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U.S. SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

For Quarter Ended: December 31, 2012

 

Commission File Number: 000-22991

 

Fuse Science, Inc.  

(Exact name of small business issuer as specified in its charter)

  

NEVADA   87-0460247
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification No.)

 

6135 NW 167 Street Suite E-21 Miami Lakes, FL 33015

(Address of principal executive office)

 

(305) 503-3873

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x    No ¨

 

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 (Section 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 ¨ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

The number of shares outstanding of registrant’s common stock, par value $0.001 per share, as of February 15, 2013 was 182,265,845.

 

1
 

FUSE SCIENCE, INC.

 

INDEX

 

 

    Page
No.
     
Part I Financial Information  
     
Item 1: Condensed Consolidated Financial Statements  
     
  Condensed Consolidated Balance Sheets as of December 31, 2012 (Unaudited) and September 30, 2012 3
  Condensed Consolidated Statements of Operations – For the Three Months Ended December 31, 2012 (Unaudited) and 2011 (Unaudited) 4
  Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited) 5
  Condensed Consolidated Statements of Cash Flows – For the Three Months Ended December 31, 2012 (Unaudited) and 2011 (Unaudited) 7
  Notes to Condensed Consolidated Financial Statements 9
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3: Quantitative and Qualitative Disclosure about Market Risk 20
Item 4: Controls and Procedures 20
     
Part II Other Information 22
     
Item 1: Legal Proceedings 22
Item 1A: Risk Factors 22
Item 2: Unregistered sales of equity securities and use of proceeds 22
Item 3: Defaults upon senior securities 22
Item 4: Submission of matters to a vote of security holders 22
Item 5: Other Information 22
Item 6: Exhibits 22

 

2
 

 

PART 1: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

 

FUSE SCIENCE, INC.

Condensed Consolidated Balance Sheets

December 31, 2012 (Unaudited) and September 30, 2012

 

    December 31,     September 30,  
    2012     2012  
             
ASSETS                
Current assets:                
Cash and cash equivalents   $ 306,383     $ 62,050  
Prepaid expenses     14,483       275,709  
Accounts receivable     20,608       30,181  
Inventory     394,741       141,808  
Other assets     3,324       64,231  
TOTAL CURRENT ASSETS     739,539       573,979  
Other assets:                
Intellectual property, net     81,106       81,756  
Fixed assets, net     114,510       93,880  
Other asset     50,000       50,000  
TOTAL OTHER ASSETS     245,616       225,636  
TOTAL ASSETS   $ 985,155     $ 799,615  
LIABILITIES AND STOCKHOLDERS' DEFICIT                
LIABILITIES                
Accounts payable   $ 576,618     $ 791,864  
Notes payable, net     355,000       105,000  
Accrued expenses     229,305       287,751  
TOTAL CURRENT LIABILITIES     1,160,923       1,184,615  
                 
    Notes Payable, net     11,268       85,757  
                 
COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS' DEFICIT                
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued and outstanding; $100 per share liquidation preference     -       -  
Common stock, $0.001 par value; authorized 400,000,000 shares; 182,265,845 and 164,700,150 shares issued and outstanding at December 31, 2012 and September 30, 2012, respectively     182,266       164,700  
Additional paid-in capital     24,976,260       22,604,931  
Non-controlling interest     (126,344 )     (126,344 )
Accumulated déficit     (25,219,218 )     (23,114,044 )
Total stockholders' deficit     (187,036 )     (470,757 )
Total liabilities and stockholders' deficit   $ 985,155     $ 799,615  

 

See accompanying notes to condensed consolidated financial statements.

 

3
 

  

 

FUSE SCIENCE, INC.

Condensed Consolidated Statements of Operations

Three Months Ended December 31, 2012 and 2011

(Unaudited)

 

    2012     2011  
Sales, net   $ 40,711     $ -  
Cost of Sales     10,988       -  
Gross Margin     29,723       -  
Expenses:                
Sales and Marketing     748,318       342,862  
General and administrative expense     1,190,013       468,622  
Research and Development     1,600       -  
Total expenses     1,939,931       811,484  
Loss from operations     (1,910,208 )     (811,484 )
Other expense:                
Interest expense     (194,966 )     (39,713 )
Beneficial conversion feature of convertible notes payable     -       (148,183 )
Other expense     (194,966 )     (187,896 )
Net loss     (2,105,174 )     (999,380 )
                 
Loss per share, basic and diluted   $ (0.01 )   $ (0.01 )
                 
Weighted average shares outstanding     176,794,628       94,360,082  
                 
Other comprehensive income                
Net loss     (2,105,174 )     (999,380 )
                 
Unrealized gain on available-for-sale securities     -       12,830  
Net comprehensive loss   $ (2,105,174 )   $ (986,550 )

 

See accompanying notes to condensed consolidated financial statements.

 

4
 

 

 

FUSE SCIENCE, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(Unaudited)

 

                            Additional  
    Preferred Stock     Common Stock     Paid-in  
    Shares     Par     Shares     Par     Capital  
                               
Balance, September 30, 2012 (audited)     -       -       164,700,150     164,700     22,604,931  
Common stock issued for:                                        
Convertible notes payable                     1,066,461       1,067       136,934  
Deferred consulting fees     -       -       1,750,000       1,750       1,188,113  
Exercise of Detachable warrants - Cash     -       -       13,830,216       13,830       1,507,494  
Exercise of Detachable warrants - noncash     -       -       919,018       919       299,199  
Warrants A and B- financing cost     -       -       -       -       (705,924 )
Warrants A and B FV     -       -       -       -       (611,654 )
Amortization of stock options     -       -       -       -       557,167  
Net loss                                        
Balance, December 31, 2012     -     $ -       182,265,845     $ 182,266     $ 24,976,260  

 

See accompanying notes to condensed consolidated financial statements.

 

5
 

 

  

FUSE SCIENCE, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit, Continued

(Unaudited)

 

   Non Controlling
Interest
   Accumulated
Deficit
   Total 
             
Balance, September 30, 2012  $(126,344)  $(23,114,044)  $(470,757)
Common stock issued for:               
Conversion of Convertible notes payable        -    138,001 
Deferred consulting fees   -    -    1,189,863 
Exercise of Detachable warrants   -    -    1,521,324 
Exercise of Detachable warrants - noncash   -    -    300,118 
Warrants A and B- financing cost   -    -    (705,924)
Warrants A and B FV   -    -    (611,654)
Amortization of Stock Options   -    -    557,167 
Net loss        (2,105,174)   (2,105,174)
Balance, December 31, 2012  $(126,344)  $(25,219,218)  $(187,036)

 

See accompanying notes to condensed consolidated financial statements.

 

6
 

 

 

 

FUSE SCIENCE, INC.

Condensed Consolidated Statements of Cash Flows

Three Months Ended December 31, 2012 and 2011

(Unaudited)

 

    2012     2011  
             
Operating activities:                
Net loss   $ (2,105,174 )   $ (999,380 )
Adjustments to reconcile net loss from operations to net cash used
in operating activities:
               
                 
Depreciation and Amortization     3,462       682  
Deferred consulting fees     187,377       148,924  
Amortization of Stock options     557,167       277,205  
Common stock issued for services     120,000       -  
Amortization of financing fees     14,000       -  
Amortization of detachable warrants     -       17,696  
Beneficial conversion feature     -       148,183  
Amortization of discounts     51,116       -  
Changes in operating assets and liabilities:                
Inventory     (252,933 )     -  
Accounts receivable     9,573       -  
Prepaid expenses and other assets     308,133       355  
Accounts payable and accrued expenses     (273,692 )     113,503  
Accounts payable and accrued expenses - related parties     -       6,617  
Deferred sales     -       4,966  
Net cash used in operating activities     (1,380,971 )     (281,249 )
Investing activities:                
Additions to fixed assets     (23,442 )     (13,750 )
Intellectual property     -       (7,440 )
Net cash used in investing activities     (23,442 )     (21,190 )
Financing activities:                
Loan proceeds     250,000       315,000  
Proceeds from warrant exercise     1,521,324       -  
Financing charges paid     (122,578 )     -  
Net cash provided by investing activities     1,648,746       315,000  
Net increase in cash and cash equivalents     244,333       12,561  
Cash and cash equivalents, beginning of period     62,050       147,905  
Cash and cash equivalents, end of period   $ 306,383     $ 160,466  

 

See accompanying notes to condensed consolidated financial statements.

 

7
 

 

 

 

FUSE SCIENCE, INC.

Condensed Consolidated Statements of Cash Flows, Continued

Three Months Ended December 31, 2012 and 2011

(Unaudited)

 

    2012     2011  
             
Supplemental Cash Flow Information:                
                 
Non-cash investing and financing activities:                
Common stock issued for convertible notes payable and accrued interest   $ 138,001     $ 511,767  
Common stock issued for financing fees   $ 300,118     $ -  

 

See accompanying notes to condensed consolidated financial statements.

 

8
 

   

FUSE SCIENCE, INC.

Notes to Condensed Consolidated Financial Statements

 

1. NATURE OF BUSINESS

 

ORGANIZATION

 

Fuse Science, Inc. (“Company”) was incorporated in Nevada on September 21, 1988.  Since that time, the Company has engaged in a number of businesses as a private and subsequently a publicly held company, including developing and marketing data communications and networking infrastructure solutions for business, government and education (which business was sold in 2002) and as a “business development company” under the Investment Company Act of 1940, from 2007 to 2009 (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 2012). 

 

2.  SIGNIFICANT ACCOUNTING POLICIES

 

CONSOLIDATION POLICY AND HISTORY OF BUSINESS

 

The condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Fuse Science, Inc. a Delaware corporation (“FS R&D”), FS Consumer Products Group, Inc., a Florida corporation and its 60% owned subsidiary, Ultimate Social Network, Inc. (“USN”). All significant intercompany balances and transactions have been eliminated in consolidation. Its common stock now trades on the OTCQB under the symbol DROP.

 

BASIS OF PRESENTATION

 

The unaudited condensed consolidated financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Stated of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information set forth in these interim condensed consolidated financial statements for the three months ended December 31, 2012, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. The September 30, 2012 year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. It is suggested that these condensed consolidated financial statements be read in conjunction with these financial statements and the notes thereto included in the Company’s latest stockholder’s annual report (Form 10-K) which were prepared assuming the Company will continue as a going concern.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.

 

REVENUE RECOGNITION

 

The Company records revenue from the sale of Enerjel™, Powerfuse™ and Electrofuse™ , when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) product has been shipped or delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured. The Company’s customers may return ordered items for a refund . The Company also provides customers incentives to purchase products at a discount. For the three months ended December 31, 2012, we have recorded sales discounts, returns and allowances of $4,740 which is netted against sales.

 

CASH AND CASH EQUIVALENTS

 

For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

INVENTORIES

 

Inventories consist of items or products, which are manufactured by a contracted manufacturer on behalf of the Company, for resale and packaging material used to distribute such products. Inventories are valued at average cost and adjusted to reflect lower of cost or market. Allowances for inventory obsolescence are determined based upon the specific facts and circumstances and market conditions. As of December 31, 2012 and September 30, 2012, no obsolescence reserves were considered necessary.

 

FIXED ASSETS

 

Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of three 3-10 years. Repairs and maintenance are charged to expense as incurred. Fixed assets, net of accumulated depreciation, amounted to $114,510 and $93,880 as of December 31, 2012 and September 30, 2012, respectively. As of December 31, 2012 and September 30, 2012, the accumulated depreciation of equipment was $7,434 and $4,622, respectively. 

 

INVESTMENTS

 

Investments are classified into the following categories:

 

  · Trading securities reported at fair value with unrealized gains and losses included in earnings;
  · Available-for-sale securities reported at fair value with unrealized gains and losses, net of applicable deferred income taxes, reported in other comprehensive income;
  · Held-to-maturity securities and other investments reported at amortized cost; and
  · Investments using the equity method of accounting.

 

 

9
 

 

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value information about financial instruments is required to be disclosed when it is practicable to estimate that value.  The carrying amounts of the Company’s cash, accounts receivable, accounts payable, accrued expenses and notes payable approximate their estimated fair value due to the short-term maturities of these financial instruments and because related interest rates offered to the Company approximate current rates.

 

 

INTELLECTUAL PROPERTY

 

Intellectual property is evaluated for impairment whenever events or changes in business circumstances indicate that the carrying value of our intellectual property may not be recoverable.  Other intangible assets are amortized on a straight-line basis over their estimated economic lives.  We believe that the straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by the Company.

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company evaluates its long-lived assets and intangible assets for impairment whenever events change or if circumstances indicate that the carrying amount of any assets may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the asset.

 

INCOME TAXES

 

The Company accounts for income taxes under the asset and liability method and deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 

 

The Company recognizes positions taken or expected to be taken in a tax return in accordance with existing accounting guidance on income taxes which prescribes a recognition threshold and measurement process. Interest and penalties on tax liabilities, if any, would be recorded in interest expense and other non-interest expense, respectively.

 

STOCK OPTION PLAN

 

The Company follows current accounting requirements and uses the modified prospective and transition method for all stock options issued.  The Company measures compensation cost for all options granted based on fair value on the date of grant and recognizes compensation expense over the service period for those options expected to vest.

 

The Board of Directors approved the Double Eagle Holdings, Ltd. 2011 Incentive Stock Plan on October 17, 2011 and it was approved by a majority of shareholders on December 8, 2011.  

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s options would have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s options, although they provide the best estimate currently.

 

STOCK-BASED COMPENSATION

 

The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost is measured based on the estimated fair value of the equity or liability instruments issued. The wide range of share-based compensation arrangements includes share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. The Company’s financial statements include an expense for all share-based compensation arrangements granted on or after January 1, 2006 and for any such arrangements that are modified, cancelled or repurchased after that date based on the grant-date estimated fair value.

 

10
 

 

RECLASSIFICATION

 

A reclassification has been made to the financial statements at September 30, 2012 to comply with the presentation for the three months ended December 31, 2012.  The reclassification had no effect on net loss.

 

LOSS PER SHARE

 

The Company’s loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the three months. Diluted losses per share reflects the potential dilution that could occur if stock options and or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the losses of the Company.

 

As described in Note 5 – Notes Payable and Note 9 – Incentive Stock Plan, the Company had warrants outstanding during each of the three months ended December 31, 2012 and September 30, 2012. The convertible notes are reflected in the calculation of diluted earnings per share for the corresponding periods by application of the “if converted” method to the extent their effect is dilutive.

 

The following is a reconciliation of the numerator and denominator used for the computation of basic and diluted net loss per common share:

 

    For the Three Months ended
December 31,
 
    2012     2011  
Numerator:                
Net loss available to stockholders   $ (2,105,174 )   $ (999,380 )
                 
Denominator:                
Weighted average number of common shares – Basic     176,794,628       94,360,082  
Weighted average number of common shares – Diluted     176,794,628       94,360,082  
                 
Net income (loss) per common share:                
Basic   $ (0.01 )   $ (0.01 )
Diluted   $ (0.01 )   $ (0.01 )

 

3. GOING CONCERN

 

The Company has not established sources of revenue sufficient to fund the development of the business, projected operating expenses and commitments for the next twelve months. The Company had a net loss from operations of $(2,105,174) during the three month period ended December 31, 2012. Included in this loss, the Company recorded non-cash compensation of $738,344 which relates to contracts entered into by the Company for current and future services undertaken for marketing and promotional activities by brand athletes through endorsement contracts, as well as contracts with consultants to provide professional services and employment contracts with the Company’s key employees. At December 31, 2012, current assets are $739,539 and current liabilities are $1,160,923. These conditions raise serious doubt about the Company’s ability to continue as a going concern. No adjustments have been made as a result of this uncertainty.

 

4. INTELLECTUAL PROPERTY

 

In April 2011, the Company completed its acquisition of FS R&D, a development stage company with no prior operations. As of December 31, 2012 and September 30, 2012 unamortized intellectual property relating to this acquisition amounted to $81,106 and $81,756, respectively.

 

11
 

 

 

5. NOTES PAYABLE

 

The Company had the following convertible notes payable at December 31, 2012 and September 30, 2012.

 

    December 31,     September 
30,
 
    2012     2012  
Convertible notes payable with interest at 12%   $ 5,000     $ 5,000  
8% One year senior secured convertible promissory note due September 9, 2012     100,000       100,000  
9% Unsecured promissory note due on demand     250,000       -  
10% Two year senior secured convertible promissory note due February 7, 2014     11,268       85,757  
    $ 366,268     $ 190,757  

 

    December 31,     September 30,  
    2012     2012  
Current   $ 355,000     $ 105,000  
Long term   11,268     85,757  
Total   $ 366,268     $ 190,757  

  

On October 12, 2012, we executed an agreement for a 9% unsecured promisory note in the amount of $250,000 which is due on demand by the lenders.

 

The recorded discount on the convertible notes payable is being amortized to interest expense over the life of the note or seven months for the discount associated with Series B Warrants and is summarized as follows as of December 31, 2012.

 

          Debt Discount  
Due Date   Face Value     Initial Value     Amortization     Discount     Carrying
Value
 
                               
February 7, 2014   $ 3,169,359     $ 854,735     $ (2,306,892 )   $ 7,732     $ 11,268  
September 9, 2012     100,000       73,476       (26,534 )     -       100,000  
    $ 3,269,359     $ 928,211     $ (2,333,426 )   $ 7,732     $ 111,268  

 

6. INCOME TAXES

 

The Company recorded no income tax benefit or expense for the losses for the three months ended December 31, 2012 and 2011 since management has determined that the realization is not assured and has created a valuation allowance for the full amount of deferred tax assets.

 

7. STOCKHOLDERS’ EQUITY (DEFICIT)

 

Preferred stock

 

At December 31, 2012, the Company had 10,000,000 shares authorized and no shares issued and outstanding of its $0.001 par value preferred stock.

 

Common stock

 

At December 31, 2012 and September 30, 2012, the Company had 400,000,000 shares authorized and 182,265,845 and 164,700,150 shares issued and outstanding, respectively, of its $0.001 par value common stock.

12
 

 

Transactions during the three months ended December 31, 2012

  

Common Stock

 

During the three months ended December 31, 2012, the Company issued 1,066,461 shares of common stock upon conversion of convertible notes payable with a principal balance and accrued interest totaling $138,001.

 

Warrants

 

During the three months ended December 31, 2012, the note holders of the February 2012 Notes exercised approximately 13,830,216 of Series B Warrants for common stock which generated $1,521,324 in cash. The fair value of the warrants included in APIC was reduced by $611,654 to reflect the Fair Value of the remaining warrants. In addition, during the period there were cashless exercises in the amount of 919,018 shares from our Series A warrants issued with our February 2012 Notes.  The fair value of the warrants included in APIC was reduced by $705,924 to reflect the fair value of the remaining warrants.

 

Options

 

During the three months ended December 31, 2012, the Company granted options to acquire up to 10,925,000 shares of its common stock to athletes for endorsement services and to consultants for services performed or to be performed. An intrinsic value in the amount of $712,830 for these options was determined using the Black-Scholes method. These options were expensed immediately as a result of these options being issued for certain contingencies which have been satisfied.

 

In addition, 11,672,598 options with an intrinsic value totaling $471,299 were issued to employees and directors during the quarter ended December 31, 2012.  

 

8. RELATED PARTY TRANSACTIONS

 

The Company operated as a Business Development Company (“BDC”) until January 20, 2009, when it elected to no longer be treated as a BDC.  As a part of its operations and consistent with the operating parameters of a BDC, the Company developed a number of relationships with its portfolio company investments, including members of the Company's board of directors becoming officers and directors of its portfolio company investments.  The Company made loans to the portfolio companies and entered into management agreements with the portfolio companies.  As a result of operating as a BDC and then converting to an operating company, a number of its previous relationships were required to be categorized as related party transactions.  Subsequently, these transactions ceased to qualify as related party transactions due to the termination of the related party relationship.

 

While operating as a BDC the Company had management contracts and made loans to its 60% owned subsidiary USN. These transactions are eliminated in consolidation with USN.

 

Related party amounts included in the balance sheet may be summarized as follows:

 

Accounts payable - related parties: 

 

    December 31,
2012
    September 30,
2012
 
             
Hank Durschlag   $ 16,178     $ 16,178  
    $ 16,178     $ 16,178  

 

Hank Durschlag is a former officer and director in Double Eagle Holdings, Ltd. Mr. Durschlag is not involved in any operational matters related to Fuse Science, Inc. and these payments relate to remaining obligations to him in his former capacity.

 

There were no transactions with related parties in the statement of operations for the three months ended December 31, 2012. Transactions with related parties in the statement of operations for the three months ended December 31, 2011 include:

 

    2011  
Prior CEO compensation   $ 10,000  
New officer compensation     59,000  
    $ 69,000  

 

 

13
 

 

 

 

9. 2011 INCENTIVE STOCK PLAN

 

On October 17, 2011, the Board of Directors of the Company approved the Double Eagle Holdings, Ltd. 2011 Incentive Stock Plan ("Plan").  The maximum number of shares authorized and available under the Plan is 20,000,000 shares and the Plan was approved on December 8, 2011 by written consent of a majority of the Company's shareholders.  Under the terms of the Plan, the options expire after 5 years.  The Company has reserved 20,000,000 shares of common stock for the grant of qualified incentive options or non-qualified options to employees and directors of the Company or its parents or subsidiaries, and to non-employee directors, consultants and advisors and other persons who may perform significant services for or on behalf of the Company under the Plan.  Prices for incentive stock options must provide for an exercise price of not less than 100% of the fair market value of the common stock on the date the options are granted unless the eligible employee owns more than 10% of the Company's common stock for which the exercise price must be at least 110% of such fair market value.

 

During the three months ended December 31, 2012, the Company granted options for 22,597,598 shares of restricted common stock, under the Plan, with a fair value of $1,184,129.  

 

Data concerning all stock options granted during the three months ended December 31, 2012 is as follows:

 

          Weighted-        
          Average     Number  
    Number     Remaining     of  
Exercise   of     Contractual     Options  
Price Range   Options     Life (Years)     Exercisable  
                   
$0.11 - $0.20     18,073,073       4.82       4,029,948  
$0.20 - $0.30     4,524,525       4.80       1,061,400  

 

The fair value of each option on the date of grant is estimated using the Black Scholes option valuation model.  The following weighted-average assumptions were used for options granted during the three months ended December 31, 2012:

 

    2012  
       
Expected term     1-5 years  
Expected average volatility     39%-62%  
Expected dividend yield     0%  
Risk-free interest rate     .62%-.78%  
Expected annual forfeiture rate     0%  

  

The fair value of each option on the date of grant is estimated using the Black Scholes option valuation model.  The following weighted-average assumptions were used for options granted during the year ended September 30, 2012: 

 

    2012  
       
Expected term     1-5 years  
Expected average volatility     163.08%-296.24%  
Expected dividend yield     0%  
Risk-free interest rate     .3%-3.12%  
Expected annual forfeiture rate     0%  

 

At December 31, 2012, the Company had the following common stock equivalents from convertible debt and the detachable warrants issued with the convertible debt, which are not included in the information above.

 

          Exercise        
    Amount     Price     Shares  
                   
Convertible debt   $ 5,000     $ 0.025       200,000  
Convertible debt   $ 100,000     $ 0.120       833,333  
Convertible debt   $ 19,000       0.130       146,154  
Detachable warrants           $ 0.120       5,792,480  
Detachable warrants           $ 0.120       2,817,176  
Detachable warrants           $ 0.120       750,000  
Detachable warrants           $ 0.250       3,583,334  
Detachable warrants – A           $ 0.130       24,403,593  
                      38,526,070  

 

At September 30, 2012, the Company had the following common stock equivalents from convertible debt and the detachable warrants issued with the convertible debt, which are not included in the information above.

 

14
 

 

          Exercise        
    Amount     Price     Shares  
                   
Convertible debt   $ 5,000     $ 0.025       200,000  
Convertible debt   $ 100,000     $ 0.120       833,333  
Convertible debt     144,605       0.130       1,112,346  
Detachable warrants           $ 0.120       5,792,480  
Detachable warrants           $ 0.120       2,817,176  
Detachable warrants           $ 0.120       750,000  
Detachable warrants           $ 0.250       3,583,334  
Detachable warrants – A           $ 0.130       25,746,553  
Detachable warrants – B           $ 0.130       14,649,605  
                      55,484,827  

 

10. COMMITMENTS AND CONTINGENCIES

 

Consulting agreement - The Company entered into a consulting agreement with Mr. Durschlag under which he should receive $100,000 over the next year.  In addition, in accordance with the terms of his patent assignment and technology transfer agreement, Mr. Durschlag is entitled to royalties on Fuse Science, Inc. sales as follows:

  

Sales Range   Commission
Rate
 
$0 - $100,000     0.00 %
$100,001 - $10,000,000     5.00 %
$10,000,001 - $50,000,000     2.50 %

 

Employment agreements - The Company entered into at-will basis employment agreements with Adam Adler, Aitan Zacharin and Brian Tuffin under the same terms and conditions:  $18,000 monthly salary, provided the Company has adequate funds to make such payment; monthly car allowance of $1,000; and a discretionary performance bonus.

 

Effective December 28, 2012 the Company entered into a settlement agreement with the Company’s former Chief Marketing Officer and Chief Information Officer, Aitan Zacharin for approximately $58,000 over a period of seven months commencing January 1, 2013.

 

Endorsement agreements - The Company has entered into endorsement agreements with a number of sports figures.  Three of the agreements at September 30, 2011 required additional shares to be issued at the end of the subsequent three years, 500,000 shares in 2012, 500,000 shares in 2013 and 250,000 shares in 2014.  In addition, a total of 1,150,000 may be issued in the event certain performance milestones are attained. As of September 30, 2012, the Company was required to issue approximately 400,000 shares for annual contracted shares and for the endorsers who have attained certain milestones.

 

The Company also issued stock options as compensation under certain other endorsement agreements.  These agreements have a term of one to five years with Company options to extend the agreements for one to three years at mutually agreeable terms. 

 

15
 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

Forward Looking Statements

 

This analysis of our results of operations should be read in conjunction with the accompanying condensed consolidated financial statements, including notes thereto, contained in Item 1 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part II of this Report.

 

Revenues and Gross Profit

 

    Three Months ended              
    December 31,     $     %  
    2012     2011     Change     Change  
                         
Sales, net   $ 40,711     $ -     $ 40,711       100 %
Cost of Sales     10,988       -       10,988       100 %
Gross Margin   $ 29,723     $ -     $ 29,723       100 %

 

Sales

 

Net Sales were $40,711 for the three months ended December 31, 2012, as compared to $ 0 for the three months ended December 31, 2011. The increase in sales is due to a limited roll out of Enerjel™, Powerfuse™ and Electrofuse™, primarily through online sales while the Company focuses on a full retail roll out through its establishment of distribution partnerships, which began shipping in during the fourth quarter of 2012.

 

Gross Profit

 

Gross profit percentage during the three months ended December 31, 2012 was 73%. Sales for the three months consisted of Enerjel™, Powerfuse™ and Electrofuse™.

 

Operating Costs and Expenses

 

    Three Months ended        
    December 31,     $  
    2012     2011     Change  
                   
General and administrative   $ 1,190,013     $ 468,622     $ 721,391  
Sales and Marketing     748,318       342,862       405,456  
Research and development     1,600       -       1,600  
    $ 1,939,931     $ 811,484     $ 1,128,447  

 

 

Our operating expenses were $1,939,931 and $811,484 for the three months ended December 31, 2012 and December 31, 2011, respectively, an increase of $1,128,447 from 2011 to 2012, reflecting increased operations. For the three months ending December 31, 2012, $557,167 was recorded for share-based compensation and amortization of deferred compensation. This compares with $451,151 for share-based compensation and amortization of deferred compensation for the three months ending December 31, 2011. The deferred compensation expense in 2012 and 2011 represents the amortized fair value of stock and options issued for services to non-employees. The share-based compensation charges to operations in 2012 and 2011 were primarily for stock options granted under our 2011 Incentive Stock Plan to executive officers and were made so that their interests would be aligned with those of shareholders, providing incentive to improve Company performance on a long-term basis. Grants of stock options were also made to third parties for various services rendered and as additional compensation for financing agreements. Amortization of deferred compensation is recorded in general and administrative expenses. Share-based compensation expense is included in sales and marketing and general and administrative expenses.

 

General and Administrative Expenses

 

For the three months ended December 31, 2012 and 2011, general and administrative expenses were $1,190,013 and $468,622, respectively. The increase of $721,391 is primarily composed of decreases in non-cash stock-based compensation costs of $171,856 to consultants and $333,431 in compensation expenses to employees. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses.

  

16
 

  

    Three Months ended December 31,  
    2012     2011  
             
Professional fees   $ 576,347     $ 178,274  
Salaries and benefits     494,541       106,394  
Other general and administrative expense     119,125       183,954  
    $ 1,190,013     $ 468,622  

 

Professional Fees Expense

 

Professional fees expense increased to $576,347 for the three months ended December 31, 2012, from $178,274 for the three months ended December 31, 2011. This increase was due to the Company’s requirements for legal, compliance, protection and accounting and consulting services related to the Company’s ongoing day-to-day business dealings and execution of its business plan, including, accounting, financial reporting and SEC compliance. Professional fees expense increase also includes $171,856 in non-cash compensation.

 

Salary and Benefits

 

Salary and benefits amounted to $494,541 for the three months ended December 31, 2012 from $106,394 for the three months ended December 31, 2011. The increase of approximately $388,000 was due to an increase in personnel headcount. Prior to April 1, 2012 the Company limited payments to employees and consultants based on cash availability resulting in underpayment of salaries. During the second quarter of the fiscal year the Company hired additional personnel. The payroll increase includes $333,431 in non-cash compensation.

 

Sales and Marketing

 

For the three months ended December 31, 2012 and 2011, sales and marketing expenses were $748,318 and $342,862, respectively. The increase of $405,456 is primarily due to the marketing efforts for Enerjel™, and PowerFuse™ and ElectroFuse™, which were subsequently launched online in December 2012. In February 2012, the Company entered into a marketing and distribution agreement with Mission to market the Company’s products through their distribution channels. This agreement included comprehensive marketing services and heavy commercialization efforts during the first ten (10) months. The Company paid Mission approximately $650,000 for these services, which is amortized over 10 months. Included in the increase in 2012 is amortization of deferred compensation (non-cash) of approximately $104,039 as of December 31, 2011 compared to $274,481 as of December 31, 2012. The Company’s products are endorsed by a number of professional athletes which are remunerated cash and non-cash payments. The increase in sales and marketing is also attributed to endorsement contracts with these professional athletes. Sales and marketing expenses consist primarily of compensation and support costs for sales and marketing personnel, professional services, promotional, marketing and related activities.

 

Research and Development

 

Included in our operating expenses for December 31, 2012 is approximately $1,600 for research and development expenses compared to $0 for December 31, 2011. Research and development expenses consist primarily of compensation for contractors engaged in internal research and product development activities, laboratory operations, and related expenses. The Company considers research and development of its technology and the science behind its products an important cornerstone of its continuing efforts. As the Company progresses it will continue to invest in research and development and anticipates increases year over year.

 

Other Income (Expense)

 

Other income (expense) consists of the following: 

 

    Three Months ended December 31,  
    2012     2011  
Beneficial conversion feature of convertible notes payable   $ -     $ (148,183 )
Interest expense     (194,966 )     (39,713 )
    $ (194,966 )   $ (187,836 )

 

 

17
 

 

Beneficial Conversion Feature

 

Beneficial conversion feature (“BCF”) was $0 for the three months ended December 31, 2012, as compared to $148,183 for the three months ended December 31, 2011, a decrease of $148,183. This decrease is the result of the December 2011 Notes in the amounts of $75,000 and $60,000 which were rolled into our February 2012 Notes.  Also included is approximately $50,000 BCF relating to January 2012 Notes. There were no new convertible notes as of December 31, 2012.

 

Interest Expense

 

Interest expense is primarily attributable to new convertible notes payable issued during first the fiscal quarter ended December 31, 2011 and those issued in February of 2012. Interest expense amounted to $194,966 for the three months ended December 31, 2012, as compared to interest expense of approximately $39,713 for the three months ended December 31, 2011. Also included in interest expense is amortization of financing fees related to the February 2012 notes and amortization of note discounts on the balance of the outstanding notes. Most of these note holders have already converted a portion of the outstanding notes into common stock. During the three months ended December 31, 2012, a total of 1,066,461 shares of common stock were issued in satisfaction of convertible debt with a face value in the amount of $138,001. Included in the amount is amortization of financing charge of approximately $14,000 and amortization of debt discounts in the amount of $51,116. 

 

Other Comprehensive Income (Loss)

 

The Company had an unrealized gain from its available-for-sale securities of $0 and $12,830 in the three months ended December 31, 2012 and 2011, respectively, resulting in a comprehensive loss of $2,105,174 and $986,550 for the three months ending December 31, 2012 and 2011, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

The following table summarizes total current assets, liabilities and working deficit at December 31, 2012 compared to December 31, 2011.

 

    December 31,
2012
    December 31,
2011
    Increase/(Decrease)  
                   
Current Assets   $ 739,539     $ 219,375     $ 520,164  
Current Liabilities   $ 1,160,923     $ 844,471     $ 316,452  
Working Deficit   $ (421,384 )   $ (625,096 )   $ 203,712  

 

18
 

 

As December 31, 2012, we had a working deficit of $(421,384), as compared to a working deficit of $(625,096) at December 31, 2011, a increase of $203,712. The decrease is primarily attributable to the Company’s issuance of $250,000 from our 9% due on demand notes, as well as $1.5 million for warrants exercised on February 2012 Notes.

  

Net cash used in operating activities for the three months ended December 31, 2012 and 2011 was $(1,384,434) and $(281,249), respectively. The net loss for the three months ended December 31, 2012 and 2011 was $(2,105,174) and $(999,380), respectively. 

 

Net cash used in and provided by investing activities for the three months ended December 31, 2012 and 2011 respectively, was $(19,979) and ($21,190), respectively. The Company purchased equipment during the three months ended December 31, 2012.

 

Net cash obtained through all financing activities for the three months ended December 31, 2012 was $1,648,746, as compared to $315,000 which was used for the three months ended December 31, 2011. The increase of approximately $1,333,746 is primarily related to a February 2012 private placement of convertible notes and warrants for approximately $3.2 million and the subsequent exercise of a portion of such warrants which generated approximately $1.3 million. Besides the foregoing existing notes and warrants, the Company issued additional notes and warrants (which we exercised) generating $1,521,324 in cash for the Company.

 

Our primary source of operating cash has been through private placements of our securities, principally convertible notes and warrants and the subsequent exercise of certain of those warrants.

 

Management estimates that it will need between $3,500,000 and $5,000,000 in capital during fiscal 2013 to continue to commercialize our products, license our technology and otherwise fully implement our business plan. We have no commitments to raise any such capital. If such capital is not available when needed on commercially reasonable terms or otherwise, we may have to scale down or delay implementation of our business plan in whole or in part and curtail its business activities, which would seriously harm the Company and its prospects.

 

Going Concern

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since its inception. At December 31, 2012, the Company had cash of approximately $306,383 and a deficit in working deficit of $(421,384). Further, at December 31, 2012, the accumulated deficit amounted to $25,219,218. As a result of the Company's history of losses and unfavorable financial condition, there is substantial doubt about the ability of the Company to continue as a going concern. 

 

The Company will require additional funding of between $3,500,000 and $5,000,000 during fiscal 2013 to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.

 

In response to these problems, management has taken the following actions:

 

  · continue with the implementation of our business plan;

 

  · generate new sales from expanded retail distribution of EnerJel™, PowerFuse™ and ElectroFuse™;

 

  · seeking additional third party debt and/or equity financing;

 

  · continue facilitation of licensing efforts; and

 

  · allocate sufficient resources to continue with advertising and marketing efforts.

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenues adequate to support the Company’s cost structure. Management plans to finance future operations through the use of cash on hand, increased revenues and capital raised through equity or debt financing. We also expect to receive proceeds from stock warrant exercises from existing shareholders. As the Company’s product continues to gain market acceptance, the Company expects sales in fiscal 2013 and beyond to substantially increase.

 

19
 

 

There can be no assurances that the Company will be able to achieve its projected level of revenues in fiscal 2013 and beyond. If the Company is unable to achieve its projected revenues and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient its operations during 2013, which could have a material adverse effect on the Company’s ability to achieve its business objectives and as a result may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

Our future expenditures will depend on numerous factors, including: the rate at which we can introduce and sell products; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and market acceptance of our products and competing technological developments. We expect that we will incur between $3,500,000 and $5,000,000 in cash expenditures for our operating expenses during fiscal 2013. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we have achieved sustained revenue generation.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

New Accounting Standards

 

There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective.  Each of these pronouncements, as applicable, has been or will be adopted by the Company.  Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results.  See Note 2.

 

Critical Accounting Policies

 

The SEC issued “Cautionary Advice Regarding Disclosure about Critical Accounting Policies”; suggesting companies provide additional disclosure and commentary on their most critical accounting policies.  The SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.  Based on this definition our most critical accounting policies are in process of evolving while we move from the development stage to the operational stage of our business cycle.

 

Off-Balance Sheet Arrangements

 

None.

 

Tabular Disclosure Of Contractual Obligations

 

None.

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4: CONTROLS AND PROCEDURES

 

 

Evaluation of Disclosure Controls and Procedures

 

Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company's financial reporting.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

 

20
 

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of September 30, 2012.  Our management has determined that, as of September 30, 2012, the Company's disclosure controls and procedures are effective.

 

Management's Report on Internal Control over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.  The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with the United States' generally accepted accounting principles (US GAAP), including those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. 

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in its Internal Control - Integrated Framework.  Based on our evaluation under the framework in Internal Control - Integrated Framework, our management has concluded that our internal control over financial reporting was effective as of December 31, 2012. 

 

This annual report does not include an audit or attestation report of our registered public accounting firm regarding our internal control over financial reporting.  Our management's report was not subject to audit or attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this annual report.

 

There were no significant changes in internal controls or in other factors that could significantly affect these controls during the quarter ended December 31, 2012.

 

21
 

 

PART II – OTHER INFORMATION

 

ITEM 1 LEGAL PROCEEDINGS

 

None.

 

ITEM 1A RISK FACTORS

 

Not applicable.

 

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

ITEM 5 OTHER INFORMATION

  

Not applicable.

 

ITEM 6 EXHIBITS

 

31.1 Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002

 

22
 

 

SIGNATURE

 

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.

 

  FUSE SCIENCE, INC.
   
February 15, 2013 By: /s/Brian Tuffin
  Brian Tuffin,
  Chief Executive Officer and
  Acting Chief Financial Officer

 

23