XOTC:AUGT Annual Report 10-K Filing - 2/29/2012

Effective Date 2/29/2012

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended February 29, 2012

 

o

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

 

For the transition period from                               to                               

 

Commission file number 333-57818

 

Augme Technologies, Inc.

(Name of issuer in its charter)

 

DELAWARE

 

20-0122076

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

350 7th AVENUE, 2nd FLOOR

NEW YORK, NY 10001

(Address of principal executive offices, including zip code)

 

(855) 423-5433

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(B) of the Exchange Act: None

 

Securities registered pursuant to Section 12(G) of the Exchange Act: None

 

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

 

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

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (Section 229.405) 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. x

 

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 o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act Yes o No x

 

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 sold on the OTC Bulletin Board on August 31, 2011 was approximately $213.4 million and was last sold on the OTC Bulletin Board on May 4, 2012 at a price of $2.33 per share.

 

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, on May 4, 2012 was 94,503,567.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 



Table of Contents

 

Form 10-K for the Year Ended February 29, 2012

 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

15

Item 2.

Description of Properties

15

Item 3.

Legal Proceedings

15

Item 4.

Mine Safety Disclosures

17

 

 

 

PART II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6

Selected Financial Data

20

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 8.

Financial Statements and Supplementary Data

31

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

55

Item 9A.

Controls and Procedures Report of Management on Internal Control over Financial Reporting

55

Item 9B.

Other Information

56

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

57

Item 11.

Executive Compensation

61

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

72

Item 13.

Certain Relationships and Related Transactions, and Director Independence

74

Item 14.

Principal Accounting Fees and Services

75

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

76

 

Signatures

 

 

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PART I

 

Forward-Looking Statements

 

This report contains forward-looking statements.  These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Factors that might affect our forward-looking statements include, among other things:

 

·      overall economic and business conditions;

 

·      the demand for our products and services;

 

·      competitive factors in the industries in which we compete;

 

·      the emergence of new technologies which compete with our product and service offerings;

 

·      other capital market conditions, including availability of funding sources; and

 

·      changes in government regulations related to our industry.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements.  These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties.  Given these uncertainties, you should not place undue reliance on these forward-looking statements.  We discuss many of these risks in greater detail under the heading “Risk Factors” included in this and other reports we file with the Securities and Exchange Commission.  Also, these forward-looking statements represent our estimates and assumptions only as of the date of the document containing the applicable statement.

 

Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments.  Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

 

ITEM 1. BUSINESS

 

Overview

 

Augme® Technologies, Inc. (“Augme” or the “Company”), Augme® (“Augme”), AD LIFE® (“AD LIFE”), AD SERVE® (“AD SERVE”), A+® (“A+”), Hipcricket® (“Hipcricket”), Boombox® (“Boombox”) and the Company logos are trademarks of Augme Technologies, Inc.

 

Augme Technologies, Inc. is a leader in mobile marketing and advertising technology and services that enable brands, advertising agencies, media companies and enterprise customers to seamlessly drive sales, engagement and loyalty. Augme has one reporting unit and is headquartered in New York City. We were formerly known as Modavox, Inc. and changed our name to Augme Technologies, Inc. in February 2010. Augme purchased the assets of the mobile marketing and mobile advertising company, Hipcricket, in August 2011 following the acquisition of the assets of JAGTAG, Inc. (“JAGTAG”) one month earlier.  Hipcricket is a mobile marketing company that creates measurable, real-time, one-to-one relationships between advertisers and their customers and prospective customers using text messages, multimedia messages, mobile web sites, mobile applications, mobile coupons, quick response codes and a mobile advertising network. The Company markets its services primarily through a direct sales force as well as through other service providers.  Following the acquisition, a leading industry analyst, Frost & Sullivan, opined that the combined Hipcricket-Augme entity will have one of the most innovative and complete sets of mobile marketing and advertising solutions in the industry, calling the company an “industry powerhouse.” Post acquisition, the combined company markets and sells its software and services to customers under the Hipcricket brand.

 

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On March 14, 2012, Hipcricket, Inc. became a wholly-owned subsidiary of Augme. Hipcricket’s AD LIFE Platform (the “Platform”) is a true end-to-end mobile marketing and mobile advertising solution, enabling customers to quickly create, deploy and measure rich-media, interactive marketing campaigns across multiple networks and devices through a single access point.  Campaigns built on this proprietary software-as-a-service (“SaaS”) platform provide optimized marketing messages to the consumer by delivering Customer Relationship Management (“CRM”)-driven personalized brand experiences to customers where they work, play and live.  The Platform is a product of combining Hipcricket’s Hip 7.0 and Augme’s AD LIFE and AD SERVE platforms and technologies.

 

The Platform features an analytical engine that uses real-time campaign data, enabling brands, advertising agencies and media companies to plan, execute, monitor and measure mobile marketing and advertising campaigns in real time throughout the campaign lifecycle.  Through Hipcricket, the Company has delivered over 175,000 campaigns to date. The Company has over a 95% renewal rate among its 300+ total customer base.

 

The Platform is built on Augme’s patented intellectual property (“IP”).  The Company has invested a significant amount of its resources and capital building its patent portfolio, which management believes is foundational to targeted Internet functions, such as advertising, broadcasting and content delivery.  The first of Augme’s core patents was granted in 2003 with a 1999 priority date, placing the Company’s invention ahead of the inception of many leading Internet advertising and mobile marketing companies.  The patents cover a two code module system, designed to automatically assemble content delivery on back-end server systems allowing websites to target content to end-users’ preferences, networks, devices and installed Internet capabilities from any website destination.  The Company believes that all patent families remain open for additional divisional and continuation-in-part filings with applications in various stages of approval.

 

AD LIFE - Mobile Marketing

 

Mobile phones are fully integrated into the lives of most of the population of the United States. There are over 320 million mobile phone subscribers in the United States out of a total population of approximately 312 million people, as a portion of the population subscribes to more than one mobile device. Each cell phone user is a “mobile consumer” who is exposed to an average of over 80,000 print ad impressions annually.  Over $150 billion is spent annually in the U.S. on traditional print marketing media across six major channels: magazine, point-of-purchase, newspaper, free standing inserts, out-of-home, and direct mail. Packaging also has become a recognized marketing medium, as consumer packaged goods companies are increasingly leveraging the package with calls to action that link the brand with consumers via such means as Quick Response (“QR”) codes, the mobile web, and mobile messaging. Our business is augmenting this advertising with interactive marketing messages sent via the print ad to mobile phones.

 

Despite the proliferation of sophisticated mobile devices and the enormous marketing value promised by interacting directly with mobile consumers, marketers continue to struggle to find an easy, affordable, and effective way to fully integrate mobile phones into existing marketing and advertising campaigns. AD LIFE is our interactive SaaS platform that solves this “mobile marketing puzzle”.  It provides marketers, brands and advertising agencies the ability to create, deliver, manage and track interactive marketing campaigns targeting mobile phone users through traditional print advertising channels, thereby enhancing and extending communication, persuasiveness and effectiveness of existing campaigns.  AD LIFE does this through a comprehensive web portal with four fully integrated components:

 

·                  Consumer Response: Turnkey tools to create and assign Consumer Response Tags (“CRTs”) that allow consumers to use their mobile phones for easy and instant access to on-demand digital content. Augme’s AD LIFE open architecture offers a wide variety of CRTs in the market today, including Short Message Service (“SMS”), 2D codes, logo, and audio recognition.

 

·                  Content Formatting: While over 30% of Internet search is done via a mobile device, it has been estimated that only 2% of digital assets are formatted for proper viewing via a mobile device. The sophisticated device detection system in AD LIFE automatically renders existing digital assets for proper viewing and navigation on nearly any mobile device regardless of phone type, operating system, or mobile service provider.

 

·                  Customer Relationship Management (“CRM”): Using data analysis gathered and processed using proprietary techniques, AD LIFE provides key metrics and results of client campaigns including demographic and behavioral data.

 

·                  Promotional Partnerships: AD LIFE provides access to pre-negotiated and readily available branded content to complement existing promotions. These include rebates and coupons that operate through a partnership with one of the nation’s leading promotions transaction settlement providers, and many additional applications and services fully

 

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integrated with leading technology and service partners.

 

Our advanced, comprehensive, and fully integrated Platform drives revenue primarily through license fees, marketing campaign fees, and fees associated with certain add-on promotional applications in the platform. Additional revenue is generated by platform administration and professional service fees related to the mobilization of client content and implementation of marketing campaigns through the platform.  To date, all of our revenues have been generated in the United States.

 

Competition

 

The mobile marketing and advertising landscape, while in its early stages, is highly competitive and fragmented, with technology evolving rapidly. Competition in the market of mobile marketing applications and services is intense.  Our products face competition from many larger, more established companies.  In addition, the introduction of competing products and services could result in a decrease in the price charged by our competitors for their products and services, reduce demand for our products and services, or even make our products and services obsolete.  Many of the landscape’s significant players and new entrants are focused on delivering point solutions targeting a specific segment of the mobile marketing and/or advertising landscape.  We believe Augme differentiates itself from the competition by offering complete, end-to-end mobile advertising and marketing solutions delivered through its Platform.

 

Customers

 

Through Hipcricket, the Company has successfully completed over 175,000 mobile campaigns to date with more than 300 clients across some of the leading brands in the U.S.  Furthermore, the Company has consistently maintained a customer renewal rate of over 95%.  Augme products serve advertisers and ad agencies in many vertical markets including automotive, retail, consumer products, food and beverage, media and broadcast, pharmaceutical and restaurant brands.

 

The Company’s client roster includes:

 

·                              Nine of the world’s top twenty pharmaceutical companies;

·                              Eight of the largest media companies in the world;

·                              The three largest advertising companies in the world;

·                              Four of the leading quick service restaurant groups in the world;

·                              The two largest food companies in the world; and

·                              One of the largest auto manufacturers in the world.

 

Distribution

 

The AD LIFE mobile platform is primarily sold through our in-house sales force. We intend to build out our channel partner strategy across multiple industries.

 

Intellectual Property Summary

 

At February 29, 2012, Augme’s patent portfolio covers technology inventions from 1999 to 2033 and protects technology that enables the following:

 

1)              Customized content delivery to any Internet enabled device;

2)              Device, browser, software, and profile detection with content targeting;

3)              Content targeting based on profiles and ambient conditions; and

4)              Content targeting based on profiles within virtual environments.

 

We believe that the combined Augme and Hipcricket mobile marketing and advertising technology businesses are well positioned to capitalize on the growth of Internet enabled smartphones that have become a leading driver of growth in Internet traffic and utilization by consumers. Due to that explosive growth, marketers are refocusing to reach consumers through mobile advertising and mobile marketing strategies, initiatives and campaigns.  We believe that our IP will be instrumental in our efforts to capture the marketing budgets and mobile marketing advertising spends of the future. We believe the growth in mobile marketing and mobile advertising spending by our customers across an array of industry verticals will continue to rise. Augme’s objectives within its IP management include the commercialization of our inventions, on-going licensing through product sales, non-litigation licensing, litigation and the complete monetization of our inventions.

 

With over 150 million unique visitors over an industry-leading 175,000 campaigns completed to date through our patented technology platforms, we continue to develop new and innovative technologies and inventions. We project to have over 100 new patent assets under Augme’s management by the end of our 2013 fiscal year.

 

We believe that growth in the mobile Internet market space may enhance our patent enforcement initiative because it has

 

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contributed to the creation of an emerging group of companies that have developed revenue streams that we believe are infringing on Augme’s patents. Augme’s inventions have solved device, infrastructure and customized content distribution problems facing Internet publishers in 1999. Now in 2012, well within the coverage of the patent protection, the identical problems are repeating in the mobile Internet and we believe that Augme’s inventions again present the solution for mobile Internet publishers and service providers. We believe that the growing number of market entries by highly capitalized companies and the highly sought after massive consumer audience emerging on the mobile Internet makes it likely that infringement of our patents is occurring. Companies that implement and monetize their solutions may have developed revenue streams subject to licensing and infringement damages by Augme.

 

Augme owns 7 patents, has received notice of allowance on one additional patent, and it has an additional 46 patents pending with the United States Patent & Trademark Office (“USPTO”). Augme also has 4 international patents pending.

 

Augme’s first family of patented inventions plays an integral role in technology platforms and services and enables targeting of content to end-users. The patents are foundational to the methods used in two primary types of Mobile Internet operations:

 

1)              Device Detection and Mobile Content Targeting; and

2)              Customized Content & Mobile Advertising Delivery

 

Augme’s “Method and System for Adding Function to a Webpage” family of patents teaches a two-code-module system that enables any networked content to be customized based on end-user criteria. The Augme patents thus enable a single Web page (traditional Internet and mobile Web) to have an infinite number of tailored service responses that allow Web page visitors to receive content that is customized to the user’s unique computing environment, connectivity, bandwidth level, geographic location, gender, age, or any other information about the Web page visitor (targeting criteria) such as behavioral marketing data. Augme’s two-code-module Web page customization process has widespread application in the fields of Targeted Advertising, E-Commerce, Mobile Marketing/Advertising and other customized content delivery operations.

 

Augme’s patented methods and systems add function to web pages through an easily distributed software code module. The method and system deliver responses to client (computer user) requests that are customized based upon visitor information and preferences. When a web page is downloaded, the technology automatically executes a first code module embedded in the Web page. The first code module issues a first command to retrieve a second code module, via a network connection, from a server system. Next, a second code module is assembled based upon the visitor information. Finally, the assembled second code module, with a service response, is returned to the visitor’s device, where, upon execution, the response is rendered on the visitor’s processor platform (computer or mobile device). The patent portfolio has been granted 3 continuation patents under this family and is pursuing 2 addition patents including a “Method and System for adding Targeted Marketing to a Webpage,” now allowed by the USPTO, and expected to be issued to the company within 60 to 90 days.

 

Augme’s patent portfolio was expanded in 2011 with the filing of the now pending “Method and System for Generation of Anonymous Profiles from a Tri-Level Mapping of Mobile Network Marketing Econometrics” that solves critical mobile marketing consumer privacy issues by protecting users’ identities and movements through a mobile network. The invention also allows for brand centric rich media and mobile marketing engagements to be tracked and presented in way that provides data in three layers of utility within the areas of retail, product and consumer engagement. The data interface resulting from this technology allows brands to manage mobile marketing technology in a way that increases the knowledge base and strategic actionable information mapping anonymous consumer behavior and data.

 

U.S. Patent Number 7,958,081 was issued to the company on June 7, 2011 and is entitled, “Apparatuses, Methods and Systems for Information Querying and Serving on Mobile Devices Based on Ambient Conditions.” Augme expanded again and has been already granted patents in continuation of the ‘081 patent and added to its portfolio patents issued on November 29, 2011, U.S. Patent Number 8,069,169, entitled “Apparatuses, Methods and Systems for Information Querying and Serving on the Internet Based on Profiles” and “Apparatuses, Methods and Systems for a Graphical Code-Serving Interface.” The Company filed these applications on September 28, 2007 and the issuing claims detail the implementation of apparatuses, methods, and systems for information querying and serving on the mobile and consumer Internet based on profiles. Information and/or advertisement providers are enabled to leverage profile information to serve context, demographic, and behavior targeted information to users on the mobile Internet using this invention.

 

Aside from its patents and pending patents, Augme also owns 18 trademarks protecting the names of its products and identity in the marketplace.

 

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Augme is engaged in several legal disputes with companies that Augme alleges are infringing the Augme patent portfolio. Currently pending patent infringement lawsuits and related matters are described in the section of this document titled “Legal Proceedings.”

 

Augme’s patents are an integral and foundational component of Augme’s technology platforms and services as well as providing potential for attractive partnership opportunities with third parties who have been identified to license the technology within prescribed market verticals.  Augme is pursuing certain strategic licensing arrangements with companies that Augme has identified as using Augme’s patented methods and processes.  In addition, Augme is obtaining organic licenses through Hipcricket’s clients’ use of Augme’s core technology and inventions.

 

The table below provides a brief description of patents in our portfolio:

 

Issue Date

 

Expiration Date

 

Patent 
Number

 

Brief Description

July 15, 2003

 

October 28, 2019

 

6,594,691

 

“Method and System for Adding Function to a Webpage.” The ‘691 patent describes a computer network and includes a first processor for maintaining a Web page having an embedded first code module and accessible through a Web address. A second processor supports a Web browser for downloading the Web page and executing the first code module. When executed, the first code module issues a first command to retrieve a second code module from a server system. The server system includes a database having a service response associated with the Web address. A second processor supports a Web browser for downloading the Web page and executing the first code module. A processor assembles the second code module having the service response. When the second code module is retrieved, the first code module issues a second command to initiate execution of the second code module to provide added function to the Web page.

September 11, 2007

 

October 28, 2019

 

7,269,636

 

“Method and Code Module for Adding Function to a Webpage.” The ‘636 patent describes a computer network that includes a first processor for maintaining a Web page having an embedded first code module and accessible through a Web address. A second processor supports a Web browser for downloading the Web page and executing the first code module. When executed, the first code module issues a first command to retrieve a second code module from a server system. The server system includes a database having a service response associated with the Web address. A second processor supports a Web browser for downloading the Web page and executing the first code module. A processor assembles the second code module having the service response. When the second code module is retrieved, the first code module issues a second command to initiate execution of the second code module to provide added function to the Web page.

August 24, 2010

 

October 28, 2019

 

7,783,721

 

“Method and Code Module for Adding Function to a Webpage.” The ‘721 patent describes, among other things, how to enable Internet and mobile websites to be delivered with customized content that is tailored to any end-user’s network-enabled device.

 

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November 9, 2010

 

October 28, 2019

 

7,831,690

 

“Appliance Metaphor for Adding Media Function to a Webpage.” The ‘690 Patent describes a media appliance metaphor, a graphic representation representing a real world counterpart (for example, a radio player) that is formed by a server system as a service response customized in response to information about a Web page.

June 7, 2011

 

September 28, 2027

 

7,958,081

 

“Apparatuses, Methods and Systems for Information Querying and Serving on Mobile Devices Based on Ambient Conditions” When targeting is possible, the system allows an ad to be served intelligently based on atmospheric information surrounding the user, and the ad can correspond to existing knowledge, probable location, and other information about the user and Multimedia Messaging Service (“MMS”) messages.

November 29, 2011

 

August 14, 2028

 

8,069,168

 

“Apparatuses, Methods and Systems for Information Querying and Serving in a Virtual World Based on Profiles” The ‘168 patent describes virtual worlds which may include for example, massively multiplayer online games like The Sim’s Online, Everquest, World of Warcraft, Second Life, and/or the like. Information and/or advertisement providers may use a code triggered information server to serve context, demographic, and behavior targeted information to users in a virtual world.

November 29, 2011

 

October 15, 2028

 

8,069,169

 

“Apparatuses, Methods and Systems for Information Querying and Serving on the Internet Based on Profiles” The ‘169 patent provides that information and/or advertisement providers may use a code triggered information server to serve context, demographic, and behavior targeted information to users on the Internet.

 

Employees

 

At February 29, 2012, Augme had approximately 142 employees, including executive management, legal, accounting, administration, sales (including channel management), client services, technology development and IT infrastructure management, technical administration and implementation. We have no labor union contracts and believe relations with our employees are satisfactory.

 

Available Information

 

You can find more information about us at our Internet websites at (http://www.augme.com) and (http://www.hipcricket.com). Information included on our websites is not a part of this report. Our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K are available from the Securities and Exchange Commission EDGAR web site at (http://www.sec.gov). All of these reports for approximately the last twelve months are available free of charge on our Internet website as soon as reasonably practicable after we file such material electronically with the SEC.

 

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ITEM 1A.  RISK FACTORS

 

In addition to the other information contained in this Form 10-K, the following are risks that we believe should be considered carefully in evaluating our business.  Our business, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks.  The risks summarized below do not represent an exhaustive list and additional risks not presently known to us or that we currently consider immaterial may also impair our business and operations.

 

We have incurred a net loss from operations for the last three fiscal years.  We cannot anticipate with certainty what our earnings, if any, will be in any future period.

 

Our net loss from operations has increased for each of the last three fiscal years, from $6.6 million to $12.5 million to $29.9 million for the fiscal years 2010, 2011 and 2012, respectively.  For the last fiscal year ended February 29, 2012, we had negative operating cash flows of $14.7 million.  Our ability to generate positive cash flows from operations and net income is dependent, among other things, on the acceptance of our products in the marketplace, market conditions, cost control, and our ability to raise capital on acceptable terms.  The financial statements included elsewhere in this report do not include any adjustments that might result from the outcome of these uncertainties.  Furthermore, developing and expanding our business will require significant additional capital and other expenditures.  Accordingly, if we are not able to increase our revenue, then we may never achieve or sustain profitability.

 

Although we recently completed a $20 million financing, we are likely to need additional financing from time-to-time in order to continue our operations.  Financing may not be available to us when we need it.

 

Although we recently completed a $20 million financing, we anticipate that, in the future, we may need additional financing to continue our operations.  Financing may not be available to us on commercially reasonable terms, if at all, when we need it.  There is no assurance that we will be successful in raising additional capital or that the proceeds of any future financings will be sufficient to meet our future capital needs.

 

Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations and net worth.

 

Pursuant to accounting principles generally accepted in the U. S., we are required to annually assess our goodwill and indefinite-lived intangible assets to determine if they are impaired. In addition, interim reviews must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results, divestitures and market capitalization declines may result in additional charges for goodwill and other asset impairments. We have significant intangible assets, including goodwill with an indefinite life, which are susceptible to valuation adjustments as a result of changes in such factors and conditions. We assess the potential impairment of goodwill and indefinite-lived intangible assets on an annual basis, as well as when interim events or changes in circumstances indicate that the carrying value may not be recoverable. We assess definite lived intangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Our 2012 and 2011 annual impairment assessment indicated no impairment of our goodwill or intangible assets.  Although our analysis regarding the fair values of the goodwill and indefinite-lived intangible assets indicates that they exceed their respective carrying values, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in goodwill impairment losses. Specifically, an unanticipated deterioration in revenues and gross margins generated by our AD LIFE mobile marketing business could trigger future impairment in that business unit.  We also evaluate other assets on our balance sheet whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Materially different assumptions regarding the future performance of our businesses could result in significant asset impairment losses.

 

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We had management changes beginning in June 2010 and continuing through 2011.  We cannot assure you that our new management has the ability to function as a team.

 

In June 2010, our Chief Executive Officer was replaced and in August 2011, following the acquisition of the assets of JAGTAG, we added a Chief Financial Officer. Additionally, following the acquisition of the assets of Hipcricket, Inc., we added a President.  Following these appointments, officers and directors resigned or have been replaced.  There can be no assurance that our new management team will function together successfully to implement our business strategy.  Our performance is dependent on the services of our management as well as on our ability to recruit, retain and motivate other key employees in the fields of engineering, marketing and finance.

 

We had two acquisitions during the last fiscal year. Our business could suffer if we are unsuccessful in integrating acquisitions.

 

We acquired two companies during the last fiscal year, and we may acquire additional companies.  These transactions create risks such as disruption of our ongoing business, including loss of management focus on existing business; problems retaining key personnel; additional operating losses and expenses of the businesses we acquired; and the difficulty of integrating accounting, management and other administrative systems to permit effective management. In addition, valuations supporting our acquisitions could change rapidly given the current economic climate. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.

 

Future advertising and competition in the mobile device market may render our technology obsolete.  If that were to happen, it would have a material, adverse effect on our business and results of operations.

 

Newer technology may render our technology obsolete which would have a material, adverse effect on our business and results of operations.  We may also be required to collaborate with third parties to develop our products and may not be able to do so in a timely and cost-effective manner, if at all.

 

Information technology, network and data security risks could harm our business.

 

Our business faces security risks.  Our failure to adequately address these risks could have an adverse effect on our business and reputation.  Computer viruses, break-ins, or other security problems could lead to misappropriation of proprietary information and interruptions, delays, or cessation in service to our customers.

 

We rely on third parties to provide services to us.  If we were to lose the services of these providers, we may not be able to find other providers who are as cost effective.  This could harm our business and our results of operations.

 

We rely on certain technology services provided to us by third parties, and there can be no assurance that these third party service providers will be available to us in the future on acceptable commercial terms or at all.  If we were to lose one or more of these service providers, we may not be able to replace them in a cost effective manner, or at all.  This could harm our business and our results of operations.

 

We must invest in technological innovation in order to stay competitive.  If we fail to make investments in technological innovations, our business and results of operations could be adversely affected.

 

If we fail to invest sufficiently in research and product development, then our products could become less attractive to potential customers, which could have a material adverse effect on our results of operations and financial condition.

 

New laws or regulations could adversely affect our business and results of operations.

 

A number of laws and regulations may be adopted with respect to the Internet or other mobile device services covering issues such as user privacy, “indecent” materials, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Adoption of any such laws or regulations might impact our ability to deliver increasing levels of technological innovation and will likely add to the cost of making our products, which would adversely affect our results of operations.

 

The steps we have taken to protect our intellectual property rights may not be adequate.

 

We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyrights to establish and protect our intellectual property rights.  These offer only limited protection, however, and the steps we have taken to protect our proprietary

 

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technology may not deter its misuse, theft or misappropriation.  Any of our patents, copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation.  Competitors may independently develop technologies or products that are substantially equivalent or superior to our solutions.  Competitors may hire our former employees who may misappropriate our proprietary technology or misuse our confidential information.  Although we rely in part upon confidentiality agreements with our employees, consultants and other third parties to protect our trade secrets and other confidential information, those agreements may not effectively prevent disclosure of trade secrets and other confidential information and may not provide an adequate remedy in the event of misappropriation of trade secrets or unauthorized disclosure of confidential information.  In addition, others may independently discover our trade secrets and confidential information, and in such cases we could not assert any trade secret rights against such parties.

 

We believe that some of our competitors have inappropriately incorporated our proprietary technology into their products.  We have and will continue to spend significant resources to monitor and protect our intellectual property rights.  We have initiated several legal actions against third parties for alleged infringement of our intellectual property rights but we cannot guarantee the outcome of these actions.

 

Our issued patents have been in the past and may in the future be challenged by third parties, and our pending patent applications may never be granted at all.  It is possible that innovations for which we seek patent protection may not be protectable.  Additionally, the process of obtaining patent protection is expensive and time consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.  There can be no assurance that any patents will have the coverage originally sought or adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain.  Any patents that are issued may be invalidated or otherwise limited, or may lapse or may be abandoned, enabling other companies to better develop products that compete with our solutions, which could adversely affect our competitive business position, business prospects and financial condition.

 

We cannot assure you that the measures we have taken to protect our intellectual property will adequately protect us, and any failure to protect our intellectual property could have a material adverse affect on our business, operating results and financial condition.

 

Third parties claiming that we infringe their intellectual property rights could cause us to incur significant legal expenses and prevent us from selling our solutions.

 

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights.  In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them.  The litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our potential patents may provide little or no deterrence.  We have received, and may in the future receive, notices that claim we have infringed, misappropriated or otherwise violated another party’s intellectual property rights. To the extent we gain greater visibility, we face a higher risk of being the subject of intellectual property infringement claims which is not uncommon with respect to software technologies.  There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods.  Any intellectual property claims made against us, with or without merit, could be very time consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources.  These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights.  These claims could also result in our having to stop using technology found to be in violation of a third party’s rights.  We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all.  Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses.  As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense.  If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of one or more of our solutions or features of our solutions and may be unable to compete effectively.  Any of these results would harm our business, operating results and financial condition.

 

In addition, our agreements with customers and channel partners include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons. Large indemnity payments could harm our business, operating results and financial condition.

 

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Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require public companies to maintain disclosure controls and procedures.  As of November 30, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness.

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, concluded that, as of November 30, 2011, the Company’s disclosure controls and procedures were ineffective due to material weaknesses in its internal control over financial reporting. The material weaknesses were caused by the lack of personnel resources with technical accounting expertise who could timely prevent or detect errors relating to accounting for share-based payments and identifying and accounting for business combinations.

 

We have continued our efforts to remediate the identified material weaknesses by improving our internal controls and procedures by ensuring we have resources with sufficient knowledge and understanding of applicable generally accepted accounting principles and regulatory reporting requirements for our industry, including the appointment of a new Chief Financial Officer and additional accounting personnel.

 

Our failure to achieve and maintain an effective internal control environment could result in the loss of investors’ confidence in our financial reporting, our financial statements being unreliable, and a material decline in our stock price.  Our failure to maintain effective internal control over our financial reporting and disclosure controls and procedures could result in investigations, enforcement actions, and monetary and other sanctions by regulatory authorities, which could adversely affect our business and financial condition.

 

The passage of “do not track” legislation could have a material adverse impact on our business.

 

Internet privacy is an ongoing issue of concern to consumers.  A survey released by Pew Internet in March 2012 on search engine use found that 73% of respondents said they would “not be OK” with search engines tracking their searches.  According to the survey, the respondents believed that using tracked information from past searches to personalize their future searches was an invasion of their privacy.  Pew Internet found that this applied to all age groups.  In late 2010, the FTC and the Department of Commerce (“DOC”) each issued a staff report proposing new frameworks for consumer privacy protection; the FTC report called for federal “Do Not Track” legislation.  The FTC has also increased its enforcement actions against companies that fail to live up to their privacy or data security commitments to consumers.  A number of privacy and data security bills have been introduced in Congress that address the collection, maintenance and use of personal information, web browsing and geo-location data, and establish data security and breach notification requirements.  Some state legislatures have adopted legislation that regulates how businesses operate on the Internet, including measures relating to privacy, data security and data breaches.  Several Congressional hearings have examined privacy implications for online, offline and mobile data.  Messaging using SMS and MMS is always permission based, but if “do not track” legislation is passed, it could negatively impact our mobile ad network. Any significant restriction on our ability to utilize these functions could have a material adverse result on our business, revenues and results of operations.

 

Our business and future plans are dependent upon key individuals and the ability to attract qualified personnel.

 

In order to execute our business, we will be dependent upon our executive officers, the loss of which could have a material adverse effect on our business.  Moreover our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel.  Competition for such personnel is intense, and there can be no assurance that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future.  The competition for software developers is especially intense because the software market has significantly expanded over the past several years. If we are unable to hire, assimilate and retain such qualified personnel in the future, our business, operating results, and financial condition could be materially adversely effected.  We may also depend on third party contractors and other partners to expand our services or develop future enhancements thereto.  There can be no assurance that we will be successful in either attracting and retaining qualified personnel, or creating arrangements with third parties.  The failure to succeed in these endeavors could have a material adverse effect on our business and results of operations.

 

We are dependent on a small number of customers for a large portion of our sales and a loss of any customer that accounts for a large portion of our revenue would cause our revenue to decline substantially.

 

Sales to four customers accounted for approximately 29% of our revenue in fiscal year 2012.  Contracts with our customers generally have no specified term.  If revenues from these key customers decline for any reason (such as competitive developments), our revenues would decline and our ability to become profitable would be impaired.  It is important to our ongoing success that we maintain these key customer relationships and at the same time develop new customer relationships.

 

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We cannot guarantee that we will have the resources or the expertise to compete against larger, more established providers of marketing applications and services.

 

Competition in the market of mobile marketing applications and services is intense.  Our products face competition from many larger, more established companies.  In addition, the introduction of competing products or services could result in a decrease in the price charged by our competitors for their products and services, reduce demand for our products and services or even make our products and services obsolete, any of which would have a material adverse effect on our business, operating results and financial condition.  There can be no assurance that we will be able to compete successfully with our existing or potential competitors, some of whom may have substantially greater financial, technical, and marketing resources, longer operating histories, greater name recognition or more established relationships in the industry.

 

Risks Relating to Ownership of Our Securities

 

Our common stock is considered a “penny stock.”  The application of the “penny stock” rules to our common stock could limit the trading and liquidity of our common stock, adversely affect the market price of our common stock and increase the transaction costs to sell those shares.

 

Our common stock is a “low-priced” security or “penny stock” under rules promulgated under the Securities Exchange Act of 1934, as amended.  In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealers’ duties in selling the stock, the customer’s rights and remedies and certain market and other information.  Furthermore, broker-dealers must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience and objectives.  Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer.  The effect of these restrictions will likely decrease the willingness of broker-dealers to make a market in our common stock, will decrease liquidity of our common stock and will increase transaction costs for sales and purchases of our common stock as compared to other securities.

 

We do not expect to pay dividends for the foreseeable future, and we may never pay dividends.  Investors seeking cash dividends should not purchase our common stock.

 

We currently intend to retain any future earnings to support the development of our business and do not anticipate paying cash dividends in the foreseeable future.  Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time.  In addition, our ability to pay dividends on our common stock may be limited by Delaware state law.  Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.

 

Limitations on director and officer liability and our indemnification of officers and directors may discourage stockholders from bringing suit against a director.

 

Article Six of our Certificate of Incorporation states that our directors shall not be personally liable to us or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Section 174 of the Delaware General Corporation Law or shall be liable because the director (1) shall have breached his duty of loyalty to us or our stockholders; (2) shall have acted in a manner involving intentional misconduct or a knowing violation

 

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of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law; or (3) shall have derived an improper personal benefit.  Article Eight states that the liability of our directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as amended.  Furthermore, we have entered into indemnification agreements with each of our executive officers and directors. The provisions of our Certificate of Incorporation and our obligations under the indemnification agreements may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.

 

The Over-the-Counter Bulletin Board is a quotation system, not an issuer listing service, market or exchange.  Therefore, buying and selling stock on the OTC Bulletin Board is not as efficient as buying and selling stock through an exchange.  As a result, it may be difficult for you to sell your common stock or you may not be able to sell your common stock for an optimum trading price.

 

The Over the Counter Bulletin Board (the “OTCBB”) is a regulated quotation service that displays real-time quotes, last sale prices and volume limitations in over-the-counter securities.  Because trades and quotations on the OTCBB involve a manual process, the market information for such securities cannot be guaranteed.  In addition, quote information, or even firm quotes, may not be available.  The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price.  Execution of trades, execution reporting and the delivery of legal trade confirmations may be delayed significantly.  Consequently, one may not be able to sell shares of our common stock at the optimum trading prices.

 

When fewer shares of a security are being traded on the OTCBB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information.  Lower trading volumes in a security may result in a lower likelihood of an individual’s orders being executed, and current prices may differ significantly from the price one was quoted by the OTCBB at the time of the order entry.  Orders for OTCBB securities may be canceled or edited like orders for other securities.  All requests to change or cancel an order must be submitted to, received and processed by the OTCBB.  Due to the manual order processing involved in handling OTCBB trades, order processing and reporting may be delayed, and an individual may not be able to cancel or edit his order.  Consequently, one may not be able to sell shares of common stock at the optimum trading prices.

 

The dealer’s spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of securities on the OTCBB if the common stock or other security must be sold immediately.  Further, purchasers of securities may incur an immediate “paper” loss due to the price spread.  Moreover, dealers trading on the OTCBB may not have a bid price for securities bought and sold through the OTCBB.  Due to the foregoing, demand for securities that are traded through the OTCBB may be decreased or eliminated.

 

We expect volatility in the price of our common stock, which may subject us to securities litigation resulting in substantial costs and liabilities and diverting management’s attention and resources.

 

The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future.  In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be a target of similar litigation.  Securities litigation could result in substantial costs and liabilities and could divert management’s attention from our day-to-day operations and consume resources, such as cash.

 

Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. The following factors may affect our operating results:

 

·                  Our ability to compete effectively;

·                  Our ability to continue to attract clients;

·                  Our ability to attract revenue from advertisers and sponsors;

·                  The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure;

·                  General economic conditions and those economic conditions specific to the internet and internet advertising;

·                  Our ability to keep our products and services web sites operational at a reasonable cost and without service interruptions;

·                  The success of our product expansion; and

·                  Our ability to attract, motivate and retain top-quality employees.

 

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

There were no unresolved staff comments as of the date of this filing.

 

ITEM 2. DESCRIPTION OF PROPERTY

 

Our headquarters are located at 350 Seventh Avenue, 2nd Floor, in New York, New York where we lease 11,850 square feet of space for administrative, sales, compliance, legal, and client services personnel under a lease that expires in November 2014. Additionally, we lease 21,000 square feet of space located at 4400 Carillon Point in Kirkland, Washington for administrative, technical, sales and client services personnel under a lease that expires in December 2013. We lease 2,079 square feet of office space in Tucson, Arizona for patent research and production personnel and 8,452 square feet of office space in Atlanta, Georgia, for technical, sales and production personnel. These leases expire in July 2013 and June 2012, respectively. Additional sattelite sales offices, (the “Sattelite Offices”), are located in Chicago, Illinois, Los Angeles, California, San Francisco, California and Dallas, Texas. The Sattelite Offices are all less than 1,000 square feet.

 

ITEM 3. LEGAL PROCEEDINGS

 

In the normal course of business, we may become involved in various legal proceedings.  Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party that, if successful, might result in a material adverse change in our business, properties or financial condition.

 

Litigation Update

 

Augme Technologies, Inc. v. Tacoda, Inc. and AOL, Inc., Civil Action No. 1:07-cv-07088-CM-GWG (the “Tacoda litigation”), a patent infringement lawsuit pending in the U.S. District Court for the Southern District of New York since August, 2007.  On November 14, 2011, the Court issued an order granting in part and denying in part Defendant Tacoda’s motion for summary judgment. The Court held that Augme could not prove literal infringement under that Court’s claim construction ruling previously issued. However, the Court reserved judgment on the issue of whether Augme could prove infringement under the doctrine of equivalents. The Court’s order invited further briefing from Augme to establish whether the Data Agent combined with the Data Tag employed in the Defendants’ advertising network operates in essentially the same manner as claimed within the patents-in-suit. Augme filed an Opposition Brief on December 5, 2011 asserting that infringement exists under the Doctrine of Equivalents. If the Court agrees with Augme’s position, the case will proceed to trial. Discovery in this matter is stayed by order of the Court while the parties await a decision on the summary judgment.

 

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On December 21, 2011, AOL/Tacoda filed a Motion for Leave to File a Sur-reply on its Motion for Summary Judgment, presumably in order to respond to the points raised in Augme’s December 5 Opposition Brief. The Court granted the motion on April 9, 2012. AOL/Tacoda’s response was filed on April 20, 2012.  On April 25, 2012, Augme then sought leave to file its own response to the defendant’s April 20 responsive brief.

 

Augme Technologies, Inc. v. AOL, Inc. and Time Warner, Inc., Civil Action No. 1:09-cv-04299-RWS (the “BOOMBOX litigation”), a patent infringement and trademark infringement lawsuit pending in the U.S. District Court for the Southern District of New York (transferred from the U.S. District Court for the Central District of California) since September 10, 2008. In December 2011, in effect lifting the stay order, the Court required the parties to attend a pretrial conference on February 1, 2012. At that conference, the Court ordered the parties to begin discovery with respect to the patent issues and placed the parties into the District Court’s Patent Pilot Program. Both parties are to provide the discovery contemplated pursuant to the Patent Pilot Program by May 1, 2012, at which time the parties will reconvene with the Court. The Court ordered the parties to submit a status report on the status of discovery efforts by April 20, 2012. AOL counsel on behalf of all the defendants sought to stay discovery pending the outcome of the Tacoda litigation. By an unpublished order dated March 5, 2012, the Court rejected that request and required discovery relating to the patent infringement claims to proceed. With respect to the trademark issues, the parties agreed to mediation. If the mediation (tentatively scheduled for June 8, 2012) is unsuccessful, the parties are to report back to the Court with a proposed schedule for the trademark aspects of the case within 30 days from the completion of the mediation. A status conference is currently scheduled for May 3, 2012, and discovery in this case is ongoing.

 

Augme Technologies, Inc. v. Gannett Co., Inc., LucidMedia Networks, Inc. and AOL, Inc., Civil Action No. 1:11-cv-05193-CM (previously Augme Technologies, Inc. v. Gannett Co., Inc., LucidMedia Networks, Inc. and AOL, Inc., Civil Action No. 3:11-cv-00282-HEH) (the “Gannett litigation”), a patent infringement lawsuit filed in the U.S. District Court for the Eastern District of Virginia on April 29, 2011, subsequently transferred to the U.S. District Court for the Southern District of New York (case no. 1:11-cv-05193-CM). Currently, the claim construction briefing in this action is due thirty days after the Court issues its decision in the Tacoda litigation, rather than as previously scheduled. The parties are currently engaged in the early stages of discovery proceedings.

 

A final settlement agreement was reached with defendant LucidMedia on April 19, 2012, resulting in a patent license and services partnership. The case is still pending with regards to the remaining defendants, and the parties are engaged in the early stages of discovery proceedings.

 

LucidMedia Networks, Inc., v. Augme Technologies, Inc., Civil Action 3:11-cv-282-HEH (the “LucidMedia litigation”) was severed from the Gannett litigation that was transferred out of Virginia and to New York. This severed counterclaim for alleged patent infringement was filed in the U.S. District Court for the Eastern District of Virginia as an Amended Complaint on August 9, 2011. On January 23, 2012, LucidMedia and Augme agreed on a preliminary settlement of all issues, and the Court entered an order staying all proceedings in the Eastern District of Virginia pending settlement discussions.  A final settlement agreement was reached on April 19, 2012. A press release announcing the final settlement agreement was issued on April 26, 2012, resulting in a patent license and services partnership.

 

Augme Technologies, Inc. v. Yahoo! Inc., Civil Action No. 3:09-cv-05386-JCS (the “Yahoo! litigation”), a patent infringement lawsuit pending in the U.S. District Court for the Northern District of California since November 16, 2009. On December 14, 2011, a Markman hearing was held to construe certain terms in the Yahoo! patents which are the subject of Yahoo!’s counterclaim. A claim construction order on the Yahoo! patents was entered on January 3, 2012. On January 6, 2012, a case management conference was held during which the Court scheduled Augme’s case against Yahoo! for a trial commencing on January 7, 2013. At the case management conference, Yahoo!’s counterclaim was severed from Augme’s claim. The trial of Yahoo!’s counterclaim, if necessary, will take place following the conclusion of the trial of Augme’s case against Yahoo! Formal fact discovery was completed on April 5, 2012, and some limited follow-up discovery is ongoing. On April 20, 2012, the parties made stipulations relating to certain of Yahoo!’s financial documents. The case is now entering the expert discovery phase, with service of expert reports filed on April 20, 2012.

 

During the fact discovery process, Augme learned that Yahoo!’s Yield Manager System (one of the products at issue) actually consisted of three separate advertisement serving systems. Court intervention was required to compel Yahoo! to provide appropriate discovery on all of the accused systems. Augme is vigorously pursuing the matter and additional Yahoo! systems are being brought into the case. As a result, Augme is now seeking to amend its infringement contentions to be consistent with the information Yahoo! has now provided.

 

Augme Technologies, Inc. v. Pandora, Inc., Civil Action No. 1:11-cv-00379 (the “Pandora litigation”), a patent infringement lawsuit pending in the U.S. District Court for the District of Delaware as of April 29, 2011. A Markman hearing was held on February 27, 2012. The discovery process is proceeding in this case and Augme is vigorously pursuing its claims against Pandora.

 

Augme Technologies, Inc. v. Velti, USA, Civil Action No. 1:12-cv-00294 (the “Velti litigation”), a patent infringement lawsuit pending in the U.S. District Court for the District of Delaware as of March 9, 2012.  Augme has filed a patent infringement lawsuit in the United States District Court of Delaware against Velti USA, Inc., a global provider of mobile marketing and advertising technology and solutions. Augme is asserting three causes of action involving alleged patent infringement related to Augme-owned United States Patent No. ‘721 (“Method and Code Module for Adding Function to a Web Page”), United States Patent No. ‘636 (“Method and Code Module For Adding Function to a Web Page”) and United States Patent No. ‘691 (“Method and System for Adding Function to a Web Page”). After a stipulation to extend time, Velti’s Answer to the Complaint is due on May 4, 2012.

 

Augme seeks injunctive relief to prevent Velti USA from continuing the alleged infringement of Augme’s patents. In addition, Augme seeks a recovery of monetary damages resulting from Velti’s past infringement of these patents and all legal fees associated with this patent enforcement effort.

 

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Augme Technologies, Inc. v. Millennial Media, Inc., Civil Action No. 1:12-cv-00424 (the “Millennial Media litigation”), a patent infringement lawsuit pending in the U.S. District Court for the District of Delaware as of April 5, 2012. Augme filed a case against Millennial Media, Inc., asserting three causes of action involving alleged patent infringement related to Augme-owned United States Patent No. 7,783,721 (“Method and Code Module for Adding Function to a Web Page”), United States Patent No. 7,269,636 (“Method and Code Module For Adding Function to a Web Page”) and United States Patent No. 6,594,691 (“Method and System for Adding Function to a Web Page”). Millennial Media’s Answer to the Complaint is due on April 30, 2012.

 

Augme seeks injunctive relief to prevent Millennial Media from continuing the alleged infringement of Augme’s patents. In addition, Augme seeks a recovery of monetary damages resulting from Millennial Media’s past alleged infringement of these patents and all legal fees associated with this patent enforcement effort.

 

Brandofino Communications vs. Augme Technologies, Inc. (“The Brandofino Litigation”) On September 27, 2011 Brandofino Communications, Inc. (“Brandofino”) filed suit against Augme and New Aug LLC in the Supreme Court of the State of New York, New York County. The complaint alleges, inter alia, breach of contract and unjust enrichment claims arising from work Brandofino allegedly performed for Augme pursuant to a marketing agreement entered into by Brandofino and Augme. The complaint seeks damages in excess of one million dollars. Augme has served its Answer and set forth counterclaims for breach of contract, unfair competition, tortious interference with business relations, and violations of New York General Business Law Section 349 (relating to violations of Augme’s intellectual property rights). The Company intends to vigorously defend against Brandofino’s claim and pursue its counterlaims.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is quoted on the OTC Bulletin Board Market under the symbol “AUGT.” The following table sets forth the quarterly high and low reported last bid prices for our common stock during the quarters indicated below:

 

 

 

High

 

Low

 

Fiscal Year 2011

 

 

 

 

 

 

 

 

 

 

 

First Quarter ended May 31, 2010

 

$

1.64

 

$

1.07

 

Second Quarter ended August 31, 2010

 

$

1.35

 

$

0.99

 

Third Quarter ended November 30, 2010

 

$

3.00

 

$

1.15

 

Fourth Quarter ended February 28, 2011

 

$

4.49

 

$

2.54

 

 

 

 

 

 

 

Fiscal Year 2012

 

 

 

 

 

 

 

 

 

 

 

First Quarter ended May 31, 2011

 

$

4.68

 

$

2.53

 

Second Quarter ended August 31, 2011

 

$

4.20

 

$

2.42

 

Third Quarter ended November 30, 2011

 

$

3.62

 

$

1.60

 

Fourth Quarter ended February 29, 2012

 

$

2.19

 

$

1.25

 

 

The foregoing quotations reflect interdealer prices, without retail markup, markdown or commission and may not represent actual transactions.

 

As of May 4, 2012, the number of holders of record of our common stock was 424.

 

To date, we have not paid dividends and do not intend to pay dividends in the foreseeable future.

 

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Equity Compensation Plan

 

The following sets forth information about our securities authorized for issuance under our equity compensation plans at February 29, 2012:

 

Plan category

 

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)

 

Weighted - average
exercise price of
outstanding
options, warrants
and rights
(b)

 

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column 
(a))
(c)

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

12,936,168

 

$

2.46

 

1,959,276

 

Equity compensation plans not approved by security holders

 

7,217,051

 

1.42

 

 

TOTAL

 

20,153,219

 

$

2.09

 

1,959,276

 

 

Performance Graph

 

The graph below compares the annual percentage change in the cumulative total return on the Company’s common stock with the NASDAQ Composite Index and the Russell 2000 Index for the five-year period ended on February 29, 2012, our 2012 fiscal year end.  Historical stock price performance should not be relied upon as an indication of future price performance.

 

Comparison of 5 Year Cumulative Total Returns

Among Augme Technologies, Inc., the NASDAQ Composite Index and the Russell 2000 Index

 

 

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ITEM 6. SELECTED FINANCIAL DATA

 

We derived the selected financial data presented below for the periods or dates indicated from our financial statements. Our financial statements for these periods were audited by an independent registered public accounting firm. You should read the data below in conjunction with our financial statements, related notes and other financial information appearing in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.” These historical results are not necessarily indicative of results that may be expected for future periods.

 

 

 

Years Ended

 

 

 

February 29,
2012

 

February 28,
2011

 

February 28,
2010

 

February 28,
2009

 

February 29,
2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

$

11,950,370

 

$

2,821,213

 

$

339,901

 

$

337,327

 

$

743,044

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUES

 

4,150,807

 

1,251,318

 

492,838

 

215,412

 

563,414

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

33,355,790

 

13,028,497

 

5,580,743

 

3,271,452

 

2,945,525

 

Depreciation and amortization

 

4,328,247

 

1,019,600

 

841,280

 

541,951

 

383,687

 

Impairment

 

 

 

 

729,000

 

 

Lease termination

 

 

 

 

489,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

37,684,037

 

14,048,097

 

6,422,023

 

5,032,248

 

3,329,212

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

(29,884,474

)

(12,478,202

)

(6,574,960

)

(4,910,333

)

(3,149,582

)

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

20,950

 

(276

)

(1,343

)

9,221

 

(153,995

)

Acquisition related contingent consideration

 

(2,716,500

)

 

 

 

 

Loss on derivative instruments

 

 

 

(335,820

)

 

 

Impairment of subscription receivable

 

 

 

 

 

(395,649

)

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS

 

(32,580,024

)

(12,478,478

)

(6,912,123

)

(4,901,112

)

(3,699,226

)

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

 

 

(588,214

)

(424,398

)

395,221

 

Loss on sale of discontinued operations

 

 

 

(878,162

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

 

 

 

(1,466,376

)

(424,398

)

395,221

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(32,580,024

)

$

(12,478,478

)

$

(8,378,499

)

$

(5,325,510

)

$

(3,304,005

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share from continuing operations

 

$

(0.41

)

$

(0.21

)

$

(0.14

)

$

(0.12

)

$

(0.10

)

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET LOSS PER SHARE

 

$

(0.41

)

$

(0.21

)

$

(0.16

)

$

(0.13

)

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

80,146,990

 

60,264,895

 

50,980,171

 

41,874,738

 

37,979,062

 

 

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As of

 

 

 

February 29,
2012

 

February 28,
2011

 

February 28,
2010

 

February 28,
2009

 

February 29,
2008

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,428,825

 

$

11,182,356

 

$

1,617,573

 

$

374,696

 

$

657,174

 

Total assets

 

100,592,076

 

32,030,876

 

19,853,749

 

5,413,953

 

5,883,750

 

Current liabilities, net of deferred revenue

 

30,213,530

 

740,129

 

1,241,777

 

2,526,819

 

1,741,707

 

Deferred revenue, current

 

1,050,369

 

1,190,151

 

222,345

 

 

 

Accumulated deficit

 

(72,533,071

)

(39,953,047

)

(27,474,568

)

(18,464,925

)

(13,139,415

)

Total stockholders’ equity

 

69,214,900

 

30,100,596

 

18,377,936

 

2,887,134

 

4,142,043

 

Total liabilities and stockholders’ equity

 

$

100,592,076

 

$

32,030,876

 

$

19,853,749

 

$

5,413,953

 

$

5,883,750

 

 

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

 

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under Risk Factors above and elsewhere in this report.

 

Overview

 

Augme provides strategic services and mobile technology to leading consumer and healthcare brands. Our sales are comprised of a combination of SaaS based sales, individual campaign fees, and mobile advertising fees.

 

We hold a portfolio of patents related to the “Method and System for Adding Function to a Webpage,” which cover technical processes and methods that we believe are an indispensable component of behavioral targeting — the automatic provision of customized content to individuals based on information such as past web activity, personal preferences, geography, or demographic data. Our technology allows marketers, brands, and agencies the ability to plan, create, test, deploy, and track mobile marketing programs across mobile channels, including SMS, 2D/QR codes, mobile websites, advertising networks, social media and branded apps.  AD LIFE 4.0 facilitates consumer brand interactions and the ability to track and analyze campaign results.  We believe that our patented device-detection and proprietary mobile content adaptation software provides a solution to the mobile marketing industry problem of disparate operating systems, device types, and on-screen mobile content rendering. We also provide business to consumer utilities including national mobile couponing solutions, strategic mobile healthcare tools, custom mobile application development, and consumer data tracking and analytics.  We are headquartered in New York City.

 

On August 25, 2011, we completed our acquisition of the business and substantially all of the assets of Hipcricket.  Hipcricket provides a cloud-based mobile marketing and advertising SaaS platform, HIP 7.0 that empowers its clients to engage customers, drive loyalty, and increase sales by creating, analyzing, and optimizing integrated mobile marketing campaigns and enterprise class solutions. The HIP 7.0 platform has been combined into the AD LIFE 4.0 platform to offer clients the combined functionality of both platforms.  Hipcricket’s clients connect with consumers across every mobile channel, including SMS, 2D/QR codes, mobile Web sites, advertising networks, social media and branded apps.  Hipcricket has also created the first comprehensive permission-based mobile ad network, targeting customers via location and highly-specific demographic information across SMS, display, rich media and video.

 

On July 22, 2011, we completed our acquisition of the business and substantially all of the assets of JAGTAG. As part of that acquisition, the Company acquired certain patents related to ambient targeting and is in the process of deploying this capability into its service offering.

 

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Trends, Events and Uncertainties

 

The mobile marketing and advertising competitive landscape, while in its early stages, is highly competitive. Many of the landscape’s significant players are focused on delivering point solutions targeting a specific segment of the mobile marketing and/or advertising landscape. We believe Augme differentiates itself from the competition by offering complete, end-to-end mobile advertising and marketing solutions delivered through its SaaS AD LIFE platform.

 

In late 2010, the FTC and the Department of Commerce each issued a staff report proposing new frameworks for consumer privacy protection; the FTC report called for federal “Do Not Track” legislation.  If “do not track” legislation is passed, it could negatively impact our mobile ad network.  Any significant restriction on our ability to utilize the functions of our technology could have a material adverse result on our business, revenues and results of operations.

 

Industry Overview

 

We believe that the convergence of several factors is fundamentally changing the way advertisers reach their audience. We anticipate consumers will continue to increase their usage of mobile devices as their medium for content consumption, creating a significant opportunity for mobile advertising. These factors include:

 

Adoption of faster and more functional mobile connected devices create unprecedented mobile advertising and marketing opportunities.

 

The ubiquity and utility of mobile devices continue to grow, empowering advertisers and marketers with an unprecedented audience and delivery capabilities never seen before. There has been widespread adoption of mobile connected devices, driven by intuitive user interfaces, lower price points, increased functionality, faster processing speeds, better graphics processors and advanced display technologies with touch capabilities. It has become possible to deliver innovative, interactive and engaging consumer media experiences on a wide variety of mobile connected devices. A 2011 report by Cisco Systems projects that the number of mobile connected devices worldwide will reach 7.1 billion by 2015. According to IDC, the number of smartphones shipped by vendors is expected to increase from approximately 305 million in 2010 to more than one billion by 2015, representing a compound annual growth rate of approximately 27%. IDC also estimates that nearly 63 million tablets will be shipped in 2011, growing to 135 million tablets in 2015, representing a compound annual growth rate of 22%.

 

Mobile usage has disrupted how content is consumed.

 

Consumers are increasingly using their mobile devices instead of their personal computers and other traditional media to access content. For example, according to industry research conducted by Kleiner Perkins Caufield & Byers, a venture capital firm, 33% of the traffic on Facebook came from mobile devices in 2011, up from 1% in 2008. Consumers use their mobile devices in all aspects of their daily lives, such as reading the news, playing games, checking sports scores, shopping, checking the weather, banking, obtaining maps and directions and listening to the radio. According to eMarketer, Inc., which publishes data, analysis and insights on digital marketing, media and commerce, the amount of time spent by consumers with their mobile devices is rising at a faster rate than the time spent viewing other types of media.

 

Advertising industry is being disrupted by mobile advertising.

 

As advertisers seek to maximize the effectiveness of their campaigns, we believe the attractiveness of traditional advertising media, such as outdoor billboards, newspapers, magazines, radio and even television, is declining relative to digital advertising. We believe this decline is due to several inherent limitations in traditional advertising, such as its limited ability to target specific audiences, its limited ability to measure audience reach, performance and in some cases, its limited geographic range. According to a December 2011 report by eMarketer, consumers are spending a larger proportion of their time with digital media, while there has been a concurrent decline in the share of time spent with traditional media. However, as summarized in the table below based on the eMarketer report, advertising spending is significantly lower on mobile than it is for other types of media, relative to consumer time spent with each type of media. Although there is still significant spending on traditional advertising, advertisers are shifting their budgets to digital channels, both online and mobile.

 

As consumers spend more time online using their personal computers, we believe digital advertising can be more effective than traditional advertising because it allows for user interaction, provides better measurement and achieves an expanded reach.

 

However, even PC-based online digital advertising suffers from a number of significant limitations, including:

 

Limited personalization. Computers often have multiple users, thus yielding audiences with limited personalization. This limits the ability of advertisers to target end users on an individual basis.

 

Limited real-time accessibility. Computers are typically used at home or in the office. Even laptops that can physically be with the user when traveling are usually used from a fixed location at their destination, where they are turned on and

 

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wirelessly connected to the Internet. As a result, user engagement with ads is generally limited to the time spent in front of the computer screen in a fixed location.

 

Limited location targeting. Most location targeting through personal computers is limited to a broad geographic area based on the records of the user’s Internet service provider. This limits the ability to deliver highly targeted advertising that is relevant to a consumer.

 

Our Solution

 

We believe mobile advertising provides significant benefits both to developers and to advertisers over traditional advertising media and PC-based online digital advertising. For developers, mobile advertising provides the opportunity to make money, acquire users and gain insight into mobile application (“app”) usage. For advertisers, the combination of the personal nature of mobile devices, their enhanced functionality and the rise of app-enabled experiences creates a powerful platform for highly targeted and effective advertising. Additionally;

 

Anytime, anywhere access. Mobile devices generally accompany users at all hours of the day and are typically turned on at all times. This provides advertisers the opportunity for nearly continual access to the user. An advertiser can reach audiences at all stages of the purchase decision — awareness, research, opinion, consideration and ultimately, purchase — in order to increase the likelihood that the viewer will become a purchaser of the product or service being advertised. This ability to target audiences at all times of the day, regardless of location, makes mobile advertising an attractive opportunity for advertisers, especially compared to newspapers, magazines, television and radio or to digital advertising delivered through personal computers.

 

Personalization. Mobile devices are inherently personal and are most often used by one person. Users often download and use a variety of apps that reflect their personal preferences and interests. In addition to customized apps, users can personalize and provide targetability via scans and messaging interactions with their mobile devices delivering a multi-channel mobile interface experience for the end users. When a user downloads any one of these mobile channels to his or her individual device, data is often exchanged that can provide information about the user’s interests. As the user downloads and registers, more data can be collected about this user’s preferences, which provides an opportunity to personalize the mobile advertising experience.

 

Location targeting and relevance. Data from mobile devices is often shared in a manner that can identify the device’s location. This enables location-targeted advertising, which has the potential to increase the impact and relevance of an ad to the user. For example, in PC-based online advertising, firms can assess a user’s browsing behavior to provide limited targeting of advertising to that user. With mobile advertising, on the other hand, an ad can be targeted to a consumer who is in close proximity to a specific location, such as a retail store, or to a consumer who recently visited that store. We believe the ad also has the potential to influence the user to walk into a nearby store.

 

More complete user engagement. Apps on mobile connected devices typically show one or two ads on each page view. We believe this limited number of ads on a small device screen can often capture the attention of the user better than the many banner ads on a typical PC-based web page. Furthermore, ads on a mobile device can take advantage of features of the device itself, such as the touch screen, swipe functionality and the accelerometer, which detects motion, to enable the user to manipulate and more deeply engage with the ad. Mobile device users can also act upon an ad immediately by, for example, downloading an app or other content, calling an advertiser directly from the mobile phone, or using the map on the device to find a nearby retail store or service provider. In some cases, mobile users can even take their device to a store to physically redeem an offer from an ad.

 

Enhanced audience targeting. Due to the significant amount of data collected from a mobile device, highly specific audiences can be created based on location and behavioral and demographic preferences to match advertisers’ objectives. We believe this ability to create and deliver highly relevant audiences also enhances the value of advertising space for developers.

 

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AD LIFE allows Augme to provide clients a full suite of mobile marketing and advertising solutions, thus providing an end-to-end, one-stop mobile campaign management software system. The Platform delivers the following benefits to customers:

 

·                  Device recognition technology that formats traditional digital assets into content that can be optimized for virtually any mobile device regardless of operating system or network provider;

·                  Open architecture which we believe offers the widest variety of CRTs in the mobile market today, including SMS, MMS, 2D / QR codes, logo, and audio recognition, allowing consumers to use their mobile devices to easily and instantly access on-demand digital content;

·                  Ability to measure campaign effectiveness using data analysis gathered and processed using proprietary techniques; these key metrics and results of client campaigns include demographic and behavioral data;

·                  Ability to deliver multimedia to both smartphones and standard phones, without requiring the consumer to download an application prior to use;

·                  Ease of implementation and integration with a brand’s existing enterprise resource planning and CRM systems provides the ability to optimize campaigns and fulfillment; and

·                  The software platform enables customers to implement mobile campaigns in a short time frame, typically 10-20 days, and is significantly more cost effective than sourcing technology compared to current market competition.

 

The key differentiating feature of Augme’s end-to-end platform is its ability to serve clients throughout the entire customer lifecycle. The Platform’s post-click engagement capabilities enable marketers to continuously re-engage with users for re-marketing purposes. Additionally, our platform allows our customers the ability to deliver content to any mobile network, operating system or device, regardless of how the device landscape changes.  This ensures that brands have the capacity to reach 100% of any intended mobile marketplace for their messaging, whether through text, quality resolution code, or other means.

 

Our Strategy

 

Our strategy is based on multi-faceted monetization through IP and the Hipcricket operating business. The Company intends to be one of the leading providers of mobile marketing and advertising solutions across multiple media types and channels.  The principal elements of our strategy are to:

 

·                  capitalize upon our existing patented technology to further develop new product innovations and licensing opportunities, including the use of ambient targeting in our mobile ad serving technology;

 

·                  deepen our existing customer relationships by providing expanded services as our customers increase their use of mobile marketing and mobile ads to gain and further engage their customers;

 

·                  add new customer relationships as our markets expand by adding to our sales force, furthering our channel sales and expanding our product offerings;

 

·                  enhance our platform by addressing technology shifts and customer driven opportunities in mobile devices, including such areas as analytics, self-service and end to end integration of mobile strategies and delivery;

 

·                  continue expansion and pursue strategic partnerships and acquisitions; and

 

·                  expand our mobile ad capabilities by investing in technology and hiring additional staff.

 

We believe our mobile marketing solutions, together with our patents which are critical to behavioral targeting, will enable us to pioneer a new era in marketing and new media communications with Internet applications and services for targeted consumers and communities worldwide.

 

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Table of Contents

 

Liquidity and Capital Resources

 

Cash flow information is as follows:

 

 

 

Fiscal Year Ended

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

(14,651,043

)

$

(5,908,423

)

$

(3,379,116

)

Investing activities

 

(6,527,487

)

(1,629,232

)

(813,393

)

Financing activities

 

21,424,999

 

17,102,438

 

5,435,386

 

 

Net cash used in operating activities was $14.7 million in the fiscal year ended February 29, 2012. Net cash used in operating activities primarily reflects the net loss for the year, which was partially offset by depreciation and amortization, employee share-based compensation and changes in operating assets and liabilities.

 

Net cash used in investing activities was $6.5 million in the fiscal year ended February 29, 2012.  Cash of $4.0 million was used for the acquisition of Hipcricket and JAGTAG.  We also spent cash for legal actions related to our patent enforcement initiatives.  During the year ended February 29, 2012, we spent $2.3 million for these legal costs, which we capitalize as intangible assets.

 

Net cash provided by financing activities was $21.4 million in the fiscal year ended February 29, 2012, mostly due to the sale of our securities. We received $2.9 million in cash during the year from the exercise of stock options and warrants.

 

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of February 29, 2012 and February 28, 2011, the Company has accumulated deficits of $72.5 million and $40.0 million, respectively. The Company is subject to the risks and challenges associated with companies at a similar stage of development including dependence on key individuals, successful development and marketing of its products and services, integration of recent business combinations, competition from substitute products and services and larger companies with greater financial, technical management and marketing resources. Further, the Company will require additional financing to execute on its key business strategies and fund operations, those funds may not be readily available or may not be on terms that are favorable to the Company. Certain financing terms could be dilutive to existing shareholders or could result in significant interest or other costs, or require the Company to license or relinquish certain intellectual property rights.

 

The Company operates in the mobile marketing industry and, accordingly, can be affected by a variety of factors. For example, management of the Company believes that any of the following factors could have a significant negative effect on the Company’s future financial position, results of operations and cash flows: unanticipated fluctuations in quarterly operating results, adverse changes in the Company’s relationship with significant customers or failure to secure contracts with other customers, intense competition, failure to attract and retain key personnel, failure to protect intellectual property, decrease in the migration trends from traditional advertising methods to digital and mobile media and the inability to manage growth.

 

On June 29, 2011 we filed a Form S-3 registration statement with the Securities and Exchange Commission for the purpose of raising up to $75.0 million through sales of our securities. The registration statement was declared effective on July 13, 2011. The registration statement allows us to raise capital by engaging in securities offerings from time-to-time, as funds are needed. On November 17, 2011, we completed a public offering pursuant to which we sold 9.4 million shares of the common stock registered on the Form S-3 registration statement at a price to the public of $2.15 per share. We raised $18.5 million in proceeds, net of $1.7 million in costs related to the offering, leaving approximately $55.0 million of the $75.0 million registered on Form S-3.

 

We expect, during fiscal 2013 that we will need to undertake additional offerings of our securities in order to meet liquidity needs and, if equity markets are favorable, we will raise additional funds to invest more rapidly in our growth strategies. If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then the Company could be required to substantially reduce or discontinue its investments in intellectual property, new customers and new products; reduce operating, marketing, general and administrative costs related to its continuing operations; or limit the scope of its continuing operations. Due to the nature of the operations and financial commitments of the Company, including contingent acquisition obligations, patent litigation costs to protect intellectual property and employee costs, the Company may not have the discretion to reduce operations in an orderly manner to a more sustainable level without impacting future operations or the intellectual property held by the Company.

 

Critical Accounting Policies and Estimates

 

General

 

Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Capitalized Legal Patent Costs

 

We capitalize external legal costs incurred in the defense of our patents where we believe that there is an evident increase in the value of the patent and that the successful outcome of the legal action is probable. During the course of any legal action, the court where the case is pending makes decisions and issues rulings of various kinds, which may be favorable or unfavorable. We monitor developments in the legal action, the legal costs incurred and the anticipated outcome of the legal action, and assess the likelihood of a successful outcome based on the entire action. If changes in the anticipated outcome occur that reduce the likelihood of a successful outcome of the entire action to less than probable, the capitalized costs would be charged to expense

 

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Table of Contents

 

in the period in which the change is determined. The capitalized legal patent costs are recorded within intangible assets on our balance sheets.

 

Income Taxes

 

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense and net operating losses. In evaluating our ability to recover our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized using all available positive and negative evidence, projected future taxable income, tax planning strategies and recent financial operations. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying business.

 

Management evaluated the probability of the utilization of the deferred income tax asset related to the net operating loss carry forwards. We have estimated a $15.3 million deferred income tax asset that relates to federal and state net operating loss carry forwards at February 29, 2012. Management determined that because we have yet to generate taxable income and that the generation of taxable income in the short term is uncertain, it was appropriate to provide a valuation allowance for the total deferred income tax asset.

 

Business Combinations

 

We account for business combinations using the acquisition method of accounting. The consideration transferred or transferable to sellers and the assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. When a business combination agreement provides for consideration to be paid in future periods, contingent on future events, the Company includes an estimate of the acquisition-date fair value of the contingent consideration as part of the cost of the combination. Contingent consideration to be paid to officers, directors, shareholders and/or employees of the acquiree whom continue employment with the Company are evaluated as to whether the amounts represent purchase consideration or a separate transaction, such as post-transaction employee compensation.  Factors evaluated require significant judgment and include, among other factors; consideration of the terms of continuing employment, levels of post-transaction compensation, ownership interest of the selling shareholder/employees, linkage of the contingent consideration to the transaction date combination valuation and any other agreements or matters related to the transaction.  Acquisition transaction costs are expensed as incurred.  The results of operations of the acquired business are included in the Company’s consolidated financial statements from the respective date of acquisition.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and intangible assets of acquired entities. Goodwill is carried at cost and is not amortized.  We test goodwill for impairment on an annual basis as of fiscal month end February of each fiscal year.

 

During the fourth quarter of fiscal 2012, the Company early adopted ASU 2011-08 “Testing Goodwill for Impairment”. As such, we initially evaluate the recoverability of goodwill annually by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. If the fair value of the reporting unit is determined to be greater than the carrying amount, further testing of goodwill impairment is not performed. If the fair value of the reporting unit is less than the carrying amount, we perform a quantitative two-step impairment test. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying amount of goodwill has been impaired.

 

The goodwill impairment test is performed at the reporting unit level. ASC 350 “Intangibles, Goodwill and others,” defines a reporting unit as an operating segment or one level below an operating segment (referred to as a “component”). An operating segment is defined by ASC 280 “Segment Reporting” as a component of an enterprise that earns revenues and incurs expenses, for which discrete financial information is available and management regularly reviews the operating results. Furthermore, an operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component. The Company has determined it has one reporting unit.

 

When performing a quantitative two-step impairment test, we depend upon our estimates of future cash flows and other factors to determine the fair value of our reporting unit. We rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 820 “Fair Value Measurements and Disclosures”.  If the carrying amount exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of the reporting unit. If the carrying value of the goodwill of the reporting unit exceed fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

The fair value of our reporting unit is dependent upon our estimate of future cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at date of the evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 30- day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium to our market capitalization. To estimate the control premium, we considered our unique competitive advantages that would likely provide synergies to a market participant. In addition, we considered external market factors, which we believe, contributed to the decline and volatility in our stock price that did not reflect our underlying fair value.

 

Intangible Assets

 

Intangible assets were recorded as the result of business acquisitions and are stated at estimated fair value at the time of acquisition less accumulated amortization. We assess the recoverability of long-lived assets when events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If undiscounted expected cash flows to be generated by a long-lived asset or asset group are less than its carrying amount, we record an impairment to write down the long-lived asset or asset group to its estimated fair value. Fair value is estimated based on discounted expected future cash flows.

 

 

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Share-Based Payments

 

The fair value of our share-based payments for stock options and stock warrants is estimated at the grant date based on the stock award’s fair value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model and is recognized as expense over the requisite service period using a straight line method. The BSM model requires various highly judgmental assumptions including expected volatility and option life. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, share-based payment expense is adjusted accordingly in that period.

 

Revenue Recognition

 

We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.

 

The Company provides access to its AD LIFE and HIP 7.0 SaaS mobile marketing platforms and services through term license fees, support fees, and mobile marketing campaign fees.  The contracts generally include multiple elements as part of the overall service delivery and revenues are generally recognized over the term of the contract.  The Company also offers professional services related to the strategy and execution of mobile marketing campaigns.  Professional services revenue is recognized as the services are performed as these services have value on a standalone basis, do not involve unique acceptance criteria and have a fair value that can be obtained as the other services are generally sold without professional services.

 

Contracts may include multiple deliverables such as production and delivery of media content, hosting, fees from content retention, delivery or placement of mobile or online advertising content.  Contracts may also include multiple deliverables such as custom software creation, audio production, and delivery of online media content or hosting. Revenues from multiple delivery contracts for the production and delivery of online media content and hosting are recorded pro-rata over the term of the media content production, delivery or hosting period.

 

Revenues from the creation of custom software are generally a component of contracts that include hosting and/or production and delivery services. Software revenues are recorded when the software is completed and accepted by the client if the software has free standing functionality, the fee for the software is separately determinable and the Company has demonstrated its capability of completing any remaining terms under the contract. Otherwise all revenues under the multi-deliverable contracts are recorded pro rata over the term of the production and content delivery or hosting period.

 

Fixed-price contracts for the creation of custom software are typically of a duration of less than one year and are accounted for using the percentage-of-completion method.  We use the percentage-of-completion method of accounting because we believe it is the most accurate method to recognize revenue based on the nature and scope of these service contracts; we believe it is a better measure of periodic income results than other methods and better matches revenue recognized with the costs incurred. Percentage of completion is measured based primarily on input measures such as hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Significant judgment is required when estimating total hours and progress to completion on these arrangements which determines the amount of revenue we recognize as well as whether a loss is recognized if one is expected to be incurred for the remainder of the project. Revisions to hour and cost estimates are incorporated in the period in which the facts that give rise to the revision become known.

 

Fees for producing interactive advertising content are based upon a fee for the production and hosting of the advertising content and/or a percentage of the fees paid by third party advertisers. Fees from third parties for the production and hosting of the advertising content are recorded pro rata over the related hosting period. Fees representing a percentage of the fees paid by third party advertisers for advertising on third party or company websites are recorded when the contractual criteria has been met and amounts are due from third party advertisers.

 

Research & Development Costs

 

Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk

 

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development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. The amortization of these costs is included in cost of revenue over the estimated life of the products.

 

Results of Operations

 

The discussions below are not necessarily indicative of the results, which may be expected for any subsequent periods and pertains only to the results of operations for the fiscal years ended February 29, 2012, February 28, 2011, and February 28, 2010. Our prospects should be considered in light of the risks, expenses and difficulties that we may encounter. We may not be successful in addressing these risk and difficulties.

 

Comparison of Fiscal Year Ended February 29, 2012 to Fiscal Year Ended February 28, 2011

 

Revenue

 

Revenues are generated through providing access to our SaaS mobile marketing platforms and services through term license fees, support fees and mobile marketing and advertising campaigns. Through our platform we deliver campaigns and other mobile marketing services using SMS, MMS, QR codes, Geo-fencing, Mobile Web, Mobile Apps, and analytics.  We also provide professional services and extensive integration into customer CRM systems using APIs.  The revenues from these multiple elements of a contract are generally recognized over the term of the contract. For the year ended February 29, 2012, revenues were $12.0 million compared with $2.8 million in the year ended February 28, 2011, an increase of 326%. The increase was mostly due to addition of the operations of Hipcricket in August 2011 and JAGTAG in July 2011.  Additionally, we saw a higher demand for our AD LIFE Platform.  During the year ended February 29, 2012, approximately 29% of our revenues were generated by four customers.

 

Cost of Revenue

 

Cost of revenues includes the costs of hosting, short codes and mobile ad inventory.  For the year ended February 29, 2012, cost of revenue increased 242% to $4.2 million from $1.3 million in the prior fiscal year, as a result of higher revenues, mostly from the acquisitions occurring during the year. The gross profit margin for the year ended February 29, 2012 was 65.3% compared with 56.9% in the prior fiscal year as a result of cost efficiencies realized from businesses acquired during the current fiscal year, the margins from the mix of business as a result of the acquisitions, as well as increased demand for our AD LIFE Platform.

 

Selling, General and Administrative

 

Selling, general and administrative expenses were $33.4 million for the year ended February 29, 2012 compared with $13.0 million for the year ended February 28, 2011, an increase of $20.3 million, or 156.0%.  The increase in expenses is primarily related to additional headcount and other costs associated with the acquisition of JAGTAG and Hipcricket.  The integration of the acquisitions caused some operational inefficiency that we expect to streamline in fiscal 2013. We experienced a $4.0 million increase in general and administrative expenses, a $7.8 million increase in sales and marketing and a $2.8 million increase in technical development costs as a result of the additional business of the acquired companies.  Employee share-based compensation expense was $6.2 million for the year ended February 29, 2012 compared with $3.0 million for the prior fiscal year, a $3.2 million increase, resulting from additional headcount.  Professional fees were $5.0 million for the year ended February 29, 2012 compared with $1.2 million for the year ended February 28, 2011, an increase of $3.8 million primarily as a result of expanded and more complex operations, business acquisitions and related compliance and regulatory costs.  Included in professional fees were $1.1 million of transaction costs resulting from the Hipcricket and JAGTAG acquisitions.

 

Depreciation and Amortization

 

Depreciation and amortization expense of $4.3 million for the year ended February 29, 2012 increased by $3.3 million from $1.0 million for the year ended February 28, 2011.  This increase is mostly related to the additional amortization expense from intangibles acquired with the purchases of Hipcricket and JAGTAG.

 

Other Expense

 

Other expense includes a charge of $2.7 million which represents the adjustment to estimated fair value of the contingent consideration provided to Hipcricket as part of the acquisition purchase price.  The consideration is estimated to be $26.0 million, which is to be paid in Augme’s common stock, or a combination of common stock and cash, at Augme’s discretion during the second quarter of fiscal year 2013.

 

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Net Loss

 

Our net loss was $32.6 million for the year ended February 29, 2012 compared with net loss of $12.5 million for the prior fiscal year.  The $20.1 million increase in net loss was mostly attributable to increased selling, general and administrative expenses related to the expansion of the Company through acquisitions, as well as increased stock based compensation and transaction related costs incurred during the year.

 

Comparison of Fiscal Year Ended February 28, 2011 to Fiscal Year Ended February 28, 2010

 

For the year ended February 28, 2011, revenues were $2.8 million compared to $339,901 for the year ended February 28, 2010.  The increase in overall revenues is due to increased customer demand for our AD LIFE platform.  Deferred revenue increased to $1.2 million for the year ended February 28, 2011 from $222,345 for the period ended February 28, 2010.

 

For the years ended February 28, 2011 and 2010, costs of revenues were $1.2 million and $492,838, respectively, reflecting higher sales volume and higher overall costs related to telecommunications, higher cost of hosting our content as well as higher personnel costs associated with increased staffing and compensation levels.

 

For the years ended February 28, 2011 and 2010, selling, general and administrative expenses, excluding stock options, warrants and stock expense, were $6.2 million and $3.7 million, respectively, a change of $2.5 million or 68%.

 

Non-cash stock options, warrants and stock expense consisted of the fair value of option and warrant expenses and the fair value of our common stock granted in the amounts of $6.9 million and $1.9 million for the years ended February 28, 2011 and 2010, reflecting an increased expense of $4.8 million in comparative years.

 

Depreciation and amortization expense was $1.0 million for the year ended February 28, 2011 compared with $841,280 in the comparable year ended February 28, 2010.  Amortization expense increased to $694,113 for the year ended February 28, 2011 compared to $557,263 for 2010.  Depreciation expense for the year ended February 28, 2011 increased to $325,487 compared with $284,017 for the year ended February 28, 2010.  The net result of changes in depreciation and amortization related to the increased capitalization of internal software.

 

Interest expense was $276 for the year ended February 28, 2011 as compared to interest expense of $1,343 for the prior year.

 

The loss on derivative instruments was zero for the year ended February 28, 2011 compared to a loss of $335,820 for the year ended February 28, 2010.

 

For the year ended February 28, 2011, the Company incurred a net loss of $12.5 million compared to a net loss of $8.4 million in the comparable prior year.  The $4.1 million additional net loss was a result of increased direct expenses, increased selling, general and administrative expenses and increased non-cash expenses as described above.

 

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Summarized quarterly financial information for the years ended February 29, 2012 and February 28, 2011 is as follows:

 

 

 

First

 

Second

 

Third

 

Fourth

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2012 quarter:

 

 

 

As restated (1)

 

 

 

 

 

 

 

Total revenues

 

$

1,205,786

 

$

1,287,122

 

$

4,424,540

 

$

5,032,922

 

$

11,950,370

 

Operating loss

 

$

(4,030,960

)

$

(6,008,740

)

$

(10,412,632

)

$

(9,432,142

)

$

(29,884,474

)

Net loss

 

$

(4,016,586

)

$

(6,003,584

)

$

(11,377,289

)

$

(11,182,565

)

$

(32,580,024

)

Basic and diluted

 

$

(0.06

)

$

(0.08

)

$

(0.13

)

$

(0.12

)

$

(0.41

)

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2011 quarter:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

286,323

 

$

718,717

 

$

853,169

 

$

963,004

 

$

2,821,213

 

Operating loss

 

$

(1,736,520

)

$

(1,957,775

)

$

(2,833,935

)

$

(5,949,972

)

$

(12,478,202

)

Net loss

 

$

(1,736,510

)

$

(1,957,769

)

$

(2,833,928

)

$

(5,950,271

)

$

(12,478,478

)

Basic and diluted

 

$

(0.03

)

$

(0.03

)

$

(0.05

)

$

(0.09

)

$

(0.21

)

 


(1)                The Company identified two errors within its previously issued financial statements for the quarter ended August 31, 2011, which were corrected in the Form 10-Q/A filed on January 17, 2012.  An error in accounting for share-based payments and warrants resulted in a reduction to warrant expense of $300,000 for the second quarter ended August 31, 2011.  An error in accounting for business combinations resulted in additional transaction expense of $696,616 for the second quarter ended August 31, 2011.

 

Contractual Obligations

 

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments as of February 29, 2012. Changes in our business needs may cause these estimates to change. Because these estimates are necessarily subjective, our actual payments in future periods are likely to vary from those presented in the table. The following table summarizes our contractual obligations as of February 29, 2012:

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

Contractual Obligations

 

Total

 

1 Year

 

1 – 3 Years

 

3 – 5 Years

 

Over 5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease obligations

 

$

2,102,618

 

$

921,075

 

$

1,174,588

 

$

6,955

 

$

 

 

As part of the acquisition purchase price, Hipcricket shareholders and employees will receive an earn-out payment, which if achieved will be no less than $15.0 million and may be as high as $27.5 million. The earn-out may be paid in Augme’s common stock or a combination of common stock and cash at Augme’s discretion, provided that the transaction remains a tax-free reorganization.  The contingent consideration recorded at the time of the acquisition was $23.3 million which is the estimated fair value of the estimated $25.2 million of consideration at the acquisition date.  These amounts included a tax liability of $2.0 million. We used a probability-weighted income-based model, which is a Level 3 input, to determine the fair value of the earn-out. As of February 29, 2012, the Company has re-measured the contingent consideration to fair value and increased the acquisition related contingent consideration by $2.7 million which is classified in other expense, resulting in a liability of $26.0 million. The estimated fair value of the acquisition related contingent consideration will be re-measured at each reporting period based on the revenues earned under the terms of the Amended and Restated Purchase Agreement.

 

Recently Issued Accounting Standards

 

See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 2 Summary of Significant Accounting Policies — Recent Accounting Standards.”

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Augme Technologies, Inc.

 

We have audited the accompanying balance sheet of Augme Technologies, Inc. (the “Company”) as of February 29, 2012 and the related statements of operations, changes in stockholders’ equity, and cash flows for the year ended February 29, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Augme Technologies, Inc. as of February 29, 2012 and the results of its operations and its cash flows for the year ended February 29, 2012, in conformity with generally accepted accounting principles in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Augme Technologies, Inc.’s internal control over financial reporting as of February 29, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 8, 2012 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

/s/ Moss Adams LLP

 

 

 

Seattle, Washington

 

May 8, 2012

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Augme Technologies, Inc.

 

We have audited the accompanying consolidated balance sheet of Augme Technologies, Inc. as of February 28, 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended February 28, 2011. Augme Technologies, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Augme Technologies, Inc. as of February 28, 2011, and the consolidated results of its operations and its cash flows for the year ended February 28, 2011 in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Augme Technologies, Inc.’s internal control over financial reporting as of February 28, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 13, 2011 expressed an unqualified opinion.

 

/s/ Freedman & Goldberg, CPA’s, P.C.

 

 

 

Farmington Hills, MI

 

 

 

May 13, 2011

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Augme Technologies, Inc.

New York, NY

 

We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of Augme Technologies, Inc. for the year ended February 28, 2010. These consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Augme is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Augme’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Augme Technologies, Inc. for the year ended February 28, 2010 in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ MaloneBailey, LLP

Houston, Texas

www.malonebailey.com

June 1, 2010

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders

Augme Technologies, Inc.

 

We have audited Augme Technologies, Inc.’s (the “Company”) internal control over financial reporting as of February 29, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a 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. The following material weakness has been identified and included in management’s assessment:  The Company lacks sufficient financial reporting and accounting resources with the appropriate technical accounting expertise to prepare timely and accurate financial statements, resulting from the inability to prevent or detect errors in a timely manner relating to accounting for share-based payments, income taxes, and identifying and accounting for business combinations.

 

In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Augme Technologies Inc.  has not maintained effective internal control over financial reporting as of February 29, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Augme Technologies Inc. as of February 29, 2012, and the related statements of operations, changes in stockholders’ equity, and cash flows for the year ended February 29, 2012. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 financial statements, and this report does not affect our report dated May 8, 2012, which expressed an unqualified opinion on those financial statements.

 

 

/s/ Moss Adams LLP

 

Seattle, Washington

May 8, 2012

 

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AUGME TECHNOLOGIES, INC.
BALANCE SHEETS

 

 

 

February 29,

 

February 28,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

11,428,825

 

$

11,182,356

 

Accounts receivable, net

 

3,734,945

 

2,025,294

 

Prepaid expenses and other current assets

 

487,321

 

132,197

 

Total current assets

 

15,651,091

 

13,339,847

 

 

 

 

 

 

 

Property and equipment, net

 

292,492

 

570,964

 

Goodwill

 

47,484,708

 

13,106,969

 

Intangible assets, net

 

36,798,085

 

4,945,545

 

Deposits

 

365,700

 

67,551

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

100,592,076

 

$

32,030,876

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

2,613,238

 

$

708,825

 

Accrued liabilities

 

1,599,792

 

31,304

 

Deferred revenue

 

1,050,369

 

1,190,151

 

Acquisition related contingent consideration

 

26,000,500

 

 

Total current liabilities

 

31,263,899

 

1,930,280

 

 

 

 

 

 

 

LONG TERM LIABILITIES

 

113,277

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

31,377,176

 

1,930,280

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Common stock, $.0001 par value; 250,000,000 shares authorized; 94,434,817 and 68,816,131 shares issued and outstanding, respectively

 

9,443

 

6,882

 

Additional paid-in capital

 

141,738,528

 

70,046,761

 

Accumulated deficit

 

(72,533,071

)

(39,953,047

)

Total stockholders’ equity

 

69,214,900

 

30,100,596

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

100,592,076

 

$

32,030,876

 

 

See accompanying notes to the financial statements.

 

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AUGME TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

 

 

 

Years Ended

 

 

 

February 29,

 

February 28,

 

February 28,

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

REVENUE

 

$

11,950,370

 

$

2,821,213

 

$

339,901

 

 

 

 

 

 

 

 

 

COST OF REVENUES

 

4,150,807

 

1,251,318

 

492,838

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Selling, general and administrative

 

33,355,790

 

13,028,497

 

5,580,743

 

Depreciation and amortization

 

4,328,247

 

1,019,600

 

841,280

 

 

 

 

 

 

 

 

 

Total operating expenses

 

37,684,037

 

14,048,097

 

6,422,023

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

(29,884,474

)

(12,478,202

)

(6,574,960

)

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

Interest income (expense), net

 

20,950

 

(276

)

(1,343

)

Acquisition related contingent consideration

 

(2,716,500

)

 

 

Loss on derivatives

 

 

 

(335,820

)

LOSS FROM CONTINUING OPERATIONS

 

(32,580,024

)

(12,478,478

)

(6,912,123

)

 

 

 

 

 

 

 

 

DISCONTINUED OPERATIONS:

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

(588,214

)

Loss on sale of discontinued operations

 

 

 

(878,162

)

LOSS FROM DISCONTINUED OPERATIONS

 

 

 

(1,466,376

)

 

 

 

 

 

 

 

 

NET LOSS

 

$

(32,580,024

)

$

(12,478,478

)

$

(8,378,499

)

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET LOSS PER SHARE:

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.41

)

$

(0.21

)

$

(0.14

)

Loss from discontinued operations

 

 

 

(0.03

)

NET LOSS PER SHARE — basic and diluted

 

$

(0.41

)

$

(0.21

)

$

(0.16

)

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

Basic and diluted

 

80,146,990

 

60,264,895

 

50,980,171

 

 

See accompanying notes to the financial statements.

 

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AUGME TECHNOLOGIES, INC

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED FEBRUARY 29, 2012, FEBRUARY 28, 2011 and FEBRUARY 28, 2010

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity

 

Balances, February 28, 2009

 

44,863,064

 

$

4,486

 

$

21,347,573

 

$

(18,464,925

)

$

2,887,134

 

Derivative Instruments, cumulative effect of change in accounting principle

 

 

 

 

 

(68,798

)

(631,144

)

(699,942

)

Business combinations

 

3,566,667

 

356

 

13,953,645

 

 

13,954,001

 

Common stock issued for cash for:

 

 

 

 

 

 

 

 

 

 

 

Stock subscription, net

 

2,514,201

 

251

 

4,049,745

 

 

4,049,996

 

Option/Warrant exercise

 

4,152,886

 

415

 

1,400,549

 

 

1,400,964

 

Common stock issued for:

 

 

 

 

 

 

 

 

 

 

 

Cashless option exercise

 

1,102,593

 

112

 

(112

)

 

 

Cashless warrant exercise

 

30,769

 

3

 

(3

)

 

 

Advisory services

 

951,570

 

95

 

1,836,456

 

 

1,836,551

 

Settlements

 

75,000

 

8

 

284,993

 

 

285,001

 

Employee share-based compensation

 

 

 

1,667,739

 

 

1,667,739

 

Warrants issued for services

 

 

 

339,229

 

 

339,229

 

Settlement of derivative liabilities

 

 

 

1,035,762

 

 

1,035,762

 

Net loss

 

 

 

 

(8,378,499

)

(8,378,499

)

Balances, February 28, 2010

 

57,256,750

 

5,726

 

45,846,778

 

(27,474,568

)

18,377,936

 

Common stock issued for cash for:

 

 

 

 

 

 

 

 

 

 

 

Stock subscription, net

 

6,204,829

 

620

 

12,345,450

 

 

12,346,070

 

Option/Warrant exercise

 

3,739,499

 

374

 

4,992,200

 

 

4,992,574

 

Common stock issued for:

 

 

 

 

 

 

 

 

 

 

 

Cashless option exercise

 

1,390,053

 

139

 

(139

)

 

 

Shares granted

 

225,000

 

23

 

236,250

 

 

236,272

 

Employee share-based compensation

 

 

 

2,961,687

 

 

2,961,687

 

Warrants issued for services

 

 

 

3,664,535

 

 

3,664,535

 

Net loss

 

 

 

 

(12,478,478

)

(12,478,478

)

Balances, February 28, 2011

 

68,816,131

 

6,882

 

70,046,761

 

(39,953,047

)

30,100,596

 

Business combinations

 

12,921,444

 

1,291

 

41,167,889

 

 

41,169,180

 

Common stock issued for cash for:

 

 

 

 

 

 

 

 

 

 

 

Stock subscription, net

 

9,400,000

 

940

 

18,529,548

 

 

18,530,488

 

Option /Warrant exercise

 

2,957,173

 

296

 

2,894,215

 

 

2,894,511

 

Common stock issued for:

 

 

 

 

 

 

 

 

 

 

 

Cashless option exercise

 

166,997

 

17

 

(17

)

 

 

Advisory services

 

173,072

 

17

 

275,483

 

 

275,500

 

Employee share-based compensation

 

 

 

6,203,229

 

 

6,203,229

 

Warrants issued for services

 

 

 

2,621,420

 

 

2,621,420

 

Net loss

 

 

 

 

(32,580,024

)

(32,580,024

)

Balances, February 29, 2012

 

94,434,817

 

$

9,443

 

$

141,738,528

 

$

(72,533,071

)

$

69,214,900

 

 

See accompanying notes to the financial statements.

 

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AUGME TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

 

 

 

Years Ended

 

 

 

February 29,
2012

 

February 28,
2011

 

February 28,
2010

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

 

$

(32,580,024

)

$

(12,478,478

)

$

(8,378,499

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

4,328,247

 

1,019,600

 

841,280

 

Change in the allowance for bad debt

 

196,328

 

 

67,503

 

Common stock issued for services

 

275,500

 

236,228

 

510,317

 

Common stock issued for settlement

 

 

 

285,001

 

Loss on sale of discontinued operations

 

 

 

878,162

 

Loss on derivative instruments

 

 

 

335,820

 

Loss on sale or disposal of fixed assets

 

32,459

 

 

 

Stock, option and warrant expense

 

8,824,649

 

6,862,472

 

2,006,968

 

Acquisition related contingent consideration

 

2,716,500

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

374,177

 

(1,909,547

)

215,715

 

Prepaid expenses and other current assets

 

(165,912

)

(53,064

)

(48,317

)

Deposits

 

(298,149

)

(40,101

)

 

Other assets

 

 

 

(27,450

)

Accounts payable and accrued liabilities

 

2,552,894

 

(501,647

)

(362,923

)

Deferred revenue

 

(907,712

)

956,115

 

178,619

 

Net cash used in continuing operations

 

(14,651,043

)

(5,908,423

)

(3,497,804

)

Net cash provided by discontinued operations

 

 

 

118,688

 

NET CASH USED IN OPERATING ACTIVITIES

 

(14,651,043

)

(5,908,423

)

(3,379,116

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Additions to property and equipment

 

(48,000

)

(207,271

)

(240,449

)

Capitalization of software development costs

 

 

(235,802

)

 

Cash paid for purchase of patents

 

(165,218

)

 

 

Cash paid for purchase of assets of businesses, net of cash acquired

 

(3,967,794

)

 

(324,000

)

Cash paid for patent defense costs

 

(2,346,475

)

(1,186,159

)

(248,944

)

NET CASH USED IN INVESTING ACTIVITIES

 

(6,527,487

)

(1,629,232

)

(813,393

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from sale of common stock, net

 

18,530,488

 

12,339,777

 

4,049,996

 

Proceeds received from the exercise of stock options and warrants, net

 

2,894,511

 

4,762,661

 

1,400,964

 

Proceeds received from payment on related party note, net

 

 

 

(15,574

)

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

21,424,999

 

17,102,438

 

5,435,386

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

246,469

 

9,564,783

 

1,242,877

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

11,182,356

 

1,617,573

 

374,696

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

11,428,825

 

$

11,182,356

 

$

1,617,573

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Interest paid

 

$

3,869

 

$

 

$

 

Income taxes paid

 

77,796

 

 

 

Cumulative adjustment to retained deficit for derivative liabilities

 

 

 

699,942

 

Settlement of derivative liabilities

 

 

 

1,035,762

 

Stock issued for acquisitions

 

41,169,180

 

 

13,954,001

 

Stock issued for patent defense

 

 

 

1,326,234

 

Acquisition related contingent consideration

 

$

23,284,000

 

$

 

$

 

 

See accompanying notes to the financial statements.

 

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AUGME TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 — DESCRIPTION OF BUSINESS

 

Augme® Technologies, Inc. (“Augme” or the “Company”), Augme® (“Augme”), AD LIFE® (“AD LIFE”), AD SERVE® (“AD SERVE”), A+® (“A+”), Hipcricket® (“Hipcricket”), Boombox® (“Boombox”) and the Company logos are trademarks of Augme Technologies, Inc.

 

Augme Technologies, Inc. provides strategic services and mobile technology to leading consumer and healthcare brands. We were formerly known as Modavox, Inc. and changed our name to Augme Technologies, Inc. in February 2010. Augme owns the “Method and System for Adding Function to a Webpage” portfolio of patents, which cover technical processes and methods that are believed to be a foundational component of behavioral targeting — the automatic provision of customized content to individuals based on information such as past web activity, personal preferences, geography, or demographic data. Augme’s AD LIFE mobile marketing technology platform allows marketers, brands, and agencies the ability to plan, create, test, deploy, and track mobile marketing programs. Through the use of Consumer Response Tags (“CRTs”) such as 2D codes, UPC codes, Short Message Services (“SMS”), and image recognition, AD LIFE facilitates consumer brand interaction and the ability to track and analyze campaign results. Using its own patented device-detection and proprietary mobile content adaptation software, AD LIFE solves the mobile marketing industry problem of disparate operating systems, device types, and on-screen mobile content rendering. Augme also provides business to consumer utilities including national mobile couponing solutions, strategic mobile healthcare tools, custom mobile application development, and consumer data tracking and analytics.

 

Augme operates under one reporting unit and is headquartered in New York City with an office location near Seattle, Washington.  Additionally, the Company maintains offices in Atlanta, Tucson, Dallas, Chicago, San Francisco and Los Angeles.  During July and August 2011, the Company made two business acquisitions, see Note 4.

 

Liquidity, Business Risks and Uncertainties

 

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of February 29, 2012 and February 28, 2011, the Company has accumulated deficits of $72.5 million and $40.0 million, respectively. The Company is subject to the risks and challenges associated with companies at a similar stage of development including dependence on key individuals, successful development and marketing of its products and services, integration of recent business combinations, competition from substitute products and services and larger companies with greater financial, technical management and marketing resources. Further, the Company will require additional financing to execute on its key business strategies and fund operations, those funds may not be readily available or may not be on terms that are favorable to the Company. Certain financing terms could be dilutive to existing shareholders or could result in significant interest or other costs, or require the Company to license or relinquish certain intellectual property rights.

 

The Company operates in the mobile marketing industry and, accordingly, can be affected by a variety of factors. For example, management of the Company believes that any of the following factors could have a significant negative effect on the Company’s future financial position, results of operations and cash flows: unanticipated fluctuations in quarterly operating results, adverse changes in the Company’s relationship with significant customers or failure to secure contracts with other customers, intense competition, failure to attract and retain key personnel, failure to protect intellectual property, decrease in the migration trends from traditional advertising methods to digital and mobile media and the inability to manage growth.

 

On June 29, 2011 we filed a Form S-3 registration statement with the Securities and Exchange Commission for the purpose of raising up to $75.0 million through sales of our securities. The registration statement was declared effective on July 13, 2011. The registration statement allows us to raise capital by engaging in securities offerings from time-to-time, as funds are needed. On November 17, 2011, we completed a public offering pursuant to which we sold 9.4 million shares of the common stock registered on the Form S-3 registration statement at a price to the public of $2.15 per share. We raised $18.5 million in proceeds, net of $1.7 million in costs related to the offering, leaving approximately $55.0 million of the $75.0 million registered on Form S-3.

 

We expect, during fiscal 2013 that we will need to undertake additional offerings of our securities in order to meet liquidity needs and, if equity markets are favorable, we will raise additional funds to invest more rapidly in our growth strategies. If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then the Company could be required to substantially reduce or discontinue its investments in intellectual property, new customers and new products; reduce operating, marketing, general and administrative costs related to its continuing operations; or limit the scope of its continuing operations. Due to the nature of the operations and financial commitments of the Company, including contingent acquisition obligations, patent litigation costs to protect intellectual property and employee costs, the Company may not have the discretion to reduce operations in an orderly manner to a more sustainable level without impacting future operations or the intellectual property held by the Company.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Actual results could differ from those estimates. Significant estimates relate to fair value of assets acquired and liabilities assumed in business combinations, acquisition related contingent consideration, allowances for tax assets, the use of the Black-Scholes pricing model for valuing stock

 

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Table of Contents

 

option and common stock warrant issuances, estimates of future cash flows used to evaluate impairment of long-lived assets, revenues earned from percentage of completion contracts and the period in which revenues should be recorded.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

 

Accounts Receivable

 

Our accounts receivable balances are due from customers throughout the U.S. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Based on the nature of the contract, our billing terms are such that a certain percentage is billed at the time of the contract and then at various time intervals or through the length of the agreement, which are generally up to twelve months.

 

We determine our allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. Our allowance for doubtful accounts was $295,985 and $99,657 as of February 29, 2012 and February 28, 2011, respectively.

 

Property and Equipment

 

Property and equipment consists primarily of computer software and office equipment, furniture and fixtures and leasehold improvements and is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 7 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful lives, ranging from 3 to 7 years.

 

We capitalize the costs of developing software for internal use or to be sold, leased or otherwise marketed. These costs include both purchased software and internally developed software. Costs of developing software are expensed until technological feasibility has been established. Thereafter, all costs are capitalized and are carried at the lower of unamortized cost or net realizable value. Internally developed and purchased software costs are generally amortized over three years.

 

Fair Value of Financial Instruments

 

The fair value of some of our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their respective carrying value due to their short maturity. Financial instruments that potentially subject us to concentrations of credit risk are cash-equivalents and trade receivables.

 

Capitalized Legal Patent Costs

 

We capitalize external legal costs incurred in the defense of our patents, including assertion of claims against others for patent infringement, where we believe that there is an evident increase in the value of the patent and that the successful outcome of the legal action is probable. During the course of any legal action, the court where the case is pending makes decisions and issues rulings of various kinds, which may be favorable or unfavorable. We monitor developments in the legal action, the legal costs incurred and the anticipated outcome of the legal action, and assess the likelihood of a successful outcome based on the entire action. If changes in the anticipated outcome occur that reduce the likelihood of a successful outcome of the entire action to less than probable, the capitalized costs would be charged to expense in the period in which the change is determined. The capitalized legal patent costs are recorded within intangible assets on our balance sheets and are amortized over the remaining useful life of the patent.

 

Indefinite-lived Intangible Assets

 

We review indefinite-lived intangible assets, which consist of acquired trade names, for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If it is determined that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

 

The addition of the acquired trade name as an indefinite-lived intangible asset was related to our 2011 acquisition of Hipcricket, Inc., which had a carrying value of $8.7 million at February 29, 2012.

 

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Table of Contents

 

Goodwill

 

Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and intangible assets of acquired entities. Goodwill is carried at cost and is not amortized.  We test goodwill for impairment on an annual basis as of fiscal month end February of each fiscal year.

 

During the fourth quarter of fiscal 2012, the Company early adopted ASU 2011-08. As such, we initially evaluate the recoverability of goodwill annually by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. If the fair value of the reporting unit is determined to be greater than the carrying amount, further testing of goodwill impairment is not performed. If the fair value of the reporting unit is less than the carrying amount, we perform a quantitative two-step impairment test. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying amount of goodwill has been impaired.

 

The goodwill impairment test is performed at the reporting unit level. ASC 350 defines a reporting unit as an operating segment or one level below an operating segment (referred to as a “component”). An operating segment is defined by ASC 280 as a component of an enterprise that earns revenues and incurs expenses, for which discrete financial information is available and management regularly reviews the operating results. Furthermore, an operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component. The Company has determined it has one reporting unit.

 

When performing a quantitative two-step impairment test, we depend upon our estimates of future cash flows and other factors to determine the fair value of our reporting unit. We rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 820.  If the carrying amount exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of the reporting unit. If the carrying value of the goodwill of the reporting unit exceed fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

The fair value of our reporting unit is dependent upon our estimate of future cash flows and other factors. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from our market capitalization plus a suitable control premium at date of the evaluation. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate and through our stock price that we use to determine our market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 30- day period before each assessment date. We use this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium to our market capitalization. To estimate the control premium, we considered our unique competitive advantages that would likely provide synergies to a market participant. In addition, we considered external market factors, which we believe, contributed to the decline and volatility in our stock price that did not reflect our underlying fair value.

 

Intangible Assets

 

Intangible assets were recorded as the result of business acquisitions and are stated at estimated fair value at the time of acquisition less accumulated amortization. We assess the recoverability of long-lived assets when events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If undiscounted expected cash flows to be generated by a long-lived asset or asset group are less than its carrying amount, we record an impairment to write down the long-lived asset or asset group to its estimated fair value. Fair value is estimated based on discounted expected future cash flows.

 

Business Combinations

 

We account for business combinations using the acquisition method of accounting. The consideration transferred or transferable to sellers and the assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. When a business combination agreement provides for consideration to be paid in future periods, contingent on future events, the Company includes an estimate of the acquisition-date fair value of the contingent consideration as part of the cost of the combination. Contingent consideration to be paid to officers, directors, shareholders and/or employees of the acquiree whom continue employment with the Company are evaluated as to whether the amounts represent purchase consideration or a separate transaction, such as post-transaction employee compensation.  Factors evaluated require significant judgment and include, among other factors; consideration of the terms of continuing employment, levels of post-transaction compensation, ownership interest of the selling shareholder/employees, linkage of the contingent consideration to the transaction date combination valuation and any other agreements or matters related to the transaction.  Acquisition transaction costs are expensed as incurred.   The results of operations of the acquired business are included in the Company's consolidated financial statements from the respective date of acquisition.

 

Share-Based Payments

 

The fair value of our share-based payments for stock options and stock warrants is estimated at the grant date based on the stock award’s fair value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model and is recognized as expense over the requisite service period using a straight line method. The BSM model requires various highly judgmental assumptions including expected volatility and option life. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, share-based payment expense is adjusted accordingly in that period.

 

Revenue Recognition

 

We provide access to our AD LIFE 4.0 and HIP 7.0 software-as-a-service (“SaaS”) mobile marketing platforms and services through term license fees, support fees, and mobile marketing campaign fees.  The contracts generally include multiple elements as part of the overall service delivery and revenues are generally recognized over the term of the contract.  We also offer professional services related to the strategy and execution of mobile marketing campaigns.  Professional services revenue is recognized as the services are performed as these services have value on a standalone basis, do not involve unique acceptance criteria and have a fair value that can be obtained as the other services are generally sold without professional services.

 

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Table of Contents

 

Contracts may include multiple deliverables such as production and delivery of media content, hosting, fees from content retention and delivery or placement of mobile or online advertising content.  Contracts may also include multiple deliverables such as custom software creation, audio production, and delivery of online media content or hosting. Revenues from multiple delivery contracts for the production