GFGU GetFugu Inc (CE)

On March 9, 2010 the Company issued 180,000 shares of common stock for services to an employee. The shares were fully vested on the date of issuance. The fair value of the shares was calculated to be $16,200 based on the share price on the date of the issuance and accordingly, the Company recorded a stock based compensation charge to the condensed consolidated financial statements for the three months ended March 31, 2010.

On March 11, 2010 the Company issued 1,000,000 shares of common stock for services to an employee. The shares were fully vested on the date of issuance. The fair value of the shares was calculated to be $80,000 based on the share price on the date of the issuance and accordingly, the Company recorded a stock based compensation charge to the condensed consolidated financial statements for the three months ended March 31, 2010.

On March 12, 2010 the Company issued 50,000 shares of common stock for services to an employee. The shares were fully vested on the date of issuance. The fair value of the shares was calculated to be $4,000 based on the share price on the date of the issuance and accordingly, the Company recorded a stock based compensation charge to the condensed consolidated financial statements for the three months ended March 31, 2010.

On March 11, 2010, the Company accepted the resignation of a consultant and the simultaneous agreement to enter into a master sales agreement.  The Company agreed to terminate the 10,000,000 options previously granted and issued 10,000,000 shares of the Company’s common stock to the consultant. The shares fully vested on the date of issuance. Accordingly, the Company accounted for the transaction as a modification of a stock based compensation award under ASC 718.  The Company recorded a charge of $1,854,742 for stock based compensation with respect to the modification of the original award.

On March 17, 2010, the Company entered into a consulting agreement pursuant to which 100,000 shares of the Company’s common stock were issued, the shares were fully vested on the date of issuance.  The Company recorded this as stock based compensation expense of $6,000 based on the share price of $0.06 per share.

Other

On January 14, 2010, the Company entered into an agreement for services related to establishing a joint venture and operating entity in Japan.  Under the terms of the agreement the Company will obtain a 75% interest in the joint venture. Pursuant to this agreement the Company

issued 3,000,000 shares of its common stock. The shares were fully vested on the date of the issuance and accordingly the Company recorded a stock based compensation charge of $480,000, which represented the fair value of the shares on the date of the agreement.

On January 15, 2010, the Company, through GetFugu Research Inc, its wholly-owned subsidiary, entered into an agreement with Health Matrix, Inc.  Under the terms of the agreement, 7,580,000 shares of the Company’s common stock were issued in exchange for all of the ownership interest in Health Matrix. The former owners of Health Matrix also entered into employment agreements which included six-month non-competition provisions.  The Company evaluated the transaction and determined that the transaction was an asset acquisition of in-process research and development comprising of trademarks and tradenames. The Company was unable to determine alternate future uses of the trademark and tradenames and determined that the employment agreement and non-compete agreement had no intrinsic value.  Accordingly, the Company recorded a charge of $1,212,800 for the three months ended March 31, 2010, for in-process research and development.

 

On March 24, 2010, the Company entered into an agreement with each of Mobile Search Technologies, Inc. and Cellular Software Corporation, pursuant to which the Company acquired both companies as wholly-owned subsidiaries in exchange for 100,000,000 shares of common stock each. Mobile Search Technologies, Inc. and Cellular Software Corporation was owned by Oscar Holdings, LLC, which is beneficially owned by the President of the Company, Carl Freer. The primary assets of each company are intellectual property rights relating to next generation mobile search technology. Each of the principals also executed a standard form confidentiality and intellectual property assignment agreement. The Company evaluated the transaction and determined that the transaction was an asset acquisition of in-process research and development comprising of patent pending algorithms with no alternate future uses. Through Carl Freer’s role as co-founder and one of the single largest indirect shareholders of the Company, Carl Freer is considered to have management control in accordance with ASC 850, “Related Party Disclosures.” The principals were determined to be affiliates and accordingly the Company recorded the transaction as a deemed dividend of $8,000,000.

Stock Options

On February 15, 2010, the Company entered into consulting agreements with two individuals including monthly fees totaling $25,000 and the issuance of non-qualified stock options totaling 20,000,000. On the date of the grant 25% of the options vest immediately and the remaining will vest over a term of 5 years. The options granted are exercisable at $0.13 per share and have a contractual life of 5 years.  The fair value of the awards based on the Black Scholes option valuation model totaled $2,454,608.  The Company recorded a charge to operations for $659,676   for the three months ended March 31, 2010, which represented the vested portion of the awards. As of March 31, 2010, options with a value of $1,794,932 remains non-vested and will be charged to operations over the remaining vesting period of 4.9 years.

 

A summary of the status of the Company’s nonvested shares of common stock as of March 31, 2010, and changes during the three months  then ended is presented below:

 

					Weighted
					Average
					Grant Date
Nonvested Shares			Shares				Fair Value
Nonvested at January 1, 2010			10,312,500			$	0.52
Granted			-				-
Vested			(1,375,000	)			0.47
Cancelled			(7,312,500	)			-
Nonvested at March 31, 2010			1,625,000			$	0.52

NOTE 5 — FAIR VALUE

ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements.  As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date and emphasizes that fair value is a market-based measurement and not an entity-specific measurement.

ASC 820 establishes the following hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value:

·

Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

·

Level 2 – Inputs use other inputs that are observable, either directly or indirectly. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

·

Level 3 – Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Liabilities measured at fair value on a recurring basis at March 31, 2010 are as follows:

 

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Other

At March 31, 2010, the Company has an obligation totaling $2,047,010 related to unpaid payroll tax, including an estimate of penalties and interest.  The Company has filed the applicable payroll tax returns.

The Company has not filed either federal or state income tax returns for the years ended 2009, 2008, and 2007.  There are no penalties or interest due, nor is a liability recorded, as in all periods the Company reported losses.

Litigation

A lawsuit was filed on November 25, 2009 against the Company, numerous former and current Company officers and directors, and other individuals and entities. Plaintiffs have made no direct claims against the Company, but have instead named it as a “nominal” defendant, and have alleged “derivative” causes of action on its behalf.   The Plaintiffs appear at present to only claim damages of approximately $26,000,000 resulting from loans they made to previous companies, which Carl Freer, the President of the Company, allegedly personally guaranteed.  The Company’s counsel is preparing a motion to dismiss. The Company and those officers and directors deny plaintiffs’ allegations, and plan to vigorously defend the action.  Accordingly, the Company has no liability accrued as it relates to this matter.

By letter dated February 24, 2010, fourteen former employees of a separate company made a demand for $430,000 in unpaid wages against that company, and threatened to file suit against the Company, on the ground that the separate company was merely an instrumentality of GetFugu, Inc. To the Company’s knowledge, no claim has been filed to date, and the Company believes the demand is not an obligation of the Company.  Accordingly, as of March 31, 2010, the Company has no liability accrued as it relates to this matter.

Although the Company believes it will be successful in defending these matters there can be no assurances that these legal matters will not result in any negative outcomes.

On April 1, 2010, Hutton International Investments, Ltd (“Hutton”) filed a claim that it suffered damages as a result of the Company's breach of a securities purchase agreement with the Company. The parties stipulated to settle the claim in exchange for issuance to Hutton of 40,000,000 shares of the Company’s common stock, subject to adjustment and the Court’s approval of the settlement under Section 3(a)(10). The court approved the settlement and dismissed the action on April 6, 2010 at which time 40,000,000 shares of the Company’s common stock were issued to Hutton. The Company recorded a charge of approximately $1,200,000 for the year ended December 31, 2009, based on the share price of the Company’s common stock on the date of settlement.

A demand for arbitration was filed on April 13, 2010, by six former employees and independent contractors, seeking unpaid wages and unspecified damages.  At March 31, 2010, the Company had accrued $147,000 for all such wages.

 

 

Other Income (Expense)

Interest Expense —Interest expense for the three months ended March 31, 2010 and 2009, totaled $63,479 and $0, respectively.

Gain on Derivative Financial Instrument —The gain on derivative financial instrument totaled $599,889 and $0 for the three months ended March 31, 2010 and 2009, respectively.  Financial instruments which do not have fixed settlement provisions are deemed to be derivative instruments.   The warrants issued with the Company’s September 18, 2009 common stock financing did not have fixed settlement provisions because the exercise price may be lowered if the Company issues securities at lower prices in the future.  The Company was required to include the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings.  In accordance with ASC 815-40, the warrants were recognized as a derivative instrument. In addition, the conversion price of a short-term note payable did not have a determinable number of shares the loans could be settled into and as a result this and an additional convertible note payable, together with non-employee warrants have been presented as a derivative liability.   Accordingly, the conversion options of these notes and embedded conversion features of non-employee warrants will be marked to market through earnings at the end of each reporting period.  

Going Concern, Liquidity and Financial Condition

The Company incurred a net loss of approximately $9.3 million and $8.1 million for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, the Company’s accumulated deficit from inception amounted to approximately $62.1 million and the Company’s working capital deficit amounted to approximately $9.7 million.  During the three months ended March 31, 2010, net cash used in operating activities amounted to approximately $546,000. During the three months ended March 31, 2010, cash provided by financing activities amounted to $562,000. As of March 31, 2010, the Company’s cash position was $15,890. Subsequent to March 31, 2010, the Company raised additional operating capital of approximately $100,000, by entering into short-term debt financing arrangements.

The Company needs to raise additional capital from external sources in order to sustain its operations while continuing the longer term efforts contemplated under its business plan. The Company expects to continue incurring losses for the foreseeable future and must raise additional capital to pursue its product development initiatives, to penetrate markets for the sale of its products and to continue as a going concern. The Company cannot provide any assurance that it will raise additional capital. If the Company is unable to secure additional capital, it may be required to curtail its research and development initiatives, modify its existing business plan and take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays in the Company’s efforts to commercialize its products, which is critical to the realization of its business plan and the future operations of the Company. These matters raise substantial doubt about the Company’s ability to continue as a going concern.   The accompanying consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern.

Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 3 of the accompanying condensed consolidated financial statements. 

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

Safe Harbor

The discussions of the results of operations and financial condition of the Company should be read in conjunction with the financial statements and notes pertaining to them that appear elsewhere in this Form 10-Q. Statements made in this Form 10-Q that are not historical or current facts are "forward- looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. The Company intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include adverse economic conditions, risks of foreign operation, entry of new and stronger competitors, inadequate capital and unexpected costs. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.