Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTIONS 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2015

 

Commission File Number 000-22991

 

Fuse Science, Inc.

(Exact name of registrant as specified in its charter)

 

N/A

(Former name of registrant as specified in its charter)

 

Nevada 87-0460247
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

5510 Merrick Rd Massapequa NY 11758

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number: 516-659-7558

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class – None

 

Name of each exchange on which registered – Not applicable

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Stock, par value $.0001

Title of class

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes   ☒ No.

 

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 ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☒

 

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,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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. (Check one):

 

Large accelerated filer   Accelerated   Non-accelerated filer   Smaller reporting company
☐   ☐   ☐   ☒
        (Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No.

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (March 31, 2014): $450,345.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 747,321,455 shares of common stock outstanding as of January 9, 2015.

 

DOCUMENTS INCORPORATED BY REFERENCE: No documents are incorporated by reference into this Report except those Exhibits so incorporated as set forth in the Exhibit index.

 

 

   

 

 

FUSE SCIENCE, INC.

FORM 10-K INDEX

 

  Page
Part I    
     
Item 1. Business 1
Item 1A. Risk Factors 7
Item 2. Properties 10
Item 3. Legal proceedings 10
Item 4. Mine Safety Disclosures 10
     
Part II    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11

Item 6. Selected Financial Data   
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 13
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23
Item 9A. Controls and Procedures 23
Item 9B. Other Information  
     
Part III    
     
Item 10. Directors, Executive Officers and Corporate Governance 24
Item 11. Executive Compensation  
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  
Item 13. Certain Relationships and Related Transactions, and Director Independence  
Item 14. Principal Accountant Fees and Services  
     
Part IV    
     
Item 15. Exhibits and Financial Statement Schedules 25
Signatures   26

 

 

 

 i 

 

 

PART I

 

FORWARD LOOKING STATEMENTS

 

This report includes forward-looking statements including statements regarding future events and financial results, including our ability to complete development of our SkyPort drone support technology, future regulatory approvals, and liquidity.

 

The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

 

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors contained herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors and our other filings with the SEC. These uncertainties and other factors include, among other things:

 

●unexpected technical and marketing difficulties inherent in major research and product development efforts;
●the extensive regulatory requirements governing both our proposed SkyPort drone support technology business and our XTRAX® remote monitoring system technology;
●unexpected changes in significant operating expenses, including components and raw materials;
●changes in the anticipated supply, demand and/or prices for our products and services;
●increased competition, including from firms that have substantially greater resources than we have;
●availability of U.S. government funding for defense research and development programs which could fund development of competing technologies;
●changes in the regulatory environment, including the current regulatory framework for commercial drone flight in the United States;
●increased difficulties facing microcap companies similar to ours in raising capital and accessing credit; and
●general economic and business conditions in the United States and elsewhere in the world.

 

Set forth below in Item 1A, "Risk Factors" are additional significant uncertainties and other factors affecting forward-looking statements. The reader should understand that the uncertainties and other factors identified in this Annual Report are not a comprehensive list of all the uncertainties and other factors that may affect forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements or the list of uncertainties and other factors that could affect those statements.

 

ITEM 1.BUSINESS

 

Business Overview

 

On October 1, 2014, Fuse Science, Inc., a Nevada corporation (“we” or the “Company”) entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Spiral Energy Tech, Inc., a Nevada corporation (“Spiral”), and Spiral Acquisition Sub, Inc., our newly formed, wholly-owned Nevada subsidiary (“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred concurrently with entering into the Merger Agreement, Acquisition Sub merged with and into Spiral, and Spiral, as the surviving entity, became a 51% majority-owned subsidiary of the Company.

 

Post-Merger, the Company is now focused on developing and expanding the business of Spiral, a development stage company, as described in detail below. While the Company’s pre-Merger legacy business is described below, the Company is not generating revenue from its legacy business at this time, and does not expect to generate revenue from its legacy business going forward.

 

 

 

 1 

 

 

Background

 

The 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.

 

In 2011, the assets of two privately held companies were transferred to a newly formed Delaware company, (the “Delaware Company”). The Delaware Company was developing sublingual and transdermal delivery technologies with applications in the sports nutrition and medical fields for the delivery of energy, medicines, vitamins and minerals. Pursuant to an exchange agreement dated April 14, 2011 the Company, whose corporate name was then “Double Eagle Holdings, Ltd.,” exchanged all the common stock of the Delaware Company for an aggregate of 23,297,000 shares of the Company’s common stock such that the Delaware Company became a wholly-owned subsidiary of the Company. In December 2011, the Company changed its name from “Double Eagle Holdings, Ltd.” to “Fuse Science, Inc.”

 

As described above, on October 1, 2014, the Company effected the Merger through which Spiral emerged as the Company’s surviving entity and majority-owned subsidiary, and the Company adopted the business plan of Spiral as the primary business of the Company.

 

Legacy Business

 

Prior to the Merger, the Company’s business involved developing certain sublingual and transdermal delivery systems for bioactive agents. The technology developed through the Company’s legacy business is intended to accelerate conveyance of medicines or nutrients relative to traditional pills and liquids and to enhance how consumers receive these products. We are currently evaluating the assets related to the Company’s legacy business with the intention of negotiating licenses or partnerships in order to monetize these assets. We are currently not renewing our contract with the manufacturer of our legacy business products in order to allow us increased flexibility in our negotiations. We have also allowed celebrity promotional contracts to expire in order to examine our new model encumbered, as management has determined the value of celebrity endorsements in the Company’s post-Merger business model is limited.

 

Current Business

 

The Company is currently focused on two business initiatives: developing and commercializing the Company’s SkyPorts drone support technology, and developing and commercializing the Company’s XTRAX® remote monitoring system, each as described further below.

 

SkyPorts Drone Support Technology

 

The Company’s primary focus is developing technology and commercializing its proprietary SkyPorts drone support technology and Energy Demand Network, or “EDEN”. This technology enables the long distance flight required for drone-based commerce without the need for drones to return “home” every 15 minutes to recharge. The technology allows a drone operator to travel many miles outside of its “home range” allowing for a flight path of numerous miles limited only by our EDEN network of SkyPorts. This network is initially being developed for use in several states with proposed future plans for nationwide deployment.

 

Conventional long distance flight planning requires combustion engines with fuel bladders or tanks that would allow drones to cover large distances. However, it is expected that government regulatory agencies will not be permitting their mass deployment due to the nature of their volatile design. The Company has designed and is currently developing the modular SkyPorts allowing for the recharging of electrical powered drones for long distant flight and commercial applications. Home deliveries and business-to-business applications will be able to thrive regionally with national capabilities, assuming we complete development of the SkyPorts and the Federal Aviation Agency (“FAA”) and other possible regulators approve commercial drone usage.

 

Because this technology is in the early stages of development, there can be no assurances the Company will successfully develop a working prototype or succeed in mass-producing the technology at a cost that is not prohibitively expensive, or that the technology, once- developed, will be successfully commercialized or gain widespread traction with consumers.

 

 

 

 2 

 

 

Products and Services

 

Upon the completion of development and commercialization efforts, the Company expects its primary business to consist of building out the network of SkyPorts, then executing the business model of annual memberships and monthly access fees for each drone enrolled. The SkyPorts will be installed on commercial rooftops or be land-based, where applicable, in order to allow commercial establishments to distribute their wares or delivery services to offer faster-than-overnight delivery. The range of applications runs from agricultural inspections and monitoring to pharmacy and fast food deliveries. The SkyPorts will be strategically installed and maintained by the Company in a given market, and drones desiring access to the network will enroll in the EDEN program with an annual enrollment charge and a monthly access fee.

 

After enrollment, clients will license our software and purchase adaptable hardware that will enable the drone to navigate anywhere the client needs to deliver the package. Advanced technology allows for this task to be accomplished to within a close proximity of the given target. However, to eliminate errant landings, a “mobile landing pad” will be distributed to all recipients who wish to make use of drone deliveries that require hyper-accurate landings and delivery locations. This will be accomplished through the use of low-level beacons embedded in a durable two-foot by two-foot landing mat that focus the done on a given spot. The mat size is designed to ensure that the client places it in a safe area; if the mat is able lay flat, it is in a good location. We expect this design will allow the drone to land both securely and in the exact spot desired.

 

Technology, Manufacturing and Suppliers

 

The Company has engaged hardware and software engineers, consultants, and third-party manufacturers to develop SkyPort prototypes, with Beta testing expected to take place in the first and second calendar quarters of 2015. The Company expects to have a fully functional prototype capable of line-of-sight flight by the end of the second quarter of 2015, with the development of more advanced units functioning beyond line-of-sight capabilities to follow. The Company currently anticipates building all units in the United States, with the exception of an insignificant amount of sub-components that may be produced overseas.

 

Market Opportunity

 

The Company’s potential customer base includes any person or commercial establishment that can and wants to utilize this type of drone technology. Currently, customers are expected to be drawn mostly from the home-delivery commerce segment, but there are additional potential uses of drone technology, including aerial photography, real estate applications, and use in agriculture, and any of these users could also potentially be interested in utilizing the SkyPort model. The Company currently expects to implement a commercialization model in which any interested user can enroll for an annual membership fee and a monthly access charge.

 

Intellectual Property

 

The Company, through Spiral Energy Tech, Inc., currently has a patent pending related to technology utilized by the SkyPort units and support network (EDEN) program that allows for the function of door-to-door delivery and limitless flight time without returning to home base for recharging. The patent application was filed by Ezra Green and subsequently assigned to Spiral. (For a description of Spiral’s patents related to the XTRAX® remote monitoring system, please see “XTRAX® Remote Monitoring System - Intellectual Property,” below.)

 

Regulatory Approvals

 

While the Company produces drone support technology and not drones themselves, drones and the broad field of unmanned aircraft systems (“UAS”) are subject to extensive regulation in the United States. The Company’s ability to successfully develop, market and sell its SkyPort technology will depend in large part on the ability of commercial drone manufacturers, operators and vendors to successfully operate within this regulatory framework. See “Risk Factors,” below.

 

 

 

 3 

 

 

Competition

 

The Company’s competitors in the drone support space include Germany-based SkySense, Inc.’s Skysense Charging Pad.

 

XTRAX® Remote Monitoring System

 

The Company’s secondary business focus is on developing and commercializing the XTRAX® remote monitoring system. XTRAX® is designed to measure the production of solar and other renewable energy systems and for transmission of the data via the cellular and radio frequency network and potentially via microwave transmission network or satellite (the XTRAX® unit does not currently have the capacity for transmission via microwave and satellite) separately, or in conjunction with solar system installations. Prior to April 25, 2013, the Company was focused on exploring and developing potential technology for application of holographic technology to solar energy systems, but abandoned that objective after the Company’s planned holography expert retired. On April 25, 2013, the Company purchased the patents and trademarks relating to the XTRAX® remote monitoring system from Carbon 612 Corporation and one of its creditors. For further discussion of the Company’s XTRAX®-related intellectual property, please see “Intellectual Property,” below.

 

Products and Services

 

XTRAX® is the Company’s patented system for remote real-time monitoring of the energy production of solar and other renewable energy systems and for providing fault notification. The system consists of a central database server and remote energy meters. The server routinely accesses the remote meters to recover the energy reading of solar, wind, geo-thermal, tidal, and other types of non-fossil fuel energy systems. The meter installed at the alternative energy system site constantly monitors the system to provide energy metering and real-time system failure detection. In case of system failure, the meter will automatically contact the server to report the type of failure. XTRAX® can also be used to sub-monitor portions of larger-scale commercial or utility sized systems to increase efficiency and reporting of performance by monitoring "strings" or "lines" individually. XTRAX® can also be used for third party verification of other production monitoring devices. The XTRAX® system as a whole provides automated billing and reporting plus the ability for users to retrieve reports from a dedicated website.

 

Market Opportunity

 

The Company plans to sell XTRAX® to photovoltaic installers, utilities and owners (primarily residential or small-scale commercial, industrial and agricultural sites) of existing and future renewable energy system installations. The Company believes that XTRAX® will enable us to acquire and validate Renewable Energy Credits (RECs) and provide information regarding greenhouse gas emissions that may support the generation of carbon credits. A carbon credit is equivalent to one metric ton of carbon dioxide prevented from entering the atmosphere and has a market-driven value depending on the type and origin of the emission reduction produced. Carbon credits are mostly purchased by governments and corporations which have a legal obligation to reduce their carbon footprint.

 

The XTRAX® Remote Access Energy Monitor System was designed specifically for the domestic REC market, as well as the commercial markets, regional and international production-based incentive programs and for the international carbon credit market. RECs, also known as Green Tags, Renewable Energy Certificates, and Tradable Renewable Certificates, are non-tangible energy commodities in the United States. One REC is considered proof that one megawatt hour of renewable energy has been created. Although electricity suppliers can purchase RECs directly from renewable energy project owners, the market has created a need for aggregators, which purchase RECs from many sources and sell the RECs in a bundled fashion. The Company believes that the capabilities of the XTRAX® unit to provide automated verifiable data presents the Company with a good opportunity to obtain significant market share.

 

An XTRAX® unit may be physically attached to any renewable energy system that produces electricity. The unit records the amount of power that is generated by the given system by measuring the power that passes through the electrical wires of the system and automatically transmits data on a daily basis to servers that host software that converts the amount of electricity passed during that specific time period into “kilowatt hours,” or “kWhs.” When the total amount of kWhs are compiled over the course of a given month, the information is transmitted to a “trading” facility that values the accumulated kWhs produced from the renewable energy system and calculates the number of carbon credits, which can then be traded at prices ranging from $10 to $40 per ton depending on the market.

 

 

 

 4 

 

 

The Company’s business model is to distribute and install XTRAX® on all new sub-100kW systems in the United States, as well as internationally in order to capture small-system production information. The XTRAX® units will be installed by a third-party professional technician. The Company will not remain the owner of the system but will charge a monitoring fee of $8.95-$29.95 per month per residential client, or more for larger-scale clients or sub metering contracts. Although these prices may fluctuate in different regions, the pricing described here is indicative of the general model.

 

Suppliers

 

While the circuit board and firmware used in connection with the manufacturing of the product are proprietary, all components and parts in an XTRAX® unit are readily available in the market. The Company will provide the proprietary design to the vendor, after which the vendor can produce the boards. Once the Company designs a printed circuit board many companies are available to produce that board. The Company intends to outsource manufacturing and assembly of the XTRAX® units.

 

Competition

 

If and when XTRAX ® is commercialized, the Company will face competition. Many of the Company’s competitors are larger with more established businesses than us and have substantially greater resources than the Company does.

 

Potential competitors may include Centrosolar America, Inc.’s CentroData monitoring system for residential photovoltaic installations, which offers web-based, not cellular, monitoring; AlsoEnergy, Inc.’s PowerTrack product which, according to their website, appears to be primarily directed to immediately detect any problem in a photovoltaic installation with immediate automated alerts to minimize downtime; AlsoEnergy, Inc.’s DECK Monitoring , a basic residential revenue-grade meter that is focused on system performance; Locus Energy, LLC’s web-based residential revenue grade meter that records performance data and stores it on a website for viewing by the homeowner or the homeowner’s installation contractor; and Energy, Inc.’s The Energy Detective lines of web-based meters, which are not revenue grade, are designed to measure and report the usage of electricity, can be installed by a skilled homeowner, but cannot be used to receive rebates, financing or trade credits.

 

Regulatory Matters

 

The Company’s operations are subject to a variety of federal, state and local laws, rules and regulations relating to worker safety, zoning, building and electrical codes, and the use, storage, discharge and disposal of environmentally sensitive materials. The Company believes that it is in compliance in all material respects with all laws, rules, regulations and requirements that affect its business. Further, the Company believes that compliance with such laws, rules, regulations and requirements does not impose a material impediment on the Company’s ability to conduct business.

 

Before the Company can complete development and commercialization of XTRAX® units, the following steps need to occur:

 

●The XTRAX® unit needs to be listed by Underwriters Laboratory (“UL”) or receive the ETL Listed Mark, which tests the product for safety. This is known as the UL or ETL listing. The Company has submitted samples and information to UL, and responded to their questions, however recent funding will enable us to continue with proper certifications. Furthermore, submission of test units to UL was delayed so that the Company could complete certain software modifications and also complete third party verification by an independent testing laboratory of the accuracy of the measurements by XTRAX® units.

 

The Company has already made certain changes requested by UL. In order to allow UL to complete their testing and list XTRAX®, the Company will need to provide UL with six units, at an estimated cost of $1,940, and pay UL $14,950 for their services. The Company plans to obtain the listing by the end of the 2cd quarter of 2015.

 

●After UL listing is obtained, the product needs to be approved by the Federal Communications Commission (“FCC”), similar to the UL listing process, because there are some magnetic emissions from the unit. The Company believes XTRAX® meets the FCC requirements and expects FCC approval will follow UL listing by approximately six weeks.

 

 

 

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●Following the UL listing and FCC approval, the Company will need to get technical approval from the cellular network carriers, which test the product for possible interference with other products. The Company does not anticipate difficulty obtaining carrier approval.

 

The Company does not believe that the UL listing, FCC approval and technical approval from cellular network carriers represent ongoing compliance matters. However, the Company can begin to offer the XTRAX® product to the market, and seek to generate revenues, only after the Company has obtained all of these approvals. The Company currently expects to begin offering XTRAX® units to the market in 2015.

 

Intellectual Property

 

In April 2013 the Company acquired the U.S. patent for a “Remote Access Energy Meter System and Method” (No. 7,336,201 – issued on February 26, 2008, and expiring on January 3, 2026) from one of Carbon 612 Corporation’s creditors for the purposes of using the patented technology in the Company’s own installations and operations . The Company also acquired the governing trademark from Carbon 612 Corporation. The patent covers remote monitoring through the use of one piece of electronic hardware via the wireless cellular network. In addition, the patent applies specifically to any energy generation facility that uses a power inverter to convert DC to AC electricity. By comparison, the Company believes that its competitors provide remote monitoring through the use of several distinct pieces of electronic hardware via the internet.

 

The elements of the Company’s potential product that are protected by the patent are:

 

●the communication of the system performance data via the cellular network or by microwave or satellite (the XTRAX® unit does not currently have the capacity for transmission via microwave and satellite); and

 

●the ability to provide real-time energy production values and system failure parameters.

 

In addition, the patent states that the energy source may be a source other than solar photovoltaic. Such other energy sources may include solar, wind, geo-thermal, tidal, and other types of non-fossil fuel dependent energy generation facilities as well as conventional fossil fuel driven energy installations.

 

On May 13, 2013, pursuant to a patent purchase agreement, the Company sold its patents to Endeavor IP, Inc. (“Endeavor”), as well as all right, title and interest in all related causes of actions and other enforcement rights under or on account of any of such acquired patents in consideration for (i) $100,000, (ii) 666,666 shares of Endeavor’s common stock and (iii) a royalty equal to 20% of the net revenues from any Enforcement Activities or Sales Transactions (as defined in the patent purchase agreement) related to the purchased patents pursuant to the terms of a proceeds interest agreement. Additionally, Endeavor granted the Company a personal, royalty-free, irrevocable, non-exclusive and worldwide license (without the right to sublicense) to, among other things, develop, distribute and sell the products and services covered by the patents sold to Endeavor. Endeavor is an intellectual property services and patent licensing company whose activities generally include the acquisition of existing rights to intellectual property through acquisitions of already issued patents and pending patent applications, both in the United States and abroad. In the event that Endeavor obtains any revenues from the enforcement or sale of the transferred patents, the Company will receive 20% of such revenues.

 

As the Company’s license to Endeavor is irrevocable, the Company will be able to continue to develop the XTRAX® system if the patents are transferred or sold to a third party. However, the patent describes methods that are believed to be used by numerous larger and substantially better capitalized companies in their solar and other installations. The Company has no expertise in patent enforcement, which could take many years and cost hundreds of thousands of dollars. The Company sold the right to enforce the patent to Endeavor after review with management and outside counsel that the intellectual property rights and the devices were used by third parties. Experts and enforcement/litigation counsel reviewed the patents and concluded that Tucson Electric, Con Edison and others potentially infringe the patent. Endeavor presently has brought actions against two major utilities (Con Edison Solutions, Inc. and Tucson Electric Power Company) and is exploring other potential actions. During June 2014, the Company received an initial royalty payment under a lawsuit seeking damages for infringement of the patents sold from Endeavor.

 

The Company also owns the registered trademark XTRAX®. In addition to the Company’s patent, potential future patent applications, and trademark, the Company also has trade secrets and know-how.

 

 

 

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Employees

 

The Company currently does not have any employees except for its officers and directors. The Company considers its employee relations to be good.

 

Facilities and Material Properties

 

The Company’s current office space at 5510 Merrick Road, Massapequa, New York 11758 is provided to it based on a month-to-month agreement with a base cost of $1,000 per month with additional costs depending on services used. The Company believes that these facilities are adequate to meet its current needs.

 

ITEM 1A.RISK FACTORS

 

We have a limited operating history with our current business.

 

The Company was incorporated in 1988 and 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.

 

The current business of the Company has not yet begun to generate significant revenues and the Company’s legacy business is not expected to generate revenues for the Company going forward. Our business is subject to all the problems, expenses, difficulties, complications and delays encountered in establishing a new business, including successful development, launch and commercialization of our products. The Company does not know if it will become commercially viable and ever generate significant revenues or operate at a profit.

 

 

The Company is dependent upon the successful development, commercial launch and acceptance of its products and the successful license of its technology.

 

The Company’s ultimate success will be dependent in large part upon its ability to timely complete development of and commercially launch its products and their acceptance by potential customers, as well as the ability to successfully license its technologies. There can be no assurance that the Company’s planned products will ever gain commercial acceptance, whether its technology will be successfully licensed, whether it will ever generate significant revenues or that it will ever be profitable.

 

The Company cannot guaranty that it can effectively market its planned products and technology.

 

A significant part of the Company’s success will depend on its marketing strategy. The Company’s marketing efforts have been limited to date. The Company is currently planning to begin test marketing consumer reaction on a small scale in the Northeast region of the United States to determine consumer reaction and marketability. There can be no assurance as to the success of any marketing strategy the Company may seek to implement. If the Company cannot effectively market its planned products and license its technology, its prospects will be harmed.

 

The scope of protection of intellectual property relating to the Company’s products is uncertain.

 

There can be no assurance as to the scope of proprietary protection, if any, which we will be able to secure for our technology. There can be no assurance that patent applications to which we hold rights or subsequently file, will result in the issuance of patents or that any patents issued will provide commercially significant protection to our technology. Moreover, the Company cannot guarantee that it will not infringe on intellectual property rights belonging to third parties, that third parties will not infringe upon the intellectual property belonging to the Company or that third parties will not develop a competing products without infringing on the Company’s intellectual property rights, any of which could harm its business.

 

We may incur material losses as a result of product recall and product liability.

 

We may be liable if the consumption of any of the products of our legacy business causes injury, illnesses or death. We also may be required to recall some of our legacy business products if they become contaminated or are damaged or mislabeled. A significant product liability judgment against us, or a widespread product recall, could have a material adverse effect on our business, financial condition and results of operations. The amount of insurance we carry is limited, and that insurance is subject to certain exclusions and may not be adequate.

 

 

 

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We are subject to substantial government regulation, and the failure to comply with any regulatory requirements applicable to us could substantially harm our business.

 

The Company has not even begun to seek regulatory approvals that may be required for its drone support technology business. As a result, it is difficult to predict when the Company may obtain these approvals or how costly the process of obtaining them will be, and there can be no assurance that the Company will ever obtain them.

 

Before the Company can complete development and commercialization of its XTRAX® units, it needs to complete the product safety testing process, receive approval from the FCC, and obtain approval from cellular network carriers. While the Company believes it will ultimately obtain all necessary approvals, there can be no assurance as to when these approvals will be obtained. If the Company fails to obtain any of these approvals, if obtaining the approvals is a lengthier process than the Company expects, or if obtaining the approvals is costlier than the Company expects, the Company may be unable to execute its business plan with respect to XTRAX®, and its results of operations and financial results could suffer.

 

If there is not a change in the U.S. government’s current regulation of unmanned aircraft systems, the Company may be unable to successfully commercialize its SkyPort drone support technology.

 

The Company presently expects a substantial proportion of its future revenue to come from the sale and licensing of SkyPort technology to customers in connection with commercial drone-based home delivery of goods. However, at present, drones, or unmanned aircraft systems (“UAS”), cannot, as a practical matter, be used for commercial delivery in the United States. In November 2014, the National Transportation Safety Board ruled that drones are aircraft subject to existing aviation laws and the regulatory power of the FAA. While the FAA permits recreational use of UAS and limited private agricultural use, they have virtually banned UAS for commercial usage. In 2012, the

 

U.S. Congress mandated that the FAA develop rules that provide for the integration of small UAS into the national airspace system by September 30, 2015, and the FAA is in the process of drafting updated regulations specifically for small UAS operations. However, it is impossible to predict when these rules may be finalized, and what the final content of such rules will be. Until, and unless, the FAA issues rules permitting commercial use of UAS, there will be substantial uncertainty around the legality of commercial drone flight in the U.S., and as a result, a market for drone support technology may not successfully develop, which could have a substantial harmful effect on our business and results of operations. If the FAA does not ultimately approve widespread commercial drone usage, deployment of the Company’s “EDEN” system may be limited to privately-owned agriculturally-designated properties, which would provide a more limited market than we currently anticipate, and we cannot offer assurances that the Company would operate profitably under such circumstances.

 

Many innovators in the field of drone technology are more established and better financed than we are, and it is possible they may develop competing drone support technology, which could have a harmful effect on our business.

 

Because commercial drone technology is presently heavily regulated in the U.S. as described above, many drone manufacturers currently have contracts with the U.S. government and its military branches. It is possible that these manufacturers may develop drone support technology similar to ours for military purposes, and if and when commercial drone flight is approved, these companies may have a competitive advantage over our Company because they have more advanced technology and greater financial resources. In addition, very large and successful companies like Google Inc. and Amazon.com, Inc. have publicly discussed their ongoing drone technology development efforts. If such companies develop commercial drone support technology, they would also have a significant competitive advantage over our Company. Competition from these companies or from military contractors could have a substantial harmful effect on our business and results of operations.

 

We currently rely on certain key individuals and the loss of one of these key individuals could have an adverse effect on the Company.

 

Our success depends to a certain degree upon certain key members of our management. These individuals are a significant factor in our growth and success. In particular, the success of our Company is highly dependent upon the efforts of our Chief Executive Officer, Ezra Green. Although we have an employment agreement with Mr. Green, the loss his services could have a material adverse effect on the success and development of our Company. Additionally, we do not anticipate having key man insurance in place on the life of our executive officers in the foreseeable future.

 

 

 

 8 

 

 

The Company’s success will be dependent in part upon its ability to attract and retain qualified personnel and consultants.

 

The Company’s success will be dependent in part upon its ability to attract and retain qualified creative marketing, sales and product development teams. The inability to do so on commercial reasonable terms may harm the Company’s proposed business.

 

Because our common stock is a penny stock, trading of our common stock may be restricted by the SEC’s penny stock regulations and FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our common stock.

 

Our common stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, our common stock.

 

In addition to the “penny stock” rules promulgated by the SEC, FINRA (the Financial Industry Regulatory Authority) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA’s requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.

The market for penny stocks has experienced numerous frauds and abuses that could adversely impact investors in our stock.

Company management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:

 

●control of the market for the security by one or a few broker-dealers that are often related to a promoter or issuer;

 

●manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

 

●“boiler room” practices involving high pressure sales tactics and unrealistic price projections by sales persons;

 

●excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

 

●wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

 

 

 

 9 

 

 

Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to affect adversely stockholder voting power.

 

Our Amended and Restated Articles of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights, super-voting or other preferred voting rights, and preferences of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.

 

We do not expect to pay cash dividends in the foreseeable future.

 

We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. Since we do not anticipate paying cash dividends on our common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our common stock.

 

ITEM 2.PROPERTIES

 

Not applicable

 

ITEM 3.LEGAL PROCEEDINGS

 

Not applicable

 

ITEM 4.MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

 10 

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our common stock is currently traded in the over-the-counter market and is quoted on the OTCQB under the symbol "DROP."

 

Total Outstanding Shares

 

80,000,000 Total outstanding shares

 

Dividends on Common Stock

 

We have not previously declared a cash dividend on our common stock and we do not anticipate the payment of dividends in the near

future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Not applicable

 

 

As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS

 

The discussion below is based upon the Company’s legacy business which is not currently generating revenue.

 

Forward Looking Statements

 

This analysis of our results of operations should be read in conjunction with the accompanying financial statements.

 

Revenues and Gross Profit

 

   Year ended
September 30,		   $   % 
   2015   2015   Change   Change 
Sales, net  $–   $448,627   $–    – 
Cost of Sales   –    1,424,573    –    – 
Gross Martin  $–   $(975,946)   –    – 

 

Sales

 

Not applicable

 

Gross Profit

 

Not applicable

 

Operating Costs and Expenses

 

   Year ended
September 30,		   $ 
   2015   2015   Change 
General and administrative   –   $3,065,428   $– 
Sales and Marketing   –    1,179,836    – 
Research and development   –    177,653      
    –   $4,422,917    – 

 

 

 

 11 

 

 

General and Administrative Expenses

 

Not applicable

 

   Year ended September 30, 
   2015   2014 
Professional fees  $–   $615,767 
Salaries and benefits   –    665,983 
Other general and administrative expense   –    1,783,678 
   $–   $3,065,428 

 

Professional Fees Expense

 

Not applicable

 

Salary and Benefits

 

Not applicable.  

 

Sales and Marketing

 

Not Applicable

 

Research and Development

 

Not applicable

 

Other Income (Expense)

 

Not applicable

 

Going Concern

 

The 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.

 

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.

 

There can be no assurances that the Company will be able to achieve positive cash flow from operations in 2015 and beyond. If the Company is unable to achieve positive cash flows from operations and is not able to obtain alternate additional financing of equity or debt, the Company may need 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.

 

 

 

 12 

 

 

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 approximately $1,500,000 in cash expenditures for our operating expenses during fiscal year 2015. 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.

 

Critical Accounting Policies

 

In December 2001, the SEC issued its Financial Reporting Release, “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 the process of evolving while we move from the development stage to the operational stage of our business cycle.

 

Off-Balance Sheet Arrangements

 

None.

 

 

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for Smaller Reporting Companies.

 

 

 

 

 

 

 13 

 

 

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

FUSE SCIENCE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Consolidated Balance Sheets at September 30, 2015 and 2014 15
   
Consolidated Statements of Operations for the years ended September 30, 2015 and 2014 16
   
Consolidated Changes in Stockholders’ Deficit for the years ended September 30, 2015 and 2014  
   
Consolidated Statements of Cash Flows for the years ended September 30, 2015 and 2014 17
   
Notes to Consolidated Financial Statements 18

 

 

 

 

 

 

 14 

 

 
FUSE SCIENCE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2015 and 2014

 

CURRENT ASSETS    
Accounts Receivable  $2,154.00 
Other Assets   3,770.00 
Investment in Marketable Securities   25.00 
Prepaid   5,433.00 
Bank   99,054.00 
Total Current Assets  $110,436.00 
      
FIXED ASSETS     
Plant & Machinery   5,844.00 
Less- Accumulated Depreciation   (1,461.00)
Intellectual Property   3,630.00 
Total Fixed Assets   8,013.00 
Total Assets  $118,449 
      
LIABILITIES     
Wages payable   – 
Short-term liability  $510,229.00 
Insurance Payable   222,612.00 
Total Current Liabilities   732,841.00 
Derivatives   217,552.00 
Total Long-term Liabilities  $217,552.00 
Total Liabilities  $950,393.00 
      
EQUITY     
Series A Stock  $1,361.00 
Series B Stock   3,200.00 
Series C Stock   3,500.00 
Common Stock   8,000.00 
Owner’s Investment   65,756,547.00 
Accumulated other comprehensive loss   (726.00)
Retained Earnings/Accumulated Loss   (76,987,436.00)
Non-controlling Interest   10,383,610.00 
Total Equities  $(831,944.00)
Total Liabilities and Equities  $118,449 

 

 

 

 15 

 

 

FUSE SCIENCE, INC. AND SUBSIDIARIES

Profit & Loss Statement

September 30, 2015 and 2014

 

 

   Amount 
Sales Revenue  $– 
Cost of Goods Sold   – 
Gross Profit  $– 
      
EXPENSES     
Research and development  $52,264.00 
Impairment of Goodwill   23,654,507.00 
General and administrative expense   3,575,228.00 
Advertising & Marketing   391,276.00 
Operating expenses   25,673,275.00 
Operating profit/loss   (25,673,275.00)
      
Other income   2,506.00 
Interest expense   (285,032.00)
Change in fair value of derivative liabilities   1,155,784.00 
Dividend on Series A preferred shares   (231,631.00)
Expense on issuance of warrant derivative liabilities   – 
Loss on sale of marketable securities   (211.00)
Expense on inducement of warrant exchange   – 
Total other income (expenses)   641,416.00 
Net profit/loss  $(25,031,859.00)
Dividend on Series A preferred shares   (2,026.00)
Net loss  $(25,033,885.00)
Net loss attributable to the non-controlling interest   (224,242.00)
Net income (loss) attributable to Common Shareholders of Fuse Science, Inc.  $(24,809,643.00)
Other Comprehensive income     
Unrealized loss on marketable securities   (515.00)
Comprehensive income (loss) attributable for Fuse Science, Inc. Common Shareholders  $(24,809,128.00)

 

 

 

 16 

 

 

FUSE SCIENCE, INC. AND SUBSIDIARIES

Cash Flow Statement

September 30, 2015 and 2014

 

 

     
Net loss  $(25,033,885.00)
Unrealized loss on marketable securities   (726.00)
Comprehensive net loss   (25,034,400.00)
Adjustments to reconcile net loss to net cash     
Depreciation and amortization   3,549.00 
Bad debt   1,704.00 
Stock and stock option compensation and deferred consulting   2,709,290.00 
Inducement of warrant exchange   – 
Amortization of discounts and financing fees   40,000,000 
Change in fair value of derivative liabilities   (1,155,784.00)
Expense on issuance of derivative liabilities   – 
Property and equipment expensed as research and development     
Loss on retirement of assets     
Dividend series A convertible preferred stock   233,657.00 
Unrealized other comprehensive loss   726.00 
Loss on impairment   21,654,507.00 
Changes in operating assets and liabilities:     
Increase (decrease) in operating assets:     
Accounts receivable   (426.00)
Inventory   – 
Prepaid expenses and other assets   (4,353.00)
Increase (decrease) in operating liabilities:     
Accounts payable   (203,948.00)
Accrued expenses   243,112.00 
Related party advances   (8,154.00)
Total adjustments   23,513,880.00 
Net Cash Used in Operating Activities  $(1,520,520.00)
      
CASH FLOWS FROM INVESTING ACTIVITIES     
Purchase of fixed assets   (1,517.00)
Purchase of intellectual property   (3,630.00)
Net Cash Used in Investing Activities   (5,147.00)
Gross Profit  $(15,033,885.00)
      
EXPENSES     
Purchased conversion rights from a shareholder   (25,000.00)
Proceeds from Series B convertible preferred stock   1,600,000.00 
Proceeds from loans   – 
Repayment of notes payable   (20,000.000)
Proceeds from issuance of stock   – 
Proceeds from warrant exercise   – 
Net Cash Provided By Financing Activities   1,555,000.00 
Net increase (decrease) in cash and cash equivalents   29,333.00 
Cash and cash equivalents, beginning of period   86,396.00 
Cash and cash equivalents,end of period   115,729.00 
Supplemental cash flow information     
Cash paid for interest   – 
Cash paid for income taxes   – 
Non-cash transactions:   – 
Series C Convertible Preferred stock issued in merger   10,790,367.00 
Beneficial conversion features on Series B convertible preferred stock   281,000.00 
Net assets acquired in merger   146,667.00 
      
Common stock issued for convertible notes payable and accrued interest   – 
Transfers from derivative liability to additional paid in capital   74,681.00 
Discount on debt recorded as derivative liability   – 
Total Expenses  $43,902,519.00 
Profit/Loss  $(68,936,404.00)

 

 

 

 17 

 

 

FUSE SCIENCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

1.NATURE OF BUSINESS

 

ORGANIZATION

 

Fuse Science, Inc. (“Company”) was incorporated in Nevada on September 21, 1988. Prior to 2002, the Company’s activities included, developing and marketing data communications and networking infrastructure solutions for business, government and education (which such business was sold in 2002) and as a “business development company” under the Investment Company Act of 1940, from 2007 to 2009. Since April 2011, the Company has focused on the development and commercialization of proprietary delivery technology concentrating on redefining the way humans receive energy, nutrition and medications today and in the future, along with the production and sale of sports nutrition and performance products.

 

During the third quarter of 2014, the Company determined to concentrate on the development of the delivery technology. As a result, the Company terminated its sales agreements with its major customers and expensed approximately $178,000 of its equipment and intellectual property to Research and Development expenses as it was determined the assets would be used solely in this capacity on a go forward basis. Additionally, approximately $38,000 of property and equipment was written off as impaired and approximately $1,200,000 of inventory was written off as management believes the inventory could not be sold prior to its expiration.

 

On August 27, 2014, the Company completed a 1:200 reverse stock split of its issued and outstanding common stock, which was approved by the holders of the Company’s outstanding voting capital and the Company’s Board of the directors on March 19, 2014. All references to common share amounts, warrants, stock options and per share amounts have been retroactively adjusted to reflect the reverse stock split for all periods presented.

 

2.SIGNIFICANT ACCOUNTING POLICIES

 

CONSOLIDATION POLICY

 

The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Fuse Science, Inc. (“FSR&D”), a Delaware corporation, 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.

 

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 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 net of discounts and allowances 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.

 

In July 2014, the Company entered into an agreement with its major customer terminating the relationship and stipulating that any inventory previously purchased by the customer is not subject to return.

 

 

 

 18 

 

 

CASH CONCENTRATIONS

 

From time to time, the Company maintains cash with financial institutions in excess of federally insured limits.

 

ACCOUNTS RECEIVABLE

 

Accounts receivable are uncollateralized customer obligations due under normal trade terms. The carrying amount of accounts receivable may be reduced by an allowance that reflects management's best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and based on assessment of current credit worthiness, estimates the portion, if any, of the balance that will not be collected. All accounts or portions thereof determined to be uncollectible are written off to the allowance for doubtful accounts. No allowance for doubtful accounts was recorded as of September 30, 2013.

 

SHIPPING AND HANDLING

 

Shipping and handling billed to customers is included in net sales and shipping and handling costs are recorded as a component of cost of sales.

 

INVENTORIES

 

Inventories consisted of finished goods, which were manufactured by a contracted manufacturer on behalf of the Company, for resale. Inventories are valued at average cost and adjusted to reflect lower of cost or market. Provisions for inventory obsolescence are determined based upon the specific facts and circumstances and market conditions. As of September 30, 2014, all remaining inventory was written off as management believes inventory could not be sold before its expiration.

 

FIXED ASSETS

 

Fixed assets are recorded at cost and depreciated using the straight-line method over the estimated useful life of 3-10 years. Repairs and maintenance are charged to expense as incurred.

 

FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that the Company would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent counter-party in the principal market or in the absence of a principal market, the most advantageous market for the investment or liability. A three-tier hierarchy is established to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs); and establishes a classification of fair value measurements for disclosure purposes.

 

The hierarchy is summarized in the three broad levels listed below:

 

Level 1 - quoted prices in active markets for identical assets and liabilities
Level 2 - other significant observable inputs (including quoted prices for similar assets and liabilities, interest rates, credit risk, etc.)
Level 3 - significant unobservable inputs (including the Company’s own assumptions in determining the fair value of assets and liabilities).

 

In accordance with Accounting Standards Codification (“ASC”) 815, the Company’s warrant and preferred stock derivative liabilities are measured at fair value on a recurring basis, and are level 3 measurements in the three-tier fair value hierarchy.

 

 

 

 19 

 

 

There were no transfers between the levels of the fair value hierarchy during the years ended September 30, 2014 and 2013.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The following methods and assumptions were used by the Company in estimating the fair values of each class of financial instruments disclosed herein:

 

Derivative Liabilities - These financial instruments are carried at fair value.

 

Notes Payable - Based upon the interest rates, current economic conditions, risk characteristics, collateral and other factors, the carrying amount of these financial instruments approximate market value (level 2 measurement).

 

DERIVATIVE LIABILITIES

 

The Company issued warrants to purchase the Company’s common stock in connection with the issuance of convertible debt, which contain certain price protection provisions that reduce the exercise price of the warrants in certain circumstances. The Company also issued Series A Convertible Preferred Stock which contains price protection provisions that reduce the conversion price of the preferred stock in certain circumstances. The Company determined that the warrants and preferred stock did not qualify for a scope exception under ASC 815 as they were determined not to be indexed to the Company’s stock and accordingly are accounted for as derivatives and are recorded on the balance sheet at fair value with the changes in the fair value recognized in the consolidated statement of operations.

 

INTELLECTUAL PROPERTY

 

Intellectual property was amortized on a straight-line basis over its estimated economic life of 15 years and evaluated for impairment whenever events or changes in business circumstances indicated that the carrying value of the intellectual property may not be recoverable. As of September 30, 2014 all remaining intellectual property was expensed to research and development expenses.

 

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 liability method whereby deferred tax assets and liabilities are provided for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

Deferred tax assets, net of a valuation allowance, are recorded when management believes it is more likely than not that the tax benefits will be realized. Realization of the deferred tax assets is dependent upon generating sufficient taxable income in the future. The amount of deferred tax asset considered realizable could change in the near term if estimates of future taxable income are modified.

 

The Company assesses its tax positions in accordance with "Accounting for Uncertainties in Income Taxes" as prescribed by the Accounting Standards Codification, which provides guidance for financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return for open tax years (generally a period of three years from the later of each return's due date or the date filed) that remain subject to examination by the Company's major tax jurisdictions. Generally, the Company is no longer subject to income tax examinations by major taxing authorities for years before September 30, 2011.

 

 

 

 20 

 

 

The Company assesses its tax positions and determines whether it has any material unrecognized liabilities for uncertain tax positions. The Company records these liabilities to the extent it deems them more likely than not to be incurred. Interest and penalties related to uncertain tax positions, if any, would be classified as a component of income tax expense in the accompanying consolidated statements of income.

 

The Company believes that it does not have any significant uncertain tax positions requiring recognition or measurement in the accompanying consolidated financial statements.

 

MARKETING, ADVERTISING AND PROMOTION COSTS

 

Marketing, advertising and promotion costs are charged to operations as incurred and are included in sales and marketing expenses in the accompanying consolidated statements of operations.

 

NON-CONTROLLING INTEREST

 

Not applicable

 

CONCENTRATION OF CREDIT RISK

 

Not applicable

 

STOCK-BASED COMPENSATION

 

The Company accounts for stock options granted to employees and directors using the accounting guidance in ASC 718 “Stock Compensation” (“ASC 718”) and for stock options granted to consultants and endorsers using the accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”). In accordance with ASC 718, the Company estimates the fair value of service based options and performance based options on the date of grant, using the Black-Scholes pricing model. In accordance with ASC 505-50, the Company estimates the fair value of service based options and performance based options at each reporting period until a measurement date is reached using the Black-Scholes pricing model.

 

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.

 

RECLASSIFICATION

 

Not applicable

 

4.FIXED ASSETS

 

Fixed Assets consisted of the following at September 30, 2015 and 2014:

 

   2015   2014 
Equipment  $–   $– 
Website   –    13,750 
Display cases  $–   $– 
Fixed assets   –    13,750 
Less: Accumulated depreciation   –    (7,923)
Fixed assets (net)  $–   $5,827 

 

 

 

 21 

 

 

5.NOTES PAYABLE

 

Not applicable

 

 

6.INCOME TAXES

 

The Company recorded no income tax benefit or expense for the losses for the years ended September 30, 2015, 2014

  

Due to the uncertain nature of the ultimate realization of the net deferred tax asset, the Company has established a full valuation allowance for the benefits of the net deferred tax asset and will recognize these benefits only as reassessment demonstrates they are more likely than not realizable. Ultimate realization is dependent upon several factors, among which is future earnings. If the allowance is reduced, the tax benefits of the net deferred tax assets will be recorded in future operations as a reduction of the Company’s income tax expense.

 

The U.S. Federal jurisdiction and Florida are the major tax jurisdictions where the Company files income tax returns.

 

7.STOCKHOLDERS’ EQUITY (DEFICIT)

 

Not applicable

 

8. INCENTIVE STOCK PLANS

 

Not applicable.

 

9. COMMITMENTS AND CONTINGENCIES

 

Not applicable

 

10.SUBSEQUENT EVENTS :

 

Not applicable

 

 

 22 

 

 

 

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

ITEM 9A.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.

 

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 (the “Exchange Act”), as of September 30, 2014. Our management has determined that, as of September 30, 2014, the Company's disclosure controls and procedures are not 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 ( “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 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 not effective as of September 30, 2014 in the following areas:

 

·The Company does not have the resources necessary to properly assess and account for certain of its financing transactions, specifically related to the Company’s issuance of preferred stock, convertible debt and warrants.

 

·The company does not have the resources necessary to properly assess and account for debt extinguishments.

 

·The Company does not have the resources necessary to properly assess and account for certain of its equity transactions, specifically related to recording stock options granted to employees, consultants and endorsers.

 

 

 

 

 

 23 

 

 

PART III

 

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

Not applicable

 

Independence

 

Our board of directors has determined that each of our non-employee directors is “independent” within the meaning of the applicable rules and regulations of the SEC and the listing standards of the NASDAQ Stock Market.

 

Board of Directors Role in Risk Oversight

 

The board of directors has periodic meetings with management and the Company’s independent auditors to perform risk oversight with respect to the Company’s internal control processes. Two of the Company’s three current directors are independent directors. The Company believes that the board’s role in risk oversight does not materially affect the leadership structure of the Company.

 

Audit Committee

 

The Company does not presently have a separately-designated standing audit committee, and the entire board of directors acts as the Company's audit committee. We do not currently have an "audit committee financial expert" since we currently do not have a separately- designated audit committee in place.

 

Code of Ethics

 

We have adopted a code of ethics that applies to all of our executive officers, directors and employees. The code of ethics codifies the business and ethical principles that govern all aspects of our business. This document will be made available in print, free of charge, to any shareholder requesting a copy in writing from our Secretary at our executive offices in Massapequa, New York.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

On November 28, 2011, the board of directors appointed Rubin Hanan, who served as a consultant to the Company since September 2011, to the offices of President and Chief Operating Officer. We are presently party to a consulting services agreement with Executive Leadership Intelligence, Inc. (“ELI”), a consulting firm which Mr. Hanan founded (the “Consulting Agreement”) which had a term

 

Compensation of Directors Table

 

Not applicable

 

Narrative Disclosure to the Director Compensation Table

 

Not applicable

 

 

 

 24 

 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

Not applicable

 

 

 

 

 

 

 

 

 

 

 

 

 25 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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 on February 23, 2022.

 

 

  FUSE SCIENCE, INC.
   
  By: /s/ Esau David Delke
    Esau David Delke
Principal Executive, Financial and Accounting officer

 

Date:  February 23, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 26 

 

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