life of the related stock options. The dividend yield represents
our anticipated cash dividend over the expected life of the stock options.
The
value
was expensed during the six months ended June 30, 2007 and included in general
and administrative expenses.
The
aggregate intrinsic value of options exercisable at June 30, 2007 was
$27,420,051. The intrinsic value is based on a June 29, 2007 closing price
of
the Company’s common stock of $5.46.
NOTE
11
-
SUBSEQUENT EVENTS
On
August
27, 2007, the Company entered into a revolving credit facility agreement
(“Credit Facility”) in the amount of $2,500,000, with Professional Offshore
Opportunity Fund, Ltd. (the “Lender”). Under the terms of the Credit
Facility, the Company may borrow up to $2,500,000 from Lender, with $500,000
advanced on closing and additional amounts to be advanced in increments not
to
exceed $250,000, or more if the parties agree, in any thirty-day period, unless
waived by Lender, in which case the loan amount could exceed $250,000 in that
period. The Company is required to repay all principal and accrued but
unpaid interest on amounts advanced pursuant to the Credit Facility no later
than August 28, 2009. The initial $500,000 advance under the Credit Facility
was
made on September 6, 2007.
The
material terms of the Credit Facility are as follows: (i) the Company has
arranged for restricted shares of common stock, held by third parties, to be
pledged as collateral for the loans pursuant to a Pledge Agreement between
Lender and such third parties; (ii) Lender may reduce the amount of the
outstanding loans by retaining for its own account pledged stock, subject to
the
volume restrictions of Rule 144 (no more than 1% of the outstanding shares
for a
90 day period.); (iii) the loans bear interest at the rate of 8% per annum;
(iv)
on each advance, the Company must repay any accrued but unpaid interest and
Lender may withhold two months interest from any advance as prepaid interest;
(v) the Company may prepay the principal and interest on the loan without
penalty; (vi) Lender may withhold from any advance a retention fee equal to
5%
of the amount loaned; (vi) in connection with the issuance of the loan, the
Company provided Lender a commitment fee of $50,000 and common stock equal
to
$250,000 (the shares were valued at the closing price on September 6, 2007,
or
$2.97 per share, the date on which the first funding in the amount of $500,000
occurred under the Credit Facility. The foregoing equates to 84,175 shares
of
common stock. The shares of common stock include piggyback registration
rights.
In
consideration for the pledge of a total of 1,842,859 of restricted shares of
common stock (“Pledged Shares”), held by third parties, as collateral against
the Credit Facility, the Company entered into a Common Stock and Warrant
Agreement with each of such third parties providing for the following
consideration, collectively: (i) restricted shares of common stock in the amount
of 2,763,489 shares (“Pledge Share Consideration”), or 150% of the amount of
shares of common stock pledged; and (ii) warrants to purchase 1,842,859 shares
of common stock, exercisable for a period of two (2) years at $2.95 per share
(“Pledge Warrant Consideration”), the closing price of the Company’s common
stock on August 27, 2007. The Common Stock and Warrant Agreements provide that
in the event Lender does not reduce the amount of the outstanding loans under
the Credit Facility by retaining for its own account Pledged Shares, then the
Pledge Share Consideration shall be reduced in proportion to the amount of
Pledged Shares not retained for Lender’s account for the purpose of reducing the
amount of the outstanding loans under the Credit Facility. In addition, the
third parties received one (1) demand registration right.
The
Company paid Newbridge Securities Corporation the sum of $100,000 and issued
150,000 shares of restricted common stock in consideration for placing the
Credit Facility.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Statement
on Forward-Looking Information
Certain
information included herein contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, or the Exchange
Act, such as statements relating to plans for product development, product
placement, capital spending and financing sources. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements made herein.
These
risks and uncertainties include, but are not limited to, our inability to
exercise significant influence or control over the management of the operations
of ZAO Electro Machinery Building Plant ATOLL, limited operating history,
history of operating losses, the inability to obtain additional capital, the
failure to successfully expand our operations, the legal and regulatory
requirements related to our industry, the inability to enter into strategic
partnerships with state and private owned entities, the loss of key personnel,
adverse economic conditions, adverse currency rate fluctuations, the inability
to protect our proprietary information against unauthorized use by third
parties, the control of our common stock by our management, the classification
of our common stock as “penny stock,” the absence of any right to dividends, the
costs associated with the issuance of and the rights granted to additional
securities, the unpredictability of the trading of our common stock and the
ability of our Board of Directors to issue up to 10,000,000 shares, $0.001
par
value, of Class A and Class B preferred stock, collectively.
Overview
Nucon,
Inc. was organized on August 25, 2005 under the laws of the State of Nevada.
On
May 23, 2006, Stafford Energy, Inc., a Nevada corporation (“Stafford”), acquired
100% of the issued and outstanding capital stock of Nucon, Inc., a Nevada
corporation, in exchange for 22,500,000 shares of common stock pursuant to
that
certain merger and share exchange agreement (“Merger Agreement”). At the
closing, Stafford amended its articles of incorporation and changed its name
to
Nucon-RF, Inc. (“Nucon”), and its two wholly-owned subsidiaries, Abucco
Technologies, Inc., a Canadian corporation (“Abucco”), and Stafford Energy
Canada, Ltd., a Canadian corporation (“Stafford Canada”), became wholly owned
subsidiaries of Nucon. Nucon, Inc., a Nevada corporation, remains a wholly
owned
subsidiary of Nucon. On July 19, 2007, we amended our articles of incorporation
to change our name to “NNRF, Inc.”.
As
the
shares of Stafford common stock issued to Nucon shareholders in the merger
transaction represented a controlling interest, the transaction has been
accounted for as a recapitalization, or reverse merger, with Nucon being
considered the acquirer. The recapitalization has been accounted for at
historical cost.
Abucco
Technologies Inc. is a developer and provider of embedded solutions that monitor
and control remote devices and appliances using wireless and TCP/IP connections.
Given that Abucco’s business is not synergistic with that of the Company, NNRF
will divest itself of Abucco in 2007. In addition, NNRF will dissolve Stafford
Canada in 2007. Stafford Canada has had no operations since inception.
In
addition to the two foregoing subsidiaries, the Company incorporated OOO
Nucon-RUS (“Nucon-RUS”), a limited liability company formed under the laws of
the Russian Federation (“RF”) in 2007. Nucon-RUS is a wholly owned subsidiary of
Nucon. In January 2007, Nucon became fully accredited to do business in the
RF
by the Russian Ministry of Justice.
In
this
report, the references to “we,” “us” or “our” relate to Nucon, Inc. from its
inception on August 25, 2005 to May 23, 2006, Nucon-RF, Inc. from May 23, 2006
to July 18, 2007, and NNRF, Inc. from July 19, 2007 forward.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect reported amounts and disclosures, some of which
may
require revision in future periods. The most sensitive estimates affecting
our
financial statements include, or may include in subsequent periods, future
volatility used in valuing equity instruments, allowances for bad debts,
depreciable lives of equipment in service and other equipment, amortization
periods of intellectual property, deferred revenues, accrued liabilities and
deferred tax valuation allowances. By their nature, these judgments are subject
to an inherent degree of uncertainty. Our judgments are based on our historical
experience, our observance of industry trends, information provided by or
gathered from our customers and information available from other outside
sources, as appropriate. There can be no assurance that actual results will
not
differ from our estimates. The most critical policies relate to revenue
recognition. The following is a description of our revenues and our revenue
recognition policies. The application of these policies, in some cases, requires
our management to make subjective judgments regarding the effect of matters
that
are inherently uncertain.
Plan
of Operation
NNRF
is a
technical solutions company focused on high-end environmental markets in the
FSU, Eastern Europe and Asia. NNRF has offices in Moscow, Russia, and Berlin,
Germany. Our
mission
is to provide cutting edge solutions for the management of nuclear waste and
power quality challenges facing the Russian, European and Asian
markets
.
We
have
licensed
or acquired technologies in the high-end environmental impact areas of nuclear
facility construction, safety and remediation, wastewater treatment, and power
quality, and intend to market and either distribute to resellers or sell the
products and services related to the foregoing technologies.
Our
current clients and partners include Rosenergoatom, the operating utility of
Russia’s nuclear facilities; Atomstroyexport, established by the Russian
government to promote the export of Russian construction, operation and
modernization of nuclear power plants abroad; and Stroikomplektinvest, a
construction supply distributor acting as NNRF’s marketing partner for power
quality equipment in the Republic of Tatarstan.
We
recently completed the purchase of 50% of ATOLL, a m
anufacturer
of spare parts for the entire nuclear cycle, including spare parts and
mechanisms for nuclear power plants, and handling equipment for nuclear waste
containers designed for long term storage of radioactive wastes and spent fuel.
We anticipate that our 50% ownership in ATOLL will result in us booking
significant revenues and profits in fiscal year 2007 based on the existing
on-hand orders of ATOLL. We are also in the due diligence phase of our proposed
acquisitions of 25.5% of JSC Electroprivod and 25.5% of Velkont, and are
currently considering other potential acquisitions in the RF.
Historically,
all of our revenues have been derived from the business of Abucco. It is our
intention to divest ourselves of Abucco as soon as practicable in fiscal 2007
given that its revenues have declined precipitously and its operations are
incongruent with the initiatives of NNRF.
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those statements included elsewhere in this statement. In addition to the
historical consolidated financial information, the following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties.
Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those
set
forth under "Risk Factors" and elsewhere in this statement.
RESULTS
OF OPERATIONS
COMPARISON
OF THREE MONTHS ENDED JUNE 30, 2007 AND 2006
Revenues.
For
the
three months ended June 30, 2007 and 2006, the Company did not realize revenues.
Accordingly, there was no cost of sales during such periods.
Operating
Expenses
.
For the
three months ended June 30, 2007, general and administrative expenses totaled
$2,109,024, as compared to $3,346,492 for the three months ended June 30, 2006.
The general and administrative expenses for the three months ended June 30,
2007
principally related to non-cash items consisting common stock issued for
services valued at $1,619,700. During the three months ended June 30, 2006,
non-cash items consisting of common stock issued for services were
$3,147,000.
Interest
Expense
.
Interest expense was $4,402,297 for the three months ended June 30, 2007, as
compared to zero for the three months ended June 30, 2006. The increase in
interest expense is directly related to the amortization of discounts and debt
offering costs related to the convertible notes and the excess fair value of
common stock issued in the settlement of accrued interest on the convertible
notes.
Net
Loss
.
Net
loss for the three months ended June 30, 2007 was $6,511,921, as compared to
$3,348,251 for the three months ended June 30, 2006.
COMPARISON
OF SIX MONTHS ENDED JUNE 30, 2007 AND 2006
Revenues.
For
the
six months ended June 30, 2006 the Company recorded limited amounts of revenue
and costs related to the sales of Abucco’s wireless technology products. There
were no such sales during the six months ended June 30, 2007 and thus the
Company did not realize any revenues and cost during such period.
Operating
Expenses
.
For the
six months ended June 30, 2007, general and administrative expenses totaled
$6,127,529, as compared to $3,534,688 for the six months ended June 30, 2006.
The general and administrative expenses for the six months ended June 30, 2007
principally related to non-cash items consisting of $5,191,291 of stock based
compensation. Foreign currency exchange loss was zero for the six months ended
June 30, 2007, as compared to $1,855 for the six months ended June 30, 2006.
Interest
Expense
.
Interest expense was $4,792,281 for the six months ended June 30, 2007, as
compared to zero for the six months ended June 30, 2006. The increase in
interest expense is directly related to the amortization of discounts and debt
offering costs related to the convertible notes and the excess fair value of
common stock issued in the settlement of accrued interest on the convertible
notes.
Net
Loss
.
Net
loss for the six months ended June 30, 2007 was $10,919,810, as compared to
$3,533,893 for the six months ended June 30, 2006.
The
foregoing revenues, operating expenses and net losses are not indicative of
what
future operating results are anticipated to be. Management for the Company
believes that revenues should increase measurably and outpace operating
expenses, thereby resulting in net income for fiscal year 2007.
Liquidity
and Capital Resources
.
At
June
30, 2007, our principal source of liquidity consisted of $125,583 of cash,
as
compared to $130,249 of cash at December 31, 2006. As of June 30, 2007, we
had
working capital of $125,440, as compared to a working capital deficit of
$363,880 at December 31, 2006. In addition, our stockholders’ equity was
$4,700,532 at June 30, 2007, as compared to $335,810 at December 31, 2006.
Our
operations used net cash of $1,405,822 during the six months ended June 30,
2007, as compared to $113,097 during the six months ended June 30, 2006.
Investing
activities for the six months ended June 30, 2007 used net cash of $1,000,000,
as compared to cash provided of $4,710 in the six months ended June 30, 2006.
The $1,000,000 used in the six months ended June 30, 2007 related to the cash
payment made on the purchase of an additional 36.75% of ATOLL.
Financing
activities provided $2,401,185 during the six months ended June 30, 2007, as
compared to $106,091 during the six months ended June 30, 2006. The majority
of
the financing provided during the six months ended June 30, 2007 related to
our
private placement of 8% convertible promissory notes.
We
will
require additional capital in the future to possibly expand the manufacturing
facilities of ATOLL, to make acquisitions, and for general working capital.
We
anticipate that we will require a minimum of $3,500,000 to fund prospective
acquisitions. While we hope to achieve some, or all, of the foregoing through
cash flow, there can be no assurance that we will be successful in doing so.
To
the extent we are not, we will seek require additional capital to achieve our
long-term business objectives from prior, and possibly other, funding sources.
There can be no assurance that such financing will be available, or if
available, on acceptable terms. If a future financing is procured in the form
of
equity, the shareholdings of the current stockholders of the Company will be
diluted.
Going
Concern Qualification
The
Company's independent auditors have included an explanatory paragraph in their
report on the December 31, 2006 financial statements discussing issues which
raise substantial doubt about the Company's ability to continue as a "going
concern." The going concern qualification is attributable to the Company's
historical operating losses, the Company's lack of cash reserves and capital,
and the amount of capital which the Company projects it needs to achieve
profitable operations.
Outlook
We
have
incurred losses of $10,919,810 and $3,533,893 for the six months ended June
30,
2007 and 2006, respectively. As of June 30, 2007, we had an accumulated deficit
of $23,401,858.
In
summary, until we generate sufficient cash from our operations, we will need
to
rely upon private and institutional sources of debt and equity financing. Based
on our existing revolving credit facility with Professional Offshore Opportunity
Fund, Ltd., in the amount up to $2,500,000, of which we have drawn down the
sum
of $500,000, we believe that we will be able to fund our existing operations
and
required expenditures through the second quarter of 2008.
However,
we will require additional financing to consummate our pending acquisitions
of
JSC Electroprivod, Velkont and RUAR. To this end, we estimate that we will
need
approximately $3,500,000 of additional equity or debt capital which we are
currently seeking. There can be no assurance that we will be successful in
this
endeavor, and if not we will be unable to consummate the acquisitions of the
foregoing entities, the result of which would likely have a material effect
on
our future results of operations.
We
are
subject to a high degree of risk as we are considered to be in unsound financial
condition. The following risks, if any one or more occurs, could materially
harm
our business, financial condition or future results of operations, and the
trading price of our common stock could decline. These risks factors include,
but are not limited to, our inability to exercise significant influence or
control over the management of the operations of ZAO Electro Machinery Building
Plant ATOLL, limited operating history, history of operating losses, the
inability to obtain additional capital, the failure to successfully expand
our
operations, the legal and regulatory requirements related to our industry,
the
inability to enter into strategic partnerships with state and private owned
entities, the loss of key personnel, adverse economic conditions, adverse
currency rate fluctuations, the inability to protect our proprietary information
against unauthorized use by third parties, the control of our common stock
by
our management, the classification of our common stock as “penny stock,” the
absence of any right to dividends, the costs associated with the issuance of
and
the rights granted to additional securities, the unpredictability of the trading
of our common stock and the ability of our Board of Directors to issue up to
10,000,000 shares, $0.001 par value, of Class A and Class B preferred stock,
collectively.
For
a
more detailed discussion as to the risks related to NNRF, Inc., our industry
and
our common stock, please see the section entitled, “Management’s Discussion and
Analysis or Plan of Operation - Risk Factors,” in our registration statement
filed on Form 10-SB, as filed with the Securities and Exchange Commission on
September 24 2007.
ITEM
3.
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls
Our
President and Chief Financial Officer, after evaluating the effectiveness
of the Company’s “disclosure controls and procedures” (as defined in the
Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e))
as
of the end of the period covered by this quarterly report, has concluded that
our disclosure controls and procedures are effective at a reasonable assurance
level based on his evaluation of these controls and procedures
required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Changes
in Internal Controls
There
were no changes in our internal controls over financial reporting that occurred
during the last fiscal quarter,
i.e.
,
the
three months ended June 30, 2007, that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
