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EX-21 - Future Now Group Inc.v168448_ex21.htm
EX-31.1 - Future Now Group Inc.v168448_ex31-1.htm
EX-32.1 - Future Now Group Inc.v168448_ex32-1.htm
EX-10.17 - Future Now Group Inc.v168448_ex10-17.htm
EX-10.18 - Future Now Group Inc.v168448_ex10-18.htm
EX-10.19 - Future Now Group Inc.v168448_ex10-19.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K/A

x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the fiscal year ended June 30, 2009.
 
OR
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from                   to                      .
 
Commission file number: 333-136069
 
Future Now Group Inc.
(Name of small business issuer in its charter)
 
Nevada
 
20-4237445
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

80 Mountain Laurel Rd ., Fairfield, CT
 
06824
(Address of principal executive offices)
 
(Zip Code)
 
Issuer’s telephone number: 877-643-7244

Securities registered under Section 12(b) of the Exchange Act: None
 
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes 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 No x
 
Indicate by check mark whether the registrant(1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day. x Yes ¨ No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy ir information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 if the Exchange Act.
 
Large accelerated filter ¨
Accelerated filter ¨
   
Non-accelerated filter   ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes  ¨  No  x
 
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
 
Class
 
Outstanding November 20, 2009
Common Stock, $0.001 par value per share
 
97,125,063 shares

Documents Incorporated by Reference: NONE

Transitional Small Business Disclosure Format (Check one): Yes  ¨ ;  No  x

 
 

 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can be based only on facts and factors of which we are currently aware. Consequently, forward-looking statements are inherently subject to risks and uncertainties. Actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.
 
Forward-looking statements can be identified by the use of forward-looking words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These statements include, but are not limited to, statements under the captions “Risk Factors,” “Management’s Discussion and Analysis or Plan of Operation” and “Description of Business,” as well as other sections in this report. Such forward-looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that may cause actual results to differ materially from those anticipated in the forward-looking statements. You should be aware that, as a result of any of these factors materializing, the trading price of our common stock may decline. These factors include, but are not limited to, the following:

 
·
the availability and adequacy of capital to support and grow our business;

 
·
economic, competitive, business and other conditions in our local and regional markets;

·
actions taken or not taken by others, including competitors, as well as legislative, regulatory, judicial and other governmental authorities;

 
·
competition in our industry;

 
·
changes in our business and growth strategy, capital improvements or development plans;

 
·
the availability of additional capital to support development; and

 
·
other factors discussed elsewhere in this annual report.
 
The cautionary statements made in this annual report are intended to be applicable to all related forward-looking statements wherever they may appear in this report.
 
We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly update any forward looking-statements, whether as a result of new information, future events or otherwise.

 
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EXPLANATORY NOTE

This amendment no. 1 to annual report on Form 10-K is being filed to provide properties required by Item 102 of Regulation S-K, market fro registrant’s common equity, related stockholder matters and issuer purchases of equity securities required by Items 201, 701(f) and 703 of Regulation S-K the financial statements required by Article 8 of Regulation S-X; management’s discussion and analysis required by Item 303 of Regulation S-K; disclosure controls and procedures required by Item 307 of Regulation S-K; internal control over financial reporting required by Item 308 of Regulation S-K; directors, executive officers and corporate governance required by Items 401, 405, 406, 407©(3), (d)(4) and (d)(5) of Regulation S-K, executive compensation required by Item 402 of Regulation S-K and paragraph (e)(4) and (e)(5) of Item 407 of Regulation S-K, security ownership of certain beneficial owners and management and related stockholder matters required by Item 201(d) of Regulation S-K, certain relationships and related transactions and director independence required by Item 404 of Regulation S-K, principal accounting fees and services required by Item 9(e) of Schedule 14A and certifications required under Rule 13a-14 of the Securities Exchange Act of 1934, as amended, and Section 1350 of the Sarbanes-Oxley Act of 2002.  These items were not available for filing with the annual report on Form 10-K filed by us on October 13, 2009. 

PART I
 
ITEM 1.  DESCRIPTION OF BUSINESS. 
 
Corporate Information
 
Overview
 
From our inception on January 23, 2006 to June 30, 2007, we were engaged in no significant operations other than organizational activities, acquiring and staking our properties, preparing the registration statements covering our securities and planning phase 1 of the exploration work on a mining property known as the “Fir property.” The Fir property is twenty-one cell mineral claims covering an area totaling 433.24 hectares located in the Kamloops Mining Division in south central British Columbia, approximately 35 kilometers south of Kamloops, British Columbia. On May 11, 2007, we announced that we had abandoned this property determining that the claim did not cover enough ground to host a viable exploration target. We then abandoned our previous business plan and focused on the identification of suitable businesses with which to enter into a business opportunity or business combination.
 
Share Exchange with Future Now, Inc.
 
On October 30, 2007, we entered into a share exchange agreement with Future Now, Inc., a privately held Delaware corporation, and the shareholders of Future Now, Inc. Future Now, Inc. is not a related entity and there were no material relationships between us and Future Now, Inc. prior to the share exchange. The closing of the transactions contemplated in the share exchange agreement and the acquisition of all of the issued and outstanding stock of Future Now, Inc. occurred on October 30, 2007. In accordance with the closing of the share exchange agreement, we issued 50,394,191 of our common shares to the shareholders of Future Now, Inc. in exchange for the acquisition, by us, of all of the issued and outstanding common shares of Future Now, Inc. on the basis of nine and one-quarter (9.25) shares of our common stock for one share of Future Now, Inc.’s common stock.
 
We had 71,242,191 shares of common stock issued and outstanding as of October 30, 2007, as a result of the issuance of 50,394,191 shares of common stock in connection with the closing of the share exchange and the concurrent cancellation of 32,000,000 shares of common stock owned by our former directors. As of the closing date, the former shareholders of Future Now, Inc. held approximately 70.74% of the issued and outstanding shares of our common stock. The issuance of the 50,394,191 shares of common stock to the former shareholders of Future Now, Inc. was deemed to be a reverse acquisition for accounting purposes. Accordingly, Future Now, Inc. the accounting acquirer entity, is regarded as the predecessor entity as of October 30, 2007. As a result of the exchange of the Future Now, Inc. common stock for our common stock, Future Now, Inc. became our wholly owned subsidiary. We will continue to file annual and quarterly reports based upon our fiscal year end of June 30.
 
In connection with the consummation of the share exchange, we changed the address of our principal executive offices effective October 30, 2007 from 650 - 1500 West Georgia Street, Vancouver, BC V6G 2Z6 to the Galleria Building, 61 Unquowa Road, Fairfield, Connecticut 06824.  Our current executive offices are located at 80 Mountain Laurel Road, Fairfield, CT 06824.

 
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Overview of Business

Through our wholly-owned subsidiaries, we provide online marketing optimization services and software solutions utilizing a proprietary methodology and supporting set of software tools that help businesses improve their online marketing to generate more sales, leads, and subscriptions. Our proprietary Persuasion Architecture® framework delivers clients “blueprints” to plan, measure and improve their online sales and marketing initiatives. Management believes that our methodology and software tool set represents a truly accountable solution to three multi-billion dollar problems;

 
1.
Low customer conversion rates;1

 
2.
High costs of customer acquisition;2and

 
3.
Poor customer retention rates.3


1  State of Retailing Online 2007, conducted by Forrester Research for the Shop.org arm of the National Retail Federation reports average conversion rates of 3.1%. comScore, Inc. reports 2007 online commerce spending at $188B. For every additional 1 percentage point retailers add to their overall conversion rate, they stand to collectively add over $60B in revenue.
2  Internet Advertising Bureau reports, in a study conducted by PricewaterhouseCoopers LLP, that 2007 online ad revenues will top $20B. Record revenues confirmed through the first 3 quarters of 2007 total $15.2B. Online customer acquisition costs are directly attributable to the cost of the media required to deliver traffic.
 3    Poor customer retention rates are most often measured by subscription businesses in terms of their churn rate. One example company, Netflix, the leader in their space reported a year end (6/30/07) churn of 63.4% of their customer base. Netflix also reported total revenue of $1.25B. To this one company alone, their problem with poor customer retention has an opportunity cost of over $2B.
 
Our business model is one of delivering software as a service complemented with certain professional services and licensing options.
 
Alkemi International Pty Ltd. Investment and Limited Term Licensing Agreement
 
On June 13, 2007, we entered into a licensing agreement, a shareholders agreement and a call option deed (collectively, the “AIPL Agreements”) with Alkemi International Pty Ltd (“AIPL”). Under the AIPL Agreements, AIPL received a limited term exclusive licensing agreement for 17 months to resell and deliver our intellectual property in Australia and New Zealand and we would have a right to convert any monies owed pursuant to the AIPL Agreements from AIPL to an ownership position in AIPL. On July 23, 2007, we delivered to AIPL notice to issue shares that totaled the outstanding balance due from AIPL as of June 13, 2007, which, at the time, was approximately $84,000. A valuation opinion was obtained whereby the value of AIPL was set at $959,300 AUD (or US $808,724) and as such we received an amount equal to $97,268 AUD or 159,897 shares of AIPL. We will continue to accrue monies owed from AIPL until a total of US$62,629 is due from AIPL. At such time the amount will automatically be converted into additional shares of AIPL and the total ownership percentage at that time of AIPL by us will equal 15%. Payments to us will then commence based upon the licensing agreement.

Share Exchange with Elemental Business, Inc.

On May 28, 2008, we completed a share exchange with Elemental Business, Inc. (“EBI”) whereby we purchased all the outstanding common stock of EBI in exchange for the issuance of 3,700,000 shares of its Common Stock. EBI became our wholly owned subsidiary. EBI is in the business of online marketing optimization using its proprietary technology. The technology was actually built around the concepts of the Persuasion Architecture® technology. Management believes that this acquisition will accelerate our time to market whereby we can touch all small businesses through a lower-priced subscription-based software product.

Industry Background
 
The Internet has emerged as a powerful marketing medium that allows millions of consumers and marketers to conduct business and interact with each other in unprecedented ways. The Internet is particularly well suited to direct marketers because of its ability to access both broad audiences, as well as precisely defined groups. As a result, the Internet provides marketers with opportunities to identify and attract customers, as well as target specific types of users and collect data on their preferences. At the same time, we believe the Internet appeals to consumers because it offers more individual control over marketing messages. The growth of the Internet has encouraged companies to spend more of their marketing budgets on Internet marketing. We believe there is a need for a marketing infrastructure that could satisfy the objectives of both marketers and consumers, which would enable businesses to acquire and retain customers, yet operate from a consumer-centric approach that would provide relevant information and meaningful value to the individual user.

 
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Products
 
We derive our revenue from the sale of products and services classified into the following categories: (a) professional services, including custom and packaged consulting; (b) software subscription licensing; (c) content and training; and (d) product sales.

Custom and Productized Consulting Services
 
These services come in three primary service lines: (a) Conversion Optimization; (b) Persuasion Scenario Analysis; and (c) Marketing Planning & Optimization with Persuasion Architecture™. All of these services are specific to the “flavor” of a site (for example, business-to-business, business-to-consumer, self-service or media). The services include three “sizes” per service line, which provides simplicity and scalability. The price for these services ranges from $2,500 to $500,000. The delivery time frame ranges from less than three months to beyond a full year.
 
Methodology Software Subscription and Licensing
 
Our Persuasion Architecture® software suite, referred to as the Minerva Architectural Process (“MAP Tool”) is available for licensing. This is a valuable option for agencies as well as medium and larger companies that intend to implement Persuasion Architecture™ across multiple clients, sites, products and channels. Companies and individuals can also become certified Persuasion Architecture partners under direct licensing and royalty programs.
 
Persuasion Architecture® is a framework, methodology and software tool set we developed to plan, build and optimize persuasive systems on-line and off-line, irrespective of channel. The unique benefit of Persuasion Architecture™ is that it allows our clients to scientifically plan marketing scenarios from a customer-centric perspective and optimize them. Persuasion Architecture™ guides clients to document every assumption based on their customers’ personal motivations. It then asks the Persuasion Architect™ to predict the scenarios that those customers will navigate. On-line, Persuasion Architecture™ uses its web analytics scenario language (PAXML - Persuasion Architecture XML) to measure scenarios and optimize against those predictions. This scenario optimization process is a six sigma process that allows the Persuasion Architect to understand whether it is the execution or the plan that needs correction.
 
Content and Training
 
We continue to develop content and training programs from our thought leadership and market awareness. Our principals and key employees have published many books and white papers on topics pertaining to their respective areas of expertise. We offer various training programs that cater to both business-to-business and business-to-consumer operations. These workshops and seminars include: Persuasive Online Copywriting, Call to Action: Design with Your Audience in Mind and Wizards of Web, online strategy for increased ROI. Trainings are generally held at rented room locations within conference resort or standard hotel operations.
 
Product Sales
 
We recently launched a line of hard copy and downloadable products that may be purchased directly from our websites. Such products are meant to educate the user and move them into another revenue channel. The products currently include: Conversion Expert’s Workbook; Future Now’s Self Service Guide to Website Optimization; (created in conjunction with Google’s partnership with the launch of the Website Optimizer Tool), Which Sells Best; A Quick Start Guide to Testing for Retailers, and Principles of Online Copywriting.

 
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Intellectual Property
 
General
 
We rely on trade secrets, prior client experience and the expertise of our team that we seek to protect, in part, by confidentiality agreements. We require all current and future employees, consultants, contractors, manufacturers, outside collaborators, directors on our board, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific limited circumstances. We require signed confidentiality or material transfer agreements from any company that receives confidential information from us. We intend to ensure that, in the case of employees, consultants and contractors, any agreements that we enter into with such persons will generally provide that all inventions conceived by the person while rendering services to us shall be assigned to us as our exclusive property.
 
Trademarks
 
We have the following registered trademark: Persuasion Architecture®.
 
Domain Names
 
We own and operate the following registered Internet domain names: futurenowinc.com, grokdotcom.com, futurenowgroup.com and persuasionarchitectureinc.com. The information contained on our websites does not form part of this report.

Research and Software Development
 
We currently have dedicated research and software development costs. We anticipate continued expenditures for such costs however over time the absolute dollar amount will decline as a percentage of our gross revenue.
 
Competition
 
We generally compete for the budgets that companies allocate to marketing. We believe the market for interactive marketing optimization will rapidly evolve and be intensively competitive. However, management believes that we have no direct competitors that provide a one-stop service/product which improves conversion rates and customer acquisition and retention. There are however companies active in various segments of this sector. The “agency” group (Organic, Inc., Critical Path, Inc., and Frog Internet Services) is concerned with tactical implementation and strategic direction but utilizes only vaguely defined micro-metrics. The “vendors group” (i.e., email marketers, search engine marketers, word-of-mouth marketing, and affiliates) offers tactical implementation and only pre-defined metrics without an overall strategic guidance. Management believes that our competitive advantage lies in our strategic marketing planning methodology and proprietary framework.
 
Our ability to compete depends on many factors. Factors over which we have some level of control include:
 
 
·
ability to enter into relationships with marketers;
 
·
ability to provide simple, cost-effective and reliable solutions;
 
·
timely development and marketing of new services; and
 
·
ability to manage rapidly changing technologies, frequent new service introductions and evolving industry standards.
 
Factors outside our control include:
 
 
·
development, introduction and market acceptance of new or enhanced services by our competitors;
 
·
changes in pricing policies of our competitors;
 
·
entry of new competitors in the market;
 
·
ability of marketers to provide simple, cost-effective and reliable promotions; and
 
·
market economy’s impact on our clients’ marketing budgets.
 
We expect competition to intensify as more competitors enter our markets. However, as referenced above, one of our most important assets is our intellectual property, which we believe will help offset some of the competitive pressures for certain of our services and products. Most of our existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical, marketing and managerial resources than we do. Most of our competitors also generate greater revenue. They may compete more effectively and be more responsive to industry and technological change than we are.

 
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Major Customers
 
We will file an amendment to this annual report to provide the information under this section.

Marketing
 
Prior to the second quarter of our current fiscal year, we had not done any outbound marketing or other advertising campaigns. Our revenues were solely due to referrals, our reputation in the market and the increasing demand for our services. In the future we plan to invest heavily in our marketing and advertising expense both in absolute dollars and as an increasing percentage of our operating expenses. Among other initiatives, our planned marketing efforts will involve: hiring new direct sales personnel, affiliated marketing arrangements, online advertising, and telemarketing.
 
Our clients are generally familiar with our methodology and employees from the numerous books written by our principals, Jeffrey and Bryan Eisenberg, our industry publication GrokDotCom, as well as our frequent appearances at industry conferences and events.

Government Regulation
 
Our products or services are not regulated by the government in any of our markets and we do not need to obtain permits specific to our industry in order for us to operate or to sell our products and services. Additionally, we are not subject to any legislation specific to our industry, products and services.

Employees
 
We will file an amendment to this annual report to provide the information under this section. 

Reports to Security Holders

None.

ITEM 1A.
RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
 
ITEM 2.
DESCRIPTION OF PROPERTY.
 
We currently do not own any real property. Our corporate headquarters are located at 80 Mountain Laurel Road, Fairfield, Connecticut 06824, which space is being donated by our current interim chief executive officer.
 
ITEM 3.
LEGAL PROCEEDINGS.
 
We are not a party to any pending legal proceedings.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
None.

 
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PART II
 
ITEM 5.
MARKET FMARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS IISSUER PURCHASES OF EQUITY SECURITIES.
 
We received approval from the OTC Bulletin Board on March 23, 2007 for quotation under the symbol “RPEX.OB.” Our trading symbol was changed from “RPEX.OB” to “FUTR.OB” in July 2007 in connection with a 12-for-1 forward stock split and company name change.
 
The following table shows the high and low bid prices for our common stock for each quarter since July 1, 2007 as reported by the OTC Bulletin Board.

We consider our stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of our stock.  Some of the bid quotations from the OTC Bulletin Board set forth below may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
 
FINRA
OTC Bulletin Board
 
Quarter Ended
 
High
   
Low
 
September 30, 2008
  $ 0.29     $ 0.08  
December 31, 2008
  $ 0.09     $ 0.01  
March 31, 2009
  $ 0.04     $ 0.01  
June 30, 2009
  $ 0.02     $ 0.01  

Quarter Ended
 
High
   
Low
 
September 30, 2007
  $ 0.61     $ 0.15  
December 31, 2007
  $ 1.01     $ 0.15  
March 31, 2008
  $ 0.50     $ 0.26  
June 30, 2008
  $ 0.40     $ 0.17  

Holders
 
As of November 20, 2009 there were 33 holders of record of our common stock who held an aggregate of 98,167,952 common shares.
 
Our common shares are issued in registered form. Our registrar and transfer agent is Island Stock Transfer, 100 Second Avenue South, Suite 104N, St. Petersburg, Florida, 33701, Telephone: (727) 289-0010, Facsimile: (727) 289-0069.

Dividend Policy
 
We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our board of directors.
 
Equity Compensation Plans
 
Under our 2007 Stock Option Plan (the “Plan”) 10,613,136 stock options were issued to the grantees (the “Grantees”), 2,363,893 of which had been exercised (“Option Exercises”) and 2,000 have expired. As part of the Option Exercises we received promissory notes from William E. Schloth and Howard Kaplan totaling $95,000.
 
Up to 13,674,370 shares of our common stock is available, as of June 30, 2009, for future issuance under the Plan. The maximum aggregate number of shares of our common stock that may be issued pursuant to the Plan is limited to 25% of the shares of common stock outstanding, which calculation is made on the first trading day of a new fiscal year; provided that, in any year no more than 8% of our common stock or derivative securitization with our common stock underlying 8% of the common stock may be issued in any fiscal year.

 
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Equity Compensation Plan Information

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 (1)
(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
    N/A       N/A       N/A  
Equity compensation plans not approved by security holders
    10,867,618     $ 0.065       13,674,370  
Total
    10,867,618     $ 0.065       13,674,370  
 
Recent Sales of Unregistered Securities

On October 20, 2009, we issued 20,000,000 shares of our common stock to a single accredited investor for an aggregate purchase price of $20,000.  The proceeds were used for general corporate purposes.  The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

On December 2, 2009, we issued a $20,567 secured promissory note to a single accredited investor for a purchase price of $20,567.  This note was secured by a pledge of all of our assets as well as the assets of our subsidiaries.  In addition, payment of the note was secured by a guaranty issued by our subsidiaries in favor of the secured party.  The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

ITEM 6.
SELECTED FINANCIAL DATA
 
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
 
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
 
Overview
 
You should read the following discussion of our financial condition and results of operations together with the audited financial statements and the notes to the audited financial statements included in this report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.
 
We are engaged in the business of in interactive marketing optimization with a primary concentration on optimizing client online conversion rates. Our proprietary Persuasion Architecture® framework provides clients “blueprints” to plan, measure and improve their online sales and marketing efforts. The combination of the proprietary methodology and related software suite allows clients to convert more online traffic into leads, subscriptions and sales thereby improving the return on investment related to money spent on marketing.

 
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Basis of Presentation of Financial Information
 
On October 30, 2007, we completed a share exchange with Future Now, Inc. and the former stockholders of Future Now, Inc. As a result of the share exchange, we abandoned our previous business and commenced the business of online marketing optimization and related software development. Because we are the successor business to Future Now, Inc. and because the operations and assets of Future Now, Inc. represent our entire business and operations from the closing date of the share exchange agreement, our management’s discussion and analysis and audited and unaudited financial statements are based on the consolidated financial results of Future Now, Inc. and its wholly owned subsidiary, Intellectual Property Licensing Group, Inc., for the relevant periods. Future Now, Inc. used to report on a calendar year basis. Commencing on the date of the share exchange, Future Now, Inc. has been reporting on a quarterly and year-end basis along with our year-end June 30.
 
Trends in Our Business and Results of Operations

The market demand for our product offering continues to grow rapidly.  The down turn in the economy should only increase the demand for offerings that can improve the return on capital expenditures.  Since inception we have serviced over 400 clients.   However, with the January 2009 launch of our new software product, Ontarget™, which now puts our Company’s 10 years of expertise in a simple application and a price point for every small business we anticipate the number of clients to grow rapidly.   If our customer base does grow at the pace we expect we will be required to continue making upfront investments in personnel necessary to support this growth.   The rate at which we add new customers, along with the scale of new customer implementations, will affect the level of these upfront investments.
 
Summary of Key Results

During the year ended June 30, 2009 we signed on and billed 85 new OnTarget™ customers versus 0 for the same periods prior year.   We still plan to deliver custom professional services, however, our future growth plans are focused on the rapid deployment of our software-as-a –service product.

Total revenues, including revenues from professional services and software subscription sales for the audited year ended June 30, 2009 were $1,705,734 as compared to the revenues of $2,084,526 for the same period ending June 30, 2008.
 
Total cost of revenues for the audited year ended June 30, 2009 were $463,020 as compared to $638,697 for the same period ended June 30, 2008.   Total operating expenses including sales and marketing expenses, stock based compensation and general and administrative expenses for the audited year ended June 30, 2009 were $3,248,262, as compared to $3,434,113 for the same period ending June 30, 2008.
 
Results of Operations
 
Twelve Months Ended June 30, 2009 compared to the Twelve Months Ended June 30, 2008
 
Revenues and Cost of Revenues
 
Total revenue for the year ending June 30, 2009 was $1,705,734, as compared to revenue of $2,084,526 for the same period ending June 30, 2008, representing a decrease of $378,792 or 18.2%.  The decrease in revenues was primarily attributable to the company’s shift to a subscription based software model from a professional service offering.
 
Cost of revenues for the year ending June 30, 2009 were $463,020, as compared to cost of revenues of $638,697 for the same period ending June 30, 2008, representing a decrease of $175,677, or 27.5%.    Cost of revenues as a percent of total revenues for the year ending June 30, 2009 was 27.1%, compared with 30.6% for the same period ending June 30, 2008.  Gross margins for the year ending June 30, 2009 were 72.9%, as compared to 69.4% for the same period ending June 30, 2008, representing a increase of 5%.  The increase in our gross margins was primarily due to increased margins achieve on subscription based business and cutbacks in our consulting staffing level.

 
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Operating Expenses

Total operating expenses for the year ending June 30, 2009 were $3,248,262, as compared to total operating expenses of $3,434,113 for the same period ending June 30, 2008, representing a decrease of $185,851 or 5.4%.   Stock based compensation of $1,115,262 was also recorded for the year ended June 30, 2009 versus $369,201 for the same period the prior year.
 
General and administrative expenses for the year ended June 30, 2009 were $1,490,821, as compared to general and administrative expenses of $2,188,440 for the same period ending June 30, 2008, representing a decrease of $697,619 or 31.9%. The decrease in general and administrative expenses was primarily due to consolidation efforts and staff reductions.

Other Income and Expenses
 
During the year ending June 30, 2009 we earned interest of $7,606 compared to $19,500 of earned interest in the same period ending June 30, 2008. Interest expense for the year ending June 30, 2009 was $1,176,397 versus $690,383 for the same period ending June 30, 2008.   Included in interest expense we also have recorded $411,059 and $420,622 for the amortization of debt discount for the year ended June 30, 2009 and 2008, respectively. We also recorded amortization of deferred offering costs for the year ended June 30, 2009 of $250,342 versus $184,691 for the same period ended June 30, 2008.

Net Income
 
Our net loss for the year ending June 30, 2009 was $8,446,541, as compared to a net income of $1,904,673 for the same period ending June 30, 2008, representing an increase of $6,541,868.  Net loss as a percentage of total revenues was -495.2.8% for the year ending June 30, 2009, as compared to net loss of 91.4% for the same period ending June 30, 2008.
 
Liquidity and Capital Resources
 
Cash Provided by Financing Activities
 
On August 25, 2008, we entered into a securities purchase agreement (the “Purchase Agreement”) with one investor pursuant to which we sold 555,556 shares of common stock, $0.001 par value (the “Common Stock”), and warrants to purchase 277,778 shares of common stock (the “Warrants”) to the Buyer for total proceeds of $100,000. The Warrants have an exercise price of $0.36 per share (the “Exercise Price”). The Warrants may be exercised at any time on or after the issuance date for a period of five (5) years. The Exercise Price may be adjusted upon stock dividends, stock splits, subsequent equity sales by the Company, pro rata distributions among our existing shareholders, the undertaking by us of a fundamental transaction, or voluntarily at the discretion of our Board of Directors.
 
Cash Flow Used in Operating Activities
 
Operating activities used cash of $294,329 for the year ended June 30, 2009, as compared to cash used of $2,166,365 for the same period ending June 30, 2008.   The decrease in cash used for operating activities for the year ending June 30, 2009 was primarily a result of cost reduction and consolidation efforts.
 
Cash Flow Used in Investing Activities
 
Investing activities used cash of $0 for the year ending June 30, 2009, as compared to cash used of $55,209 used for the year ending June 30, 2008. The cash used as of June 30, 2008 represented the leasehold improvements done on the Company’s offices at 55 Washington Street and certain computer and other office related equipment.
 
Capital Expenditures
 
We had no material capital expenditures during the year ended June 30, 2009.
 
Off-Balance Sheet Arrangements
 
We had no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

 
11

 

Critical Accounting Policies
 
Our discussion and analysis of the financial condition and results of operations are based upon Future Now Group Inc.’s financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Revenue Recognition
 
The Company derives its revenue from the sale of products and services that it classifies into the following three categories: (1) professional services; (2) software subscriptions, and (3) training and product sales.   The Company utilizes written contracts as the means to establish the terms and conditions upon which its products and services are sold to customers.

The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and related interpretations, SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 — Revenue Recognition. For arrangements outside the scope of SOP 97-2, the Company evaluates if multiple elements can be accounted for separately in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.

Professional service revenues -

Because the Company provides its applications as services, it follows the provisions of SAB No. 104, Revenue Recognition, and SOP 97-2, Software Revenue Recognition. The Company recognizes revenue when all of the following conditions are met:

 
§
there is persuasive evidence of an arrangement;

 
§
the service has been provided to the customer;

 
§
the collection of the fees is reasonably assured; and

 
§
the amount of fees to be paid by the customer is fixed or determinable.

Since the Company cannot allocate a fair value to the various elements of its contracts based on vendor-specific objective evidence, the Company recognizes revenue in accordance with contract accounting under the percentage-of-completion method. The professional service component of the monthly payment project is recognized as the services are performed. The Company recognizes revenues resulting from professional services sold separately from the licensing services as those professional services are performed.

Software Subscriptions

The Company derives its licensing revenue from selling software and methodology licenses to customers. The Company does not provide custom software development services or create tailored products to sell to specific customers. The software licenses are sold with certain post-contract services, installation and training. As such, the combination of these products and services represent a “multiple-element” arrangement for revenue recognition purposes. Since the Company cannot allocate a fair value to the various elements of its contracts based on vendor-specific objective evidence, the Company recognizes revenue in accordance with contract accounting under the percentage-of-completion method.

 
12

 

Deferred revenues

Deferred revenues consist of billings or payments received in advance of revenue recognition for our professional services, licensing and training services described above and we recognize them as revenue only when the revenue recognition criteria are met.

Equity/revenue sharing revenues

The Company derives revenue through revenue and equity sharing arrangements (“RSP/ESP Agreement”) whereby the Company participates in online revenue (“Revenue Participation”) increases resulting from the Company’s recommendations and in an effort to reduce the cash outlay by clients might take some fees as equity ownership (“Equity Participation”) in clients. Along with all RSP/ESP Agreements the Company will also take cash payments for licensing, training and support services. The Company’s policy as it pertains to recognizing revenue related to, such revenue is recorded as it is earned based upon stages outlined in the RSP/ESP Agreement.

Deferred Revenues
 
Deferred revenues consist of billings or payments received in advance of revenue recognition for our professional services, licensing and training services described above and we recognize them as revenue only when the revenue recognition criteria are met.
 
Research and Software Development Costs

Costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company determines technological feasibility when a working model has been completed. After technological feasibility is established, any additional costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, until the product is available for general release.   The Company will be considering the capitalization of research and software development costs next quarter because technological feasibility has almost been established for software being developed.

Debt Obligations with Warrants

Between the period of March 2007 and August 15, 2007, pursuant to an investment subscription agreement and closing documents (the “Offering”), we offered for sale three year 10.5% convertible promissory notes (the “Notes”), convertible into shares of our common stock. In the offering, we sold units consisting of $50,000 in Notes and seven-year warrants to purchase 16,000 shares of our common stock, at an exercise price of $0.75 per share (the “Warrants’). We issued Notes with a face amount of $675,000 and 216,000 Warrants. Under a placement agent agreement related to the Offering, we also issued placement agent warrants (“Placement Warrants”) in the amount of $28,161

In accordance with GAAP, we estimated the fair value of the Notes, Warrants and Placement Warrants. The initial fair value of the Notes reflected a fair value adjustment to the Notes for the estimated fair value of the Warrants issued in connection with this debt. The estimated fair value of the Warrants at the date of issuance, using the Black-Scholes valuation method, was $99,800, and has been recorded as a debt discount against the face value of the $675,000 Notes. This discount is being amortized as interest expense over the three-year term of the Notes. The initial fair value of the Placement Warrants that we are obligated to issue, using the Black Scholes valuation method, was $15,349, and has been recorded as deferred offering costs on the Financial Statements. The amount is being amortized over the three- year term of the Notes.

In connection with the share exchange, we received additional funding of $2,000,000 through the issuance of two year 11% convertible notes (“New Notes”) and stock purchase warrants (“New Warrants”) (both collectively referred to herein as, the “New Financing”). Along with the $2,000,000 face value of the notes we issued warrants to purchase 5,714,286 shares of our common stock, with one-half exercisable at $0.35 per share, and the other half at $0.50 per share, and with an expiration date that is five years from the date of issuance. Under a placement agent agreement amendment related to the New Financing, we also issued five-year placement agent warrants (“New Placement Warrants”) to purchase 571,429 shares of our common stock, at an exercise price of $0.35.

 
13

 

In accordance with GAAP, we estimated the fair value of the New Notes, New Warrants and New Placement Warrants. The initial fair value of the New Notes reflected a fair value adjustment to the New Notes for the estimated fair value of the New Warrants issued in connection with this debt. The estimated fair value of the New Warrants at the date of issuance, using the Black-Scholes valuation method, was $1,213,086 and has been recorded as a debt discount against the face value of the $2,000,000 New Notes. This discount is being amortized as interest expense over the three-year term of the Notes. The initial fair value of the New Placement Warrants that we are obligated to issue, using the Black Scholes valuation method, was $308,315, and has been recorded as deferred offering costs on the Financial Statements. The amount is being amortized over the two-year term of the New Notes.
 
Stock-Based Compensation

Stock-based compensation is a critical accounting policy for us, due primarily to the significant judgment required when estimating the fair value of stock-based compensation awards, including the selection of a valuation method (e.g., Black-Scholes) and the underlying assumptions within such valuation (e.g. estimated lives and volatility).

On January 1, 2006, we adopted SFAS 123(R) using the modified-prospective transition method. Under this transition method, compensation cost recognized during the year ended December 31, 2006 includes: (a) compensation cost for all share-based awards granted prior to, but not yet vested as of, January 1, 2006 (including awards granted prior to January 1, 2003), based on the grant-date fair values and related service periods estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on the grant-date fair values and related service periods estimated in accordance with the provisions of SFAS 123(R).

SFAS 123(R) clarifies and expands the guidance in SFAS 123 in several areas, including measuring fair value and attributing compensation cost to reporting periods. Changes prescribed by SFAS 123(R) include a requirement that we estimate forfeitures of share-based awards at the date of grant, rather than recognizing forfeitures as incurred as permitted by SFAS 123.

The fair values of restricted share rights are determined using the closing price of our common stock on the date of grant, while the fair values of stock options and stock purchase awards are estimated at the date of grant using the Black-Scholes option-pricing model. The estimated fair values of awards are amortized over the vesting period of the applicable award.

Effective July 17, 2007, FNI adopted the 2007 Stock Option Plan (the “Plan”). Subsequent to June 30, 2007, we have issued stock options related to the Plan and have accounted for such options as provided for above.

Allowances for Accounts Receivable

We record a sales allowance to provide for estimated future adjustments to receivables, generally resulting from credits issued to customers in conjunction with amendments or renewals of subscription service arrangements. We record provisions for sales allowances as a reduction to revenues. Specific provisions are made based on amendments or renewals associated with specific subscription service arrangements, which are expected to result in the issuance of customer credits. Additionally, provisions are made based on actual credits issued as a percentage of our historical revenues. We evaluate the estimate of sales allowances on a regular basis and adjust the amount reserved accordingly.

We make judgments as to our ability to collect outstanding receivables and provide allowances when collection becomes doubtful. Specific provisions are made based on an account-by-account analysis of collectability. Additionally, we make provisions for non-customer-specific accounts based on our historical bad debt experience and current economic trends. We record provisions in operating expenses. We write off customer accounts receivable balances to the allowance for doubtful accounts when it becomes likely that we will not collect the receivable from the customer.

 
14

 

Income Taxes

We make estimates to determine our current provision for income taxes, as well as deferred tax assets and liabilities, income taxes payable and any valuation allowances. Our estimates related to our current provision for income taxes are based on current tax laws. Changes in tax laws or our interpretation of tax laws could impact the amounts provided for income taxes in our financial statements. We assess the likelihood that we will be able to recover our deferred tax assets. Realization of our deferred tax assets is dependent upon future taxable income as well as our use of prudent and feasible tax planning strategies. Our estimates regarding future profitability may change due to future market and industry conditions, changes in tax laws and other factors. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, changes in tax laws, ongoing prudent and feasible profits and our stock price. To the extent we believe it is more-likely-than-not that some portion or all of our net deferred tax assets will not be realized, we establish a valuation allowance against the deferred tax assets. To the extent we establish or change a valuation allowance in a period, we reflect the change with a corresponding increase or decrease to our tax provision in the consolidated statement of operations.

Goodwill and Intangible Assets

The Company accounts for its goodwill and intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS 142, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Goodwill and intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset's estimated fair value with its carrying value, based on cash flow methodology.

Intangibles with definite lives are subject to impairment testing in the event of certain indicators. Impairment in the carrying value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 
15

 

ITEM 8.  FINANCIAL STATEMENTS.

Report of Independent Registered Public Accounting Firm
17
   
Consolidated Balance Sheets as of June 30, 2009 and 2008
18
   
Consolidated Statements of Operations for the years ended June 30, 2009 and 2008
19
   
Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the years ended June 30, 2009 and 2008
20
   
Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008
21
   
Notes to Financial Statements
22

 
16

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and
Stockholders of Future Now Group, Inc.
 
We have audited the accompanying consolidated balance sheets of Future Now Group, Inc. and Subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years then ended. Future Now Group, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits 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. The company 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 the company’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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 Future Now Group, Inc. and Subsidiaries as of June 30, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and is in a working capital deficit position that raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ Rosenberg, Rich, Baker Berman & Company
 
Somerset, New Jersey
December 8, 2009
 
17

 

Future Now Group Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2009 and 2008
 
   
6/30/09
   
6/30/08
 
             
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 34,138     $ 228,467  
Investment in available for sale marketable securities
    39,212       60,266  
Accounts receivable, net
    10,650       289,299  
Note receivable
    58,132       53,115  
Other current assets
    -       30,007  
Prepaid expenses
    73,333       219,996  
TOTAL CURRENT ASSETS
    215,465       881,150  
                 
Fixed assets, net
    -       44,706  
Investment in unconsolidated subsidiary, at cost
    -       82,000  
Deferred offering costs, net
    -       250,342  
Deferred tax asset
    -       1,037,985  
Intangible asset, net
    236,387       398,611  
Goodwill
    185,717       185,717  
Security deposits and other assets
    -       41,603  
Prepaid expenses
    -       73,340  
                 
TOTAL ASSETS
  $ 637,569     $ 2,995,454  
                 
LIABILIATIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 598,562     $ 384,820  
Derivative liability
    4,712,227          
Deferred revenue
    41,477       116,723  
Income tax payable
    1,500       1,350  
Current portion of convertible debentures, net of discount
    1,442,103       1,300,000  
TOTAL CURRENT LIABILITIES
    6,795,869       1,802,893  
                 
Convertible debentures, net of discount
    41,568       262,319  
TOTAL LIABILITIES
    6,837,437       2,065,212  
                 
STOCKHOLDERS' EQUITY(DEFICIT):
               
Preferred stock, $.001 par value, 50,000,000 shares authorized, none issued and outstanding
    -       -  
Subscription receivable
    -       (95,000 )
Common stock, $.001 par value, 900,000,000 shares authorized, 77,125,063 and 75,463,952 shares issued and outstanding, as of June 30, 2009 and 2008, respectively
    77,125       75,464  
Additional paid-in capital
    4,209,079       2,933,258  
Retained earnings
    (10,340,284 )     (1,893,743 )
Accumulated other comprehensive loss
    (145,788 )     (89,737 )
TOTAL STOCKHOLDERS' EQUITY(DEFICIT)
    (6,199,868 )     930,242  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
  $ 637,569     $ 2,995,454  

See Accompanying Notes to Audited Consolidated Financial Statements

 
18

 

Future Now Group Inc. and Subsidiaries
Consolidated Statements of Operations
For the Twelve Months Ended June 30, 2009 and 2008

   
Twelve
Months Ended
June 30 , 2009
   
Twelve
Months Ended
June 30, 2008
 
             
Revenues:
           
Subscription revenues
  $ 280,395     $ -  
Professional service revenues
    1,425,339       2,084,526  
Total Revenues
    1,705,734       2,084,526  
                 
Cost of Revenues
    463,020       638,697  
Gross Profit
    1,242,714       1,445,829  
                 
Operating expenses:
               
Marketing and sales
    336,197       360,112  
Research and development
    305,982       516,360  
Stock based compensation
    1,115,262       369,201  
General and administrative
    1,490,821       2,188,440  
                 
Total operating expenses
    3,248,262       3,434,113  
                 
Loss from operations
    (2,005,548 )     (1,988,283 )
                 
Other (income) expenses
               
Interest expense and amortization of debt discount
    1,254,482       690,383  
Change in the fair value of derivative liability
    3,861,262          
Amortization of deferred financing costs
    172,257       196,079  
Other expense
    114,683       84,389  
Realized capital gains
    -       (35,326 )
Total other expenses
    5,402,684       935,525  
                 
(Loss) before taxes
    (7,408,232 )     (2,923,808 )
Income tax provision (benefit)
    1,038,309       (1,019,135 )
                 
Net (loss) applicable to common shareholders
  $ (8,446,541 )   $ (1,904,673 )
                 
Comprehensive (loss):
               
Unrealized loss on available for sale marketable securities
    (56,051 )     (89,737 )
                 
Total comprehensive (loss)
  $ (8,502,592 )   $ (1,994,410 )
                 
Net (loss) per share – basic and diluted
  $ (0.11 )     (0.03 )
                 
Weighted number of shares outstanding - basic and diluted
    78,108,595       62,759,669  

See Accompanying Notes to Audited Consolidated Financial Statements

 
19

 

Future Now Group Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
for the Years Ended June 30, 2009 and 2008

   
Preferred
Stock
   
Common
   
Paid-In
   
Accum
Comp
   
Sub
   
Retained
   
Stockholders'
 
   
Shares
   
Par
Value
   
Shares
   
Par
Value
   
Capital
   
(Loss)
   
Rec'b
   
(Deficit)
   
Equity
(Deficit)
 
                                                                         
Balance, June 30, 2007
    -     $ -       44,400,000     $ 44,400     $ 285,099     $ -     $ (800 )   $ 10,930     $ 339,629  
                                                                         
Issuance of stock options
    -       -                       361,865                               361,865  
Issuance of additional placement agent warrants
    -       -                       1,137                               1,137  
Issuance of warrants with convertible debt
    -       -                       912,259                               912,259  
Conversion of convertible note
    -       -       675,939       676       225,418                               226,094  
Exercise of warrants
    -       -       1,110,000       1,110       88,890                               90,000  
Exercise of stock options
    -       -       2,363,893       2,364       112,635               (95,000 )             19,999  
Issuance of additional warrants bridge notes
                                    209,662                               209,662  
Recapitalization due to reverse merger
    -       -       22,785,548       22,786       (23,586 )             800       -       (0 )
Issuance of stock for share purchase
                    428,572       429       149,571                               150,000  
Elemental business acquisition
                    3,700,000       3,700       588,300                               592,000  
Issuance of warrants for services
                                    22,007                               22,007  
Change in fair value of marketable securities
    -       -       0       0       0       (89,737 )                     (89,737 )
Net loss for period
    -       -                                               (1,904,673 )     (1,904,673 )
      -       -                                                          
Balance June 30, 2008
    0     $ -       75,463,952     $ 75,464     $ 2,933,258     $ (89,737 )   $ (95,000 )   $ (1,893,743 )   $ 930,242  
                                                                         
Issuance of stock and warrants for share purchase
                    555,556       556       99,444                               100,000  
Change in fair value of marketable services
                                            (56,051 )                     (56,051 )
Stock issued for prepaid consulting services
                    2,500,000       2,500       567,500                               570,000  
Stock issued for quarterly Board compensation
                    44,444       44       11,956                               12,000  
Employee stock options
                                    321,522                               321,522  
Modification of employee stock options
                                    107,500                               107,500  
Stock options issued for debt guaranty
                                    82,052                               82,052  
Reduction to subscription receivable with separation agreement
                                                    25,000               25,000  
Officer compensation waiver
                                    154,408                               154,408  
Reduction to subscription rceivable with share relinguishment
                    (1,438,889 )     (1,439 )     (68,561 )             70,000               0  
Net loss for period
                                                            (8,446,541 )     (8,446,541 )
                                                                         
Balance June 30, 2009
    0     $ -       77,125,063     $ 77,125     $ 4,209,079     $ (145,788 )   $ -     $ (10,340,284 )   $ (6,199,868 )

See Accompanying Notes to Audited Consolidated Financial Statements

 
20

 

Future Now Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the Years ended June 30, 2009 and 2008
   
Year End
June 30,
2009
   
Year Ended
June 30,
2008
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss)
  $ (8,446,541 )   $ (1,904,673 )
Adjustments to reconcile net (loss) to cash used in operating activities:
               
                 
Change in deferred tax asset
    1,037,985       (1,020,484 )
Realized gain on sales of investment
    -       (35,326 )
Provision for doubtful accounts
    55,500       54,500  
Stock based compensation
    1,115,262       369,201  
Depreciation
    44,706       10,894  
Change in derivative liability
    3,861,262          
Amortization of prepaid interest
    220,000       146,667  
Amortization of debt discount
    446,507       420,622  
Amortization of intangibles
    162,223       11,389  
Loss on impairment of asset
    0          
Amortization of deferred offering costs
    250,342       184,691  
                 
Change in operating assets and liabilities:
               
Accounts and notes receivable
    223,149       (67,352 )
Prepaid and other current assets
    222,985       (331,340 )
Deferred offering costs
    250,342       (180,667 )
Income tax receivables/payable
    (150 )     8,831  
Accounts payable and accrued expenses
    213,742       149,765  
Deferred licensing fees
    -       (33,334 )
Deferred revenue
    (75,246 )     89,123  
Security deposit and other assets
    123,603       (38,872 )
Net cash used in operating activities
  $ (294,329 )   $ (2,166,365 )
                 
CASH FLOW FROM INVESTING ACTIVITIES:
               
Issuance of revolving credit facility
    -       (45,115 )
Proceeds from sale of investment
    -       35,326  
Cash acquired in EBI transaction
    -       4,880  
Equipment purchases and leasehold improvements
    -       (50,300 )
Net cash used in investing activities
  $ -     $ (55,209 )
                 
CASH FLOW FROM FINANCING ACTIVITIES:
               
Proceeds from stock option exercises
    -       20,000  
Proceeds from sale of common stock
    100,000       150,000  
Proceeds from warrant exercises
    -       90,000  
Proceeds from issuance of convertible debentures
    -       1,550,000  
Net cash provided by financing activities
  $ 100,000     $ 1,810,000  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (194,329 )     (411,574 )
                 
CASH AND CASH EQUIVALENTS at beginning of period
    228,467       640,041  
CASH AND CASH EQUIVALENTS at end of period
  $ 34,138     $ 228,467  
                 
Supplemental disclosure of cash flow information
               
Cash paid for:
               
Interest
  $ 16,823     $ 47,242  
Income Taxes
  $ 500     $ 1,250  
                 
Supplemental schedule of non-cash investing and financing activities
               
Deferred offering warrant costs
  $ -     $ 172,341  
Issuance of stock for services to be provided
  $ 550,000          
Debt discount on convertible notes
  $ -     $ 611,971  
Issuance of stock for board of directors quarterly retainer
  $ 12,000          
Contribution of deferred compensation to equity
  $ 241,481          
Forgiveness of promissory note
  $ 25,000          
Change in fair value of marketable securities for sale
  $ (56,051 )        
Conversion of convertible debt
  $ -     $ 225,000  
Promissory notes issued for option purchases
  $ -     $ 95,000  
Prepaid interest and deferred offering withheld from gross proceeds from the issuance of convertible debentures
  $ -     $ 550,000  
Receipt of marketable securities for engagement terms
  $ -     $ 150,000  
Acquisition of Elemental Business, Inc.
  $ -     $ 592,000  

See Accompanying Notes to Audited Consolidated Financial Statements

 
21

 

FUTURE NOW GROUP, INC. and SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2009
 
Note 1. The Company and Nature of Business
 
Future Now Group, Inc. (the “Company”) through its wholly-owned subsidiaries, Future Now, Inc (“FNI”), Intellectual Property Licensing Group, Inc,(“IPLG”), Future Now Consulting, Inc. (“FNCI”) and Elemental Business, Inc (“EBI”), provides online marketing optimization services and software solutions utilizing a proprietary methodology and supporting set of software tools that help businesses improve their online marketing to generate more sales, leads, and subscriptions. The Company’s proprietary Persuasion Architecture® framework delivers clients “blueprints” to plan, measure and improve their online sales and marketing initiatives.
 
On May 28, 2008, the Company completed a share exchange with EBI whereby the Company purchased all the outstanding common stock of EBI in exchange for the issuance of 3,700,000 shares of its Common Stock (See note 3).

Note 2.  Gong Concern
 
Liquidity.  As of June 30, 2009, we had $34,138 in cash.   We had $39,212 in marketable securities and $10,650 in accounts receivable, $6,580,404 in working capital deficiency, and an accumulated deficit of $10,340,284.   Our net loss and operating loss for the year ended June 30, 2009 was $8,446,541 and $2,005,548 million, respectively.   On April 13, 2009 an investor with $1,800,000 principal amount of convertible notes issued a default notice for non-payment.   These conditions raise substantial doubt about our ability to continue as a going concern.

The Company is presently in discussions with the investor that issued the default notice and is also exploring other potential financial transaction to restructure the Balance Sheet so as to continue to effectively pursue its business plan.    Once restructured the Company plans to continuing to look for additional capital as well as consider other strategic financial transaction and partnering opportunities.   Until such a time the Company plans to maintain its operations at bear minimum costs and management will continue to defer compensation as required.   No adjustment has been made in the accompanying financial statements to the carrying amount and classification of recorded assets and liabilities should we be unable to continue operations.

Note 3. Summary of Significant Accounting Policies
 
Use of Estimates
 
The consolidated financial statements of the Company have been prepared using accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from those estimates.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of FNI, IPLG, FNCI and EBI. All inter-company balances and transactions have been eliminated in the consolidated financial statements.
 
Concentration of Risk
 
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term marketable securities, long-term investments and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. For the year ended June 30, 2008, one customer represented 11% of our gross revenue.
 
Fixed Assets
 
Fixed assets consists of leasehold improvements and office equipment and is stated at cost less accumulated depreciation. Depreciation is determined by using the straight-line method over the estimated useful lives of the related assets, generally two to five years or the lease term.

 
22

 

Revenue Recognition
 
The Company derives its revenue from the sale of products and services that it classifies into the following three categories: (1) professional services, including, custom & packaged consulting; (2) software subscriptions, and (3) training and product sales. The Company has traditionally sold its services, products and licenses through customer referrals. The Company utilizes written contracts as the means to establish the terms and conditions upon which its products and services are sold to customers.
 
The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and related interpretations, SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 — Revenue Recognition. For arrangements outside the scope of SOP 97-2, the Company evaluates if multiple elements can be accounted for separately in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
 
Professional service revenues
 
Because the Company provides its applications as services, it follows the provisions of SAB No. 104, Revenue Recognition, and SOP 97-2, Software Revenue Recognition. The Company recognizes revenue when all of the following conditions are met:

 
§
there is persuasive evidence of an arrangement;

 
§
the service has been provided to the customer;

 
§
the collection of the fees is reasonably assured; and

 
§
the amount of fees to be paid by the customer is fixed or determinable.

The Company recognizes revenue resulting from professional services sold with licensing offerings (generally considered to be at the time of, or within 45 days of, sale of the licensing offering) over the term of the related professional services contract as these services are considered to be inseparable from the licensing service, and the Company has not yet established objective and reliable evidence of fair value for the undelivered element. Since the Company cannot allocate a fair value to the various elements of its contracts based on vendor-specific objective evidence, the Company recognizes revenue in accordance with contract accounting under the percentage-of-completion method. The professional service component of the monthly payment project is recognized as the services are performed. The Company recognizes revenues resulting from professional services sold separately from the licensing services as those professional services are performed.
 
Software Subscriptions
 
The Company derives its licensing revenue from selling software and methodology licenses to customers. The Company does not provide custom software development services or create tailored products to sell to specific customers. The software licenses are sold with certain post-contract services, installation and training. As such, the combination of these products and services represent a “multiple-element” arrangement for revenue recognition purposes. Since the Company cannot allocate a fair value to the various elements of its contracts based on vendor-specific objective evidence, the Company recognizes revenue in accordance with contract accounting under the percentage-of-completion method.

Deferred revenues
 
Deferred revenues consist of billings or payments received in advance of revenue recognition for our professional services, licensing and training services described above and we recognize them as revenue only when the revenue recognition criteria are met.

 
23

 

Equity/revenue sharing revenues

The Company derives revenue through revenue and equity sharing arrangements (“RSP/ESP Agreement”) whereby the Company participates in online revenue (“Revenue Participation”) increases resulting from the Company’s recommendations and in an effort to reduce the cash outlay by clients may take some fees as equity ownership (“Equity Participation”) in clients. Along with all RSP/ESP Agreements the Company will also take cash payments for licensing, training and support services. The Company’s policy as it pertains to recognizing revenue related to, such revenue is recorded as it is earned based upon stages outlined in the RSP/ESP Agreement. During the years ended June 30, 2009 and 2008, the Company entered into two RSP/ESP Agreements and has recorded the following revenue; (i) licensing fees of $30,000 (ii) support/training fees of $19,000; and (i) $150,000 worth of Equity Participation. The Company fully completed its obligations under one arrangement and is ongoing with the other.

The revenue booked for the Equity Participation was the market value of the Client’s public stock (“Market Value of Services”). As such the Company received 882,353 of the client’s common stock that was than trading at $0.17 on the date the RSP/ESP Agreement was executed. The Client launched the new website on January 17, 2008. The Company recorded the $150,000 market value of the Equity Participation during the quarter ended March 31, 2008 in the professional services revenue line of the statement of operations. As part of the RSP/ESP Agreement a protection feature (“Restricted Share Adjustment”) was negotiated whereby if at any time during the service period of this RSP/ESP Agreement the market price (“Market Price”) of the publicly traded Common Stock (“Common Stock”) times the shares held paid to the Company drops to 70% of the Total Equity Based Compensation amount or less for ten (10) consecutive days then all work shall cease. The Client will have the option to make up the difference in cash or additional Restricted Shares to return the value paid to the Company to the agreed upon original Market Value of Service level within 30 days. If the Client chooses not to exercise this option then the default provisions of this RSP/ESP Agreement shall be in force. If the default provision is made effective or if the client fails to launch the new website, the Company would receive an additional $50,000 penalty cash payment. Based upon the traded market price of the client common stock in late February and early March, the client issued to the Company an additional 1,172,442 restricted shares. The value of the additional shares was marked at $85,588 and was reflected as an adjustment to the value of the Equity Participation on the face of the Balance Sheet in equity as accumulated comprehensive adjustment. During the quarter ended March 31, 2008 the Company recorded a loss adjustment of $119,186 to the equity section. The Company will record any realized gains or losses in its Statement of Operation related to the Equity Participation only when sold. The Company’s policy is to recognize any additional shares received as part of the Restricted Share Adjustment provision as an offset to unrealized losses as reflected in the accumulated comprehensive loss amount in the equity section. Under the Restricted Share Adjustment provision, the Company received an additional 7,991,902 restricted shares in June that had a market value at the time of issuance of $119,879. As of June 30, 2008 the Company owed 10,046,697 restricted common stock of the client

The Company will recognize the Revenue Participation upon receipt of the proceeds.  For the year ended June 30, 2009, the Company recognized $35,000 in revenue related to this provision.

Cash and Cash Equivalents
 
The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents are comprised of money market funds. The carrying amounts approximate fair value due to the short maturities of these instruments.
 
Accounts Receivable
 
The Company’s accounts receivable are derived from a large number of direct customers. Collateral is not required for accounts receivable. The Company maintains an allowance for potential credit losses as considered necessary. The allowance for potential credit losses was $160,000 and $104,500 as of June 30, 2009 and 2008, respectively. The Company performs ongoing reviews of all customers that have breached their payment terms or for whom information has become available indicating a risk of non-recoverability. The Company records an allowance for bad debts for specific customers identified as well as an allowance based on its historical collection experience. The Company’s evaluation of the allowance for potential credit losses requires the use of estimates and the actual results may differ from these estimates.

Research and Software Development Costs
 
Costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company determines technological feasibility when a working model has been completed. After technological feasibility is established, any additional costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, until the product is available for general release. The Company has not capitalized any research and software development costs because technological feasibility has not been established for software being developed during the period ended June 30, 2009.

 
24

 
 
Goodwill and Intangible Assets

The Company accounts for its goodwill and intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible Assets.  Under SFAS 142, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Goodwill and intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset's estimated  fair value with its carrying  value,  based on cash flow methodology.  

Intangibles with definite lives are subject to impairment testing in the event of certain indicators. Impairment in the carrying value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value.  The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value.

Cost of Revenues
 
The Company’s cost of revenues primarily consists of personnel associated with the Company’s professional services as well as network operations.
 
Income Taxes
 
The Company provides for income taxes using the asset and liability method. Under this method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credit and loss carry-forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of future income tax assets is dependent upon the generation of sufficient future taxable income during the period in which the deferred tax assets are recoverable. Management assesses the likelihood that the deferred tax assets will be recovered from future taxable income and whether a valuation allowance is required to reflect any uncertainty. Management has determined that a full valuation allowance was necessary as of June 30, 2009.
 
Fair Value of Financial Instruments
 
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, income tax receivable, accounts payable and accrued expenses approximate their fair values due to the short term maturities of these financial instruments.
 
The fair value of the Company’s debt obligations approximates its carrying value as it is based on or about the current rates offered to the company for debt of the same maturities with similar collateral.
 
Recent Accounting Pronouncements

Effective July 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), which provides a framework for measuring fair value under GAAP. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS 157 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.

Effective January 1, 2009, the Company adopted FASB ASC Topic 805, Business Combinations (“ASC 805”). ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. ASC 805 also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 also provides guidance for recognizing changes in an acquirer’s existing income tax valuation allowances and tax uncertainty accruals that result from a business combination transaction as adjustments to income tax expense. The Company does not believe ASC 805 will have a material impact on the Company’s financial statements.

 
25

 

In April 2009, the FASB issued updated guidance related to business combinations, which is included in the Codification in ASC 805-20, Business Combinations – Identifiable Assets, Liabilities and Any Noncontrolling Interest (“ASC 805-20”). ASC 805-20 amends and clarifies ASC 805 to address application issues regarding initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. In circumstances where the acquisition-date fair value for a contingency cannot be determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency is recognized as of the acquisition date based on the estimated amount. ASC 805-20 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not believe ASC 805-20 will have a material impact on the Company’s future financial statements.

Effective January 1, 2008, the Company adopted FASB ASC 820-10, Fair Value Measurements and Disclosures – Overall (“ASC 820-10”) with respect to its financial assets and liabilities. In February 2008, the FASB issued updated guidance related to fair value measurements, which is included in the Codification in ASC 820-10-55, Fair Value Measurements and Disclosures – Overall – Implementation Guidance and Illustrations. The updated guidance provided a one year deferral of the effective date of ASC 820-10 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company adopted the provisions of ASC 820-10 for non-financial assets and non-financial liabilities effective January 1, 2009, and such adoption did not have a material impact on the Company’s results of operations or financial condition.

Effective April 1, 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and Disclosures – Overall – Transition and Open Effective Date Information (“ASC 820-10-65”). ASC 820-10-65 provides additional guidance for estimating fair value in accordance with ASC 820-10 when the volume and level of activity for an asset or liability have significantly decreased. ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not have an impact on the Company’s consolidated results of operations or financial condition.

Effective April 1, 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments – Overall – Transition and Open Effective Date Information (“ASC 825-10-65”). ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends ASC 270-10 to require those disclosures in all interim financial statements. The adoption of ASC 825-10-65 did not have a material impact on the Company’s results of operations or financial condition.

Effective April 1, 2009, the Company adopted FASB ASC 855-10, Subsequent Events – Overall (“ASC 855-10”). ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date – that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Adoption of ASC 855-10 did not have a material impact on the Company’s results of operations or financial condition.
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.

 
26

 

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition ) (“ASU 2009-13”) and ASU 2009-14, Certain Arrangements That Include Software Elements , (amendments to FASB ASC Topic 985, Software ) (“ASU 2009-14”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption.

Note 4. Business Acquisition

On May 28, 2008, the Company completed the acquisition of all the outstanding equity securities of Elemental Business, Inc. (“EBI”) pursuant to a Share Exchange agreement among the Company and EBI and EBI shareholders. As a result of this transaction, EBI became a wholly owned subsidiary of the Company. The total purchase price for the acquisition was $592,000, the fair value of the stock issued for the acquisition, and included the repayment of EBI’s existing bank credit facility at closing. The results of the operations of EBI from the date of acquisition are included in the consolidated financial statements.

EBI is in the business of online marketing optimization utilizing its proprietary technology. The technology was actually built on the concepts around the Persuasion Architecture® methodology.

Purchase Price Allocation: EBI’s results of operations are included in the Company’s statement of operation from the acquisition date. In accordance with SFAS 141, the total purchase price was allocated to EBI’s net tangible and intangible assets and liabilities based upon their fair value as of May 28, 2008. The Company employed the services of an independent valuation specialist to assist in the valuation and allocation of goodwill resulting from the acquisition. The following represents the allocation of the purchase price to the acquired net assets of EBI and the associated estimated useful lives:

   
Amount
   
Estimated Useful Life
 
             
Net Working Capital
  $ (3,717 )     -  
Trade Name
    40,000    
3 years
 
Proprietary Technology
    300,000    
3 years
 
Customer Relationships
    70,000    
3 years
 
Goodwill & Going Concern Value
    185,717    
Indefinite
 
                 
Total
  $ 592,000          

 
27

 
 
 
During the year ended June 30, 2009 the Company wrote off the remaining unamortized trade name in light of the new product release.  The total net written off was $25,556.
 
The following is unaudited pro forma information for the year ended June 30, 2008, as if the acquisition of EBI were consummated on July 1, 2006. The pro forma information is not necessarily indicative of the combined financial position or results of operations, which would have been realized had the acquisition been consummated during the period for which the pro forma financial information is presented.
 
   
2008
 
         
Revenue
 
$
2,215,683
 
         
Net (loss)
 
$
(1,957,613
)
         
Earnings per share – basic & diluted
 
$
(0.03
)

Note 5. Notes Receivable
 
In connection with one of the RSP/ESP Agreements, on February 25 th , 2008, the Company entered into a Revolving Line of Credit Agreement (the “Revolver”) whereby the Company granted the client a revolving credit line of $70,000. As of the date the Revolver was signed, the Company had expended $41,245 in third party design, programmer and ecommerce campaign efforts and such amount was treated as drawn down from the Revolver. The Company advanced an additional $3,870 to the client under the Revolver before its expiration. All sums advanced pursuant to the Revolver shall bear interest from the date each advance is made until paid in full at the rate of ten percent (10%) per annum, simple interest. The client shall pay accrued interest on the outstanding principal balance on a monthly basis commencing on April 15, 2008, and continuing on the fifteenth day of each month thereafter. The entire unpaid principal balance, together with any accrued interest and other unpaid charges or fees hereunder, shall be due and payable on the maturity date of May 1, 2009 (“Maturity Date”). As of the date of this report the note has not been paid and is accruing interest at the amount noted in the Revolver agreement. The Company has reflected the amount of the Revolver as a note receivable in the current asset section of the Balance Sheet. For the year ended June 30, 2008, the Company recorded interest income of $345 related to the Revolver.   As of May 1, 2009 the note went into default and started accruing interest at a rate of 18%.  During the year ended June 30, 2009  the Company recorded interest income of  $7,317.  However, the Company still has the option at any time to convert all or a portion of the outstanding principal and interest on the underlying promissory note (“Note”) related to the Revolver into a number of shares of common stock, $0.001 par value per share (the “ Common Stock ”) equal to a fraction, the numerator of which shall be the amount of principal and interest being so converted and the denominator of which shall be equal to the Conversion Price (the “ Conversion Shares ”). The “ Conversion Price ” shall be $0.05.   If at any time prior to the Maturity Date and/or full repayment of the Note, the Market Price of the Client’s Common Stock remains less than 75% of the Conversion Price for a ten (10) consecutive trading days (“Average Trading Price”) then the Conversion Price will be automatically adjusted down to the then calculated Average Trading Price. The adjustment feature will continue to adjust down should the Market Price continue to decline prior to repayment or conversion.

As part of the Revolver the Company also received 250,000 Common Stock purchase warrants. The warrants are exercisable at $0.25 for a period of five years from issuance. As of June 30, 2009 all the warrants remain outstanding. The warrants have a cashless exercise provision and are not redeemable by the client. The warrants also have standard anti-dilution provisions as it related to amount and price.

On April 15, 2008, the Company also entered into a promissory note arrangement with an employee for $8,000. The note carries an interest rate of 5% and is repayable on a monthly basis at $240.    The balance of the promissory note as of June 30, 2009, and 2008 was $5,700 and $8,000, respectively.

Note 6. Marketable Securities

We classify our investments as “available-for-sale” in accordance with the provisions of Statement of Financial Accounting Standards No. 115. “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). We do not have any investments classified as “trading”. Investments that we intend to hold for more than one year are classified as long-term investments.

 
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Available-for-sale securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. Unrealized losses considered to be “other-than-temporary” are recognized currently in earnings. The cost of securities sold is based on the specific identifications method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value.

At June 30, 2009, we maintained a portfolio consisting of common stock of two publicly traded entity.

Note 7. Investment in Unconsolidated Subsidiary
 
Alkemi International Pty Ltd Investment & Limited Term Licensing Agreement
 
On June 13, 2007, the Company entered into a licensing agreement, a stockholders agreement and a call option deed (all collectively, the “AIPL Agreements”) with Alkemi International Pty Ltd (“AIPL”). Under the AIPL Agreements, AIPL received a limited term exclusive licensing agreement (17 months) to resell and deliver the intellectual property of the Company in the Australian and New Zealand Territories and the Company would have a right to covert any monies owed per the Agreements from AIPL to ownership position in AIPL. On July 23, 2007, the Company delivered to AIPL notice to issue shares that totaled the outstanding balance due from AIPL as of June 13, 2007 to equity in AIPL (then amount was $82,000). An independent valuation company issued an opinion whereby the value of AIPL was set at $959,300 AUD (exchange rate 1.18619 or US$808,724) and as such the Company received an amount equal to $97,268 AUD$ or 159,897 shares of AIPL. The Company will continue to accrue monies owed from AIPL until a total of US$62,629 is due from AIPL. At such a time the amount will automatically be converted into additional shares of AIPL and the total ownership percentage at that time of AIPL by the Company will equal 15% of AIPL. Payments to the Company will then commence based upon the licensing agreement. The original agreement with AIPL began in 2004. This investment is being accounted for under the cost method.  For the year ended June 30, 2008, the Company was owed $28,624 under the AIPL Agreements for licensing fees. The Company has recorded such amount as an accounts receivable until such a time as it might convert or collect.

Based upon management review of the potential impairment of the asset, the Company wrote off all asset values related to AIPL.  On numerous occasion management requested financial information on the AIPL as well as status of the investment.   No response could be gathered and contact information on the AIPL was not valid any longer.  Accordingly, the Company wrote off its investment as of June 30, 2009.
 
Note 8. Convertible Debentures and Warrants
 
Bridge Convertible Notes
 
Between the period from March 1, 2005 through August 15, 2007, pursuant to an investment subscription agreement and closing documents, Future Now Inc. sold $675,000 in face value of 10.5% convertible promissory notes, convertible into shares of Future Now Inc.’s common stock (the “Offering”). Each $50,000 in notes included the issuance of seven-year warrants to purchase 148,000 shares of Future Now Inc.’s common stock, or like security issued in a qualified financing or acquisition, at an exercise price of $0.08 per share. The notes are redeemable at the earlier of either (i) repayment from the sales escrow redemption feature (the “Redemption Feature”); (ii) three years from the date of issuance; (iii) a financing transaction of at least $2,500,000 (the “Qualified Financing”); or (iv) the closing of a material acquisition of Future Now Inc., whether by merger, recapitalization, sale of assets or other similar material transaction (an “Acquisition”). At the note holders’ option, all, or a portion of, the principal and accrued interest on the notes may be converted into shares of the Future Now Inc.’s common stock along with a Qualified Financing or Acquisition. The number of shares into which the notes are convertible will equal the quotient of the converted principal and interest divided by the lower of (i) the price per share issued in a Qualified Financing or Acquisition, at a 20% discount, or (ii) $0.35. If the holder elects the conversion option, the minimum number of shares of common stock each warrant will convert into is 142,311. As additional protection against repayment of the notes, under the Redemption Feature, the Company will escrow three and one-half (3.5%) percent of its gross revenues in a separate bank account and pay down the notes, on a semi-annual basis, until such time as the total principal has been repaid (“Redemption Escrow”). Unless the notes are fully paid off, the first payment under the Redemption Feature will be due within thirty (“30”) days of the first anniversary of the notes, and then on a semi-annual basis thereafter. The notes were issued with warrants having expiration dates seven-years from issuance. The investors were granted an aggregate of 1,998,000 warrants to purchase shares of the Future Now Inc.’s common stock at an exercise price of $0.08 per share. Prior to the share exchange, $200,000 of the face amount of the notes and 1,110,000 warrants were converted into Future Now Inc.’s common stock.

 
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As part of the share exchange, the unconverted notes and warrants were assumed by the Company. For amendments to the registration rights and conversion price of the notes and warrants, the note holders received new warrants, with the same terms, equal to 100% of their unconverted warrants. The only amendment to the note holders’ registration rights was to grant the Company’s new investors in the New Financing (described below), the first right of registration in front of the existing note holders.
 
As provide for with the Redemption Feature of the Notes, during April 2008, the note holders received an aggregate principal payment of $75,891 which represented 3.5% gross sales for the period April 1, 2007 through March 31, 2008.   The Company failed to make such payment of principal during 2009.   Since April 2009, the Company has also failed to interest payment to note holders.   As of June 30, 2009, the principal balance of the bridge convertible notes was $356,625, net of $17,485 of unamortized debt discount and recorded $23,497 in accrued interest.   The note holders will now accrued at an 18% interest rate.
 
Share Exchange Convertible Notes
 
Immediately following the closing of the share exchange, the Company entered into two convertible note agreements, a securities purchase agreement, four warrant agreements, and a pledge and security agreement (collectively, the “Financing Agreements”), by and between the Company and two purchasers named therein. The Financing Agreements provide for the offering by the Company to the purchasers of $2,000,000 (the “New Financing”) in 11% secured convertible notes maturing on the second anniversary of the closing date of the New Financing. Interest on the notes was prepaid.
 
The notes will convert into shares of the Company’s common stock, at the option of the Company, at the conversion price. The conversion price is equal to the lowest of (a) the Fixed Conversion Price (as defined below), (b) the Lowest Fixed Conversion Price (as defined below), and (c) the Default Conversion Price (as defined below). The “Fixed Conversion Price” is $0.35 per share. The “Lowest Fixed Conversion Price” is the lowest of any new transaction price from any subsequent financing. The “Default Conversion Price,” applicable only after and during events of default, is the amount equal to 70% of the three lowest closing prices during the 20 days prior to a notice of conversion.  The Company will have the right to prepay all or part of the outstanding principal on the notes by giving the purchasers advance written notice of 10 trading days. The prepayment amount will be 115% of the prepaid principal during year one and 125% of the prepaid principal during year two.
 
Beginning on the first trading day of the sixth full month after the closing of the New Financing and on the first day of each month thereafter, the notes will be repaid in an amount equal to 5% of the principal amount of the notes. Prior to the effective date of a registration statement covering the shares of common stock issued in connection with the New Financing, such amount shall be paid in cash at 120% of the principal amount due. After the effective date, the amount shall be paid either in cash at 115% of the principal amount due or at the option of the Company, in shares of common stock at the lesser of the Fixed Conversion Price or 80% of the average of the closing bid prices of the common stock for the five trading days prior to the monthly payment date. The Company’s right to make payment in shares of its common stock is subject to a 4.99% conversion cap. The purchasers, in their sole discretion, can defer any or all monthly payments to any subsequent month.
 
The purchaser received (a) warrants to purchase shares of the Company’s common stock, equal to 50% of the issue date conversion shares exercisable at $0.35, and (b) warrants to purchase 50% of the issue date conversion shares exercisable at $0.50. 2,380,943 and 2,389,943 warrants were issued at $0.35 and $0.50, respectively. The warrant prices are subject to adjustment if there is a subsequent financing with a lower price. The expiration date will be the last day of the month in which the fifth anniversary of the effective date of a registration statement occurs. Warrant shares are to be included in the registration statement. Additionally, there is a cashless exercise right if the effective date has not occurred by the first anniversary of issuance or if the registration statement is no longer effective during any time when the warrants are still outstanding.
 
Additionally, the Company must file a registration statement to cover the purchasers’ interest shares of common stock, warrants and 200% of the number of shares of common stock equal to all of the shares issued or issuable on conversion of the notes and compensation stock no later than 60 days from the closing date of the New Financing and shall have a registration statement declared effective no later than 120 days from the closing date. Upon default of the above the Company shall pay, as penalties, to the purchasers 2% per month, in cash, of the principal amount of the notes for each 30-day period until the registration statement is filed or declared effective, as the case may be. The Company’s registration statement filed under Form S1 became effective on April 29, 2008. The Company incurred penalties for not have the registration statement deemed effective of $80,000. The penalty amount has been included in other expenses on the Statement of Operations.

 
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The purchasers agreed not to convert its notes or exercise warrants, and the Company will not be permitted to issue shares as interest, upon a payment date or pursuant to a mandatory conversion, to the extent such conversion, exercise or issuance would result in the purchasers’ beneficial ownership of more than 4.99% of the outstanding shares of common stock of the Company at that time. The Company will be authorized to rely on the purchasers’ representations as to the net amount of such purchasers’ holdings at the time of conversion or exercise. This limit will not apply under certain circumstances.
 
The first principal payment under the notes became due on April 30, 2008. The Company paid that amount and the May 30, 2008 payment in cash for a total of $240,000 which represented $200,000 in principal pay down and $55,000 in a risk premium expense.  For the payment due as of June 30, 2008 and beyond the Company elected to pay the amount in common stock.  As provided for the note documents the note holders elected to defer that stock issuance.  However, on April 13, 2009 the note holder issued a default notice for non-payment. The Company is presently in discussions with the investor that issued the default notice and is also exploring other potential financial transaction to restructure the Balance Sheet so as to continue to effectively pursue its business plan.    Based on the default, as of June 30, 2009, the Company has recorded all obligations under this New Financing as a current liability, $1,800,000 in principal and $195,000 in risk premium.   The Company has also recorded a derivative liability of $362,426 related to the default conversion feature of the New Financing.   Also related to the default the Company accelerated the debt discount amortization.   The remaining principal balance on the note will now accrue additional interest at a rate of 7%.
  
Note 9. Stockholders’ Equity
 
Common Stock
 
The Company is authorized to issue up to 900,000,000 shares of common stock and 5,000,000 shares of preferred stock both with par value of $0.001. The Company had 77,125,063 and 75,463,952 shares of common stock issued and outstanding as of June 30, 2009 and 2008, respectively.
 
On August 25, 2008, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with one investor pursuant to which the Company sold 555,556 shares of common stock, $0.001 par value (the “Common Stock”), and warrants to purchase 277,778 shares of common stock (the “Warrants”) to the Buyer for total proceeds of $100,000. The Warrants have an exercise price of $0.36 per share (the “Exercise Price”). The Warrants may be exercised at any time on or after the issuance date for a period of five (5) years. The Exercise Price may be adjusted upon stock dividends, stock splits, subsequent equity sales by the Company, pro rata distributions among the Company’s existing shareholders, the Company’s undertaking a fundamental transaction, or voluntarily at the discretion of the Company’s Board of Directors.

On January 30, 2009, the Board of Directors granted a total of 14,204,048 shares of the Company’s common stock to a total of eight company personnel as compensation for the retirement of a total of $214,481 in compensation that had been deferred since August 2008 (“Salary Conversion”).    The Salary Conversion included all compensation deferred up to and including January 31, 2009.   The number of shares received for the Salary Conversion was priced at the then current market price of the Company’s common stock which was $0.0151.    As part of the Salary Conversion, the Company agreed to pay 20% cash to the personnel to assist with the coverage of tax implications related to the conversion.   The total amount of such payment will be $42,896 and is to be paid on or before December 31, 2009.    As part of the agreement, the participants further agreed to defer all or a portion of their February salary as determined by the Chief Executive and Financial Officer of the Company.

On March 30, 2009, the Board of Director, by the agreement of all personnel that participated in the Salary Conversion, resolved to cancel the grant.   Such shares will be returned to Treasury.    Furthermore through written acknowledgement of the participants in the Salary Conversion all $214,481 that was accrued was waived by such participants.  Such amount was recorded in the Company statement of operations as an expense with the corresponding credit to paid-in-capital.   From February 1, 2009 through June 30, 2009 certain personnel again deferred their compensation.    Through June 30, 2009, $75,000 has been deferred and is recorded as a liability on the Balance Sheet.

Through a settlement agreement with the Company’s chief operating officer in April 2009 and a share relinquishment arrangement with the Chief Financial Officer, the Company has eliminated the subscription receivable of $95,000.

 
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Note 10. Stock Based Compensation
 
On July 18, 2007, through written consent in lieu of a special meeting of the stockholders and the Board of Directors (the “Board”) of FNI., the 2007 stock incentive plan was adopted (the “Plan”). As part of the share exchange the Plan was assumed by the Company. The Plan provides a maximum number of shares of the Company’s common stock that may be issued there under, which amount shall be equal to no more than 25% of the outstanding common stock of the Company, determined on the first trading day of each fiscal year. On July 18, 2007, the Board granted 5,337,250 options under the Plan to key employees and affiliated personnel (both, the “Grantees”). The options granted had an exercise price of $0.05 and were immediately vested. On September 15, 2007, the Board granted an additional 2,208,438 options to Grantees. The options had an exercise price of $0.06 and were immediately vested. Through written agreements, the Grantees further agreed in writing that the exercise price would reset to the price of the stock on the day the share exchange was completed. As consideration for this amendment and as a result of the recapitalization of the Company due to the reverse acquisition, the Company granted the Grantees additional options that represented 25% of the Grantees’ original option grants with the same terms and conditions upon the closing of the share exchange. The Company issued a total of 1,295,451 additional options. The Company considered the new options as part of the reverse acquisition and recorded no additional compensation.

On August 8, 2008, as part of a financial consulting agreement, the Company issued 2,500,000 shares of restricted common stock. The agreement is for a period of three years. The market value as of the date of issuance was $550,000. The Company has recorded the initial amount as a Prepaid Expense on the Balance Sheet with the corresponding credit to capital stock and additional paid in capital. The Company is amortizing that amount on a monthly basis over the three-year life of the agreement at a rate of $15,278 per month.    During the year ended June 30, 2009 the Company accelerated all the compensation related to this because the services are no longer being utilized.

On August 31, 2008, the Company issued a total of 44,444 shares of Company stock to its two independent board members as payment for their quarterly retainer fees. The Company recorded $12,000 in stock based compensation related to this issuance.

On October 28, 2008, the Board of Directors granted a total of 2,515,000 stock options to key employees of the Company. The newly issued options consisted of; (i) 2,500,000 five-year stock options issued to the Company’s Chief Financial Officer for a personal guarantee under a $500,000 working capital credit line with a bank.  The options were issued at market and are exercisable at $0.04 and vested immediately. Related to this grant the Chief Financial Officer canceled 1,250,000 stock options previously received for a personal guarantee that was executed related to an accounts receivable factor line of credit that has since been cancelled; and (ii) 15,000 stock options that vest over a four year period and are exercisable at $0.04.   In October 2008, 1,254,625 stock options were forfeited by certain employees related to the termination of their employment with the Company. Additionally, on October 28, 2008, the Company’s Board of Directors authorized to reduce the exercise price to $0.04 and extend the contractual term to five years from October 28, 2008 for an aggregate 7,469,743 fully vested stock options held by key management of the Company.  The revised terms of the stock options were accounted for as a modification in accordance with SFAS 123R.   The modification of the stock options was treated as an exchange of the original award for a new award.  In connection with the modification the Company recognized incremental compensation in the amount of $107,500 measured as the excess of the fair value of the modified award over the fair value of the original award immediately before its terms were modified.

Compensation expense is amortized on a straight line basis over the requisite service period for the entire award, which is generally the maximum vesting period of the award, and if necessary, is adjusted to ensure that the amount recognized is at least equal to the vested (earned) compensation. For the year ended June 30, 2009, the Company recorded total stock based compensation expense of $1,115,262.  Related to the issuance of options, as of June 30, 2009 the total unrecognized compensation cost related to unvested stock options was $82,599 which is expected to be recognized over a weighted average period of 3.4 years.
 
The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards and warrant issuances. The calculation of the fair value of the awards using the Black-Scholes option-pricing model is affected by the Company’s stock price on the date of grant as well as assumptions regarding the following:
  
·
Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price;
 
 
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·
The expected term represents the period of time that awards granted are expected to be outstanding and is currently the average of the contractual term and the vesting period. With the passage of time, actual behavioral patterns surrounding the expected term will replace the current methodology; and

·
The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award. An increase in the risk-free interest rate would result in an increase to the Company’s stock-based compensation expense.
 
Current stock option and warrant pricing assumptions:
 
   
For the Years Ended
June 30  
 
   
 
2009
 
2008
 
Market prices
 
$.012 - $.05
 
$.16 - $.50
 
Exercise prices
 
$.04 - $.06
 
$.16 - $.50
 
Expected lives
 
5
 
5
 
Expected volatility
 
115 %
 
115 %
 
Expected dividends 
 
-
 
-
 
Risk-free rate of return (weighted average)
 
3.0 – 4.0%
 
3.15 – 4.91%
 

Options

The following table sets forth all the Company’s common stock option activity and weighted average prices for the year ended June 30, 2009:
 
   
Shares
   
Weighted Average
Exercise Prices
   
Weighted Average
Remaining
Contractual Term
 
Stock Options
                 
                   
Outstanding at beginning of the year
    8,247,243     $ 0.33       4.75  
Granted
    12,594,743     $ 0.05       5.00  
Exercised
    -     $ 0.00       -  
Forfeited/Expired
    (9,974,368 )   $ 0.30       -  
Outstanding at the end of the period
    10,867,618     $ 0.065       4.95  
                         
Options exercisable at the end of the period
    10,450,000                  
 
Warrants
  
The following table sets forth all the Company’s common stock warrant activity as of June 30, 2009:

   
Warrants
Outstanding
   
Weighted
Average
Exercise Prices
   
Weighted Average
Remaining
Contractual Term
(years)
 
Outstanding at the beginning of the year
    9,046,979     $ 0.41       5.6  
Issued
    277,778       0.36       4.7  
Exercised
    -       0.00       -  
Expired
    -       0.00       -  
Outstanding at the end of the period
    9,324,757     $ 0.40       4.7  
Vested
    9,324,757     $ 0.40       4.7  
Exercisable at the end of the period
    9,324,757     $ 0.40       4.7  
 
 
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Note 11. Income Taxes

Loss before income taxes consisted of the following:

   
Twelve Months Ended June 30,
 
   
2009
   
2008
 
                 
Loss before income taxes
  $ (7,589,111 )   $ (2,923,808 )

The components of the provision (benefit) for income taxes are as follows:

   
Twelve Months Ended June 30,
 
   
2009
   
2008
 
Current
           
Federal
    -       -  
State
    1,500       1,100  
Local and franchise
            250  
Total current tax provision
    1,500       1,350  
                 
Deferred
               
Federal
    892,795       (874,806 )
State
    145,339       (145,679 )
Local and franchise
    -       -  
Total deferred tax benefit
    1,038,134       (1,020,485