UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________

FORM 10-Q

____________________

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to____________

Commission File No. 000-49652

FONU2 Inc.

(Exact name of registrant as specified in its charter)

331 East Commercial Blvd.

Ft. Lauderdale, Florida 33334

 (Address of principal executive offices)

(954) 938-4133

 (Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [  ] No [X]*

*  The registrant is currently working to obtain the audited financial statements of Cygnus Internet, Inc., that are required to be filed with its amended Current Report on Form 8-K dated March 29, 2012.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

1

Large accelerated filer [  ]  Accelerated filer [  ]   Non-accelerated filer [  ]  Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ] No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Not applicable.

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:

August 20, 2012 - Common – 66,451,182

August 20, 2012 - Preferred –0

PART I

Item 1.  Financial Statements

The financial statements of the registrant required to be filed with this Quarterly Report on Form 10-Q were prepared by management and commence below, together with related notes. In the opinion of management, the financial statements fairly present the financial condition of the registrant.

2

FONU2 INC. (formerly Zaldiva, Inc.)

Condensed Consolidated Balance Sheets

(Unaudited)

The Company issued common stock with a preliminary estimated value of $5,341,126 in connection with the Cygnus acquisition.  See Note 7.

The accompanying condensed notes are an integral part of these interim financial statements.

5

FONU2 INC.

(formerly Zaldiva, Inc.)

Notes to the Condensed Consolidated Financial Statements

June 30, 2012

NOTE 1 - CONDENSED CONSOLIDATED 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, 2012 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, 2011 audited financial statements.  The results of operations for the periods ended June 30, 2012 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, 2012 the Company realized a net loss of $616,047 and has incurred an accumulated deficit of $3,968,862.  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 – SIGNIFICANT ACCOUNTING POLICIES

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 and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Management has considered all recent accounting pronouncements issued since the last audit of our financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.

Fair Value Measurements

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. exit price), in an orderly transaction between market participants at the measurement date. The Company categorizes its assets and liabilities measured at fair value based upon the level of judgment associated with the inputs used to measure the fair value. Level inputs, as defined by ASC 820-10, are as follows:

6

FONU2 INC.

(formerly Zaldiva, Inc.)

Notes to the Condensed Consolidated Financial Statements

June 30, 2012

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value Measurements (Continued)

·

Level 1 – quoted prices in active markets for identical assets or liabilities.

·

Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

·

Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

The following table summarizes fair value measurements by level at June 30, 2012, for liabilities measured at fair value on a recurring basis:

Derivative liability was valued under the Black-Scholes model with the following assumptions:

The following is a reconciliation of the derivative liability (Level 3):

NOTE 4 – NOTES PAYABLE

Convertible Notes Acquired from Cygnus

In the acquisition of Cygnus Internet, Inc. the Company assumed $75,000 of convertible notes payable. The notes payable accrue interest at 10% per annum. The shares are convertible to shares of the Company’s common stock at a discount equal to 30% of the trading price of the Company’s common stock. However, the shares may not be converted at a price lower than $0.10 per share or higher than $0.50 per share.  The Company has the option to redeem the note for 130% of the principal at any time.  The note is due or convertible on demand.  Consequently, the liability was recorded at $107,143 on the balance sheet.  See Note 7 regarding the purchase price allocation.  

Asher Enterprises Convertible Note

On April 30, 2012, the Company issued an 8% secured convertible note (the “April 2012 Note”) in the amount of $58,000 to Asher Enterprises, Inc. (“Asher”). The principal and accrued interest is payable on February 2, 2013, or such earlier date as defined in the agreement. The note is convertible by Asher at any time after 180 days from the issue date. The note is convertible into shares of the Company’s common stock at a price of 58% of the average of the three lowest trading prices of the Company’s common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date. Asher is not entitled to convert any portion of the April 2012 Note to the extent that the shares to be issued in connection therewith would cause Asher’s beneficial ownership of the Company’s common stock to exceed 4.99% of the outstanding shares of the Company’s common stock.  Because of the operation of the floating conversion price and the limitation on the ability of Asher to convert as described above, the Company is unable to determine at any time the number of shares into which Asher could convert the April 2012 Note.

7

FONU2 INC.

(formerly Zaldiva, Inc.)

Notes to the Condensed Consolidated Financial Statements

June 30, 2012

NOTE 4 – NOTES PAYABLE (Continued)

Asher Enterprises Convertible Note (Continued)

The April 2012 Note contains customary representations and warranties, customary affirmative and negative covenants, customary anti-dilution provisions, and customary events of default that entitle Asher to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the April 2012 Note. A default on the April 2012 Note could lead to certain penalties, including an obligation to pay default interest and/or other monetary penalties.  At June 30, 2012 the outstanding unpaid balance on the April 2012 Note was $58,000.

The Company accounts for the fair value of the conversion features in accordance with ASC Topic No. 815-15 “Derivatives and Hedging; Embedded Derivatives” (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component of results of operations. The Company valued the embedded derivative using the Black-Scholes pricing model. The fair value upon issuance of the April 2012 Note of $92,389 was recorded as a derivative liability. A discount to the convertible debt principal of $58,000 was recorded and a derivative expense was recorded for $34,389. Amortization of debt discount amounted to $12,727 for the period ended June 30, 2012. As of June 30, 2012, the Company recognized a gain in the fair value of the embedded derivative of $17,472 and reduced the embedded derivative liability by this same amount. The derivative liability in the April 2012 Note will be revalued each reporting period using the Black-Scholes model.

The Black-Scholes model was valued with the following inputs:

·

Stock Price – The Stock Price was based on the average closing price of the Company’s common stock for the three lowest of the ten days prior to the valuation date. The valuation date can either be the date of issuance of the convertible debt note or the last day of a reporting period (the “Valuation Date”). Stock prices ranged from $0.03 to $0.38.

·

Variable Conversion Price – The variable conversion price was based on 58% of the trading price of the Company’s common stock on the Valuation Date.

·

Time to Maturity – The time to maturity was determined based on the length of time between the Valuation Date and the maturity of the debt.

·

Risk Free Rate – The risk free rate was based on the one year treasury note rate as of the valuation dates with term commensurate with the remaining term of the debt. The risk free rate as of the commitment date was 0.20%.

·

Volatility – The volatility was based on the historical volatility of the Company.

Other Notes Payable

In the acquisition of Cygnus Internet, Inc. the Company assumed a $20,000 note payable.  This note accrues interest at eight percent per annum and is due on demand.

During May 2012, the Company entered into two Note Agreements whereby the Company borrowed an aggregate of $40,000.  The notes accrue interest at ten percent per annum and are due on demand.  The Company made a payment of $21,000 during the quarter ended June 30, 2012.

NOTE 5 – COMMON STOCK

The Company is authorized to issue 2,000,000,000 shares of its common stock at a par value of $0.001 per share. As of June 30, 2012 there were 66,101,182 shares issued and outstanding.

On January 12, 2012, the Company issued 62,500 shares to a consultant for services.  The shares were valued at $0.08 per share for a total of $5,000.

8

FONU2 INC.

(formerly Zaldiva, Inc.)

Notes to the Condensed Consolidated Financial Statements

June 30, 2012

NOTE 5 – COMMON STOCK (Continued)

On February 8, 2012, the Company issued 125,000 shares to a consultant for services.  The shares were valued at $0.08 per share for a total of $10,000.

On March 6, 2012 the Company issued 90,000 shares of common stock to an unrelated third-party vendor in order to satisfy an outstanding debt.  The shares were valued at the market price on the date of issuance of $0.20 per share, for a total of $18,000.  As the aggregate market value of the shares issued exceeded the amount of the satisfied debt, the Company recorded a loss on settlement of debt in the amount of $10,800 relative to this transaction.

On March 29, 2012, pursuant to the closing of its Agreement and Plan of Reorganization (the “Agreement”) with Cygnus Internet, Inc. the Company consummated several employment and consulting agreements, for which common stock was issued as partial consideration.  Each of the agreements has a one-year term.  A total of 2,600,000 shares were issued pursuant to these agreements.  (See Note 8) The shares were valued at the market price of $0.20 per share. $120,000 was expensed immediately for the employment agreements as the shares were fully vested.  The Company has recorded prepaid expenses in the amount of $400,000 pursuant to the consummation of the independent contractor agreements and will be expensed over the term of the agreement.

On May 1, 2012 the Company entered into a note agreement whereby the Company borrowed $20,000.  The Company issued the lender 25,000 shares of its common stock as an incentive to make the loan to the Company.  These shares were valued at $0.34 per share, being the trading price of the stock on the date of issuance, resulting in interest expense of $8,500.

On May 4, 2012, the Company issued an aggregate of 200,000 shares of common stock to three contractors and/or employees as follows:  (i) to Jeff Olweean 150,000 “unregistered” and “restricted” shares of common stock pursuant to the terms of his Independent Contractor Agreement; (ii) to Robert B. Lees 25,000 “unregistered” and “restricted” shares pursuant to the terms of his Executive Employment Agreement; and (iii) to Nicole Leigh 25,000 “unregistered” and “restricted” shares pursuant to the terms of her Executive Employment Agreement.  On June 6, 2012, the Company issued an additional 175,000 shares pursuant to these agreements.  (See Note 8)

On May 7, 2012, the Company issued 40,000 units for cash at $0.25 per share, resulting in total proceeds of $10,000. Each unit consists of one share of “unregistered” and “restricted” share of common stock and one warrant to purchase an additional share of common stock at an exercise price of $0.50 per warrant, exercisable for one year.

In June 2012 the Company issued 250,000 shares of common stock for a consulting agreement.  The shares were valued at $0.06 for a total value of $15,000.  The Company has recorded a prepaid expense in the amount of $15,000 pursuant ot the agreement and will be expensed over the six month term of the agreement.

On June 30, 2012 the Company issued 25,000 shares of common stock to a note holder as an interest payment.  The shares were valued at $0.20, resulting in interest expense of $5,000.

9

FONU2 INC.

(formerly Zaldiva, Inc.)

Notes to the Condensed Consolidated Financial Statements

June 30, 2012

NOTE 6 – WARRANTS

The following table summarize the stock warrant activity as of and for the period ended June 30, 2012:

An expense of $7,069 was recorded during the nine months ended June 30, 2012, for the value of warrants.  

NOTE 7 – ACQUISITION

Acquisition of Cygnus Internet, Inc.  On March 29, 2012, the Company; Cygnus Internet, Inc., a Florida corporation (“Cygnus”); and Jeffrey Pollitt, who is the beneficial owner of approximately 37% of Cygnus’ outstanding shares, executed an Agreement and Plan of Reorganization (the “Agreement”) by which the Company acquired all of the material assets of Cygnus (the “Assets”) used directly or indirectly in the operation of Cygnus’ business, including but not limited to Cygnus’ operations that are currently conducted under the names “FONU2,” “FONUS.COM,” “CANDYFONE” and “CANDYFONE.COM,” together with all intellectual property, computer hardware and software associated with such business (the “FONU2 Business”).  Following the completion of the asset acquisition (the “Acquisition”), the Company is continuing the operation of the FONU2 Business.  

The Company issued to the Cygnus common stockholders, on a pro rata basis, a total of 53,411,262 “unregistered” and “restricted” shares of its common stock (the “Acquisition Shares”) in exchange for the conveyance of all of the Assets to the Company.  The transaction is being accounted for as a business combination in accordance with ASC 805 “Business Combination.”  For provisional purchase price determination, the shares were valued at $0.10 per share, for an aggregate purchase price of $5,341,126.  The preliminary fair value of these shares has been determined considering the restrictions, resulting in a discount of 50% from the closing share price. The purchase price is being allocated to tangible and intangible assets acquired and liabilities assumed based on their preliminary estimated fair values at the date of the acquisition (March 29, 2012). The excess of the purchase price over the fair value of net assets acquired is being allocated to goodwill.

The preliminary fair values assigned are based on reasonable methods applicable to the nature of the assets acquired and liabilities assumed.  The following summarizes the preliminary estimated fair values of the net assets acquired:

10

FONU2 INC.

(formerly Zaldiva, Inc.)

Notes to the Condensed Consolidated Financial Statements

June 30, 2012

NOTE 7 – ACQUISITION (Continued)

Due to the magnitude of the transaction wherein the Company acquired Cygnus and the fact that significant information to be obtained and analyzed is preliminary in nature, the Company’s fair value estimates for the purchase price allocation are preliminary and may change during the allowable measurement period, which is up to the point the Company obtains and analyzes the information that existed as of the date of the acquisition necessary to determine fair values, but in no case to exceed more than one year from the date of acquisition.  As of June 30, 2012 the fair values of the net assets are preliminary as the Company continues to accumulate and analyze information necessary to finalize the fair values.  Due to the preliminary nature of these estimates, the fair values identified above could increase or decrease significantly.

NOTE 8 – SIGNIFICANT EVENTS

Change of Domicile - On December 2, 2011, the Company’s stockholders approved the Company’s change of domicile from the state of Florida to the state of Nevada.  The change of domicile was effectuated by merging the company into the Company’s wholly-owned subsidiary, Zaldiva, Inc., a Nevada corporation (“Zaldiva Nevada”), with every share of the Company’s common and preferred stock automatically being converted into one-half of one corresponding share of Zaldiva Nevada, and with all fractional shares that would otherwise result from such conversion being rounded up to the nearest whole share.  The Company filed Articles of Merger in the States of Florida and Nevada on December 2, 2011. The Company’s financial statements have been retroactively restated to reflect the reverse stock-split.

Executive Employment and Independent Contractor Agreements - On March 29, 2012, in connection with the closing of its Agreement and Plan of Reorganization with Cygnus Internet, Inc., a Florida corporation (“Cygnus”), and Jeffrey M. Pollitt, who is Cygnus’ Chief Executive Officer and the holder of approximately 37% of Cygnus’ outstanding shares of common stock, Zaldiva, Inc., a Nevada corporation (the “Company”), executed the following agreements:

An Executive Employment Agreement with the Company’s new Chief Executive Officer, Jeffrey M. Pollitt.  This Agreement is for a one-year term with automatic one-year renewals unless either party gives 60 days written notice of non-renewal.  Mr. Pollitt’s Executive Employment Agreement provides for an annual salary of $120,000 and contains standard non-competition, non-solicitation and non-disclosure covenants.

An Executive Employment Agreement with Robert B. Lees, the Company’s Chief Financial Officer.  This Agreement is for a one-year term with automatic one-year renewals unless either party gives 60 days written notice of non-renewal.  Mr. Lees’ Executive Employment Agreement provides for an annual salary of $36,400.  In addition, Mr. Lees has been issued 300,000 “unregistered” and “restricted” shares of the Company’s common stock upon execution of his Executive Employment Agreement, and he will be entitled to receive an additional 12,500 “unregistered” and “restricted” shares of the Company’ common stock every month during the term thereof.  Mr. Lees’ Executive Employment Agreement also contains standard non-competition, non-solicitation and non-disclosure covenants.  

An Executive Employment Agreement with Nicole Leigh, the Company’s Chief Marketing Officer.  This Agreement is for a one-year term with automatic one-year renewals unless either party gives 60 days written notice of non-renewal. Ms. Leigh’s Executive Employment Agreement provides for a salary of $700 per week.  In addition, Ms. Leigh has been issued 300,000 “unregistered” and “restricted” shares of the Company’s common stock upon execution of her Executive Employment Agreement, and she will be entitled to receive an additional 12,500 “unregistered” and “restricted” shares of the Company’ common stock every month during the term thereof.  Ms. Leigh’s Executive Employment Agreement also contains standard non-competition, non-solicitation and non-disclosure covenants.  

11

FONU2 INC.

(formerly Zaldiva, Inc.)

Notes to the Condensed Consolidated Financial Statements

June 30, 2012

NOTE 8 – SIGNIFICANT EVENTS (Continued)

An Executive Employment Agreement with Mark Simpson, the Company’s new Corporate Operating Officer.  This Agreement is for a one-year term with automatic one-year renewals unless either party gives 60 days written notice of non-renewal.  Mr. Simpson’s Executive Employment Agreement provides for an annual salary of $120,000 and contains standard non-competition, non-solicitation and non-disclosure covenants.   This Agreement was rescinded on June 8, 2012.  As of June 30, 2012 the Company has satisfied all of its obligations relative to this Agreement. Subsequent to June 30, 2012, this agreement was rescinded by both parties.

An Independent Contractor Agreement with William Lavenia, by which Mr. Lavenia will work together with the Company’s Board of Directors to enhance the value of the Company as a going concern, to develop business opportunities for the Company, and to make introductions to individuals and corporations.  This Agreement is for a one-year term with automatic one-year renewals unless either party gives 60 days written notice of non-renewal.  Mr. Lavenia’s Independent Contractor Agreement provides for an annual consulting fee of $120,000 and provides for reimbursement of reasonable out-of-pocket expenses incurred by Mr. Lavenia in connection with his services to the Company. This Agreement was rescinded on June 8, 2012.  As of June 30, 2012 the Company has satisfied all of its obligations relative to this Agreement. Subsequent to June 30, 2012, this agreement was rescinded by both parties.

An Independent Contractor Agreement with Jeff Olweean, by which Mr. Olweean will work together with the Company’s Board of Directors to enhance the value of the Company as a going concern, to develop business opportunities for the Company, and to make introductions to individuals and corporations.  This Agreement is for a one-year term with automatic one-year renewals unless either party gives 60 days written notice of non-renewal.

Mr. Olweean’s Independent Contractor Agreement provides for an annual consulting fee of $48,000.  In addition, Mr. Olweean has been issued 2,000,000 “unregistered” and “restricted” shares of the Company’s common stock upon execution of his Independent Contractor Agreement, and will also receive 150,000 “unregistered” and “restricted” shares of the Company’s common stock on the last day of every month during the term of the Agreement.  Mr. Olweean will also be reimbursed for reasonable out-of-pocket expenses that he incurs in connection with his services to the Company.  

On May 14, 2012, the Company issued 747,757 shares of common stock to Jeff Olweean upon conversion of 75,000 shares of preferred stock.  However, due to various administrative delays in getting the shares issued to Mr. Olweean, Mr. Olweean elected to reverse his conversion notification.  Therefore, the financial statements are presented as if the conversion and issuance had never occurred.

NOTE 9 – SUBSEQUENT EVENTS

Subsequent to June 30, 2012 the Company issued an aggregate of 350,000 common shares to three individuals as compensation for services rendered.  (See Note 8)

On August 15, 2012 the Company entered into a Preferred Stock Buyback Agreement whereby the two holders of the Company’s Series A preferred stock (“the shareholders”) agreed to convey back to the Company 100% of their outstanding shares, which the Company then immediately cancelled.  In addition, the shareholders agreed to waive all claims to dividends, late fees, and accrued interest related to the shares.  In exchange for this conveyance, the Company agreed to execute a quitclaim deed to convey the title to the Company’s retail location to the shareholders, with the understanding that the shareholders would then lease the facility back to the Company rent-free for a period of six months in substantially the same form as the Company’s original lease on the facility.

In accordance with ASC 855 Company management reviewed all material events through filing of these financial statements and there are no additional material subsequent events to report.

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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, 2012 Compared to The Three Months Ended June 30, 2011.

During the quarterly period ended June 30, 2012, we recognized total revenues of $41,403, a decrease from our total revenues of $51,691 in the quarterly period ended June 30, 2011.  Cost of goods sold during quarterly periods ended June 30, 2012, and 2011, were $21,530 and $13,751, respectively, or approximately 52% and 27% of sales in these periods.

Our operating expenses increased to $328,481 during the quarterly period ended June 30, 2012, from $90,620 in the year-ago period.  The increase is due to significantly higher general and administrative expenses and professional fees.  These amounts were $78,815 and $48,522, respectively, for general and administrative in the June 30, 2012 and 2011 quarters.  We had increased professional fees of $245,229 in the June 30, 2012 quarter, up from $36,917 in the prior year period.

For the three months ended June 30, 2012, our net loss was $354,962, or $0.01 per share, as compared to a net loss of $57,556, or $0.01 per share, during the June 30, 2011 period.  Our increasing net loss was largely attributable to the above-referenced increases in general and operating expenses and increased cost of sales.

For The Nine Months Ended June 30, 2012 Compared to The Nine Months Ended June 30, 2011.

During the nine months ended June 30, 2012, we recognized total revenues of $147,348, a decrease from our total revenues of $158,116 in the nine months ended June 30, 2011.  Cost of goods sold during the nine months ended June 30, 2012, and 2011 were $95,697 and $54,403, respectively, or approximately 65% and 34% of sales in these periods.  

Our operating expenses increased to $600,627 during the nine months ended June 30, 2012, from $388,220 in the year-ago period.  The increase is due largely to significantly higher general and administrative expenses and professional fees.  These amounts were $274,946 and $165,804, respectively, in the nine month periods ended June 30, 2012 and 2011.  Professional fees increased to $311,806 in the nine months ended June 30, 2012, up from $208,105 in the year-ago period.

13

For the nine months ended June 30, 2012, our net loss was $616,047, or $0.02 per share, as compared to a net loss of $336,941, or $0.02 per share, during the nine months ended June 30, 2011.

Liquidity

The Company had cash on hand of $6,552 at June 30, 2012.  We believe that this cash on hand will not be sufficient to meet our expenses through the end of our 2012 fiscal year, and that it will be necessary 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, 2012, 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 May 1, 2012, the Company issued 25,000 “unregistered” and “restricted” shares of its common stock to Jeffrey

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Olweean as partial consideration for a loan whereby the Company borrowed $20,000.  These shares were valued at $0.34 per share, which was the trading price of the Company’s common stock on the date of issuance.

On May 4, 2012, the Company issued 325,000 “unregistered” and “restricted” shares each to Robert B. Lees and Nicole Leigh pursuant to the terms of their respective Executive Employment Agreements, and 2,150,000 such shares to Jeffrey Olweean pursuant to the terms of the terms of his Independent Contractor Agreement.    Under the terms of their respective agreements, Mr. Lees and Ms. Leigh are entitled to receive 12,500 “unregistered” and “restricted” compensation shares each on a monthly basis, and Mr. Olweean is entitled to receive 150,000 such shares per month. Accordingly, a total of 175,000 such shares was issued to these three individuals on June 6, 2012, and an additional 175,000 shares were issued on July 2, 2012.  Each of these agreements was filed as an exhibit to the Company’s Current Report on Form 8-K, dated March 29, 2012, and filed with the Securities and Exchange Commission on the same date.  

On May 9, 2012, the Company accepted the subscription of one individual investor to purchase 40,000 units, for total proceeds of $10,000.  Each unit consisted of one “unregistered” and “restricted” share of common stock and one warrant to purchase an additional share of common stock at a price of $0.50 per share, exercisable for one year.  

On May 14, 2012, the Company issued to Jeffrey Olweean 747,757 unregistered shares of its common stock upon conversion of 75,000 shares of preferred stock.  However, due to administrative delays in issuing the common shares, the conversion was rescinded and the issuance of these common shares was rescinded on June 21, 2012.

On May 29, 2012, the Company issued an additional 25,000 “unregistered” and “restricted” shares to Mr. Olweean in partial consideration of the execution of another promissory note in the amount of $20,000.

Each of these sales was made in reliance on the exemption from registration provided by Rule 506 of Regulation D of the Securities and Exchange and each investor’s representation that he/she was an “accredited investor” as defined in Rule 501(a) thereof.  

Item 3.  Defaults Upon Senior Securities.

None; not applicable.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

(a)(i)  On August 15, 2012, which is subsequent to the end of the period covered by this Report, the Company executed a Preferred Stock Buyback Agreement (the “Buyback Agreement”) by which it purchased all of the 500,000 issued and outstanding shares of its Series A 4% Convertible Preferred Stock (the “Preferred Stock”) from Jeffrey Olweean and Nicole Leigh in consideration of the conveyance of title to the Company’s retail location at 331 E. Commercial Blvd., Ft. Lauderdale, Florida.  As partial consideration under the Buyback Agreement, Mr. Olweean and Ms. Leigh each agreed to waive their claims to all dividend payments and late fees that are currently owed to them under the terms of their Preferred Stock.  As a result of the execution of the Buyback Agreement, all 500,000 shares of the Company’s Preferred Stock are deemed to have been cancelled as of the dated thereof.  In addition, the parties entered into a lease by which the Company may conduct its operations from the retail location rent-free for a period of six months (the “Lease”). Copies of the Buyback Agreement and the Lease are attached hereto as Exhibit 10.1 and are incorporated herein by reference. The foregoing descriptions of the Buyback Agreement and the Lease do not purport to be complete and are qualified in their entirety by reference to the exhibits hereto which are incorporated by reference.

(ii)  On August 16, 2012, which is subsequent to the end of the period covered by this Report, the Company executed Rescission Agreements with William Lavenia and Mark Simpson, by which it rescinded the Independent Contractor Agreements that it had executed with each of these persons on March 29, 2012.  Each of these Independent Contractor Agreements was filed as an exhibit to the Company’s Current Report on Form 8-K, dated March 29, 2012, and filed with the Securities and Exchange Commission on the same date.  Copies of each of the Rescission Agreements are attached hereto as Exhibits 10.2 and 10.3, respectively, and are incorporated herein by

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reference. The foregoing descriptions of the Rescission Agreements do not purport to be complete and are qualified in their entirety by reference to the exhibits hereto which are incorporated by reference.

(b)  During the quarterly period ended June 30, 2012, 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.

(i)

Where incorporated in this Report

Current Report on Form 8-K dated

Part II, Item 2

March 29, 2012

Exhibit No.                          Identification of Exhibit

10.1

Preferred Stock Buyback Agreement with Lease attached as Exhibit “C” thereto

10.2

Lavenia Rescission Agreement

10.3

Simpson Rescission Agreement

*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.

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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.

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