The accompanying notes are an integral part of these unaudited financial statements.
4
| | | | | | | | |
FONU2, INC. |
Statements of Cash Flows |
(Unaudited) |
| | | | | | | | |
| | | | For the Nine |
| | | | Months Ended |
| | | | June 30, |
| | | | 2013 | | 2012 |
OPERATING ACTIVITIES | | | | | |
Net loss | $ | (889,449) | | $ | (34,947,262) |
Adjustments to reconcile loss to cash flows from operating activities: | | | | | |
Depreciation | | 1,426 | | | 4,655 |
Contribution Salary | | - | | | 125,000 |
Amortization of debt discount | | 87,000 | | | 13,500 |
Loss on derivative liability | | 61,423 | | | - |
Common stock issued for services | | 116,801 | | | 34,223,583 |
Loss on default of note payable | | 29,000 | | | - |
Changes in operating assets and liabilities | | | | | |
Inventory | | (244) | | | 4,374 |
Prepaid expenses and other assets | | 198,452 | | | 109,511 |
Accounts payable & accrued liabilities | | 208,285 | | | 77,243 |
Net Cash Used in Operating Activities | | (187,306) | | | (389,396) |
| | | | | | | | |
INVESTING ACTIVITIES | | | | | |
Purchase of fixed assets | | (3,000) | | | - |
Net Cash Used in Investing Activities | | (3,000) | | | - |
| | | | | | | | |
FINANCING ACTIVITIES | | | | | |
Cash received from Zaldiva.com | | - | | | 8,249 |
Capital contributions | | - | | | 1,000 |
Distributions to shareholders | | - | | | (1,830) |
Cash received on convertible notes payable | | 105,000 | | | 50,000 |
Cash received on notes payable | | | | | 123,000 |
Repayment of notes payable | | - | | | (21,000) |
Proceeds from related party payables | | 201,300 | | | - |
Repayments of related party payables | | (5,000) | | | - |
Common and preferred stock issued for cash | | - | | | 224,749 |
Net Cash Provided by Financing Activities | | 301,300 | | | 384,168 |
| | | | | | | | |
NET INCREASE (DECREASE) IN CASH | | 110,994 | | | (5,228) |
| | | | | | | | |
CASH AT BEGINNING OF YEAR | | 3,038 | | | 13,840 |
| | | | | | | | |
CASH AT END OF YEAR | $ | 114,032 | | $ | 8,612 |
The accompanying notes are an integral part of these unaudited financial statements.
5
FONU2, INC.
Statements of Cash Flows
(Unaudited)
(Continued)
| | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | |
| CASH PAID FOR: | | | | | |
| | | | | | | | |
| | Interest | $ | - | | $ | - |
| | Income taxes | $ | - | | $ | - |
| | | | | | | | |
NON-CASH INVESTING ACTIVITY | | | | | |
| Conversion of accounts payable to notes payable | | 26,500 | | | - |
| Common stock issued for convertible notes payable | | 81,000 | | | - |
| Cancellation of common stock | | 23,103 | | | 100 |
| Debt discount from derivative liability and common stock issued with debt | | 87,000 | | | 13,500 |
| Write off of derivative liability into additional paid in capital | 143,596 | | | - |
| Notes payable become convertible | | 58,000 | | | - |
| Shares issued to acquire Zaldiva.com | | - | | | 346,488 |
| Conversion of preferred stock to common stock | | - | | | 25,076 |
| Stock issued for prepaid expenses | | - | | | 427,500 |
| | | | | | |
The accompanying notes are an integral part of these unaudited financial statements.
6
FONU2, INC.
Notes to the Condensed Unaudited Financial Statements
June 30, 2013
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2013 and for all periods presented herein, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2012 audited financial statements. The results of operations for the periods ended June 30, 2013 are not necessarily indicative of the operating results for the full year.
NOTE 2 - GOING CONCERN
The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. During the nine months ended June 30, 2013 the Company realized a net loss of $889,449 and had a working capital deficit of $696,268. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – RELATED PARTY NOTES PAYABLE
During the period ended June 30, 2013 the Company borrowed an aggregate amount of $188,300 from its former CEO, Jeff Pollitt. The note is unsecured, bears no interest and is due on demand.
During the period ended June 30, 2013 the Company borrowed an aggregate amount of $13,000 from its CMO, Niccole Leigh. The Company made a $5,000 payment on this amount during the period, leaving an open balance of $8,000 at June 30, 2013. The note is unsecured, bears no interest and is due on demand.
NOTE 4 – FAIR VALUE MEASUREMENTS
As defined in FASB ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
7
FONU2, INC.
Notes to the Condensed Unaudited Financial Statements
June 30, 2013
NOTE 4 – FAIR VALUE MEASUREMENTS (Continued)
The three levels of the fair value hierarchy are as follows:
| |
Level 1 – | Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities. |
| |
Level 2 - | Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars. |
| |
Level 3 – | Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. |
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as June 30, 2013.
| | | | | | | | | | | | | | |
Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total |
LIABILITIES: | | | | |
Derivative liability | | | - | | | -- | | 4,827 | | 4,827 |
NOTE 5 – DERIVATIVE INSTRUMENTS
During 2013, the Company issued debt instruments that were convertible into common stock at a 42 percent discount to the average of the three lowest closing prices during the ten day period prior to conversion. See Note 6. The conversion options embedded in these instruments contain no explicit limit to the number of shares to be issued upon settlement and as a result are classified as liabilities under ASC 815. Additionally, because the number of shares to be issued upon settlement is indeterminate, all other share settle-able instruments must also be classified as liabilities. A debt discount of $87,000 was recorded as a result of this derivative liability, all of which was amortized into interest expense for the nine months ended June 30, 2013.
During 2013, certain notes payable were converted resulting in settlement of the related derivative liabilities. The Company re-measured the embedded conversion options at fair value on the date of settlement and recorded these amounts to additional paid-in capital.
The following table summarizes the changes in the derivative liabilities during the period ended June 30, 2013:
| | |
Ending balance as of September 30, 2012 | $ | - |
Additions due to new convertible debt issued | | 153,465 |
Reclassification of derivative liabilities to additional paid-in capital due to conversion of debt | | (143,596) |
Change in fair value | | (5,042) |
Ending balance as of June 30, 2013 | $ | 4,827 |
8
FONU2, INC.
Notes to the Condensed Unaudited Financial Statements
June 30, 2013
NOTE 5 – DERIVATIVE INSTRUMENTS (Continued)
During the period ended June 30, 2013, the loss on derivatives of $61,423 in the statement of operations consisted of a gain on the change in fair value of $5,042 noted above and a loss of $66,465, which was the amount by which the derivative liabilities exceeded the principal of the related notes payable on the date the notes were issued.
The Company uses the Black Scholes Option Pricing Model to value its derivatives based upon the following assumptions: dividend yield of -0-%, volatility of 86-693%, risk free rate of 0.12-0.18% and an expected term of 0.25 to one year.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
During 2013, $58,000 of notes payable that were previously not convertible became convertible. The embedded conversion options in these notes are required to be classified as liabilities. See Note 5. The note payable was due on February 2, 2013, and the Company incurred an additional $29,000 owed as part of the principal of the note due to being in default. During the period ended June 30, 2013, the lender converted $81,000 of the note payable. As of June 30, 2013, the note had an outstanding principal of $6,000.
On March 11, 2013 the Company entered into a convertible promissory note with an unrelated third party, wherein the Company borrowed $78,500. $23,500 of the proceeds were paid directly to the Company’s vendors by the lender. The principal accrues interest at a rate of eight percent per annum and is due in full on December 16, 2013. The note is convertible at the option of the holder at any point at least 180 days from the note date at a 42 percent discount to the average of the three lowest closing prices during the ten day period prior to conversion. The note will accrue interest at a rate of 22 percent per annum should the Company default. The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities once the conversion option becomes effective after 180 days due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
On June 12, 2013 the Company entered into a convertible promissory note with an unrelated third party, wherein the Company borrowed $53,000. $3,000 of the proceeds were paid directly to the Company’s vendors by the lender. The principal accrues interest at a rate of eight percent per annum and is due in full on March 14, 2014. The note is convertible at the option of the holder at any point at least 180 days from the note date at a 42 percent discount to the average of the three lowest closing prices during the ten day period prior to conversion. The note will accrue interest at a rate of 22 percent per annum should the Company default. The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities once the conversion option becomes effective after 180 days due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
9
FONU2, INC.
Notes to the Condensed Unaudited Financial Statements
June 30, 2013
NOTE 7 - COMMON STOCK
On October 22, 2012 the Company
entered into a Redemption Agreement with HMBL Trust, William Lavenia, and SLP-DZ-NTZ, LLC (collectively, the “Stockholders”), by which the Company agreed to purchase a total of 8,102,736 shares of its common stock from the Stockholders for total aggregate consideration of one dollar. The Company further agreed to release the Stockholders from any and all liability relating to any claims that it may have as of the date of the Redemption Agreement. The 8,102,736 repurchased shares of common stock were cancelled immediately upon receipt.
During the nine months ended June 30, 2013 the Company issued 4,081,515 shares of common stock for services valued at $116,801.
On February 27, 2013, Jeff Pollitt, the Company’s CEO, resigned his position with the Company. Pursuant to this resignation, Mr. Pollitt returned 15,000,000 of his 22,796,962 shares of the Company’s common back to the Company. The 15,000,000 shares were cancelled by the Company immediately upon receipt.
During the nine months ended June 30, 2013 the Company issued 6,386,468 shares of common stock to a third party pursuant to a partial conversion of a convertible promissory note. The issuance resulted in an $81,000 reduction to the convertible promissory note, which has an outstanding balance of $6,000 at June 30, 2013.
NOTE 8 – SUBSEQUENT EVENTS
Subsequent to June 30, 2013, the Company issued common stock to various entities as follows:
1)
756,364 shares of common stock upon the conversion of a $6,000 convertible promissory note along with $2,320 unpaid accrued interest.
2)
8,000,000 shares of common stock for consulting services
3)
243,055 shares of common stock upon conversion of a $25,000 convertible promissory note along with unpaid accrued interest.
4)
6,250,000 units sold at $0.04 per unit, consisting of one share of common stock and one warrant to purchase an additional share of common stock at $0.04 per share, exercisable for three months.
10
Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Results of Operation
For The Three Months Ended June 30, 2013 Compared to The Three Months Ended June 30, 2012.
We had $76,380 in revenue in the quarterly period ended June 30, 2013, compared to $41,403 in the quarterly period ended June 30, 2012. Cost of sales was $32,616 and $21,530 and gross profits were $43,764 and $19,873, in the quarters ended June 30, 2013 and 2012, respectively.
Our operating expenses decreased to $175,152 during the quarterly period ended June 30, 2013, from $390,290 in the year-ago period. We had a loss from operations of $131,388 in the three months ended June 30, 2013 compared to a loss from operations of $370,417 in the three months ended June 30, 2012. We had net interest expense of $7,861 in the quarter ended June 30, 2013 and $13,601 for the quarter ended June 30, 2012 and a loss on derivative liability of $46,695 for the three months ended June 30, 2013 and $0 for the three months ended June 30, 2012.
For the three months ended June 30, 2013, our net loss was $92,554, or $0.00 per share, as compared to a net loss of $384,018, or $0.01 per share, during the year-ago period.
For The Nine Months Ended June 30, 2013 Compared to The Nine Months Ended June 30, 2012.
We had $204,658 in revenue in the nine months ended June 30, 2013, compared to $41,403 in the nine months ended June 30, 2012. Cost of sales was $88,503 and $21,530 and gross profits were $116,155 and $19,873, in the nine months ended June 30, 2013 and 2012, respectively.
Our operating expenses decreased to $810,704 during the nine months ended June 30, 2013, from $34,953,534 in the year-ago period. We has a loss from operations of $694,549 in the nine months ended June 30, 2013 compared to a loss from operations of $34,933,661 in the nine months ended June 30, 2012. We had net interest expense of $133,477 in the nine months ended June 30, 2013 and $13,601 for the nine months ended June 30, 2012 and a loss on derivative liability of $61,423 for the nine months ended June 30, 2013 and $0 for the nine months ended June 30, 2012.
For the nine months ended June 30, 2013, our net loss was $889,449, or $0.02 per share, as compared to a net loss of $34,947,262, or $0.84 per share, during the June 30, 2012 period.
11
Liquidity
The Company had cash on hand of $114,032 as of June 30, 2013. We believe that this cash on hand will not be sufficient to meet our expenses through the end of our 2013 fiscal year. We will have to seek additional financing through either a private placement of our stock or through debt financing. While management expects to be able to raise the required funds, there is no guarantee that we can obtain adequate financing. Our ability to achieve a level of profitable operations and/or additional financing may affect our ability to continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2013, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. This material deficiency is due to a lack of adequate internal controls and the absence of an audit committee.
Changes in internal control over financial reporting
There were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None; not applicable.
Item 1A. Risk Factors.
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On April 9, 2013, and June 13, 2013, the Company issued a total of 450,000 “unregistered” and “restricted” shares of common stock, and 75,000 “unregistered” and “restricted” shares of common stock, respectively, to Jeffrey A. Olweean, Robert B. Lees and Nicole Leigh under the terms of their respective Independent Contractor Agreements and Executive Employment Agreements. Each of these issuances was made in reliance on the exemptions from
12
registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.
On April 17, 2013; May 17, 2013; and June 4, 2013, the Company issued 1,190,476 “unregistered” and “restricted” shares; 1,090,909 “unregistered” and “restricted” shares; and 1,351,351 “unregistered” and “restricted” shares, respectively, to Asher Enterprises, Inc., upon partial conversion of a convertible promissory note. These issuances were made in reliance on Rule 144 of the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the quarterly period ended June 30, 2013, there were no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.
Item 6. Exhibits.
Exhibit No. Identification of Exhibit
| |
31.1
31.2
32 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Robert B. Lees, Interim President.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Robert B. Lees, Chief Financial Officer.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided by Robert B. Lees, Interim President and Chief Financial Officer. |
101.INS | XBRL Instance Document* |
101.PRE. | XBRL Taxonomy Extension Presentation Linkbase* |
101.LAB | XBRL Taxonomy Extension Label Linkbase* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase* |
101.SCH | XBRL Taxonomy Extension Schema* |
*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
FONU2, INC.
| | | | |
| | | | |
Date: | August 19, 2013 | | By: | /s/Robert B. Lees |
| | | | Interim President and CEO, CFO and Director |
| | | | |
| | | | |
Date: | August 19, 2013 | | By: | /s/ Nicole Leigh |
| | | | Nicole Leigh, Director |
14
