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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, 2011

[  ] 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, 11th Floor
New York, NY 10010
(Address of principal executive offices, including zip code)

(855) 423-5433
(Issuer’s telephone number)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined Rule 405 of the Securities Act.
Yes [  ] 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 sold on the OTC Bulletin Board on August 31, 2010 was $1.23 per share and was last sold on the OTC Bulletin Board on May 12, 2010 at a price of $3.41 per share.

The number of shares outstanding of the registrant's Common Stock, $0.0001 par value, on May 13, 2011 was 69,808,604.
 
 
 

 
DOCUMENTS INCORPORATED BY REFERENCE

None
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Augme Technologies, Inc.
Form 10-K for the Year Ended February 28, 2011

TABLE OF CONTENTS

PART I
   
     
Item 1.
Business
4
Item 1A.
Risk Factors
9
Item 1B.
Unresolved Staff Comments
12
Item 2.
Properties
12
Item 3.
Legal Proceedings
13
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
14
Item 6
Selected Financial Data
16
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
Item 8.
Financial Statements and supplementary data
23
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
46
Item 9A.
Controls and Procedures
46
Item 9B.
Other Information
47
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
47
Item 11.
Executive Compensation
51
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
62
Item 13.
Certain Relationships and Related Transactions, and Director Independence
63
Item 14.
Principal Accounting Fees and Services.
63
     
PART IV
   
     
Item 15.
Exhibits, Financial Statement Schedules
64
 
 
 
 

 
PART I

ITEM 1. DESCRIPTION OF BUSINESS

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

AD LIFE™ - Mobile Marketing

AD LIFE™ is our interactive software-as-a-service (“SaaS”) 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.

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 annually 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.

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 technology and services required for the implementation of a complete mobile marketing campaign. Recently, 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 LIFE™ maintains a time-to-market advantage with our strategic vision, our integrated and comprehensive technology platform, and our sales strategy.  We are 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 as described below:

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 a wide 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.

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

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

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.

Intellectual Property Summary

Augme’s patent portfolio that is described below is foundational to the methods utilized in two primary types of Mobile Internet operations providing:
1. Device detection and mobile content rendering


2. Customized content & mobile advertising delivery


























Central to the growth being experienced and projected within Augme’s marketing technology businesses is the fact that the Internet enabled “Smartphone”
 has become a leading driver of growth in Internet traffic and utilization by consumers. Due to that explosive growth, publishers are refocusing to reach consumers through mobile websites and initiatives. One example of the effect of adding computers to cellular phones is the phenomenal growth of Apple’s mobile software applications market in addition to those “application” communities that have been cultivated by Google with its Android, Blackberry, and Microsoft as well as others. This market has been brought about by the presence of the foundational mobile broadband Internet infrastructure and mobile device advancements. In fact, the cellular phone has been augmented with mobile computers complete with processors, Internet browsers, operating systems and even software applications. The problem that Augme’s products provide real time mobile customized content delivery, enabling richer and more functional content to reach end users. The additional claims of patents we were issued in 2010 and the investment in our enforcement efforts during 2010 have set the stage for both our 2011 Enterprise Software as a Service (SaaS) licensing strategy and non-litigation license enforcement strategy.   The hyper-growth in the mobile marketing space, the rapid consumer adoption of “Smartphone”, continued focus on intellectual property expansion, and IP enforcement are 2011 initiatives already underway.

We believe that growth in the mobile Internet market space may enhance our patent enforcement initiative because it has contributed to the creation of an emerging group of companies that have developed revenue streams that are dependent on technology that we believe is infringing on Augme’s patents. Augme’s inventions have solved device, infrastructure and customized content distribution problems facing Internet publishers in 1999. Now in 2011, well within the coverage of the patent protection, the identical problems are repeating in the mobile Internet and we believe that Augme’s inventions again present the solution for mobile Internet publishers and service providers. We believe that the growing number of market entries by highly capitalized companies and the highly sought after massive consumer audience emerging on the mobile Internet makes it likely that infringement of our patents is occurring. Companies that implement
and monetize their solutions may have developed revenue streams subject to licensing and infringement damages by Augme.

The establishment of “Smartphones”, tablets, and mobile devices as the leading growth driver of Internet utilization by consumers has given rise to mobile Internet web pages that we believe have embedded Augme’s patented system. Augme’s system is used to achieve compatible content delivery to a wide array of mobile devices over mobile Internet networks as well as consumer targeted content delivery. In order to accommodate the various screen sizes, operating systems and Internet connectivity
levels of mobile users, we believe that publishers use Augme’s invention to embed a small universally compatible first code module into the mobile webpage. The subsequent method patented by Augme allows for a customized service response targeted to an individual mobile user device, mobile Internet network environment, and preferences. We believe that Augme’s system is the state-of-art solution for both the mobile and Internet publishers.

Augme's solutions are supported by its intellectual property portfolio, and the Company now owns four patents and has additional patents pending with the United States Patent & Trademark Office ("USPTO"). The patents contain a broad range of claims covering the Company's proprietary technologies and products. Augme also owns six trademarks protecting the names of its products and identity in the marketplace.

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 (the “’691 Patent”) was issued on July 15, 2003, and is titled “Method and System for Adding Function to a Webpage.”  US. Patent No. 7,269,636 (the “’636 Patent”) was issued on September 11, 2007, and is titled “Method and Code Module for Adding Function to a Webpage.” 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. US Patent No. 7,783,721 entitled "Method and Code Module for Adding Function to a Webpage” was issued August 24, 2010. The software device that is patented enables Internet and mobile websites to be delivered with customized content that is tailored to any end-user’s network-enabled device.  The customization being performed by the software device is achieved by automatically gathering information about the user’s device, browser and other information provided from the content of the Web page containing the patented technology.

 
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US Patent No. 7,831,690 (the “’690 Patent”) entitled "Appliance Metaphor for adding Media Function to a Web Page” was issued November 9, 2010.  This technology enables content targeting by publishers of Internet and mobile web destinations and adds content customization capability to a web page that allows any device, network appliance, or browser to receive an optimized service response automatically with a service delivery of a consumer targeted response formed by a server system and customized in response to information about a web page.

The claims of the ‘690 patent define Augme's technology that enables content targeting by publishers of Internet and mobile web destinations. The newly issued patent claims provide ownership of: technology that adds content customization capability to a web page; technology that allows any device, network appliance, or browser to receive an optimized service response automatically; and a service delivery of a consumer targeted response formed by a server system and customized in response to information about a web page. We intend to continue our efforts to monetize and enforce our intellectual property rights.

The Company believes that the issuances of these patents further establish Augme as the owner of foundational Internet content targeting technology. We believe these issuances provide further validation of our Company’s core technology and increase our patent claims in key new areas for our business operations and enforcement strategy. These new patents are being further assessed and maximized to contribute to the overall valuation of the Augme portfolio. Augme has focused on growing its intellectual property portfolio and managed in 2010 to double the size of our patent portfolio through a direct and measured effort. These new patented claims provide ownership of our technology inventions within the mobile network and Internet appliance applications.
 
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 Webpage (traditional Internet and mobile Web) to have an infinite number of tailored service responses that allow Webpage 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 that 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 Webpage is downloaded, the technology automatically executes a first code module embedded in the Webpage.  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, 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.”  

According to Forrester Research, August 2010, mobile marketing is projected to be the fastest growing sector in the United States Interactive Marketing Spend, from 2009 to 2014, growing from $391 million to $1.27 billion or a 27% compound annual growth rate, (“CAGR”).  Behavioral targeted advertising or “Display Advertising” is expected to grow from $7.82 billion in 2009 to $16.9 billion in 2014, a 17% CAGR. US Interactive Marketing Spend, from 2009 to 2014 as a whole is expected to more than double from $25.57 billion in 2009 to $54.95 billion in 2014.

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

 
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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 of Augme’s core technology platforms.  
 
In an effort to support Augme’s future business strategy, and in conjunction with the repositioning of other corporate assets earlier in fiscal year 2010, 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.

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

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 (FY2012) business strategy is primarily focused on generating near-term revenue from AD LIFE™.  Augme provides strategic services and mobile technology to leading consumer and healthcare brands. Augme's AD LIFE™ mobile marketing technology platform allows marketers, brands, and agencies the ability to plan, create, test, deploy, and track mobile marketing programs. Through the use of consumer response tags (CRTs) such as 2D codes, UPC codes, SMS, and Image Recognition, AD LIFE™ facilitates consumer brand interaction and the ability to track and analyze campaign results. Using its own patented device-detection and proprietary mobile content adaptation Software as a Service, (“SaaS”), AD LIFE™ solves the mobile marketing industry problem of disparate operating systems, device types, and on-screen mobile content rendering. Augme also provides business to consumer utilities including national mobile couponing solutions, strategic mobile healthcare tools, custom mobile application development, and consumer data tracking and analytics. In addition to AD LIFE™, Augme owns and licenses the digital broadcast platform BOOMBOX®. Augme does not currently deploy BOOMBOX® technology within our AD LIFE™ mobile marketing platform. We believe these revenue producing efforts 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.

Effective December 17, 2010, we executed a Non-Exclusive License Agreement, (the “Agreement”), that granted to the Licensee solely within the Territory and within the Field of Use (as defined below), a non-exclusive, non-sub licensable, non-transferable and non-assignable license agreement with XA, The Experimental Agency, Inc., (“XA” or “Licensee”) that includes; the "Licensed Patents & Trademark", that refers to U.S. Patent Nos. 6,594,691 entitled ("Method and System for Adding Function to a Web Page") (the "’691 Patent"); and 7,269,636 entitled ("Method and Code Module for Adding Function to a Web Page") (the "’636 Patent"); and 7,783,721 entitled ("Method and Code Module for Adding Function to a Webpage"); and 7,831,690 (the “’690 Patent”) entitled (“Appliance Metaphor For Adding Media Function To A Web Page”), (the “Licensed Patents”) and a release with respect to any other patents of this family of patents owned or controlled by Augme or its affiliates that XA needs to use or practice the claims of the '691 Patent, '636 Patent, ‘721 Patent, and ‘690 Patent within it’s management and operation of BoomBox® the Internet Broadcasting Platform; and the trademark registration No. 3,668,343 for BoomBox® Trademark Issued On August 18, 2009.

The Licensed Patents may be incorporated by Licensee into Licensee Products or Services within the Field of Use ("BoomBox Products or Services") as an enhancement thereto solely in the Field of Use for use by end user customers of Licensee ("End User(s)"). Licensee will not make available to any End User any BoomBox Products or Services unless the End User executes a written agreement, in a form acceptable to Augme, specifying that (i) End User obtains no property rights to the Licensed Patents by virtue of such use of the BoomBox Products or Services; and (ii) End User's use of the Licensed Patents is restricted to its use of the BoomBox Products or Services within the Territory and will not extend beyond the term of the Agreement.

 
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For each calendar quarter, Licensee shall owe Augme royalties equal to ten percent (10%) of Gross Revenue generated from the sale of BoomBox Products & Services under the Agreement.  To date, the Agreement has not produced any revenues to us.
 
“Licensee” means XA, The Experimental Agency, Inc.

"Field of Use" means utilization of the above mentioned patents and trademark ONLY within the management and operation of BoomBoxÒ the Internet Broadcasting Platform in the following business markets; event, entertainment, marketing, e-learning and corporate communications.

"Territory” means the fifty states of the United States and the District of Columbia.

Employees

As of May 13, 2011 Augme has 50 employees that includes executive management, legal, accounting, administration, sales (including channel management), client services, technology development and IT infrastructure management, technical administration and implementation. We have no labor union contracts and believe relations with our employees are satisfactory.

Available Information

You can find more information about us at our Internet 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.
 
 
 
 
 
 
 
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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.

We incurred a net loss from operations for the last three fiscal years.  We cannot assure you that we will ever be profitable.

Our net loss from operations has increased for each of the last three fiscal years, from $4,910,333 to $6,574,960 to $12,478,202 for the fiscal years ending February 28, 2009, 2010 and 2011, respectively.  For the last fiscal year ended February 28, 2011, we had negative operating cash flows of $5,908,423.  Our ability to generate positive cash flows from operations and net income is dependent, among other things, on the acceptance of our products in the marketplace, market conditions, cost control, and our ability to raise capital on acceptable terms.  The financial statements included elsewhere in this report do not include any adjustments that might result from the outcome of these uncertainties.  Furthermore, developing and expanding our business will require significant additional capital and other expenditures.  Accordingly, if we are not able to increase our revenue, then we may never achieve or sustain profitability.

Even though we recently completed a $9 million financing, we are likely to need additional financing from time-to-time in order to continue our operations.  Financing may not be available to us when we need it.

Although we recently completed a $9 million financing, we anticipate that, in the future, we may need additional financing to continue our operations.  Financing may not be available to us on commercially reasonable terms, if at all, when we need it.  There is no assurance that we will be successful in raising additional capital or that the proceeds of any future financings will be sufficient to meet our future capital needs.

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

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

           Our 2011 and 2010 annual impairment testing indicated no impairment of our goodwill or intangible assets.  Although our analysis regarding the fair values of the goodwill and indefinite lived intangible assets indicates that they exceed their respective carrying values, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in goodwill impairment losses. Specifically, an unanticipated deterioration in revenues and gross margins generated by our Ad Life mobile marketing business segment could trigger future impairment in that segment.  We also evaluate other assets on our balance sheet whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Materially different assumptions regarding the future performance of our businesses could result in significant asset impairment losses.

 
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The trading price of our common stock is subject to wide fluctuations.  We are also subject to the “penny stock rules”.  Both of these factors make any investment in our securities risky.

The trading price of our common stock is, and it may continue to be, subject to wide fluctuations in response to business or other factors, many of which are beyond our control.  As long as the trading price of our common shares is below $5 per share, the trading of our common shares will be subject to the “penny stock” rules.  Both of these factors make any investment in our securities risky.

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

In June 2010 our Chief Executive Officer was replaced and since that date other officers and directors have resigned or been replaced.  There can be no assurance that our new management team will function together successfully to implement our business strategy.  Our performance is dependent on the services of our management as well as on our ability to recruit, retain and motivate other key employees in the fields of engineering, marketing and finance.

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

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

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

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

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

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

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

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

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

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

Risks Relating to Ownership of Our Securities

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

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

 
-10-

 
The stock market in general has experienced volatility that often has been unrelated to the operating performance of companies.  These broad fluctuations may be the result of unscrupulous practices that may adversely affect the price of our stock, regardless of our operating performance.

Stockholders should be aware that, according to SEC Release No. 34-29093 dated April 17, 1991, the market for penny stocks has suffered from patterns of fraud and abuse.  Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.  The occurrence of these patterns or practices could increase the volatility of our share price.

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

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

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

Article Eight of our Certificate of Incorporation states that our directors shall not be personally liable to us or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Section 174 of the Delaware General Corporation Law or shall be liable because the director (1) shall have breached his duty of loyalty to us or our stockholders, (2) shall have acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law, or (3) shall have derived an improper personal benefit.  Article Eight further states that the liability of our directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as amended.  These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.

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

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

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

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

 
-11-

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

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

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

Our ability to compete effectively.
Our ability to continue to attract clients.
Our ability to attract revenue from advertisers and sponsors.
The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure.
General economic conditions and those economic conditions specific to the internet and internet advertising.
Our ability to keep our 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.

Also, 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.

Further, 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 1B.  UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2. DESCRIPTION OF PROPERTY

Our headquarters are located at 43 West 24th Street, 11th Floor, in New York City, where we lease approximately 12,500 square feet of space for administrative, sales and client services personnel under a lease that expires in January 2012.  Additionally, we lease additional office space of approximately 3,000 square feet of office space in Tucson, Arizona for patent research and production personnel and approximately 2,200 square feet and 8,452 square feet of office space in Alpharetta and Atlanta, Georgia, respectively for sales, technical and production personnel.  These leases expire in July 2012, October 2011 and June 2012, respectively. The locations of these offices are; (i) University of Arizona Technology & Science Park, 9070 South Rita Road, Suite 1550, Tucson, Arizona; (ii) 1000 Cambridge Square, Alpharetta, Georgia; and (iii) 5 Concourse Parkway, 9th Floor, Atlanta, Georgia, respectively.

 
-12-

 
ITEM 3. LEGAL PROCEEDINGS
 
In the normal course of business, we may become involved in various legal proceedings.  Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party that, if successful, might result in a material adverse change in our business, properties or financial condition.

During fiscal year ended February 28, 2011 we continued our patent enforcement actions as described below:

Tacoda, Inc.  In 2007, Augme filed a lawsuit against Tacoda, Inc. in the U.S. District Court, Southern District of New York, seeking damages for alleged 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”).  The case is still unresolved.

AOL, LLC, Time Warner, Inc., and Platform-A, Inc.  On September 10, 2008, we filed a complaint against AOL, LLC in the U.S. District Court, Central District of California, seeking damages for alleged 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 mark BOOMBOX RADIO, and infringement of our U.S. Patent Nos. 6,594,691 and 7,269,636.  Pursuant to a court order dated April 14, 2009, the case was transferred to the U.S. District Court, Southern District of New York, so that our case against Tacoda, Inc. and this case could be adjudicated in the same court, since both cases involved the same patents.

Yahoo! Inc.  On November 16, 2009, Augme filed a Complaint against Yahoo! Inc. seeking damages for alleged infringement relating to our U.S. Patent Nos. 6,594,691 and 7,269,636, which patents relate to methods and systems for delivery of selected content from a network to a web page visitor.  The matter is currently pending in the United States District Court for the Northern District of California, Case No. C-09-5386 EDL.  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.

On November 12, 2010, Yahoo! filed a motion for summary judgment with the United States District Court for the Northern District of California.  On December 3, 2010, an order was issued by Magistrate Judge Joseph C. Spero denying the Yahoo! motion without prejudice.  On December 3, 2010, Yahoo! filed a Notice of Motion and Motion for Leave to File Amended Answer with Additional Counterclaims seeking damages for costs of defense and will full infringement and to join World Talk Radio, LLC as a Counterclaim Defendant.  Augme denies that any merit exists with respect to these counterclaims and will continue to pursue the prosecution of Yahoo!'s infringement against the Company’s patent claims.

Subsequent events to fiscal year ended February 28, 2011 are described below:
 
On December 29, 2009, two holders of the Company’s 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. On or about March 21, 2011, the parties executed a Settlement Agreement and Mutual Release that included the issuance by the Company of 103,094 unregistered shares of common stock and 34,406 registered shares of common stock. The matter is pending dismissal within the court.
 
On April 7, 2011, Yahoo! filed a motion for summary judgment with the United States District Court for the Northern District of California.  On April 20, 2011, an order was issued by Magistrate Judge Joseph C. Spero denying the Yahoo! motion.  
 
On April 29, 2011, we filed a complaint against PANDORA MEDIA, INC. in the U.S. District Court, District of Delaware, seeking damages relating to our U.S. Patent No. 7,831,690, which patents relate to an “Appliance Metaphor For Adding Media Function To A Web Page”.
 
On April 29, 2011, we filed a complaint against GANNETT CO., INC.; LUCIDMEDIA NETWORKS, INC.; and AOL, INC. in the U.S. District Court, Eastern District of Virginia, seeking damages relating to our U.S. Patent No. 7,783,721, which patents relate to an “Method and Code Module For Adding Function to a Web Page” and U.S. Patent No. 7,831,690, which patents relate to an “Appliance Metaphor For Adding Media Function To A Web Page”.

 
-13-

 
PART II

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

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

Fiscal Year 2010
 
High
   
Low
 
             
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 28, 2010
  $
2.02
    $
1.07
 
                 
Fiscal Year 2011
               
                 
First Quarter ended May 31, 2011
  $
1.64
    $
1.07
 
Second Quarter ended August 31, 2011
  $
1.35
    $
.99
 
Third Quarter ended November 30, 2011
  $
3.00
    $
1.15
 
Fourth Quarter ended February 29, 2011
  $
4.49
    $
2.54
 

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

Subsequent to February 28, 2011 and through May 13, 2011, we made the following equity transactions, which were not registered under the Securities Act and not previously reported in a Quarterly Report on Form 10-Q or in a Current Report or Form 8-K:

1)
 
2)
 
3)
Issued 734,976 shares for cash in connection with the exercise of options.
 
Issued 90,500 shares for cash in connection with the exercise of warrants.
 
Issued 90,500 shares in connection with the exercise of cashless 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 13, 2011, the number of holders of record of our common stock was 298.

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, 2011.

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
 
5,808,665 shares of common stock 
 
$1.77 
 
4,191,335 
 
                 
Equity compensation plans not approved by security holders
 
 
8,138,868 shares of common stock
 
 
 
 
 $1.32
 
 
-0-
  
 
 
 
-14-

 
Benefit Plans

2004 Stock Plan

In March 2004, our Board 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.

2010 Stock Plan

        In September 2010, the shareholders of the Company approved the Augme Technologies, Inc. 2010 Incentive Stock Option Plan (the “Plan”), which our Board adopted on August 12, 2010. The purpose of the Plan is to advance our interests and those of our stockholders by enabling us to attract and retain persons of ability to perform services for us by providing an incentive to such individuals through equity participation in the Company and by rewarding such individuals who contribute to the achievement of our economic objectives.  The Plan permits us to grant, for a ten-year period, stock options, restricted stock awards and bonuses of stock, collectively referred to in this discussion as “awards”.  We reserved 10 million shares of our Common Stock for issuance to our directors, employees, independent contractors and consultants under the Plan. The Board of Directors administers the Plan. The Board has the authority and discretion, subject to the provisions of the Plan, to select persons to whom awards will be granted, referred to in this discussion as “Participants”, to designate the number of shares to be covered by each award, to specify the type of consideration to be paid, and to establish all other terms and conditions of each award. As of May 6, 2011 there are 6,098,665 options issued leaving a balance authorized of 3,901,335 options.
 
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. These options have a life of 10 years, and vest immediately.

EMPLOYEE STOCK OPTIONS

On February 28, 2011, we had 13,947,533 options outstanding. For the period ended February 28, 2011, we recognized $2,961,687 of stock compensation expense for options.

 
-15-

 
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,
 
 
2011
 
2010
 
2009
 
2008
 
2007
 
     
Statement of Operations Data:
                             
REVENUE
  $ 2,821,213     $ 339,901     $ 337,327     $ 743,044     $ 1,064,278  
                                         
COST OF REVENUE
    1,251,318       492,838       215,412       563,414       542,966  
Operating expenses:
                                       
Selling, general and administrative
    6,166,025       3,662,481       2,309,912       2,635,734       1,376,916  
Stock, Option & Warrant Expense
    6,862,472       1,918,262       961,540       309,791       23,500  
Depreciation and amortization
    1,019,600       841,280       541,951       383,687       348,103  
Impairment
    -       -       729,000       -       -  
Lease termination Expense
    -       -       489,845       -       -  
                                         
Total operating expenses
    14,048,097       6,422,023       5,032,248       3,329,212       1,748,519  
                                         
LOSS FROM OPERATIONS
    (12,478,202 )     (6,574,960 )     (4,910,333 )     3,149,582 )     (1,227,207 )
OTHER INCOME (EXPENSES)
                                       
Interest income (expense), net
    (276 )     (1,343 )     9,221       (153,995 )     3,350  
Loss on Derivatives
    -       (335,820 )     -       -       -  
Impairment of subscription receivable
    -       -       -       (395,649 )     -  
                                         
LOSS FROM CONTINUING OPERATIONS
    (12,478,478 )     (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  
    Loss on sale of discontinued operations
    -       (878,162 )     -       -       -  
                                         
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    -       (1,466,376 )     (424,398 )     395,221       (669,775 )
                                         
Net income (loss)
  $ (12,478,478 )   $ (8,378,499 )   $ (5,325,510 )   $ 3,304,005 )   $ (554,082 )
                                         
Basic and diluted loss per share from continuing operations
  $ (0.21 )   $ (0.14 )   $ (0.12 )   $ (0.10 )   $ (0.04 )
                                         
Basic and diluted net income (loss) per share
  $ (0.21 )   $ (0.16 )   $ (0.13 )   $ (0.09 )   $ (0.02 )
                                         
Weighted average shares of common stock used in computing basic and diluted net loss per share
    60,284,895       50,980,171       41,874,738       37,979,062       31,551,573  
 
 
-16-

 

 
As of
 
 
February 28,
2011
 
February 28,
2010
 
February 29,
2009
 
February 28,
2008
 
February 28,
2007
 
 
Balance Sheet Data:
                         
Cash, cash equivalents and short-term marketable securities
 
$
11,182,356
   
$
1,617,573
 
$
374,696
   
$
657,174
   
$
1,220,592
 
Total assets
   
32,030,876
     
19,853,749
   
5,413,953
     
5,883,750
     
4,867,363
 
Current Liabilities
   
740,129
     
1,241,777
   
2,526,819
     
1,741,707
     
783,907
 
Deferred revenue
   
1,190,151
     
234,036
   
-
     
-
     
-
 
Accumulated Deficit
   
(39,953,047
)
   
(27,474,568
)
 
(18,464,925
)
   
(13,139,415
)
   
(9,139,566
)
Total stockholders’ equity (deficit)
   
30,100,596
     
18,377,936
   
2,887,134
     
4,142,043
     
4,083,456
 
Liabilities & Shareholders’ Equity
 
$
32,030,876
   
$
19,853,749
 
$
5,413,953
   
$
5,883,750
   
$
4,876,363
 

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 Risk Factors above and elsewhere in this report.

Overview

Founded in 1999, we provide strategic services and mobile technology to leading consumer and healthcare brands. We were formerly known as Modavox, Inc. and changed our name to Augme Technologies, Inc. in February 2010. Augme owns the “Method and System for Adding Function to a Webpage” portfolio of patents, which cover technical processes and methods that are an indispensable component of behavioral targeting – the automatic provision of customized content to individuals based on information such as past web activity, personal preferences, geography, or demographic data. Augme’s AD LIFE™ mobile marketing technology platform allows marketers, brands, and agencies the ability to plan, create, test, deploy, and track mobile marketing programs. Through the use of consumer response tags (CRTs) such as 2D codes, UPC codes, SMS, and image recognition, AD LIFE™ facilitates consumer brand interaction and the ability to track and analyze campaign results. Using its own patented device-detection and proprietary mobile content adaptation software, AD LIFE™ solves the mobile marketing industry problem of disparate operating systems, device types, and on-screen mobile content rendering. Augme also provides business to consumer utilities including national mobile couponing solutions, strategic mobile healthcare tools, custom mobile application development, and consumer data tracking and analytics.  Augme is headquartered in New York City.

Augme Technologies, Inc.™, Augme™, AD LIFE™, AD SERVE™ and the Augme logo are trademarks of Augme Technologies, Inc.

In 2009, 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.

In an effort to support our new business strategy, and in conjunction with the repositioning of other corporate assets earlier in 2009, Augme executed an Asset Purchase Agreement, effective January 1, 2010, to dispose of certain tangible and intangible assets and certain liabilities and to transfer certain obligations related to our Internet radio services.  This transaction transferred the business operations of our Internet radio services to World Talk Radio, LLC, an Arizona based limited liability company (“WTR”) that is owned and operated by VoiceAmerica.

The disposition of the Internet radio operations resulted in a reduction in our expenses, enabling management to focus all available resources on the corporate strategy defined in 2009 that includes an expanded IP licensing structure as well as supporting the development and further commercialization of marketing driven technologies.  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.

AD LIFE™ (“Augme Mobile”) is our interactive SaaS 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.  AD LIFE™ continues to validate its growth plan of becoming the premier mobile marketing provider for the world’s largest consumer package goods (CPG) companies and their marketing agencies.  By integrating the AD LIFE™ platform within the marketing technology function of these formidable clients, we anticipate accelerated growth as the platform is utilized across multiple brands under a single master contract.  AD LIFE™ is experiencing significant momentum, evidenced by our success in acquiring Fortune 500 CPGs as clients and some of the most common household brands as clients.  Our websites are located at www.augmemobile.com and www.augme.com and include a complete overview of our technology.  Information on our websites is not a part of this filing.

 
-17-

 
We provide interactive media marketing platforms that enable marketers and advertising agencies to integrate brands, promotions, video, and other digital content through 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.  We believe our integrated, easy-to-use, end-to-end platform is the most extensive mobile marketing and advertising campaign management platform in the industry.  Campaigns built on our marketing platforms condense the customer loyalty cycle by delivering personalized brand experience to customers where they work, play and live.

Our AD LIFE™ platform enables Internet video broadcasting, Internet advertising, and mobile marketing.  AD LIFE™ provides marketers, brands, and advertising agencies the ability to create, deliver, manage, and track interactive marketing campaigns aimed at mobile consumers regardless of network, operating system, or device type.  Our products and services include: website mobilization, content rendering, mobile campaign management, ad serving, data analytics and tracking, as well as content distribution, among other services.

Currently, we generate revenue by providing mobile marketing services through our AD LIFE™ platform.  The majority of our sales are driven by individual campaign fees, which usually include various levels of recurring fees throughout each campaign’s term.  Although we generated revenues of approximately $2.8 million during our fiscal year ending 2011, we believe that progress made with acquiring a marquee list of customers and developing valuable partnerships will drive significant future growth.    We are currently doing business with three of the world’s top ten pharmaceutical companies that have combined net revenues of over $150 billion.  Some of our other clients include four Fortune 100 companies, six Fortune 200 companies and four Global Fortune 500 companies.  However, even though we have expanded our list of clients, we cannot guarantee that our results during the next twelve months will meet our forecasts.

Our Solution

Our Augme Mobile Marketing division offers AD LIFE™, an interactive SaaS platform to provide marketers, brands, and advertising agencies the ability to create, deliver, manage, and track interactive marketing campaigns targeting mobile consumers through print advertising channels.  AD LIFE™ offers the only end-to-end mobile solution that allows brands a scalable, centralized execution and reporting platform.  More importantly, AD LIFE™ solves numerous mobile complications using the only content rendering and device detection patents in the industry.  Our patents allow us to provide our clients a full suite of mobile marketing services, thus providing an end-to-end mobile campaign management software system.  Our AD LIFE™ platform delivers the following benefits to our customers:

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

 
Our open architecture offers the widest variety of consumer response tags (“CRTs”) in the market today, including SMS, 2D codes, logo, and audio recognition, these CRTs allow consumers to use their mobile devices to easily and instantly access on-demand digital content;

 
Ability to measure campaign effectiveness using data analysis gathered and processed using proprietary techniques, these key metrics and results of client campaigns including demographic and behavioral data; 
 
 
Integration with brands’ existing ERP and CRM systems provides the ability to optimize campaigns and fulfillment;

 
Our software platform enables our customers to implement mobile campaigns in a short time frame, typically 10 to 20 days and is significantly more cost effective than sourcing technology;

 
Provides brands with centralized database and access to over 120 million consumer data records.

Additionally, our platform allows our customers the ability to deliver content to any mobile network, operating system or device, regardless of how the device landscape changes.  This ensures that brands have the capacity to reach 100% of any intended marketplace for their messaging, whether through text, quality resolution code, or other means.

Our Strategy

Our strategy is to be the leading provider of mobile marketing and advertising solutions globally across multiple media types and channels.  The principal elements of our strategy are to:

 
·
capitalize upon our existing patented technology to further develop new product innovations and licensing opportunities;
 
·
deepen our existing and add new strategic customer relationships as our markets expand;
 
·
enhance our platform by addressing technology shifts in mobile devices and computing;
 
·
continue global expansion and pursue strategic partnerships and acquisitions;
 
·
focus on earned versus paid media using engagement-based techniques and behavioral targeting;
 
·
continue to transition and proliferate into a software-as-a-service, (“SaaS”) business model.

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

Critical Accounting Policies

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

Revenue Recognition Policy

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.

Contracts may include multiple 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 multiple delivery contracts for the production and delivery of online media content and hosting are recorded pro-rata over the term of the media content production 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.

Measuring Fair Value
 
In September 2006, the FASB issued ASC 820 that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The provisions of ASC 820 were effective January 1, 2008.  The provisions delayed the effective date of ASC 820 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008.

As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (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 observation of those inputs.  ASC 820 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).

 
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The three levels of the fair value hierarchy defined by ASC 820 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.

As required by ASC 820, financial assets and liabilities are classified in their entirety 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 fair value assets and liabilities and their placement within the fair value hierarchy levels.

Results of Operations

The discussion is not necessarily indicative of the results, which may be expected for any subsequent periods and pertains only to the results of operations for the fiscal years ended February 28, 2011, 2010 and 2009. 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.

2011 Versus 2010

For the year ended February 28, 2011, revenues were $2,821,213 compared to $339,901 for the year ended February 28, 2010, an increase of 730%.  The increase in overall revenues is due to increased customer demand for our Ad Life™ platform.  Deferred revenue increased to $1,190,151 for the year ended February 28, 2011 from $234,036 for the period ended February 28, 2010.

For the years ended February 28, 2011 and 2010 Selling, general, and administrative expenses were $6,166,025 and $3,662,481, respectively, a change of $2,503,544 or 68 %.  

For the years ended February 28, 2011 and 2010 Production and service delivery costs were $1,251,318 and $492,838, respectively, reflecting higher sales volume and higher overall costs related to telecommunications, higher cost of hosting our content as well as higher personnel costs associated with increased staffing and compensation levels.
 
Non-cash stock options, warrants and stock expense consisted of the fair value of option and warrant expenses and fair value of our common stock granted in the amounts of $1,918,262 and $6,862,472 for the years ended February 28, 2010 and 2011.

The change in these expenses primarily consisted of $4,944,210 of increased non-cash stock, option and warrant expense.
 
Depreciation and amortization expense was $1,091,600 for the year ended February 28, 2011 compared with $841,280 in the comparable year ended February 28, 2010.  Amortization expense increased to $694,113 for the year ended February 28, 2011 compared to $284,017 for 2010.  Depreciation expense for the year ended February 28, 2011 increased to $325,487 compared to $557,263 for the year ended February 28, 2010.  The net result of changes in depreciation and amortization relate to the increased capitalization of internal software

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

The loss on derivative instruments was $0 for the year ended February 28, 2011 compared to a loss of $335,820 for the year ended February 28, 2010.

 
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For the year ended February 28, 2011, the Company incurred a net loss of $12,478,478 compared to a net loss of $8,378,499 in the comparable prior year.  The $4,099,979 increase in the net loss is a result of increased direct expenses, increased selling, general and administrative expenses and increased non-cash expenses as described above.

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 related to revenues from AD LIFE.  

Cost of revenues primarily consist of salaries of our client services, service delivery personnel 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 AD LIFE as we established 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 platform 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 and warrant expense, expenses to market our products, and other corporate expenses.  For the year ended February 28, 2010 our selling, general and administrative expenses were $3,662,481 vs. $2,309,912 for the year ended February 28, 2009, an increase of $1,352,569. The increase primarily consists of 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 Company growth, an increase in professional fees of $237,007 from $1,084,821 in fiscal year 2009 to $1,321,828 in fiscal year 2010.

Non-Cash stock, option and warrant expense increased $951,762 from fiscal 2009 to 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 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 explained above.
 
Liquidity and Capital Resources
 
During fiscal year 2011, we raised $17,102,438 of capital through the issuance of registered and unregistered shares of common stock.
 
As of February 28, 2011, we had cash balances of $11,182,356 and working capital surplus of $11,072,927. 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. As discussed in our risk factors, developing and expanding our business will require significant additional capital and other expenditures.  

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:

 
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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 $7,671,325 deferred income tax asset that relates to net operating loss carry forwards at February 28, 2011. 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.

Goodwill is carried at cost and is not amortized.  We test goodwill for impairment on an annual basis as of fiscal month end February of each fiscal year, relying on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data.  Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 820.

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

Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of the reporting unit with its carrying value. If the carrying amount exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of the reporting unit. If the carrying value of the goodwill of the reporting unit exceed fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

Based on the results of the step one annual assessments of the recoverability of goodwill, as of February 28, 2011 and 2010, the fair value of the reporting unit did not exceed its book value and therefore step two was not required.

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

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.
 
 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Index to Consolidated Financial Statements

   
   
Reports of Independent Registered Public Accounting Firms
24
   
Consolidated Balance Sheets as of February 28, 2011 and February 28, 2010.
27
   
Consolidated Statements of Operations for the years ended February 28, 2011, 2010 and 2009.
28
   
Consolidated Statement of Stockholders' Equity for the years ended February 28, 2011, 2010 and 2009.
29
   
Consolidated Statements of Cash Flows for the years ended February 28, 2011, 2010 and 2009
30
   
Notes to Consolidated Financial Statements
31

 
 
 
 
 
 
 
 
 
-23-

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and
Stockholders of Augme Technologies, Inc.
 
We have audited the accompanying consolidated balance sheet of Augme Technologies, Inc. as of February 28, 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended February 28, 2011. Augme Technologies, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Augme Technologies, Inc. as of February 28, 2011, and the consolidated results of its operations and its cash flows for the year ended February 28, 2011 in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Augme Technologies, Inc.’s internal control over financial reporting as of February 28, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 13, 2011 expressed an unqualified opinion.
 
/s/ Freedman & Goldberg, CPA’s, P.C.
   
Farmington Hills, MI
   
May 13, 2011
 




 
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
 Augme Technologies, Inc. (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 the consolidated statements of operations, stockholders' equity, and cash flows for each of the years ended February 28, 2010 and 2009. 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 the consolidated results of its operations and its cash flows for the years ended February 28, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.
 

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



 
-25-

 
To the Board of Directors and
Stockholders of Augme Technologies, Inc.
 
We have audited Augme Technologies, Inc.’s internal control over financial reporting as of February 28, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Augme Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Augme Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of February 28, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of operations, stockholders’ equity, and cash flows of Augme Technologies, Inc., and our report dated May 13, 2011 expressed an unqualified opinion.
 
/s/ Freedman & Goldberg, CPA’s, P.C.
   
Farmington Hills, MI
   
May 13, 2011
 

 
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AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.)
 
CONSOLIDATED BALANCE SHEETS
 
   
February 28,
 
   
2011
   
2010
 
ASSETS
           
CURRENT ASSETS:
           
  Cash and cash equivalents
  $ 11,182,356     $ 1,617,573  
  Accounts receivable, net   of allowance for
               
    doubtful accounts of $99,657 and $63,747, respectively
    2,025,294       115,747  
  Prepaid expenses and other current assets
    132,197       79,133  
  Current assets of discontinued operations
    -       -  
  Total current assets
    13,339,847       1,812,453  
                 
Property and equipment, net of accumulated depreciation of
               
    $1,058,728 and $733,241, respectively
    570,964       464,690  
Goodwill
    13,106,969       13,106,969  
Software and patents, net of accumulated amortization of
               
    $2,150,792 and $1,456,679, respectively
    4,945,545       4,442,187  
Deposits
    67,551       27,450  
Long-term assets of discontinued operations
    -       -  
TOTAL ASSETS
  $ 32,030,876     $ 19,853,749  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
  Accounts payable
  $ 708,824     $ 879,584  
  Accrued liabilities
    31,305       362,193  
  Deferred revenue
    1,190,151       222,345  
                 
            Total current liabilities including deferred revenue
    1,930,280     $ 1,464,122  
                 
   Long-term deferred revenue
    -       11,691  
                 
            Total liabilities including deferred revenue
    1,930,280       1,475,813  
                 
STOCKHOLDERS' EQUITY:
               
Common stock, $.0001 par value; 100,000,000 shares authorized;
               
   68,816,131 and 57,256,750 shares issued and outstanding, respectively
    6,882       5,276  
Additional paid-in capital
    70,046,761       45,846,778  
Accumulated deficit
    (39,953,047 )     (27,474,568 )
  Total stockholders' equity
    30,100,596       18,377,936  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 32,030,876     $ 19,853,749  
   
See accompanying notes to the consolidated financial statements.
 
 
 
-27-

 

AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
         
Years Ended
 
   
February 28,
   
February 28,
   
February 28,
 
   
2011
   
2010
   
2009
 
                   
REVENUE
  $ 2,812,213     $ 339,901     $ 337,327  
                         
COSTS OF REVENUES (Excluding depreciation):
  Production of service delivery costs
    1,251,318       492,838       215,412  
  
Operating Expenses
 
                       
  Selling, general, and administrative
    6,166,025       3,662,481       2,309,912  
  Stock, option and warrant expense
    6,862,472       1,918,262       961,540  
  Depreciation and amortization
    1,019,600       841,280       541,950  
  Impairment
    -       -       729,000  
  Lease termination expense
    -       -       489,845  
                         
Total operating expenses
    14,048,097       6,422,023       5,032,248  
                         
LOSS FROM OPERATIONS
    (12,478,202     (6,574,960     (4,910,333 )
                         
OTHER INCOME (EXPENSES)
                       
  Interest income (expense), net
    (276     (1,343     9,221  
  Loss on derivatives
    -       (335,820     -  
  Impairment of subscription receivable
    -       -       -  
                         
LOSS FROM CONTINUING OPERATIONS
    (12,478,478     (6,912,123     (4,901,112 )
                         
DISCONTINUED OPERATIONS:
                       
  Income (loss) from discontinued operations
    -       (588,214     (424,398 )
  Loss on sale of discontinued operations
    -       (878,162     -  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    -       (1,466,376     (424,398 )
                         
NET LOSS
  $ (12,478,478   $ (8,378,499   $ (5,325,510 )
                         
BASIC AND DILUTED NET LOSS PER SHARE:
                       
  Loss from continuing operations
  $ (0.21   $ (0.14     (0.12 )
  Income (loss) from discontinued operations
  $ (.00   $ (0.03   $ (0.01 )
NET LOSS PER SHARE – basic and diluted
  $ (0.21   $ (0.16   $ (0.13 )
WEIGHTED AVERAGE SHARES OUTSTANDING
                       
  Basic and diluted
    60,264,895       50,980,171       41,874,738  
                         
See accompanying notes to the consolidated financial statements.
 
 
 
-28-

 
AUGME TECHNOLOGIES, INC. (FORMERLY MODAVOX, INC.)
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
YEARS ENDED FEBRUARY 28, 2011, 2010 and 2009
 
                                     
   
Common Stock
   
Additional
               
Total
 
   
Number
         
Paid-in
   
Stock
   
Accumulated
   
Shareholders'
 
   
of Shares
   
Total
   
Capital
   
Subscription
   
Deficit
   
Equity
 
                                     
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  
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  
                                                 
Cashless option exercise
    1,390,053       139       (139                     -  
                                                 
Common stock issued for cash for:
                                               
Subscriptions & Options/Warrants
                                               
Exercise
    10,169,328       1,017       17,200,756       136,894               17,338,667  
                                                 
Employee stock, option & warrant
                                               
Expense
                    6,862,472                       6,862,472  
                                                 
Net loss
                                    (12,478,478     (12,478,478 )
                                                 
Balances, February 28, 2011
    68,816,131       6,882       69,909,867       136,894     $ (39,953,047 )     30,100,596  
 
See accompanying notes to the consolidated financial statements.
 
 
 
-29-

 
 
AUGME TECHNOLOGIES, INC.(FORMERLY MODAVOX, INC.)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
   
Years Ended
 
   
February 28,
 
   
2011
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
  Net loss
  $ (12,478,478   $ (8,378,499   $ (5,325,510 )
  Adjustments to reconcile net loss to net cash used in operations:
                       
    Depreciation and amortization
    1,019,600       841,280       541,951  
    Bad debt expense
            67,503       203,816  
    Common stock issued for termination of lease
    -       -       552,000  
    Common stock issued for services
    236,228       510,317       87,500  
    Common stock issued for settlement
            285,001       -  
    Impairment of goodwill
    -       -       729,000  
    Impairment of subscription receivable
    -       -       -  
    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
    6,862,472       1,667,739       888,653  
    Warrants granted for services
            339,229       84,936  
    Changes in operating assets and liabilities:
                       
      Receivables
    (1,909,547 )     215,715       (371,731 )
      Deposits
    (40,101     -       -  
      Prepaid expenses and other current assets
    (53,064     (48,317     (12,797 )
      Other assets
    -       (27,450     -  
      Accounts payable and accrued expenses
    (501,647     (362,923     708,035  
      Deferred revenue
    956,115       178,619       -  
Net cash used in continuing operations
    (5,908,423     (3,497,804     (1,912,401 )
Net cash provided by discontinued operations
    -       118,688       683,860  
NET CASH USED IN OPERATING ACTIVITIES
    (5,908,423     (3,379,116     (1,228,541 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
  Additions to property and equipment
    (207,271     (240,449     (313,104 )
  Capitalization of Software Development Costs
    (235,802     -       -  
  Purchase of assets from New Aug, LLC
    -       (324,000     -  
  Cash paid for purchase of intangible assets
    (1,186,159     -       (50,476 )
  Patent defense cost
    -       (248,944     (353,000 )
Net cash used in continuing operations
    (1,629,232     (813,393     (716,580 )
Net cash used in discontinued operations
    -       -       (88,986 )
NET CASH USED IN INVESTING ACTIVITIES
    (1,629,232     (813,393     (805,566 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
  Common stock issued for cash
    12,339,777       4,049,996       1,672,353  
  Proceeds from subscription receivable
    -       -       107,159  
  Proceeds received from the exercise of warrants
    4,333,466       1,320,214       -  
  Proceeds received from the exercise of stock options
    429,195       80,750       -  
  Payments on line of credit
    -       -       (19,590 )
  Net proceeds from (payments on) related party note payable
            (15,574     (8,293
NET CASH PROVIDED BY FINANCING ACTIVITIES
    17,102,438       5,435,386       1,751,629  
                         
NET CHANGE IN CASH AND CASH EQUIVALENTS
    9,564,783       1,242,877       (282,478 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    1,617,573       374,696       657,174  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 11,182,356     $ 1,617,573     $ 374,696  
 
                   
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
    -       -       -  
  Stock issued for subscription receivable
    -       -       -  
  Stock issued for settlement of accounts payable
    -       -       -  
                         
See accompanying notes to the consolidated financial statements.
 

 
-30-

 
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.

Segment Reporting

The Company has determined it has one reporting unit.

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.

Contracts may include multiple 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 multiple delivery contracts for the production and delivery of online media content and hosting are recorded pro rata over the term of the media content production 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.

 
-31-

 
Upon completion and execution of a Master Service Agreement or Statement of Work (“SOW”) revenue is booked into the accounting system.  If the SOW is to be completed in 1 year, the entry is debit accounts receivable and credit deferred revenue in current assets and liabilities, respectively.  If the SOW extends over a year then the short-term portion, less than a year, is booked as short term and the long-term portion or over a year is booked as such.

Revenue is recognized and reclassified from deferred revenue to current period income depending on the type of revenue.  Implementation and set up fees are booked upon signature or upon mobilization to start work on the project.  Campaign fees are incurred monthly and recognized over the term of the contract.  Software license fees are recognized over the term of the SOW on a prorated basis.

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.  If stock-based grants such as options and warrants are exercised the balance of unamortized stock-based costs are expensed in the same financial reporting period as exercised.

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, 2011, there were potentially dilutive securities of options exercisable into 13,947,533 shares of common stock, and warrants exercisable to purchase 10,680,981 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.

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.

 
-32-

 
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.

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 $99,657 and $63,747 as of February 28, 2011 and 2010, 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 $325,487, $284,017 and $223,578 for the years ended February 28, 2011, 2010 and 2009, respectively.

Property and equipment consisted of the following at February 28, 2011 and February 28, 2010:

   
2011
   
2010
 
Furniture
  $ 60,289     $ 47,374  
Computers, software, production equipment
    1,467,759       1,081,410  
Phone systems
    40,364       30,687  
Leasehold improvements
    61,280       38,460  
     Total
    1,629,692       1,197,931  
Accumulated depreciation
    (1,058,728     (733,241 )
     Net
  $ 570,964     $ 464,690  
 
 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

Goodwill is carried at cost and is not amortized.  We test goodwill for impairment on an annual basis at the end of each fiscal year, relying on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data.  Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 820.

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

Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of the reporting unit with its carrying value. If the carrying amount exceeds its fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of the reporting unit. If the carrying value of the goodwill of the reporting unit exceed fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 
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Based on the results of the step one annual assessments of the recoverability of goodwill, as of February 28, 2011 and 2010, the fair value of the reporting unit did not exceed its book value and therefore step two was not required.

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

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 7 for the impairment recorded by the Company.

When incurring legal costs when we choose to litigate with 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, 2011, 2010 and 2009, the Company capitalized $1,186,159, $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.

Software and patents consisted of the following at February 28, 2011 and February 28, 2010: