Attached files

file filename
EX-10.3 - HIPCRICKET, INC.ex10-3.htm
EX-10.1 - HIPCRICKET, INC.ex10-1.htm
EX-31.1 - HIPCRICKET, INC.ex31-1.htm
EX-32.1 - HIPCRICKET, INC.ex32-1.htm
EX-10.7 - HIPCRICKET, INC.ex10-7.htm
EX-10.9 - HIPCRICKET, INC.ex10-9.htm
EX-10.4 - HIPCRICKET, INC.ex10-4.htm
EX-10.13 - HIPCRICKET, INC.ex10-13.htm
EX-10.11 - HIPCRICKET, INC.ex10-11.htm
EX-10.12 - HIPCRICKET, INC.ex10-12.htm
EX-10.14 - HIPCRICKET, INC.ex10-14.htm
EX-10.10 - HIPCRICKET, INC.ex10-10.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2010

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to ____________________

Commission file number 333-57818

Augme Technologies, Inc.
(Name of issuer in its charter)

Delaware
20-0122076
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification
No.)

43 West 24th Street, Suite 11B
New York, NY 10010
(Address of principal executive offices, including zip code)

(800)  825-8135
(Issuer’s telephone number)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined Rule 405 of the Securities Act.
Yes [  ] 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 to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]   No [  ]

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

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in  Part III of this Form 10-K or any amendment to this Form 10-K. [x]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ]   Accelerated filer [ √ ]   Non-accelerated filer [  ]   Smaller reporting company [ ]

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

 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the OTC Bulletin Board on May 28, 2009 was $56,745,292.

The number of shares outstanding of the issuer's Common Stock, $0.0001 par value, on May 28, 2010 was 57,456,977.
 
DOCUMENTS INCORPORATED BY REFERENCE

None
 
 
 
 
 
 
 
 
 
 
 
 
 

 
Augme Technologies, Inc.
Form 10-K for the Year Ended February 28, 2010

TABLE OF CONTENTS

PART I
   
     
Item 1.
Description of Business
4
Item 1A.
Risk Factors
11
Item 1B.
Unresolved Staff Comments
17
Item 2.
Description of Property
17
Item 3.
Legal Proceedings
17
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
27
Item 6
Selected Financial Data
24
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
25
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 8.
Financial Statements
F-1
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
30
Item 9A.
Controls and Procedures
30
Item 9B.
Other Information
31
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
31
Item 11.
Executive Compensation
36
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
42
Item 13.
Certain Relationships and Related Transactions, and Director Independence
44
Item 14.
Principal Accounting Fees and Services.
44
     
PART IV
   
     
Item 15.
Exhibits and Financial Schedules
44
 
 
 
 

 
PART I

ITEM 1. DESCRIPTION OF BUSINESS

Augme Technologies, Inc., formerly Modavox, Inc., is a technology and services leader in interactive marketing platforms that enable marketers and advertising agencies to seamlessly integrate brands, promotions, video and other digital content through the power of the Internet and mobile communications. Augme’s intuitive new media marketing platforms give companies the control they need to quickly create, deploy and measure rich-media, interactive marketing campaigns across all networks and devices. Campaigns built on Augme marketing platforms condense the customer loyalty cycle by delivering personalized brand experience to customers where they work, play and live. Through its three operating divisions including mobile marketing (AD LIFE™), video content broadcasting and delivery (AD BOOM™) and ad network provisioning (AD SERVE™), Augme is connecting brands and content to consumers in a network of mobile and multimedia experiences enabling companies and their advertising agencies to increase marketing ROI and further monetize brand interactions.

Intellectual Property

Augme owns the “Method and System for Adding Function to a Webpage” portfolio of patents.  The Augme patents teach technical methods/systems enabling the dynamic customization of Web pages based upon user (Web site visitor) information (such as browser type, geographic location, behavioral data, etc.).  US Patent No. 6,594,691, was issued on July 15, 2003, and is titled “Method and System for Adding Function to a Webpage.”  US. Patent No. 7,269,636, was issued on September 11, 2007, and is titled “Method and code module for adding function to a Web page.” The ‘636 Patent is a continuation patent based on the ‘691 Patent and incorporates Claims that reflect how concepts from the ‘691 Patent are implemented in state-of-the-art delivery infrastructure and delivery practices seen in the marketplace today.
 
The Augme patents teach a two-code-module system that enables any networked content to be customized based on end-user criteria. The Augme patents thus enable a single Web page (traditional Internet and mobile Web) to have an infinite number of tailored service responses that allow Web page visitors to receive content that is customized to the user’s unique computing environment, connectivity, bandwidth level, geographic location, gender, age, or any other information about the Web page visitor (targeting criteria) such as behavioral marketing data.  Augme’s two-code-module Web page customization process has widespread application in the fields of Targeted Advertising, E-Commerce, Mobile Marketing/Advertising and other customized content delivery operations.

Augme’s patented methods and systems use Web browsers which adhere to the standards for Hypertext Transfer Protocol (HTTP) and add function to a Web page through an easily distributed software code module.  The method and system deliver responses to client (computer user) browser requests that are customized based upon visitor information and preferences.  When a Web page is downloaded, the technology automatically executes a first code module embedded in the Web page.  The first code module issues a first command to retrieve a second code module, via a network connection, from a server system.  Then, a second code module is assembled based upon the visitor information.  Finally, a the assembled second code module, with a service response, is returned to the visitor’s browser, where, upon execution, the response is rendered on the visitor’s processor platform (computer).

Augme’s patents have been cited on at least six occasions in third party filings with the U.S. Patent Office, including by Oracle, IBM, Sun Micro Systems and Hewlett Packard, in support of their own invention filings.

Augme believes that the methods and systems taught by its patents are being widely used in various Internet-based (including the mobile Web) industries and business verticals, including but not limited to “behavioral targeted advertising.”  Behavioral targeted advertising is the fastest-growing segment of Internet advertising, with expected growth from $575 million in 2007 to $3.8 billion in 2011. Internet advertising as a whole is expected to more than double from $21.7 billion in 2007 to $50.3 billion in 2011.

Augme is engaged in several legal disputes with companies which Augme alleges are infringing the Augme patent portfolio.  Currently pending patent infringement lawsuits and related matters are described in Part I, Item 3 (“Legal Proceedings”).

Augme’s patents are an integral and foundational component of Augme’s technology platforms and services as well as providing potential for attractive partnership opportunities with third parties who have been identified to license the technology within prescribed market verticals.  As Augme works to attain legal victories in currently pending patent infringement lawsuits, it is also pursuing certain strategic licensing arrangements with companies that Augme has identified as using Augme’s patented methods and processes.  In addition, Augme is obtaining organic licenses through Augme’s clients’ use Augme’s core technology Platforms – AD LIFE™ (mobile platform), AD Boom™ powered by Boombox® (video platform), and AD SERVE™ (ad-serving platform).  As part of these efforts, Augme’s Chief Technology Officer has prepared a study in conjunction with patent counsel detailing perceived use of the Augme patented methods and systems within the Mobile Marketing/Advertising Industry.
 
-4-

 
Augme’s Portfolio Detail

METHOD AND SYSTEM FOR ADDING FUNCTION TO A WEB PAGE
Initial Patent
Patent #:      6594691
Filing Date:  10/28/1999
 
Continuation #1
Patent #:      7269636
Effective Date:  10/28/1999
Issue Date:  09/11/2007
   
Assignment: Augeme Technologies, Inc.
 
4636 E. University Dr., Ste 275
 
Phoenix, AZ 80354
 
Phone: 602.648.6080
 
Fax: 602.648.6081
 
Related and Pending 6594691 Filings:
 
Filed: 08/17/2007
Divisional Filing – Positive Indication on Issuance from U.S.P.T.O.
 
“Appliance” Patent Filed with Petition to Make Special

Filed: 09/17/2007
2nd Continuation Filing – Pending
 
With the appointment of Mark Severini as the Chief Executive Officer in April 2009 and the Company's subsequent acquisition of the assets of New Aug, LLC, our company began deploying products, services and technology within the mobile marketing marketplace. On July 14, 2009, the company completed the acquisition of one hundred percent (100%) of the business and assets of New Aug, LLC, a provider of a web-based marketing platform that provides marketers, brands and advertising agencies the ability to create, deliver, manage and track interactive marketing campaigns targeting mobile consumers through traditional print advertising channels. The results of New Aug, LLC’s operations have been included in the consolidated financial statements of the Company since that date. New Aug, LLC now operates as the Division now known as AD LIFE™. The integration of a mobile marketing division has expanded the reach of the overall strategy to develop, commercialize, and monetize our technological assets within the advertising and marketing industries, complementing pre-existing online targeted advertising initiatives to bring together a comprehensive strategy that fully leverages our core technology capabilities and IP claims.

 
-5-

 
In an effort to support Augme’s FY2010 business strategy, and in conjunction with the repositioning of other corporate assets earlier in FY2010, Augme disposed of certain tangible and intangible assets and certain liabilities and transferred certain obligations related to Internet Radio services. This transaction, effective December 31, 2009, transferred the business operations of our Internet Radio services to World Talk Radio, LLC (“WTR”), an Arizona based Limited Liability Company  owned and operated by VoiceAmerica co-founder and ten year veteran Jeff Spenard, the former President of Internet Radio and former Board Member of the Company.

The disposition of the Internet Radio operations resulted in an immediate reduction in expenses. Furthermore, as part of the strategy to streamline operations and to create non-encumbered revenues to support growth businesses, we will receive a perpetual royalty as a percentage of gross revenue generated by WTR for as long as the new entity provides Internet radio services according to the following graded schedule:

 
(i)
January 1, 2010 through March 31, 2010 – 5% of Gross Revenue

 
(ii)
April 1, 2010 through June 30, 2010 – 10% of Gross Revenue

 
(iii)
July 1, 2010 through June 30, 2015 – 15% of Gross Revenue

 
(iii)
July 1, 2016 and after – 5% of Gross Revenue


With the disposition of the Internet Radio operations, Augme now manages three operating divisions branded under “Augme” – derived from the verb Augment: to make something greater by adding to it. The Augme branded portfolio offers products and services based upon Marketing Driven Technology Platforms that enhance the delivery of marketing communications through intelligent distribution to all Internet-enabled devices. The current (FY2010-2011) business strategy is primarily focused generating near-term revenue from AD LIFE and AD BOOM. Meanwhile, AD SERVE has the potential to provide an incremental revenue stream for stand-alone ad provisioning, yet more importantly it represents an opportunity to serve in a complementary role to add value to the other divisions, tying together a comprehensive offering to create a one-of-a-kind suite of Marketing Driven Technologies. We believe these three divisions together with our patents essential to behavioral targeting will enable us to pioneer a new era in marketing and new media communications with Internet applications and services for targeted consumers and communities worldwide.

For a complete overview of the technology and our offerings, visit www.augme.com.

AD LIFE - Mobile Marketing

AD LIFE is our interactive platform to provide marketers, brands and advertising agencies the ability to create, deliver, manage and track interactive marketing campaigns targeting Mobile Consumers through traditional print advertising channels.

Mobile phones are a way of life. There are over 240 million cell phone subscribers in the United States out of a total population of over 300 million. Each cell phone user is a “Mobile Consumer” – exposed to an average of over 80,000 ad impressions annually that could be augmented by interactive mobile marketing messages. Meanwhile, over $150 billion is spent in the US on traditional print marketing media across six major channels: magazine, point-of-purchase, newspaper, free standing inserts (“FSI”), out-of-home, and direct mail. Packaging also has become a recognized marketing medium, as consumer packaged goods companies are increasingly leveraging the package as a means to communicate with consumers.

Despite the proliferation of sophisticated mobile devices and the enormous marketing value promised by interacting directly with mobile consumers, marketers continue to struggle to find an easy, affordable, and effective way to fully integrate mobile into existing marketing and advertising campaigns. Augme solves this “mobile marketing puzzle” through a comprehensive platform that fully integrates all the tools and technologies required for traditional print media channels to deliver digital interactive marketing content on-demand to the mobile consumer.
 
-6-

 
For clients – including major consumer brands and their advertising agencies – AD LIFE augments advertising media with mobile interactivity to enhance and extend communication, persuasiveness, and effectiveness of existing campaigns. For Mobile Consumers, AD LIFE is an engine allowing them to respond to advertising by easily connecting to on-demand content and promotions (such as coupons, product information, web links, video/music downloads) printed in advertising media they see every day.

The competitive landscape for mobile marketing applications and services has historically been highly fragmented, comprised of mostly niche providers offering specific components of the required technology and services required for the implementation of a complete mobile marketing campaign. Over the past six months, we have seen noticeable progress by our mobile marketing competitors. Venture capital and private equity financing is aggressively moving into our space, bringing significant capital to consolidate small niche players into more comprehensive competitive threats. What was for a long time a very fragmented mobile marketing industry is quickly consolidating to create new and more formidable competitors. We believe AD LIFEmaintains a time-to-market advantage with our strategic vision, our integrated and comprehensive technology platform, and our sales strategy.  We are closing contracts and delivering service to some of the largest consumer product and pharmaceutical brands, and we continue to build out our channel partner strategy with media purveyors and ad agencies across multiple industries.

AD LIFE enables marketers, brands, and advertising agencies to easily create, deliver, manage, and track interactive mobile marketing campaigns through a comprehensive web portal with four fully integrated and forward thinking components.

Consumer Response: Turnkey tools to create and assign Consumer Response Tags (“CRTs”) that allow consumers to use their mobile phone to easily and instantly access on-demand digital content. Augme Mobile’s open architecture offers the widest variety of CRTs in the market today, including SMS, 2D codes, Logo, and Audio recognition.

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

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

Promotional Partnerships: Access to pre-negotiated and readily available branded content to complement existing promotions. These include rebates and coupons that operate through a partnership with Inmar – the nation’s leading promotions transaction settlement provider, and many additional applications and services fully integrated with leading technology and service partners.

Technical partnerships are a critical differentiator for the AD LIFEplatform, demonstrating our vision and success in building and integrating leading edge mobile marketing solutions. In FY2010 we announced a number of unique and valuable technical integration partnerships. Our collaboration with Inmar – the nation’s leading promotions transaction settlement provider – enables consumer directed rebate charity program (initially used by our client Springer Mountain Farms). We delivered the SmartSource mobile coupon program for News America Marketing, offering top national brand coupons available exclusively through the mobile phone. We also announced the successful integration and deployment of Scanbuy’s mobile multi-barcode scanner application and its new ScanLife Packaging Connect barcode registration solution into the AD LIFE™ mobile marketing platform, enabling product manufacturers and packaging companies to seamlessly link existing UPC, EAN or ISBN barcodes to the AD LIFE™ platform’s content creation, delivery, tracking and behavioral analytics tools, thereby providing consumers the opportunity to enhance their shopping and brand experiences.

Our advanced, comprehensive, and fully integrated AD LIFE mobile platform drives revenue primarily through license fees, marketing campaign fees, and fees associated with certain add-on promotional applications in the platform. Additional revenue is generated by platform administration and professional service fees related to the mobilization of client content and implementation of marketing campaigns through the platform.

As an early stage business in an emerging market, AD LIFEcurrently has a small number of clients and relatively low revenue, whereby each client is an important piece of our revenue base. However, as our client base grows throughout the current fiscal year, our revenue will naturally and quickly spread and become less dependent on any one client.

The AD LIFE sales strategy emphasizes indirect sales channel partnerships which continues to show progress since the acquisition of New Aug, LLC, highlighted by our ongoing working relationships with top traditional media purveyors in the US such as Graphic Packaging International, Shorewood Packaging (International Paper), News Corp’s News America Marketing (a division of News Corp), Verifone (formerly Clear Channel). These larger, more established firms create immediate credibility and build brand awareness and lead generation for Augme through their strong existing client relationships. Augme has also expanded the scope of the indirect sales channel to include advertising agencies of all sizes, leveraging the scalability of the AD LIFE platform and expanding the reach of our sales efforts by enabling these agencies to immediately offer a mobile component to their existing client base. The indirect sales channel strategy allows Augme to keep sales costs lower while greatly expanding the reach of our overall sales efforts by leveraging the sales agents of our partners.
 
-7-

 
AD LIFE continues to validate its growth plan of becoming the premier mobile marketing provider for the worlds largest consumer product companies and their marketing agencies. By integrating the AD LIFE platform within the marketing technology function of these formidable clients, we anticipate annuitized growth as the platform is utilized across multiple brands under a single master contract. We have historically referred to the initial sales engagements with these clients as “proof of concept” – whereby we serve to augment existing marketing initiatives around a single brand in their portfolio. Our strategy has been to demonstrate our ability to seamlessly and effectively add and execute a mobile component to a marketing campaign of that single brand, enabling us to win incremental business with additional brands under an existing master service agreement with the multi-brand client. We generate revenue from the single-brand proof-of-concept execution, but more importantly we earn credibility and trust company-wide to win business with brands across the client’s portfolio. This strategy continues to progress, as we were recently awarded an incremental sales opportunity from an existing customer – one of the largest consumer product companies in the US – to expand our relationship to include additional brands in their portfolio.

In addition to targeting consumer product brands, the AD LIFEplatform has tremendous potential within specific vertical markets. In order to most effectively address one of the most active mobile marketing segments, we created Augme Mobile Health, which is the AD LIFE platform modified for the unique needs of the health care and pharmaceutical industry. This HIPAA-compliant mobile interactive technology offering enables marketers of prescription-drugs and their agencies to communicate with patients, health care providers, and consumers instantly through mobile phones, capturing them at point-of-prescription or point-of-purchase.

AD BOOM - Video Content Delivery, Featuring BoomBox® Technology

AD BOOM – the Division created  around our pre-existing and market-proven BoomBox® technology – is an intelligent Broadcast as a Service (BaaS) platform, now newly packaged and designed specifically for marketers and content owners, designed for marketers and clients who want to sell, promote, extend and enhance their content through a viral Internet distribution model. AD BOOM features the BoomBox® Video suite of applications and services to deliver content straight to desktops and Internet-enabled devices, and provides managed access for live and on-demand Internet broadcasting, e-learning and rich media advertising.

We believe the market for the monetization of video content delivery is ready to increase significantly, as all major media companies and content owners of all sizes face increased pressure to monetize their video content to survive. We further believe there is a large underserved market opportunity within the Internet PPV and we are establishing a leadership role in the space and applying exclusive patented targeting technology as barrier to competitors.

In recent months, the AD BOOMTM team has completed the necessary technological development, competitive analysis, platform specific business plan, and go-to-market strategy to successfully compete in the market. AD BOOMTM will be launching an updated, dedicated website and multimedia marketing initiative in Q2FY2011. The company believes AD BOOMTM is now poised with a highly competitive product offering to make an unabashed financial contribution through customer acquisition and revenue production, contributing to top-line revenues and bottom-line profit by the end of this fiscal year.

AD BOOM is a patented, secure video platform ideal for broadcasting both live and on-demand video content across any computing platform or mobile device. Our customers have full access to user-friendly BoomBox® Software as a Service (SaaS) admin portal, where they have the ability to fully customize their video player’s look, feel, social syndication functions, geo restrictions, SEO metadata and much more. Unlike most Video Platforms today, the BoomBox® also offers full web-page publishing tools; which means, if you do not have any existing web presence but have video you wish to share with the world, we can help you create a fully contextual web experience. Conversely, if you do have a preexisting web experience, we provide you with a variety of widget templates to choose from so that your BoomBox® video player fits perfectly into your existing environment.

We provide easy-to-use templates and tools for anyone to become a video broadcaster. Since our platform offering is SaaS our customers can manage their player/ page look and feel, content & distribution from any computer with web access, which relieves the burden of purchasing and hosting proprietary software, meaning the BoomBox® platform is incredibly convenient and saves our clients’ time, money & precious space on their hard drives. We are equipped to accommodate virtually any video format; HTML, Flash, Microsoft Silverlight and coming soon, HTML5 which is the new, preferred format for iPhone & iPad.
 
-8-

 
Along with our end-to-end platform and broadcast capability comes unique monetization offerings. For clients who wish to execute a full web-page broadcasting experience, our templates come with a variety of combinations of banner inventory (IAB standard 728x90, 300x250, 160x600 and more). Available in full-page and widget applications are in-player logo integration options, in-player pre, mid & post-roll and sponsor watermarks.

On top of all of this, we understand that not all video is created equal and there may be times where premium content needs to be gated and charged for.  As a solution, we offer our BoomBox Box Office that allows publishers to charge users a pay-per-view or subscription fees for access to content. Customers can leverage our in-house shopping cart to capture revenue or we can hook our Box Office up to an alternative source for revenue collection. The BoomBox® platform offers real-time analytics so our customers can see exactly who is watching, where they are, and how long they have tuned in.

The BoomBox® video platform, which has been built over 10 years, leverages the support of two US patents which outline our company’s ownership of the solution which identifies devices, bandwidth, bit rate, browser, geography, and any other predetermined parameter, allowing us the ability to deliver fully formatted and customized content based on end user criteria. This means that your video content will render perfectly across any device, including mobile

The Online Video Platform market is rapidly evolving, with many emerging applications and utilizations of Internet video still in their infancy and large underserved markets in the space of events and venues, franchise operations, and corporate communications (HR, IR, PR).  Some competitors have established greater name recognition and resources than Augme has established do and will continue to undertake more extensive marketing campaigns. Largely, Augme has and may continue to be out invested in the area, technologically as well as advertising and promotion. In addition, these competitors may adopt more aggressive pricing policies than we do. However, Augme has distinct advantages over many of our current and potential competitors particularly in the emerging applications described above.  Moreover, many competitors may infringe upon the Augme IP and are accumulating damages that Augme is focused on collecting over the long term.  In essence the larger our competitors get so too do the damages and royalties owed to Augme. The most comparable and recognized players include Brightcove, Episodic, Ooyala, LiveStream, Kit Digital, and Monetize Media. Our BoomBox® player is technologically on par with each of the players mentioned above, which is an impressive realization given that many of our competitors have received far more significant outside funding and venture capital to develop their technology. Furthermore, we have identified three key development marketing and product packaging initiatives which will soon be underway, to further enhance the BoomBox® platform to add the edge we need to continue to compete successfully in the emerging areas in this space. Our advancements will be incorporated and deployed by the end of Q2FY2011.

AD BOOM has complete International Pay-Per-View for NBC Universal Artists and professional sports operations that have proven out a model that is now being aggressively marketed to customers in three primary verticals.  Owners and operators of Events and Venues, Franchise Operations and Multi Unit Operators, and Internet/Mobile Publishers are focal point of the current marketing initiative. BoomBox® continues to be used to power NBC, CBS, ABC, and FOX affiliates, delivering Internet broadcasts of network feeds from satellite remotes, high school sports stadiums, extreme weather alerts, and field reports to website visitors, often during hours outside the normal television broadcasting schedule. Augme has also developed interactive broadcasting platforms for clients including Bank of America (Merrill Lynch), and continues to build on enterprise configurations of the software that have been developed for Advanced Equities Corporation, Sudler & Hennessey, NAACP, Arizona State University, University of Arizona, Georgetown University, State of Arizona, State of New Mexico, The Arizona Republic, The Detroit Free Press, Village Voice and the New York Times.

Roughly $4,000 in passive revenue is captured each month from licensing, hosting and transfer fees of existing legacy deals. Leveraging the latest version of the AD BOOM platform scheduled for release in Q2FY2011, our residual passive revenue stream will increase with new sales as well as upselling to our existing client base interested in added features and functionality. Current clients include: West Virgina Media Holdings, DeMartini Seminars, Bank of America, XA The Experiential Agency, and Broadcast Media Incorporated (BMI) amongst others.

A recent client for AD BOOM is Comfort Zone Yoga Center for Whole Self Healing. Augme is building fully custom video network and web experience, utilizing our Box Office feature to monetize training videos via monthly subscription, live pay-per-view & on-demand pay-per-view options. This recently executed contract is a template for going forward AD BOOM engagements, generating revenue for production and delivery of content (pay-per-view and on-demand), plus residual passive per month licensing, hosting & transfer fees.
 
-9-

 
The AD BOOM division does not rely on a few major customers, but rather generates smaller, recurring revenue streams across multiple clients.

AD SERVE - Ad Network Provisioning

AD SERVE (formerly Stream Syndicate) is a digital advertising delivery platform that serves rich media and marketing communications to targeted destinations in a compatible, measurable and cost-effective manner. While ad serving is a highly competitive and crowded market, we believe the value of effectively competing is evidenced by the recent acquisitions in this space. In the current strategic plan, AD SERVE complements the AD LIFE and AD BOOM platforms for a complete suite of marketing driven technology products and services, and AD SERVE represents an opportunity to directly apply some of the most valuable claims of our intellectual property.

During 2009, the stand alone advertising platform AD SERVE (formerly the Stream Syndicate) was enhanced through further adoption within our client accounts, Gannett, Village Voice, West Virginia Media, South Dakota News Network, and ABC Disney’s Toledo affiliate.  It was also utilized by KFC in a national targeted advertising campaign for our customer Lion New Media. These deployments demonstrate the value of the platform – including targeting and reporting – and will help support core technology blueprints for future product development. More importantly for the current business strategy, the presence of these offers represent valuable complementary features and functionality to AD LIFE and AD BOOM clients, thus creating the opportunity for additional revenue with mobile marketing and video content delivery clients outside the core offers of those two divisions.

Technology Development and Delivery Infrastructure

One area that will play a large role in the success of our business is the effective monetization of Augme’s Intellectual property through the development and deployment of our Marketing Driven Technology Platforms, which includes our own proprietary technology development. The company owns mobile (AD LIFETM), video content delivery (AD BOOMTM), and ad network provisioning (AD SERVETM) platform technologies.  For all three, we have established application throughout FY2010 with foundational customers in key market verticals. We have and continue to invest in new versions of our software platforms with a companywide focus on the mobile AD LIFE™ and audio video AD BOOM™. Our technology continues to be proven in a diverse group of Internet applications all of which we believe have direct utility for use by clients for marketing and advertising purposes across highly scalable industry verticals. We believe that available resources are adequate to meet our current FY2011 development needs, and/or that any additional development resources that may be necessary can be easily obtained by hiring additional employees or by outsourcing either domestically or on a foreign basis through our overall development infrastructure currently in place.  Many customer projects fund improvements to the core technologies.

Interactive content, applications, and services are delivered and maintained over the Internet through a series of specialized computer servers maintained for that purpose (“Hosting Services”).  Hosting Services are provided by us through hosting agreements with Limelight Networks, Inc. (“Limelight”), and RackSpace Hosting (“RackSpace). We purchase storage, hosting, and bandwidth transfer from these companies based upon the different needs of the content that is being delivered to the Internet. These relationships with Limelight, and RackSpace provide a scalable, up-to-date hosting infrastructure and a secure network of dedicated media servers that allow our customers’ content to reach end users. The agreement with Limelight is a 12-month agreement, ending in May 2011. The Agreement with RackSpace is done on a device-by-device basis with varying contract lengths (generally 12 months). We are billed each month by Limelight based upon our usage and our monthly commitment. Any disruption of service with Limelight or Rackspace would adversely affect our business.

Employees

As of May 24, 2009 Augme employs 20 associates, including executive management, sales (including channel management), client services, technology development and IT infrastructure management, technical administration and implementation, and reception. We outsource some of our core technology development, which is currently under a 12-month contract with our vendor. We have no labor union contracts and believe relations with our employees are satisfactory.

Available Information

You can find more information about us at our Internet web site at (http:// www.augme.com). Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and our current reports on Form 8-K are available from the Securities and Exchange Commission EDGAR web site at (http://www.sec.gov). All of these reports are available free of charge on our internet website as soon as reasonably practicable after we file such material electronically with the SEC.
 
-10-

 
Forward Looking Statements

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by management. Words such as "anticipate," "expect," "intend" "plans," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language appearing elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

ITEM 1A.  RISK FACTORS

Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Annual Report on Form 10-K and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

We cannot assure you that we will be able to develop the infrastructure necessary to achieve the potential sales growth.

Achieving revenue growth will require that we develop additional infrastructure in sales, technical and client support functions. We cannot assure you that we can develop this infrastructure or will have the capital to do so. We will continue to design plans to establish growth, adding sales and sales support resources as capital permits. but at this time these plans are untested. If we are unable to use any of our current marketing initiatives or the cost of such initiatives were to significantly increase or such initiatives or our efforts to satisfy our existing clients are not successful, we may not be able to attract new clients or retain existing clients on a cost-effective basis and, as a result, our revenue and results of operations would be affected adversely.
 
-11-

 
We have a short operating history and a new business model in an emerging and rapidly evolving market. This makes it difficult to evaluate our future prospects and increases the risk of your investment.

We have very little operating history for you to evaluate in assessing our future prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results. In addition, we have limited experience operating our business during an economic downturn. Accordingly, we do not know if our current business model will continue to operate effectively during the current economic downturn. Furthermore, we are unable to predict the likely duration and severity of the adverse economic conditions in the U.S. and other countries, but the longer the duration the greater risks we face in operating our business. There can be no assurance, therefore, that current economic conditions or worsening economic conditions, or a prolonged or recurring recession, will not have a significant adverse impact on our operating and financial results.

The markets that we are targeting for revenue opportunities may change before we can access them.

The markets for traditional Internet and mobile Web products and services that we are targeting for revenue opportunities are changing rapidly and are being pursued by many other companies, and the barriers to entry are relatively low. We cannot provide assurance that we will be able to realize these revenue opportunities before they change or before other companies dominate the market. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales, limit client attrition and maintain our prices.

We may need additional capital to fund our operations.

We believe that we may require additional capital to fund the anticipated expansion of our business and to pursue targeted revenue opportunities. We cannot assure you that we will be able to raise additional capital. If we are able to raise additional capital, we do not know what the terms of any such capital raising would be. In addition, any future sale of our equity securities would dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations.

We face significant competition from large and small companies offering products and services related to mobile marketing technologies and services, targeted advertising delivery and the delivery of Web-based video.

Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. Our current and potential competitors may have more extensive client bases and broader client relationships than we have. In addition, these companies may have longer operating histories and greater name recognition. These competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. If we are unable to compete with such companies, the demand for our products could substantially decline.

If we fail to promote and maintain our brand in a cost-effective manner, we may lose (or fail to gain) market share and our revenue may decrease.

We believe that developing and maintaining awareness of the Augme brand in a cost-effective manner is critical to our goal of achieving widespread acceptance of our existing and future technologies and services and attracting new clients. Furthermore, we believe that the importance of brand recognition will increase as competition in our industry increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the effectiveness and affordability of our products and services for our target client demographic. Historically, efforts to build brand recognition have involved significant expense, and it is likely that our future marketing efforts will require us to incur significant expenses. Such brand promotion activities may not yield increased revenue and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing clients to our competitors or be unable to attract new clients, which would cause our revenue to decrease.
 
-12-

 
If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenues and operating results could suffer.

Our success depends on providing products and services that client’s use to promote their brands and products via mobile Web, Web-based video or other Web-based advertising. Our competitors are constantly developing innovations in customized communications, including technologies and services related to mobile marketing, targeted ad delivery and Web-based video delivery. As a result, we must continue to invest significant resources in research and development in order to enhance our existing products and services and introduce new high-quality products and services that people will use. We are unable to develop code in house and we rely on outsourced and overseas development teams. If we are unable to predict user preferences or industry changes, if we are unable to manage our projects or product enhancements, or if we are unable to modify our products and services on a timely basis, we may lose users, clients and advertisers. Our operating results would also suffer if our innovations are not responsive to the needs of our users, clients and advertisers, are not appropriately timed with market opportunity or are not effectively brought to market.
 
The success of our business depends on the continued growth and acceptance of mobile marketing/advertising and Web-based video delivery as a communications tool, and the related expansion and reliability of the Internet infrastructure. If consumers do not continue to use the mobile Web and Web-based video delivery, or alternative communications tools gain popularity, demand for our marketing and advertising technologies and services may decline.

The future success of our business depends on the continued and widespread adoption of mobile marketing and Web-based video delivery as a significant means of advertising and marketing communication. Security problems such as “viruses,” “worms” and other malicious programs or reliability issues arising from outages and damage to the Internet infrastructure could create the perception that mobile or Web-based marketing/advertising is not a safe and reliable means of communication, which would discourage businesses and consumers from using such methods. Any decrease in the use of mobile devices or Web-based video resources would reduce demand for our marketing technologies and services and harm our business.
 
If we fail to manage our anticipated growth, our business and operating results could be harmed.

If we do not effectively manage our anticipated growth, the quality of our products and services could suffer, which could negatively affect our brand and operating results. To effectively manage our potential growth, we will need to improve our operational, financial and management controls and our reporting systems and procedures. These systems enhancements and improvements may require significant capital expenditures and allocation of valuable management resources. If the improvements are not implemented successfully, our ability to manage our growth will be impaired and we may have to make significant additional expenditures to address these issues, which could harm our financial position.

 
-13-

 
Our relationships with our channel partners may be terminated or may not continue to be beneficial in generating new clients, which could adversely affect our ability to increase our client base.

We maintain a network of active channel partners which refer clients to us within different business verticals. If we are unable to maintain our contractual relationships with existing channel partners or establish new contractual relationships with potential channel partners, we may experience delays and increased costs in adding clients, which could have a material adverse effect on us. The number of clients we are able to add through these marketing relationships is dependent on the marketing efforts of our partners over which we exercise very little control.

Competition for employees in our industry is intense, and we may not be able to attract and retain the highly skilled employees whom we need to support our business.

Competition for highly skilled technical and marketing personnel is intense and we continue to face difficulty identifying and hiring qualified personnel in certain areas of our business. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In particular, candidates making employment decisions, particularly in high-technology industries, often consider the value of any equity they may receive in connection with their employment. As a result, any significant volatility in the price of our stock may adversely affect our ability to attract or retain highly skilled technical and marketing personnel.

In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve our clients could diminish, resulting in a material adverse effect on our business.

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued contributions of our executive officers and other key technical and marketing personnel, each of whom would be difficult to replace. The loss of the services of executive officers or key personnel and the process to replace any of our key personnel would involve significant time and expense, may take longer than anticipated and may significantly delay or prevent the achievement of our business objectives.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.

Our patents, trademarks, trade secrets, copyrights and all of our other intellectual property rights are important assets for us. There are events that are outside of our control that pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed or made available through the internet. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective, and we may not prevail in legal proceedings to prosecute alleged patent infringement or intellectual property misappropriation. Any significant impairment of our intellectual property rights, including any adverse ruling or delay in our pending patent or trademark litigation, could harm our business or our ability to compete. Also, protecting our intellectual property rights, including prosecution of patent infringement lawsuits, is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.

We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from these trade secrets.
 
-14-

 
We may in the future be subject to intellectual property rights claims, which are costly to defend, could require us to pay damages and could limit our ability to use certain technologies in the future.

Companies in the internet, technology and media industries own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us grows. Our technologies may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management resources and attention.

With respect to any intellectual property rights claim, we may have to pay damages or stop using technology found to be in violation of a third party's rights. We may have to seek a license for the technology, which may not be available on reasonable terms and may significantly increase our operating expenses. We have not fully reviewed and assessed the potential intellectual claims centered on our latest asset purchases, mergers, or acquisitions to evaluate any technology licenses required. The technology also may not be available for license to us at all. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for the infringing aspects of our business, we may be forced to limit our product and service offerings and may be unable to compete effectively. Any of these results could harm our brand and operating results.

Our ability to offer our products and services may be affected by a variety of U.S. and foreign laws.

The laws relating to the liability of providers of online services for activities of their users are currently unsettled both within the U.S. and abroad. Future regulations could affect our ability to provide current or future programming.

We have a limited operating history, have incurred net losses in the past and expect to incur net losses in the future.

We have a limited operating history and have not recorded a profit on an annual basis. As a result of this, and the uncertainty of the market in which we operate, we cannot reliably forecast our future results of operations. We expect to increase our operating expenses in the future as a result of developing, refining and implementing a sales strategy.

We have incurred net losses in the past and we expect to incur net losses in the future. As of February 28, 2010, our accumulated deficit was $27,474,568. Our recent net losses were $8.4 million for the year ended February 28, 2010, $5.3 million for the year ended February 28, 2009 and $3.3 million for the year ended February 29, 2008. There is no guarantee we will be profitable in the future. In addition, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses exceed our expectations, our financial performance could be adversely affected. If our revenue does not grow to offset these increased expenses, we may not be profitable in any future period. Our recent revenue growth may not be indicative of our future performance. In future periods, we may not have any revenue growth, or our revenue could decline.

We are incurring significant costs as a result of operating as a public company, and our management has been, and will continue to be, required to devote substantial time to compliance initiatives.

The Sarbanes-Oxley Act of 2002, and rules subsequently implemented by the SEC require, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We expect to continue to incur such expenses and expend such time in the future. In addition, we will continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If in the future we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

Problems with third party hosting companies could harm us.

We rely on third-party hosting companies. Any disruption in the network access or co-location services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business.

Our business depends on the growth and maintenance of the Internet infrastructure.

Our success will depend on the continued growth and maintenance of the internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable internet services. Internet infrastructure may be unable to support the demands placed on it if the number of internet users continues to increase or if existing or future internet users access the internet more often or increase their bandwidth requirements. In addition, viruses, worms and similar programs may harm the performance of the internet. The internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as our ability to provide our solutions.
 
-15-

 
Our operating results may fluctuate.

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

Our ability to compete effectively.
Our ability to continue to attract clients.
Our ability to attract revenue from advertisers and sponsors.
The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure.
General economic conditions and those economic conditions specific to the internet and internet advertising.
Our ability to keep our web sites operational at a reasonable cost and without service interruptions.
The success of our product expansion.
Our ability to attract, motivate and retain top-quality employees.

Our stock price is volatile, and you may not be able to resell your shares at or above the price you paid.

The trading price of our common stock is highly volatile and subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

Quarterly variations in our results of operations.
 
Changes in estimates of our financial results
 
Investors’ general perception of us
Disruption to our operations.
The emergence of new sales channels in which we are unable to compete effectively.
Commencement of, or our involvement in, litigation.
Any major change in our board or management.
Changes in governmental regulations or in the status of our regulatory approvals.

In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance.

 
 
-16-

 
Since there is limited trading volume in our common stock, there is a high degree of volatility in our stock price and you may not be able to resell any of the shares you purchase or may have to sell your shares at a substantially reduced price.

Our common stock trades on the OTC Bulletin Board Trading System. The Bulletin Board tends to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make a market in particular stocks. There is a greater chance of market volatility for securities that trade on the Bulletin Board as opposed to a national exchange or quotation system. The trading volume in our stock is very limited, which causes high price volatility. In addition, because of the limited volume of trading, the last quoted sales price may not represent a price at which you could sell a significant number of shares, and any sustained selling of shares may dramatically reduce the price of the shares. As a result, you may not be able to resell your shares at a favorable price, or at all.

ITEM 2. DESCRIPTION OF PROPERTY

Our headquarters is located in New York City, were we lease approximately 3,000 square feet of space for administrative, sales and client services personnel under a lease that expires in January 2012.   Additionally, we lease approximately 1,450 square feet of office space in Tucson, Arizona for sales and technical personnel expiring in 2011. Management believes that these facilities are adequate for current operations.  In December 2008, we consolidated our Las Vegas and San Diego offices to allow for better communication and our revenue growth strategies.  Our lease in Las Vegas was month to month and we provided a buyout for the San Diego offices equal to the remaining terms of the lease with a clause which allows for remuneration if the space is sublease to another party during the term.  We issued 300,000 shares of Augme Common Stock to the landlord in connection with the buyout.  The total cash buyout is consistent with the amount owed on the lease through the term.  The fair value of the 300,000 shares was $552,000 and was recorded as a lease termination expense at February 28, 2009.

ITEM 3. LEGAL PROCEEDINGS

Tacoda, Inc., AOL, Inc. & Platform A, Inc.

In 2007, Augme, formerly Modavox, filed a lawsuit against Tacoda, Inc. in the U.S. District Court, Southern District of New York, alleging infringement of Augme-owned U.S. Patent Nos. 6,594,691 (“Method and System for Adding Function to a Web Page”) and 7,269,636 (“Method and Code Module for Adding Function to a Web Page”). Augme’s claims against Tacoda allege that Tacoda’s ad-targeting system/service directly infringes the Augme patents.  Augme has identified the technical components of Tacoda’s/AOL’s ad-targeting technology/systems and believes that such systems misappropriate the methods and systems described in Augme’s aforementioned patents.  Tacoda was acquired by AOL, Inc. in September, 2007, for $275 million.

On May 16, 2008, Augme, formerly Modavox, issued a Cease and Desist letter to the AOL, LLC President and Chief Operating Officer. We advised of the possible expansion of our current action against Tacoda to include AOL, LLC if they intended to utilize the Tacoda Advertising process throughout the AOL, LLC “Platform A”  as described in then recent publications and news releases. We informed AOL, LLC that a non-exclusive license to the patents-in-suit is available; however, in the absence of a license AOL, LLC’s published intention to make the Tacoda solution available across the Platform-A Network would in fact infringe upon well identified patents.
 
-17-

 
On May 23, 2008, Augme, formerly Modavox, issued a Cease and Desist letter to AOL, LLC related to its Trademark Registration No. 2,397,385 for the word-mark BOOMBOX® RADIO in connection with “entertainment services featuring music, news, talk shows, video and computer games, movies, and television shows, provided via a global computer network.” The use of BOOMBOX by AOL for entertainment services is believed by management to be an infringement of its rights in the BOOMBOX® RADIO mark for confusingly similar services. Management maintains that AOL’s use of the near identical mark causes confusion or deceives the public into thinking AOL’s services originate or are somehow related to Augme’s services, or have the sponsorship or approval of Augme. The remedies available include an injunction or court order prohibiting use of the mark, an award of profits from use of the mark, monetary damages sustained by Augme, or a reasonable royalty for past use as well as seizure, impoundment and destruction of any infringing forms, documents, signage, literature, and material bearing the mark, and costs of the action.

On September 10, 2008, Augme, formerly Modavox, filed a complaint against AOL, LLC at the U.S. District Court, Central District of California, for infringement of our trademark BOOMBOX® RADIO.   On January 21, 2009, we filed a First Amended Complaint against AOL, LLC, Time Warner, Inc. and Platform-A, Inc., for trademark infringement relating to our word-mark BOOMBOX® RADIO and infringement of our U.S. Patent Nos. 6,594,691 and 7,269,636.  Per court order dated April 14, 2009, the case was transferred to the U.S. District Court, Southern District of New York, where our complaint against Tacoda, Inc. for infringement of our U.S. Patent Nos. 6,594,691 and 7,269,636 is pending. As of  June 1, 2010, the AOL action remains unresolved as does the action against Tacoda.  The Parties’ previously scheduled Mediation with respect to the BOOMBOX® Trademark matter has been continued for what is expected to be a few weeks pending production of certain discovery related to damages.

Recent developments in the Tacoda/AOL patent infringement cases are cited below:

Motion for Sanctions for Spoliation of Evidence and Evasive Disclosure Practices

On April 22, 2010, Augme filed a “Motion for Sanctions for Spoliation of Evidence and Evasive Disclosure Practices.”  The Motion describes alleged non-preservation activities and omissions of Tacoda which resulted in the loss and/or willful destruction or alteration of evidence, as well as evasive actions taken by Tacoda during discovery.  A redacted version of the Motion is available as part of the public court record.  In the Motion, Augme describes the correlation between the Claims of the Augme patents and the operation of the Tacoda/AOL ad-targeting technology.

The Motion is an updated version of the motion filed by Augme on October 28, 2009, which was taken off the Court’s calendar by Augme (with leave to re-file) following a purported remedial supplemental source code production to be made by Tacoda in response to Augme’s motion and the Court’s request for clarification of some of the technology. As Augme’s renewed Motion states, Tacoda’s eleventh-hour production did not cure the alleged material discovery failures highlighted in Augme’s original motion, and in fact Augme’s technical experts have uncovered what they believe are additional instances of evidence spoliation since Augme’s original motion was taken off the Court’s calendar.

In addition to the relief it seeks, the Motion shows the comprehensive measures undertaken by Augme’s legal team and expert witnesses since Augme’s First Request for the Production of Documents in June, 2008, to identify key technical processes within Tacoda’s systems, and to obtain access to the critical source code and related files which prove how those systems operate. As described in the Motion, Augme contends that Tacoda’s processes map the steps taught by one or more of the Claims of Augme’s ‘691 and ‘636 patents, and it is Augme’s belief that Tacoda’s efforts in discovery have sought to deny Augme the opportunity to prove this with direct evidence.

The Motion, which was filed partially under seal pursuant to a previously issued Protective Order, identifies software source code and other significant materials that Augme contends were lost, destroyed, not preserved, or withheld in violation of applicable legal authorities. The Motion further contends that Tacoda had an obligation to preserve this evidence regarding its source code and related materials and that Tacoda should have known that destruction of such source code and related materials would materially increase the effort to Augme to fully and fairly prepare its infringement claims for trial.

The Motion seeks remedial and punitive evidentiary sanctions. Such sanctions include judicial findings and factual stipulations related to Tacoda’s Internet software and hardware for the period in question, which include, among others, that: (i) designated facts regarding how Tacoda’s systems infringe upon Augme’s Patents, be taken as established for the purpose of this case; and (ii) in its defense, Tacoda is precluded from asserting it has not infringed the Augme Patents in reliance upon source code or related data it has failed to produce as of the date of filing this Motion. The sanctions sought also include specific jury instructions, such as: (i) Tacoda destroyed relevant versions of its Source Code and related materials that existed when the Complaint was first filed by Augme in August 2007, (ii) this evidence was relevant to Augme’s case and its ability to directly prove infringement, and (iii) these facts can support an inference that the evidence would have been unfavorable to Tacoda. The Motion also seeks attorney fees and costs.
As of June 1, 2010, the Motion is being briefed by the Parties and no hearing date has been set.
 
-18-

 
 
Motion for Leave to File Second Amended Complaint Joining Claims Against AOL Based Upon Fraud and Inequitable Conduct

On Friday, May 14, 2010, Augme filed a “Motion for Leave to File Second Amended Complaint Joining Claims Against AOL Based Upon Fraud and Inequitable Conduct” related to its pending patent infringement action against Tacoda, Inc.

Augme’s May 14, 2010, Motion alleges that, based upon new evidence discovered by Augme, it would unfairly prejudice Augme to continue litigation solely against Tacoda, given that Tacoda is no longer operating as a separate entity and that AOL, as a matter of law, is responsible for Tacoda’s liabilities in this matter.  Among other things, Augme’s Motion specifically alleges that Tacoda is currently a mere “shell” company with no apparent assets to satisfy a judgment against it.  Further, Augme alleges that, based upon recently discovered evidence, AOL has been dominating and controlling Tacoda during almost the entire period this action has been pending, with Tacoda operating as a “division” within AOL, and that as a result AOL has become the alter ego of Tacoda and thus should be directly liable for Tacoda’s alleged patent infringement.

Augme’s Motion seeks to add AOL as an additional defendant in the Tacoda action and to hold AOL liable for Tacoda’s infringement of Augme’s patents before and during the time that Tacoda was under AOL’s control.  Permitting Augme to amend its Complaint against Tacoda to include AOL as an additional defendant will avoid any possible fraud or inequity upon Augme in its pursuit of remedies against Tacoda for alleged infringement of Augme’s patents.

As of June 1, 2010, the Motion is still pending.

To date, Augme’s patent infringement claims in the AOL case have been “stayed” (suspended) pending resolution of the Tacoda action.

Yahoo, Inc.

On April 28, 2009, we issued a Cease and Desist letter to Yahoo, Inc. related to our U.S. Patent Nos. 6,594,691 and 7,269,636. Up to the past year, Yahoo had been deploying Blue Lithium’s technology which involved targeting for internet marketers and Web site publishers by delivery of ads based upon behavioral, contextual and demographic visitor parameters and preferences. Subsequently, our attorneys and experts found that Yahoo! had transitioned to what is believed to be a similar technology. This technology results in customized content delivery accomplished in a manner which Augme believes still falls within the scope of one or more claims of each of the ‘691 and ‘636 patents.  Accordingly, Augme has concluded that Yahoo and previously its Blue Lithium division have been and are infringing one or more claims of both the ‘691 and the ‘636 patents.  The remedies available to us include an injunction prohibiting any infringing actions, an award of damages adequate to compensate us for the infringement, and costs of the action.

On November 16, 2009, after extensive investigation and due diligence, Augme, formerly Modavox, filed a Complaint against Yahoo! Inc. for patent infringement, which matter is currently pending in the United States District Court for the Northern District of California, Case No. C-09-5386 JCS. Augme’s Complaint specifically asserts that Yahoo! has operated a business for profit that uses Augme’s technology claimed and described in the ‘691 and ‘636 patents without having sought or received Augme’s authorization to use its patented technology.  The remedies available to us, if successful, include an injunction prohibiting any infringing actions, an award of damages adequate to compensate us for the infringement, and costs of the action.

Augme’s Complaint alleges that it has suffered irreparable harm as a result of the alleged infringement and thus seeks preliminary and permanent injunctions against Yahoo! to prevent Yahoo! from making, using, selling and offering for sale any products or services which infringe the ‘691 or ‘636 patents, or otherwise inducing or contributing to the alleged infringement. Augme’s Complaint also seeks monetary damages in an amount to be determined at trial, but in no event less than a reasonable royalty, to compensate Augme for Yahoo!’s alleged infringement, as well as a finding that Yahoo!’s infringement was willful and deliberate, which finding could entitle Augme to up to three-times actual damages. The Complaint also seeks attorneys’ fees and Court costs, as well as any other remedies that the Court deems equitable and just.

Presently, the parties stipulated to and have been ordered to participate in a Settlement Conference before Magistrate Judge Elizabeth D. Laporte before the end of July and the parties intend to continue settlement discussions before a private mediator if the matter is not thereby resolved.
 
-19-

 
Other Litigation

On December 29, 2009, two holders of Company Common Stock Purchase Warrant Agreements filed a lawsuit against the Company in the United States District Court for the Central District of California. The Complaint alleges Breach of Contract, Contractual Breach of the Implied Covenant of Good Faith and Fair Dealing, Declaratory Relief, and Injunctive Relief, related to certain Common Stock Purchase Warrant Agreements. Augme disagrees with the allegations contained in the Complaint and intends to vigorously defend the matter and otherwise enforce its rights with respect to the matter. Augme has retained counsel, is defending the matter, and as of June 1, 2010, the matter remains unresolved.

October 26, 2009, Movieland Classics, LLC, a former customer of Augme, now Augme, filed an action for breach of contract, fraud and negligent misrepresentation alleging damages of $30,000 to $40,000.  Augme cross-complained for the $8,500 unpaid portion of the $13,500 contract. Augme takes the position that damages in the case are limited by the terms of the contract to the $5,000 paid.  The case is presently scheduled for mediation and discovery is underway.

If unsuccessful, these claims may materially and adversely affect our business and , with respect to the warrant litigation, may result in dilution to our shareholders.
 

 
 
 
 
 
 
 
-20-

 
PART II

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


During the year ended February 28, 2010, our common stock traded on the OTC Bulletin Board Market under the symbol “MDVX." Since March 23, 2010, and as part of the change in our corporate identity, we have traded under the symbol “AUGT” The following table sets forth the quarterly high and low reported last bid prices for our common stock during each quarter of fiscal year 2009 and 2008:

Fiscal Year 2009
 
High
   
Low
 
             
First Quarter ended May 31, 2008
 
$
1.95
   
$
1.47
 
Second Quarter ended August 31, 2008
   
1.90
     
1.44
 
Third Quarter ended November 30, 2008
   
1.80
     
1.18
 
Fourth Quarter ended February 28, 2009
   
2.18
     
1.36
 
                 
Fiscal Year 2010
               
                 
First Quarter ended May 31, 2009
 
$
3.93
   
$
1.65
 
Second Quarter ended August 31, 2009
   
4.35
     
3.10
 
Third Quarter ended November 30, 2009
   
3.78
     
2.20
 
Fourth Quarter ended February 29, 2010
   
2.02
     
1.07
 

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

Subsequent to February 28, 2010 and through May 28, 2010, we completed the following transactions:

1)
Issued 30,000 shares for cash.
2)
Issued 170,227 shares to former employees under cashless exercise of options.

WARRANTS

The Company has issued all such securities in reliance on Section 4(2) of the Securities Act of 1933, as amended.

As of May 28, 2010, the number of holders of record of our common stock was approximately 272.
 
-21-

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

The following sets forth information about our securities authorized for issuance under our equity compensation plans at February 28, 2010.

Equity Compensation Plan Information

Plan category
 
Number of securities
to be issued upon
exercise of
outstanding options.
 
Weighted - average
exercise price of
outstanding options.
 
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
 
               
   
(a)
 
(b)
 
(c)
 
               
Equity compensation plans approved by security holders
 
-0-
 
 
N/A
 
 
N/A
 
 
                   
Equity compensation plans not approved by security holders
 
 
 
1,225,000 shares of common stock
4,300,000 shares of common stock
 
 
$
 
$
 
 
0.62
 
0.25
 
  
 
-0-
 
-0-
 
  
 
                 
 
 
 
 
 
 
 
-22-

 
Benefit Plans

2004 Stock Plan

In March 2004, we adopted our 2004 Stock Plan pursuant to which key employees, including officers, directors and consultants of the Company are eligible to receive incentive stock options as well as non-qualified stock options and stock appreciation rights ("SARs"). The Stock Plan expires in March 2014 and is administered by the Board of Directors or the Compensation Committee thereof. Incentive stock options granted under the Stock Plan are exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value ("FMV") of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the Stock Plan to a stockholder owning more than 10% of the outstanding Common Stock may not exceed five years and the exercise price of an incentive stock option granted to such a stockholder may not be less than 110% of the FMV of the Common Stock on the date of the grant. Non-qualified stock options may be granted on terms determined by the Board of Directors or the Compensation Committee. SARs, which give the holder the privilege of surrendering such rights for an amount of stock equal to the appreciation in the Common Stock between the time of grant and the surrender, may be granted on any terms determined by the Board of Directors or the Compensation Committee. The Stock Plan also permits the grant of new stock options to participants who tender shares of the Company's Common Stock as payment of the exercise price of stock options or the payment of withholding tax ("Reload Options"). The Reload Options will be granted at the fair market value of a share of Common Stock on the date of the grant and will be exercisable six months following the date of the grant. The Stock Plan also includes limited option valuation rights upon a change of control of the Company. 2,000,000 shares were reserved for issuance under the Stock Plan, of which, to date, 1,800,000 shares were issued.
 
 
 
 
 
 
 
 
 
 
-23-

 
During the year ended February 28, 2009, Augme granted 1,732,296 options exercisable into unregistered shares of common stock at $1.50 per share. These options, consistent with those granted during the year ended February 28, 2007, vest over 5 years however have a five year term. Augme did not recognize an expense for these options grants as the first vesting date occurs following the fiscal year ending February 28, 2009.

During the year ended February 28, 2009, Augme also granted 427,342 options exercisable into unregistered shares of common stock at $0.55 per share to a former employee. The options originate from a 2006 agreement that has been under dispute and were considered to have a “Remote” chance under SFAS 5 to be issued. It became probable that Augme would have to issue these options when the settlement agreement was signed into in fiscal 2009. These options have a life of 10 years, and vest immediately.

EMPLOYEE STOCK OPTIONS

On February 28, 2010, we had 5,380,455 of these options outstanding. For the period ended February 28, 2010, we recognized $1,579,033 of stock compensation expense.

ITEM 6. SELECTED FINANCIAL DATA

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

   
Year Ended February 28,
 
   
2010
 
2009
 
2008
 
2007
 
2006
 
       
Statement of Operations Data:
                               
REVENUE
 
$
339,901
 
$
337,327
 
$
743,044
 
$
1,064,278
 
$
-
 
                                 
COST OF REVENUE
   
492,838
   
215,412
   
563,414
   
542,966
   
-
 
Operating expenses:
                               
 
Selling, general and administrative
   
5,580,743
   
3,271,452
   
2,945,525
   
1,400,416
   
-
 
 
Depreciation and amortization
   
841,280
   
541,951
   
383,687
   
348,103
       
 
Impairment
   
-
   
729,000
   
-
   
-
   
-
 
 
Lease termination Expense
   
-
   
489,845
   
-
   
-
   
-
 
                       
Total operating expenses
   
6,422,023
   
5,032,248
   
3,329,212
   
1,748,519
   
-
 
                       
LOSS FROM OPERATIONS
   
(6,574,960
)
 
(4,910,333
)
 
(3,149,582
)
 
(1,227,207
)
 
-
 
OTHER INCOME (EXPENSES)
                               
 
Interest income (expense), net
   
(1,343
)
 
9,221
   
(153,995
)
 
3,350
   
-
 
 
Loss on Derivatives
   
(335,820
)
 
-
   
-
   
-
   
-
 
 
Impairment of subscription receivable
   
-
   
-
   
(395,649
)
 
-
   
-
 
                                 
LOSS FROM CONTINUING OPERATIONS
   
(6,912,123
)
 
(4,901,112
)
 
(3,699,226
)
 
(1,223,857
)
 
-
 
                                 
DISCONTINUED OPERATIONS
                               
                       
    Loss from discontinued operations
   
(588,214
)
 
(424,398
)
 
395,221
   
669,775
   
(2,186,104
)
    Loss on sale of discontinued operations
   
(878,162
 
-
   
-
   
-
   
-
 
                       
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
   
(1,466,376
)
 
(424,398
)
 
395,221
   
(669,775
)
 
(2,186,104
)
                       
Net income (loss)
 
$
(8,378,499
 )
$
(5,325,510
)
$
(3,304,005
)
$
(554,082
)
$
(2,186,104
)
                       
Basic and diluted loss per share from continuing operations
 
$
(0.14
)
$
(0.12
)
$
(0.10
)
$
(0.04
)
$
-
 
                       
Basic and diluted net income (loss) per share
 
$
(0.16
)
$
(0.13
)
$
(0.09
)
$
(0.02
)
$
(0.17
)
                       
Weighted average shares of common stock used in computing basic and diluted net loss per share
   
50,980,171
   
41,874,738
   
37,979,062
   
31,551,573
   
12,696,032
 
 
 
-24-

 

 
As of February
 
 
February 28,
2010
 
February 28,
2009
 
February 29,
2008
 
February 28,
2007
 
February 28,
2006
 
 
     
     
Balance Sheet Data:
                         
Cash, cash equivalents and short-term marketable securities
  $ 1,617,573     $ 374,696   $ 657,174     $ 1,220,592     $ 325,040  
Total assets
    19,853,749       5,413,953     5,883,750       4,867,363       3,678,051  
Deferred revenue
    222,345       -     -       -       -  
Accumulated Deficit
    (27,474,568     (18,464,925 )   (13,139,415 )     (9,139,566 )     (8,585,484  
Total stockholders’ equity (deficit)
  $ 18,377,936     $ 2,887,134   $ 4,142,043     $ 4,083,456     $ 1,369,181  


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

Overview

In fiscal year 2010, we initiated a comprehensive business growth strategy aimed at fully leveraging the value of our technology and patent portfolio by accelerating the advanced development of technology platforms that apply the most valuable aspects of the patents, and selling applications and services based upon our technology platforms in high growth markets.

In an effort to support our fiscal year 2010 business strategy, we transferred the business operations of our Internet Radio services to World Talk Radio, LLC (“WTR”). Note that due to the disposition of these assets and discontinued operations of Internet Radio business, the historical revenues, costs, and expenses of our Internet Radio business are retroactively presented as discontinued operations in our income statement for the recently ended fiscal year and all prior years. As a result of the Internet Radio transaction, we will receive a perpetual royalty as a percentage of gross revenue generated by WTR for as long as the new entity provides Internet radio services. Income from this royalty will be reported as part of discontinued operations and not part of our revenues.  Consequently, this analysis compares the operating results of our continuing operations, which presently includes our three operating divisions.

 
-25-

 
With the disposition of the Internet Radio operations, Augme now manages three operating divisions. Our current business growth strategy is primarily focused generating near-term revenue from AD LIFE and AD BOOM, while AD SERVErepresents an opportunity to serve in a complementary role to add incremental revenue opportunities to clients of the other divisions.

We believe that we have validated the strategic assumption that our patented and proprietary software technology may be utilized to create scalable, salable and highly competitive products and services, and that our current strategy will enable us to pioneer a new era in marketing and new media communications with Internet applications and services for targeted consumers and communities worldwide. While we have secured proof-of-concept revenue for our current operating divisions, we have yet to generate sufficient revenue or an adequate client base to demonstrate scalability that would allow us to project sustainable long-term growth and predictable profit margins. However, in fiscal year 2010, we have established sales and delivery infrastructure to fulfill our revenue goals. Furthermore, because our applications and services are based on scalable marketing driven technology platforms with integrated components offering a wide variety of valuable, leading edge, easy to integrate services for a broad client base, we believe that steadily increasing revenue and a growing client base in fiscal year 2011 will provide data that will enable us to better project revenue and profit margins.

Our advanced, comprehensive, and fully integrated AD LIFE mobile platform drives revenue primarily through license fees, marketing campaign fees, and fees associated with certain add-on promotional applications and services. Additional revenue is generated by platform administration and professional service fees related to the mobilization of client content and implementation of marketing campaigns through the platform. As an early stage business in an emerging market, AD LIFEcurrently has a small number of clients and relatively low revenue, whereby each client is an important piece of our revenue base. However, as our client base grows, our revenue will naturally and quickly spread and become less dependent on any one client.

For AD BOOM, roughly $4,000 in passive revenue is captured each month from licensing, hosting & transfer fees of existing legacy contracts. Leveraging the latest version of the AD BOOM platform scheduled for release in the second quarter of fiscal year 2011, our residual passive revenue stream will increase with new sales as well as upselling added features and functionality to our existing client base, which includes West Virgina Media Holdings, DeMartini Seminars, Bank of America, XA The Experiential Agency, and Broadcast Media Incorporated (BMI) amongst others. A recent client for AD BOOM is Comfort Zone Yoga Center for Whole Self Healing. Augme is building fully custom video network and web experience, utilizing our Box Office feature to monetize training videos via monthly subscription, live pay-per-view & on-demand pay-per-view options. This recently executed contract is a template for going forward AD BOOM engagements, generating revenue for production and delivery of content (pay-per-view and on-demand), plus residual passive per month licensing, hosting & transfer fees.

Production and service delivery expenses include client services (project managers, marketing managers) and implementation personnel (platform administration and other professional services including the development of traditional and mobile web sites), as well as third party software production costs and third party hosting costs.

Selling, general and administrative expenses consist primarily of salaries, commissions (including indirect channel partner commissions) and related expenses for sales, marketing, accounting, and administrative personnel, as well as other general corporate expenses such as rent, communication (public relations and investor relations), legal and accounting fees.

Results of Operations

The discussion of the results of operations compares the fiscal years ended February 28, 2010 with the fiscal year ended February 28, 2009 and the fiscal year ended February 28, 2009 with the fiscal year ended February 29, 2008, and is not necessarily indicative of the results which may be expected for any subsequent periods. Our limited operating history makes predicting future operating results very difficult. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in similar positions. We may not be successful in addressing these risk and difficulties.
 
-26-

 
2010 Versus 2009

For the year ended February 28, 2010, gross revenues were $339,901 an increase of $2,574 over 2009 revenues of $337,327. The increase in revenues relates to revenues from the AD LIFE division, which is our newest division and resulted from our acquisition of New Aug, LLL, completed on July 14, 2009.  This increase in revenues was partially offset by lower revenues from our AD BOOM and AD SERVE divisions, which were in the process of being repositioned in the market and went through a restructuring of the sales department during fiscal 2010.

Cost of revenues primarily consist of salaries and wages of our client services and service delivery personnel and cost to host our platforms and deliver content to our clients.  Our cost of revenues for the year ended February 28, 2010 were $492,838 vs. $215,412 for the fiscal year ended February 28, 2009, an increase of $277,426.  This increase in costs is primarily related to our new AD LIFE division as we establish the necessary infrastructure in order to support our increasing customer base in this area.  We believe that as revenues grow we will not need to increase costs at the same rate due to the ability to leverage our platforms and related costs over a larger revenue base.

Selling general and administrative expenses primarily consist of wages and benefits for sales, administrative, development personnel and outside development expenses, finance and accounting personnel, professional fees, stock option expense, expenses to market our products, and other corporate expenses.  For the year ended February 28, 2010 our selling, general and administrative expenses were $5,580,743 vs. $3,271,453 for the year ended February 29, 2009, an increase of $2,309,290. The increase primarily consists of a $951,762 non-cash expense increase related to stock compensation, an increase in salaries and wages of $923,496 from $634,582 in fiscal year 2009 to $1,558,078 primarily due to increase in personnel related to the acquisition of New Aug, LLC, an increase in professional fees of $237,007 from $1,084,821 in fiscal year 2009 to $1,321,828 in fiscal year 2010.

Depreciation and amortization expenses increased to $841,280 in 2010 from $541,950 in 2009 due principally to the increase in software amortization expense arising from the software developed internally and the amortization of intangible assets associated with the acquisition of New Aug, LLC in July 2009.

There was no impairment on goodwill recorded for the year ended February 28, 2010, compared to $729,000 for the year ended February 28, 2009.

In fiscal year 2009, we recorded a lease termination expense of $489,845 associated with the termination of the termination of an office lease in San Diego.  This payment was made in the form of the Company’s common stock.
 
Interest expense, net of interest income was $1,343 compared to net interest income of $9,221 in the prior year.

Loss from discontinued operations was $1,466,376 in fiscal year 2010 vs. a loss of $424,398.  This increase consists primarily of the loss on the sale of discontinued operations that was recorded in fiscal 2010 of $878,162.

The net loss was $8,378,499 in 2010 compared to a net loss of $5,325,510 in 2009 for the reasons as explained above.
 
2009 Versus 2008

For the year ended February 28, 2009, gross revenues were $337,327 vs. revenues of $743,044 in fiscal 2008, a decrease of $405,717.  This decrease was due to decreased in the Interactive Division (now broken into AD BOOM and AD SERVE) because of the strategic focus on our patent and Intellectual Property strategy. As a result, we have extended the reach of our Interactive Products Enterprise Communication Software which is primarily our BoomBox® Video product and related hosting. In the fourth quarter of 2009 we finalized an internal control policy related to collections which required a write off of certain accounts that had been in the reserve for doubtful accounts for more than year.

Cost of revenues for fiscal 2009 were $215,412 compared to $563,414 for fiscal 2008, a decrease of $348,002. This decrease in costs is due to the lower revenues, which reduce our internal delivery costs. Also in fiscal 2009, we renegotiated contracts with content management and hosting vendors in order to decrease costs

Selling general and administrative expenses for fiscal year 2009 were $3,271,453 vs. $2,945,525 for fiscal year 2008, an increase of $325,928.  This increase consists primarily of a $651,749 increase in non-cash stock compensation expense, a $284,851 loss on a settlement, an increase in salaries and benefits of $214,947 from $419,635 in fiscal year 2008 to $634,582 in fiscal year 2009.  These increases were partially offset by a decrease of $370,723 in professional fees from $1,455,544 in fiscal year 2008 vs. $1,084,821 in fiscal year 2009.
 
-27-

 
Depreciation and amortization expenses increased to $541,950 in fiscal year 2009 from $383,687 in fiscal year 2008 due principally to the increase in software amortization expense arising from the software developed internally and acquired externally during fiscal 2008 and 2007.

Impairment in the amount of $729,000 was recorded for the year ended February 28, 2009 on the Goodwill related to Kino acquisition. No such expense was recorded for fiscal year 2008.
 
In fiscal year 2009, we recorded a lease termination expense of $489,845 associated with the termination of the termination of an office lease in San Diego.  This payment was made in the form of the Company’s common stock.

Interest income, net of interest expense was $9,221in 2009 compared to net interest expense of $153,995 in the prior year.

The loss from discontinued operations in fiscal year 2009 was $424,398 vs. income from discontinued operations of $395,221 in fiscal year 2008.

The net loss was $5,325,510 in 2009 compared to $3,304,005 in 2008 for the reasons as explained above.
 
 
 
 
 
-28-

 
Liquidity and Capital Resources
 
During fiscal year 2010, we raised $5,450,960 of capital through the issuance of unregistered shares of common stock.
 
As of February 28, 2010, we had cash balances of $1,617,573 and working capital surplus of $348,331.  We do not believe that this liquidity is adequate to fund our current operations without supplemental funds from sales of our equity or other sources. Due to the sustained and substantial progress in the procurement of necessary working capital required to meet operating and general corporate expenditures, we believe that we will have enough cash flow from operations and from financing sources to continue for the next twelve months. Specifically, we have had substantive discussions with existing warrant holders and other prospective financing sources which lead us to believe that we will be able to obtain the capital necessary to not only maintain current operations, but also to develop and implement our growth strategy in our core businesses as well as ensure a vigorous effort in protecting our Intellectual Property.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Certain of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported if future events indicate that different assumptions should have been used or uncertainties are resolved differently than currently anticipated. The following describes the assumptions involved in these accounting policies:

Management evaluated the probability of the utilization of the deferred income tax asset related to the net operating loss carry forwards. We have estimated a $4,823,000 deferred income tax asset that relates to net operating loss carry forwards at February 28, 2010. Management determined that because we have yet to generate taxable income and that the generation of taxable income in the short term is uncertain, it was appropriate to provide a valuation allowance for the total deferred income tax assets.

We evaluate the impairment of long-lived tangible and intangible assets, including goodwill,  in accordance authoritative guidance in order to determine whether a write down of the applicable long-lived asset is required. This evaluation requires that we estimate future cash flows in order to evaluate whether any impairment has occurred. Due to the nature of estimates, actual cash flows will vary from those estimated.
 
Stock option expense is recorded in accordance with authoritative guidance. The calculation of this expense requires certain assumptions, including the expected volatility of our stock price. See Note 2 of Notes to the Consolidated Financial Statements for the assumptions utilized.

Our revenue recognition policy requires that we evaluate client contracts with multi-deliverables in accordance with authoritative guidance to determine the period in which revenues are recognized. These evaluations are based upon the interpretation of client contracts.

We record a liability for contingencies when we believe that it is reasonably possible that a liability exists and when we can estimate the potential range of that liability. We evaluate contingencies based upon our analysis of the contingency, which includes receiving advice from professionals, such as attorneys.
 
-29-

 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
 Augme Technologies, Inc. (formerly Modavox, Inc.)

Index to Consolidated Financial Statements

   
   
Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets as of February 28, 2010 and February 28, 2009.
F-3
   
Consolidated Statements of Operations for the years ended February 28, 2010, 2009 and
 
February 29, 2008.
F-4
   
Consolidated Statement of Stockholders' Equity for the years ended February 28, 2010, 2009 and February 29, 2008.
F-5 - F-6
   
Consolidated Statements of Cash Flows for the years ended February 28, 2010, 2009 and
 
February 29, 2008.
F-7 - F-8
   
Notes to Consolidated Financial Statements
F-9 - F-27

 
 
 
 
 
 
 
 
 
 
F-1

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
 Augme Technologies, Inc. (formerly Modavox, Inc.)
 New York, NY

We have audited the accompanying consolidated balance sheets of Augme Technologies, Inc. (formerly Modavox, Inc.) as of February 28, 2010 and 2009, and the consolidated statements of operations, stockholders' equity, and cash flows for each of the three years ended February 28, 2010, February 28, 2009 and February 29, 2008. These consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Augme is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Augme’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Augme Technologies, Inc. as of February 28, 2010 and February 28, 2009, and the consolidated results of its operations and its cash flows for the three years ended February 28, 2010, February 28, 2009 and February 29, 2008 in conformity with accounting principles generally accepted in the United States of America.
 

MaloneBailey, LLP
Houston, Texas
www.malonebailey.com
June 1, 2010
 
F-2

 


AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.)
 
CONSOLIDATED BALANCE SHEETS
 
   
February 28,
 
   
2010
   
2009
 
ASSETS
           
CURRENT ASSETS:
           
  Cash and cash equivalents
 
$
1,617,573
   
$
374,696
 
  Accounts receivable, net   of allowance  for
               
    doubtful accounts of $63,747 and $436,273, respectively
   
115,747
     
373,965
 
  Prepaid expenses and other current assets
   
79,133
     
30,816
 
  Current assets of discontinued operations
     -        444,871  
  Total current assets
   
1,812,453
     
1,224,348
 
                 
Property and equipment, net of accumulated depreciation of
               
    $733,241 and $449,266, respectively
   
464,690
     
508,258
 
Goodwill
   
13,106,969
     
386,746
 
Software and patents,  net of accumulated amortization of
               
    $1,456,679 and $899,417 , respectively
   
4,442,187
     
1,548,272
 
Deposits
   
27,450
     
348,000
 
Long-term assets of discontinued operations
    -        1,398,329  
TOTAL ASSETS
 
$
19,853,749
   
$
5,413,953
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
  Accounts payable
 
$
879,584
   
$
1,059,242
 
  Accrued liabilities
   
362,193
     
605,653
 
  Deferred revenue
   
222,345
     
-
 
  Related party note payable
   
-
     
15,574
 
  Current liabilities of discontinued operations
     -        846,350  
  Total current liabilities
   
1,464,122
     
2,526,819
 
                 
  Long-term deferred revenue
   
11,691
     
-
 
                 
            Total liabilities
   
1,475,813
     
2,526,819
 
                 
STOCKHOLDERS' EQUITY:
               
Common stock, $.0001 par value; 100,000,000 shares authorized;
               
   57,256,750 and 44,863,064 shares issued and
               
    outstanding, respectively
   
5,726
     
4,486
 
Additional paid-in capital
   
45,846,778
     
21,347,573
 
Accumulated deficit
   
(27,474,568
)
   
(18,464,925
)
  Total stockholders' equity
   
18,377,936
     
2,887,134
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
19,853,749
   
$
5,413,953
 
   
See accompanying notes to the consolidated financial statements.
 
 
 
F-3

 

AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
         
Years Ended
 
   
February 28,
   
February 28,
   
February 29,
 
   
2010
   
2009
   
2008
 
                   
REVENUE
  $ 339,901     $ 337,327     $ 743,044  
                         
COSTS OF REVENUES (Excluding depreciation):
  Production of service delivery costs
    492,838       215,412       563,414  
  
Operating Expenses
 
                       
  Selling, general, and administrative
    5,580,743       3,271,453       2,945,525  
  Depreciation and amortization
    841,280       541,950       383,687  
  Impairment
    -       729,000       -  
  Lease termination expense
    -       489,845       -  
                         
Total operating expenses
    6,422,023       5,032,248       3,329,212  
                         
LOSS FROM OPERATIONS
    (6,574,960       (4,910,333       (3,149,582  
                         
OTHER INCOME (EXPENSES)
                       
  Interest income (expense), net
    (1,343       9,221       (153,995  
  Loss on derivatives
    (335,820       -       -  
  Impairment of subscription  receivable
    -       -       (395,649  
                         
LOSS FROM CONTINUING OPERATIONS
    (6,912,123       (4,901,112       (3,699,226  
                         
DISCONTINUED OPERATIONS:
                       
  Income (loss) from discontinued operations
    (588,214       (424,398       395,221  
  Loss on sale of discontinued operations
    (878,162       -       -  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    (1,466,376       (424,398       395,221  
                         
NET LOSS
  $ (8,378,499 )   $ (5,325,510     $ (3,304,005  
                         
BASIC AND DILUTED NET LOSS PER SHARE:
                       
  Loss from continuing operations
  $ (0.14 )   $ (0.12 )   $ (0.10  
  Income (loss) from discontinued operations
  $ (0.03 )   $ (0.01 )   $ 0.01  
NET LOSS PER SHARE – basic and diluted
  $ (0.16 )   $ (0.13 )   $ (0.09  
WEIGHTED AVERAGE SHARES OUTSTANDING
                       
  Basic and diluted
    50,980,171       41,874,738       37,979,062  
                         
See accompanying notes to the consolidated financial statements.
 
 
F-4

 
 
AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.)
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
YEARS ENDED FEBRUARY 28, 2010, 2009 AND FEBRUARY 29, 2008
 
                           
 
Common Stock
   
Additional
         
Total
 
 
Number
       
Paid-in
 
Stock
 
Accumulated
 
Shareholders'
 
 
of Shares
 
Total
   
Capital
 
Subscription
 
Deficit
 
Equity
 
                           
Balances, March 1, 2007
 
36,069,203
 
$
3,607
   
$
14,318,067
 
$
(402,808
)
$
(9,835,410
)
$
4,083,456
 
                                       
Common stock issued for
    purchase of World Talk Radio
    assets
 
900,000
   
90
     
1,259,910
   
-
   
-
   
1,260,000
 
Common stock issued for:
                                     
    Cash
 
2,022,376
   
202
     
851,181
   
(100,000
)
 
-
   
751,383
 
    Services
 
650,000
   
65
     
468,435
   
-
   
-
   
468,500
 
Common stock issued for warrant
    cashless exercise
 
140,140
   
14
     
(14
)
 
-
   
-
   
-
 
Common stock issued for
    settlement of accounts payable
 
61,881
   
6
     
55,687
   
-
   
-
   
55,693
 
Employee stock option expense
 
-
   
-
     
141,796
   
-
   
-
   
141,796
 
Warrants granted for services
 
-
   
-
     
289,571
   
-
   
-
   
289,571
 
Impairment of subscription
     receivable
 
-
   
-
     
-
   
395,649
   
-
   
395,649
 
Net loss
 
-
   
-
     
-
   
-
   
(3,304,005
)
 
(3,304,005
)
Balances, February 29, 2008
 
39,843,600
   
3,984
     
17,384,633
   
(107,159
)
 
(13,139,415
)
 
4,142,043
 
                                       
Common stock issued for:
                                     
     Cash
 
3,177,801
   
318
     
1,672,035
   
-
   
-
   
1,672,353
 
     Services
 
50,000
   
5
     
87,495
   
-
   
-
   
87,500
 
Common stock issued for warrant
     cashless exercise
 
99,353
   
10
     
(10
)
 
-
   
-
   
-
 
Common stock issued for option
     cashless exercise
 
952,310
   
95
     
(95
)
 
-
   
-
   
-
 
Common stock issued to
     placement agent
 
60,000
   
6
     
(6
)
 
-
   
-
   
-
 
Common stock issued for
     purchase  of Avalar assets
 
150,000
   
15
     
277,485
   
-
   
-
   
277,500
 
Common stock issued for deposit
     on purchase of New Augme
 
200,000
   
20
     
347,980
   
-
   
-
   
348,000
 
Contingent shares issued for
     purchase of WTR assets
 
30,000
   
3
     
52,497
   
-
   
-
   
52,500
 
 
 
F-5

 

 
Common shares issued for
     termination of lease agreement
   
300,000
     
30
     
551,970
     
-
     
-
     
552,000
 
Employee stock option expense
   
-
     
-
     
888,653
     
-
     
-
     
888,653
 
Warrants granted for services
   
-
     
-
     
84,936
     
-
     
-
     
84,936
 
Proceeds from subscription
      receivable
   
-
     
-
     
-
     
107,159
     
-
     
107,159
 
Net loss
   
-
     
-
     
-
     
-
     
(5,325,510
)
   
(5,325,510
)
Balances, February 28, 2009
   
44,863,064
     
4,486
     
21,347,573
   
$
-
     
(18,464,925
)
   
2,887,134
 
                                                 
Common stock issued for:
                                               
  Cash
   
2,514,201
     
251
     
4,049,745
     
-
     
-
     
4,049,996
 
  Services
   
   246,467
     
  25
     
   510,292
     
-
     
-
     
   510,317
 
  Patent defense costs
   
705,103
     
70
     
  1,326,164
     
-
     
-
     
1,326,234
 
  Litigation settlement
   
75,000
     
8
     
   284,993
     
-
     
-
     
285,001
 
Common stock issued for:
                                               
  Option exercise
   
323,000
     
32
     
     80,718
     
-
     
-
     
80,750
 
  Warrant Exercise
   
3,829,886
     
383
     
1,319,831
     
-
     
-
     
1,320,214
 
Common stock issued for:
                                               
  Cashless option exercise
   
1,102,593
     
112
     
             (112)
     
-
     
-
     
-
 
  Cashless warrant exercise
   
30,769
     
3
     
               (3)
     
-
     
-
     
-
 
  Purchase of New Aug, LLC assets
   
3,466,667
     
346
     
  13,831,655
     
-
     
-
     
13,832,001
 
 Purchase of Radio Pilot – escrowed shares
   
100,000
     
10
     
121,990
     
-
     
-
     
122,000
 
Employee Stock Option Expense
   
-
     
-
     
1,667,739
     
-
     
-
     
1,667,739
 
Warrant Expense
   
-
     
-
     
339,229
     
-
     
-
     
339,229
 
Derivative instruments - Cumulative effect of change in accounting principle
   
-
     
-
     
       (68,798
)
   
-
     
(631,144
)
   
(699,942)
 
Settlement of derivative liabilities
   
-
     
-
     
     1,035,762
     
-
     
     
1,035,762
 
Net loss
   
-
     
-
     
-
     
-
     
(8,378,499
)
   
(8,378,499
)
Balances, February 28, 2010
   
57,256,750
   
$
5,726
   
$
45,846,778
   
$
-
   
$
(27,474,568
)
   
18,377,936
 
                                                 
See accompanying notes to the consolidated financial statements.
 
 
 
 
F-6

 
AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                   
   
Years Ended
 
   
February 28,
   
February 29,
 
   
2010
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
  Net loss
  $ (8,378,499 )   $ (5,325,510 )   $ (3,304,005 )
  Adjustments to reconcile net loss to net cash used in operations:
                       
    Depreciation and amortization
    841,280       541,951       383,687  
    Bad debt expense
    67,503       203,816       120,665  
    Common stock issued for termination of lease
    -       552,000       -  
    Common stock issued for services
    510,317       87,500       468,500  
    Common stock issued for settlement
    285,001       -       -  
    Impairment of goodwill
    -       729,000       -  
    Impairment of subscription receivable
    -       -       395,649  
    Loss on sale of discontinued operations
    878,162       -       -  
    Loss on disposal of fixed assets
    -       1,746       -  
    Loss on derivative instruments
    335,820       -       -  
    Stock option expense
    1,667,739       888,653       141,796  
    Warrants granted for services
    339,229       84,936       289,571  
    Changes in operating assets and liabilities:
                       
      Receivables
    215,715       (371,731 )     192,602  
      Prepaid expenses and other current assets
    (48,317 )     (12,797 )     (3,904 )
      Other assets
    (27,450 )     -       -  
      Accounts payable and accrued expenses
    (362,923 )     708,035       -  
      Deferred revenue
    178,619       -       -  
Net cash used in continuing operations
    (3,497,804 )     (1,912,401 )     (1,315,439 )
Net cash provided by discontinued operations
    118,688       683,860       294,273  
NET CASH USED IN OPERATING ACTIVITIES
    (3,379,116 )     (1,228,541 )     (1,021,166 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
  Additions to property and  equipment
    (240,449 )     (313,104 )     (232,088 )
  Purchase of assets from New Aug, LLC
    (324,000 )     -       -  
  Cash paid for purchase of intangible assets
    -       (50,476 )     (27,163 )
  Patent defense cost
    (248,944 )     (353,000 )     -  
Net cash used in continuing operations
    (813,393 )     (716,580 )     (259,251 )
Net cash used in discontinued operations
    -       (88,986 )     (57,841 )
NET CASH USED IN INVESTING ACTIVITIES
    (813,393 )     (805,566 )     (317,092 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
  Common stock issued for cash
    4,049,996       1,672,353       751,383  
  Proceeds from subscription receivable
    -       107,159       -  
  Proceeds received from the exercise of warrants
    1,320,214       -       -  
  Proceeds received from the exercise of stock options
    80,750       -       -  
  Payments on line of credit
    -       (19,590 )     (410 )
  Net proceeds from (payments on) related party note payable
    (15,574 )     (8,293 )     23,867  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    5,435,386       1,751,629       774,840  
                         
NET CHANGE IN CASH AND CASH EQUIVALENTS
    1,242,877       (282,478 )     (563,418 )
CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD
    374,696       657,174       1,220,592  
CASH AND CASH  EQUIVALENTS, END OF PERIOD
  $ 1,617,573     $ 374,696     $ 657,174  
 
 
F-7

 
                         
SUPPLEMENTAL CASH FLOW INFORMATION:
                       
  Cash paid for interest
  $ -     $ -          
  Cash paid for income taxes
    -       -          
                         
NONCASH INVESTING AND FINANCING ACTIVITIES:
                       
  Cumulative adjustment to retained deficit for derivative liabilities
  $ 699,942     $ -     $ -  
  Settlement of derivative liabilities
    1,035,762       -       -  
  Stock issued for purchase of assets from New Aug, LLC
    13,832,001       -       -  
  Stock issued for patent defense
    1,326,234       -       -  
  Issuance of accrued Radio Pilot common stock
    122,000       -       -  
  Stock issued for purchase of assets from Avalar
    -       277,500       -  
  Contingent shares issued for purchase of World Talk Radio
    -       52,500       -  
  Contingent shares issued for purchase of Avalar
    -       122,000       -  
  Stock issued for placement agent services
    -       6       -  
  Stock issued for deposit on acquisition of New Augme
    -       348,000       -  
  Stock issued for purchase of World Talk Radio
    -       -       1,260,000  
  Stock issued for subscription receivable
    -       -       100,000  
  Stock issued for settlement of accounts payable
    -       -       55,693  
                         
See accompanying notes to the consolidated financial statements.
 


 
 
 
 
 
 
 
 
 
F-8

 
AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS

Augme Technologies, Inc. (formerly Modavox, Inc.) (“we”, “our”, or the “Company”) is a Delaware corporation headquartered in New York, New York. We are a provider of technology and services in interactive media marketing platforms that enable marketers and agencies to seamlessly integrate brands, promotions, video and digital content through the power of the internet and mobile communications.  Our intuitive new media marketing platforms give companies the control they need to quickly create, deploy and measure rich-media, interactive marketing campaigns across all networks and devices.  Campaigns built on Augme marketing platforms condense the customer loyalty cycle by delivering personalized brand experience to customers where they work, play and live.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassifications
 
Certain prior year amounts have been reclassified to conform to the current year presentation.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements.  The Company regularly evaluates estimates and judgments based on historical experience and other relevant facts and circumstances. Actual results could differ from those estimates.  Significant estimates relate to allowances for tax assets, the use of the Black-Scholes pricing model for valuing stock option and common stock warrant issuances, estimates of future cash flows used to evaluate impairment of long-lived assets, the period in which revenues should be recorded, and the collectability of accounts receivable.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its controlled subsidiaries.  Equity investments in which the Company exercises significant influence, but does not control and is not the primary beneficiary, are accounted for using the equity method of accounting.  Investments in which the Company does not exercise significant influence over the investee are accounted for using the cost method of accounting.  Intercompany transactions are eliminated.
 
F-9

 
Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Revenue Recognition

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

Revenue from the Company’s AD BOOM™ digital video platform and AD SERVE™ ad delivery platform is based upon the terms of individual contracts and includes revenue from the production and delivery of online media content, revenue from the creation of custom software for online content delivery functionality, fees for hosting websites, and fees for producing online advertising content for third party and company websites.

Contracts may include single deliverables such as production and delivery of media content, hosting, fees from content retention or fees from online advertising content, or may include multiple deliverables such as custom software creation, audio production, and delivery of online media content or hosting. Revenues from single delivery contracts for the production and delivery of online media content and hosting are recorded pro rata over the term of the media content production and delivery or hosting period.  Multiple deliverable contracts are evaluated based on authoritative guidance to determine whether they meet the separation criterion for recognition of each deliverable as a separate unit.

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

Fees for producing interactive advertising content are based upon a fee for the production and hosting of the advertising content and/or a percentage of the fees paid by third party advertisers. Fees from third parties for the production and hosting of the advertising content are recorded pro rata over the related hosting period. Fees representing a percentage of the fees paid by third party advertisers for advertising on third party or company websites are recorded when the contractual criteria has been met and amounts are due from third party advertisers.
 
F-10

 
Stock-Based Compensation

The Company applies the fair value recognition provisions for all stock-based payments granted or modified on or subsequent to March 1, 2006 in accordance with authoritative guidance. Under this guidance, the Company records compensation costs over the requisite service period of the award based on the grant-date fair value. The straight-line method is applied to all grants with service conditions.

Loss per Share

In accordance with authoritative guidance, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the number of common and common equivalent shares outstanding during the period, assuming full dilution. As of February 28, 2010, there were potentially dilutive securities of options exercisable into 2,399,622 shares of common stock, and warrants exercisable to purchase 5,384,195 shares of common stock.  However, the computation of diluted earnings per share does not assume conversion or exercise of securities that would have an anti-dilutive effect on the calculation of earnings per share as the inclusion of these outstanding warrants and stock options would be anti-dilutive. Accordingly, diluted net loss per share and basic net loss per share are identical for each of the periods in the accompanying consolidated statements of operations.

Fair Value of Financial Instruments

Financial instruments consist primarily of cash, accounts receivable, obligations under accounts payable and accrued expenses. The carrying amount of cash, accounts payable and accrued expenses approximates fair value because of the short maturity of those instruments.

The Company applies the authoritative guidance in measuring assets and liabilities that are carried at fair value.  The guidance defines fair value, establishes a framework for measuring fair value, and provides required disclosures about fair value measurements.
 
F-11

 
Fair value under the authoritative guidance is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined are as follows:

·
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
·
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
·
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
 
F-12

 
Accounts Receivable

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

The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. Our allowance for doubtful accounts was $63,747 and $436,273 as of February 28, 2010 and February 28, 2009, respectively.

Property and Equipment

Property and equipment consists primarily of software, office and computer equipment, furniture, fixtures and leasehold improvements and is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 7 years. Depreciation expense was $284,017, $223,578, and $122,334 for the years ended February 28, 2010 and 2009 and February 29, 2008, respectively.

Property and equipment consisted of the following at February 28, 2010 and February 28, 2009:

   
2010
   
2009
 
Furniture
 
$
43,374
   
$
70,607
 
Computers, software,  production equipment
   
1,081,410
     
1,033,368
 
Phone systems
   
30,687
     
30,687
 
Leasehold improvements
   
38,460
     
38,460
 
     Total
   
1,197,931
     
957,524
 
Accumulated depreciation
   
(733,241
)
   
(449,266
)
     Net
 
$
464,690
   
$
508,258
 
 
 
 
F-13

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

Goodwill, Intangible Assets, and Long-lived Assets

Goodwill represents costs in excess of fair values assigned to the underlying net assets acquired. The Company follows authoritative guidance with respect to the accounting for business combinations, goodwill and other intangible assets, and the impairment or disposal of long-lived assets.  This guidance requires the use of the purchase method of accounting for business combinations, sets forth the accounting for the initial recognition of acquired intangible assets and goodwill and describes the accounting for intangible assets and goodwill subsequent to initial recognition. Under these provisions, goodwill is not subject to amortization and an annual review is required for impairment. The impairment test is based on a two-step process involving (i) comparing the estimated fair value of the related reporting unit to its net book value and (ii) comparing the estimated implied fair value of goodwill to its carrying value. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value. The Company's annual impairment testing date is February 28.

The Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.

The Company reviews its long-lived assets, including property and equipment, identifiable intangibles, and goodwill annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. See Note 6 for the impairment recorded by the Company for the year ended February 28, 2010, 2009 and February 29, 2008.

When incurring legal costs to sue other parties for infringing on the Company’s patents, or in defending against claims by other parties that our patents are not valid, the Company capitalizes those legal costs as additional costs of the patent where the Company determines that a favorable outcome from the litigation is probable.  If the Company is ultimately unsuccessful, the costs are charged to expense. For legal costs that are capitalized, the value of any award received upon successful resolution of the legal action will first be recorded as a reduction of the capitalized legal costs, with any excess recorded as income.  For the years ended February 28, 2010 and 2009, the Company capitalized $1,575,178 and $353,000, respectively, of legal costs related to our lawsuit against Tacoda and Yahoo as the Company has determined that a favorable outcome is probable.
 
F-14

 
Software and patents consisted of the following at February 28, 2010 and February 28, 2009:

   
Useful Life in
             
   
Months
   
2010
   
2009
 
                   
Software
 
36 to 84
   
$
2,084,393
   
$
2,084,393
 
Trademarks and patents
Identifiable intangible assets:
   Customer relationships
    Acquired technology
    Non-compete agreement
   
55
 
72
60
36
     
1,938,473
 
950,000
670,000
212,000 
     
363,296
 
-
-
-
 
    Acquired trade name 
   
24
     
44,000 
     
-
 
  Total
           
5,898,866
     
2,447,690
 
Accumulated amortization
           
(1,456,679
)
   
(899,417
)
                         
  Net
         
$
4,442,187
   
$
1,548,273
 

During the years ended February 28, 2010 and 2009 and February 29, 2008, the Company recorded amortization expense on intangible assets of $557,263, $318,372, and $105,416, respectively.

Deferred Revenue

Amounts billed or collected in advance of the period in which the related product or service qualifies for revenue recognition are recorded as deferred revenue.
 
The Company relieves the deferred revenue balance and records revenue when the service has been performed in accordance with the Company’s revenue recognition policy.

Income Taxes

Income taxes are provided for tax effects of transactions reported in the financial statements and consist of income taxes currently due plus deferred income taxes related to timing differences between the basis of certain assets and liabilities for financial statement and income tax reporting. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

Recent Accounting Pronouncements

In September 2009, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are not covered by software revenue guidance. This guidance provides another alternative for establishing fair value for a deliverable when vendor specific objective evidence or third-party evidence for deliverables in an arrangement cannot be determined. Under this guidance, companies will be required to develop a best estimate of the selling price for separate deliverables. Arrangement consideration will need to be allocated using the relative selling price method as the residual method will no longer be permitted. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company is currently evaluating the impact, if any, of this guidance on its consolidated financial statements.

In May 2009, the FASB issued authoritative guidance establishing general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued. This new standard was effective beginning with the Company’s second quarter financial reporting and did not have a material impact on the Company’s consolidated financial statements

In June 2008, the FASB issued authoritative guidance requires all derivatives to be recorded on the balance sheet at fair value.  Fair value for securities traded in the open market and derivatives are based on quoted market prices.  Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.  The pricing model the Company used for determining fair values of its derivatives is the Black-Scholes option-pricing model.  Valuations derived from this model are subject to ongoing internal and external verification and review.  The model uses market-sourced inputs such as interest rates, exchange rates and option volatilities.  Selection of these inputs involves management’s judgment and may impact net income.  All of the securities underlying the Company’s derivatives were exercised during the fiscal year ended February 28, 2010, and, therefore, no derivative liability is reported on the balance sheet as of February 28, 2010.
 
F-15

 
NOTE 3 – DISCONTINUED OPERATIONS

On December 31, 2009, the Company entered into to a binding letter of intent with World Talk Radio, LLC (“WTR”), an Arizona Limited Liability Company, regarding the disposition of certain assets and liabilities related to the Internet Radio operations based in Tempe, AZ.
 
On February 25, 2010, the Company and WTR executed the final Asset Purchase Agreement in connection with the Binding Letter of Intent.
 
As consideration for the sale of the assets of the Internet Radio operations, the Company will receive a perpetual royalty as a percentage of gross revenue collected by WTR, based on the following schedule:

 
January 1, 2010 – March 31, 2010
-  5% of Gross revenues collected
April 1, 2010 – June 30, 2010
- 10% of Gross revenues collected
July 1, 2010 – June 30, 2015
-  15% of Gross revenues collected
July 1, 2015 and after
-  5% of Gross revenues collected

Since the proceeds from the sale of the Internet Radio operations is contingent on future revenue collected, we were required to record the net asset sold to WTR as a loss on the sale of discontinued operations, which amounted to $878,162.  However, all future royalty payments received will be reported as a gain on the sale of discontinued operations in the period received.

Management evaluated the future royalty payments and determined the cash flows are indirect. Management then performed an evaluation under FASB ASC 205-20 and determined there was no significant continuing involvement by Augme in the operations of the disposed Internet Radio component. Augme does not retain an interest and there are no existing contracts that would allow Augme to influence the operating or financial policies of the Internet Radio component.

Pursuant to accounting rules for discontinued operations, we have classified fiscal year 2010 and prior reporting periods to present the activity related to the Internet Radio operations as a discontinued operation. Discontinued operations for the twelve months ended February 28, 2010, 2009, and February 29, 2008 are summarized as follows: