WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended: December 31, 2009 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____________ to ____________ |
COMMISSION FILE NUMBER 000-52274
FUTURE NOW GROUP INC.
(Exact name of small business issuer as specified in its charter)
| NEVADA | | 20-4237445 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
80 Mountain Laurel Rd
Fairfield, CT 06824
(Address of principal executive offices)
877-643-7244
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o No o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if smaller reporting company) | Smaller reporting company x |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
As of February 22, 2010, there were 97,125,063 shares of our common stock, par value $0.001 per share, outstanding.
Form 10-Q
Quarterly Report
December 31, 2009
Table of Contents
| | | | Page |
| PART I. FINANCIAL INFORMATION | | 3 |
| | | | |
| ITEM 1. | FINANCIAL STATEMENTS | | 3 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | 11 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | 14 |
| ITEM 4. | CONTROLS AND PROCEDURES | | 14 |
| | | |
| PART II. OTHER INFORMATION | | 15 |
| | | | |
| ITEM 1. | LEGAL PROCEEDINGS | | 15 |
| ITEM 1A. | RISK FACTORS | | 15 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | | 15 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | | 15 |
| ITEM 4. | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS | | 15 |
| ITEM 5. | OTHER INFORMATION. | | 15 |
| ITEM 6. | EXHIBITS | | 15 |
| | | |
| SIGNATURES | | 16 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to the Financials
| Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and June 30, 2009 | | | 4 | |
| Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended December 31, 2009 and 2008 | | | 5 | |
| Consolidated Statement of Changes in Stockholders’ Equity (Deficit) (Unaudited) as of December 31, 2009 | | | 7 | |
| Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended December 31, 2009 and 2008 | | | 8 | |
| Notes to Consolidated Financial Statements (Unaudited) | | | 10 | |
FUTURE NOW GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 (UNAUDITED) AND JUNE 30, 2009
| ASSETS | | | | | | |
| | | 12/31/09 | | | 6/30/09 | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 21,426 | | | $ | 34,138 | |
| Investment in available for sale marketable securities | | | 190,791 | | | | 39,212 | |
| Accounts receivable, net | | | 36,448 | | | | 10,650 | |
| Note receivable | | | 5,700 | | | | 58,132 | |
| Prepaid expenses | | | — | | | | 73,333 | |
| TOTAL CURRENT ASSETS | | | 254,365 | | | | 215,465 | |
| | | | | | | | | |
| Fixed assets, net | | | 1,058 | | | | — | |
| Intangible asset, net | | | 168,053 | | | | 236,387 | |
| Goodwill | | | 185,717 | | | | 185,717 | |
| TOTAL ASSETS | | $ | 609,193 | | | $ | 637,569 | |
| | | | | | | | | |
| LIABILIATIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 626,025 | | | $ | 585,468 | |
| Accrued interest | | | 155,369 | | | | 13,094 | |
| Derivative liability | | | 917,089 | | | | 4,712,227 | |
| Deferred revenue | | | 11,452 | | | | 41,477 | |
| Income tax payable | | | 1,500 | | | | 1,500 | |
| Current portion of long-term debt | | | 2,181,562 | | | | 1,442,103 | |
| TOTAL CURRENT LIABILITIES | | | 3,892,997 | | | | 6,795,869 | |
| | | | | | | | | |
| Convertible debentures, net of discount | | | 0 | | | | 41,568 | |
| TOTAL LIABILITIES | | | 3,892,997 | | | | 6,837,437 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY: | | | | | | | | |
| Preferred stock, $.001 par value, 50,000,000 shares authorized, | | | | | | | | |
| none issued and outstanding | | | — | | | | — | |
| Common stock, $.001 par value, 900,000,000 shares authorized, | | | | | | | | |
| 97,125,063 and 77,125,063 shares issued and outstanding, | | | | | | | | |
| as of December 31, 2009 and June 30, 2009, respectively | | | 97,125 | | | | 77,125 | |
| Additional paid-in capital | | | 4,209,078 | | | | 4,209,079 | |
| Retained earnings | | | (7,543,614 | ) | | | (10,340,284 | ) |
| Accumulated other comprehensive loss | | | (46,393 | ) | | | (145,788 | ) |
| TOTAL STOCKHOLDERS' EQUITY | | | (3,283,804 | ) | | | (6,199,868 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 609,193 | | | $ | 637,569 | |
The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements
FUTURE NOW GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
DECEMBER 31, 2009 AND 2008 (UNAUDITED)
| | | Three Months Ended December 31, 2009 | | | Three Months Ended December 31, 2008 | | | Six Months Ended December 31, 2009 | | | Six Months Ended December 31, 2008 | |
| | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | |
| Revenues: | | | | | | | | | | | | |
| Software subscription revenues | | $ | 196,860 | | | $ | 8,250 | | | $ | 415,510 | | | $ | 8,250 | |
| Professional service revenues | | | 77,108 | | | | 451,929 | | | | 119,446 | | | | 1,303,627 | |
| Total Revenues | | | 273,968 | | | | 460,179 | | | | 534,956 | | | | 1,311,877 | |
| | | | | | | | | | | | | | | | | |
| Cost of Revenues | | | 115,486 | | | | 128,589 | | | | 261,620 | | | | 383,978 | |
| Gross Profit | | | 158,482 | | | | 331,590 | | | | 273,336 | | | | 927,899 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Marketing and sales | | | 26,185 | | | | 128,568 | | | | 49,993 | | | | 277,838 | |
| Research and development | | | 43,752 | | | | 68,402 | | | | 80,751 | | | | 137,535 | |
| Stock based compensation | | | — | | | | (20,685 | ) | | | — | | | | 466,453 | |
| General and administrative | | | 113,954 | | | | 368,250 | | | | 199,466 | | | | 723,470 | |
| Total operating expenses | | | 183,891 | | | | 544,535 | | | | 330,211 | | | | 1,605,296 | |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | | (25,409 | ) | | | (212,945 | ) | | | (56,875 | ) | | | (677,397 | ) |
| | | | | | | | | | | | | | | | | |
| Other (income) expenses | | | | | | | | | | | | | | | | |
| Interest expense and amortization of debt discount | | | 344,798 | | | | 179,647 | | | | 911,028 | | | | 437,153 | |
| Change in the fair value of derivative liability | | | (7,112,463 | ) | | | — | | | | (3,795,138 | ) | | | — | |
| Amortization of deferred financing costs | | | — | | | | 57,699 | | | | — | | | | 115,398 | |
| Other expense | | | 30,566 | | | | (154 | ) | | | 30,566 | | | | 41 | |
| Total other expenses (income) | | | (6,737,099 | ) | | | 237,192 | | | | (2,853,544 | ) | | | 552,592 | |
| | | | | | | | | | | | | | | | | |
| Income (Loss) before taxes | | | 6,711,690 | | | | (450,137 | ) | | | 2,796,669 | | | | (1,229,989 | ) |
| Income tax provision (benefit) | | | 0 | | | | 0 | | | | 0 | | | | (269,545 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) applicable to common shareholders | | $ | 6,711,690 | | | $ | (450,137 | ) | | $ | 2,796,669 | | | $ | (960,444 | ) |
| | | | | | | | | | | | | | | | | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | |
| Unrealized gain (loss) on available for sale marketable securities | | | (75,267 | ) | | | 10,880 | | | | 99,395 | | | | 830 | |
| | | | | | | | | | | | | | | | | |
| Total comprehensive income (loss) | | $ | 6,636,423 | | | $ | (439,257 | ) | | $ | 2,896,064 | | | $ | (959,614 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) per share - basic | | $ | 0.07 | | | $ | (0.01 | ) | | $ | 0.03 | | | $ | (0.01 | ) |
| Net income (loss) per share - diluted | | $ | (0.00 | ) | | $ | (0.01 | ) | | $ | (0.00 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted number of shares outstanding - | | | | | | | | | | | | | | | | |
| basic | | | 91,093,317 | | | | 78,563,952 | | | | 84,993,915 | | | | 77,917,686 | |
| diluted | | | 1,892,949,239 | | | | — | | | | 1,884,993,915 | | | | — | |
The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements
FUTURE NOW GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE PERIOD ENDED DECEMBER 31, 2009 (UNAUDITED)
| | | Preferred Stock | | | Common | | | Paid-In | | | Accum Comp | | | Retained | | | Stockholders' | |
| | | Shares | | | Par Value | | | Shares | | | Par Value | | | Capital | | | Gain (Loss) | | | (Deficit) | | | (Deficit) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance June 30, 2009 | | | — | | | $ | — | | | | 77,125,063 | | | $ | 77,125 | | | $ | 4,209,078 | | | $ | (145,788 | ) | | $ | (10,340,283 | ) | | $ | (6,199,868 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in fair value of marketable securities | | | | | | | | | | | | | | | | | | | | | | | 99,395 | | | | | | | | 99,395 | |
| Employee stock options | | | | | | | | | | | | | | | | | | | 0 | | | | | | | | | | | | 0 | |
| Sale of common stock | | | | | | | | | | | 20,000,000 | | | | 20,000 | | | | | | | | | | | | | | | | 20,000 | |
| Net income for period | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,796,669 | | | | 2,796,669 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2009 | | | — | | | $ | — | | | | 97,125,063 | | | $ | 97,125 | | | $ | 4,209,078 | | | $ | (46,393 | ) | | $ | (7,543,614 | ) | | $ | (3,283,804 | ) |
The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008
(UNAUDITED)
| | | Six Months Ended December 31, 2009 | | | Six Months Ended December 31, 2008 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) | | $ | 2,796,669 | | | $ | (960,444 | ) |
| Adjustments to reconcile net income (loss) to cash used in operating activities: | | | | | |
| | | | | | | | | |
| Change in deferred tax asset | | | — | | | | (269,670 | ) |
| Provision for doubtful accounts | | | (10,500 | ) | | | (4,500 | ) |
| Stock based compensation | | | — | | | | 466,453 | |
| Depreciation | | | — | | | | 5,933 | |
| Change in derivative liability | | | (3,795,138 | ) | | | — | |
| Amortization of prepaid interest | | | 73,333 | | | | 110,000 | |
| Amortization of debt discount | | | 652,324 | | | | 170,342 | |
| Amortization of intangibles | | | 68,333 | | | | 68,334 | |
| Amortization of deferred offering costs | | | — | | | | 115,398 | |
| | | | | | | | | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts and notes receivable | | | (15,049 | ) | | | 89,957 | |
| Prepaid and other current assets | | | — | | | | 3,160 | |
| Accounts payable and accrued expenses | | | 182,832 | | | | 165,940 | |
| Deferred revenue | | | (30,025 | ) | | | (101,723 | ) |
| Net cash used in operating activities | | $ | (77,221 | ) | | $ | (140,820 | ) |
| | | | | | | | | |
| CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | |
| Equipment purchases and leasehold improvements | | | (1,058 | ) | | | — | |
| Net cash (used in) investing activities | | $ | (1,058 | ) | | $ | — | |
| | | | | | | | | |
| CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from loan from director and shareholder | | | 25,000 | | | | — | |
| Proceeds from promissory note with accredited investor | | | 20,567 | | | | — | |
| Proceeds from sale of common stock | | | 20,000 | | | | 100,000 | |
| Net cash provided by financing activities | | $ | 65,567 | | | $ | 100,000 | |
| | | | | | | | | |
| NET (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (12,712 | ) | | | (40,820 | ) |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS at beginning of period | | | 34,138 | | | | 228,467 | |
| CASH AND CASH EQUIVALENTS at end of period | | $ | 21,426 | | | $ | 187,647 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | |
| Cash paid for: | | | | | | | | |
| Interest | | $ | — | | | $ | 13,595 | |
| Income Taxes | | $ | — | | | $ | 500 | |
| | | | | | | | | |
| Supplemental schedule of non-cash investing and financing activities | | | | | | | | |
| Issuance of stock for services to be provided | | $ | — | | | $ | 550,000 | |
| Issuance of stock for board of directors quarterly retainer | | $ | — | | | $ | 12,000 | |
| Change in fair value of marketable securites for sale | | $ | — | | | $ | 830 | |
| Conversion of note receivable and accrued interest to available for sale marketable securities | | $ | 55,486 | | | $ | — | |
The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements
FUTURE NOW GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) AS OF DECEMBER 31, 2009
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Future Now Group Inc. (“FNGI”, the “Company” or “Future Now”), have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation SX. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010. This document should be read in conjunction with the Company’s Form 10K filing for June 30, 2009 and other financial reports filed from time to time.
Liquidity. As of December 31, 2009, we had $21,426 in cash. We had $190,791 in restricted marketable securities and $36,448 in accounts receivable, $3,638,632 in working capital deficiency, and an accumulated deficit of $7,543,614.Our operating loss for the three and six months ended December 31, 2009 was $25,409 and $56,875, respectively. As of December 31, 2009 we were still in default in the $1,800,000 notes we hold. These conditions raise substantial doubt about our ability to continue as a going concern.
The Company is presently in discussions with the investor that issued the default notice and is also exploring other potential financial transaction to restructure the Balance Sheet so as to continue to effectively pursue its business plan. Once restructured the Company plans to continuing to look for additional capital as well as consider other strategic financial transaction and partnering opportunities. Until such a time the Company plans to maintain its operations at bear minimum costs and management will continue to defer compensation as required. No adjustment has been made in the accompanying financial statements to the carrying amount and classification of recorded assets and liabilities should we be unable to continue operations.
NOTE 2. PROMISSORY NOTE AND FINANCING.
On October 30, 2009, two secured debenture executed with an investors on October 29, 2007 matured. The Company was unable to repay the obligation and as such continues to be in default.
On October 8, 2009, the Company received $25,000 from a board member who is also a shareholder. The amount has been treated as a loan to shareholder and at the present time does not have an interest rate. The Company plans to formalize the securities instrument underlying the loan along with its overall restructuring efforts.
On December 2, 2009, we issued a $20,567 secured promissory note to a single accredited investor for a purchase price of $20,567. This note was secured by a pledge of all of our assets as well as the assets of our subsidiaries. In addition, payment of the note was secured by a guaranty issued by our subsidiaries in favor of the secured party. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.
NOTE 3. COMMON STOCK
The Company is authorized to issue up to 900,000,000 shares of common stock and 50,000,000 shares of preferred stock both with par value of $0.001. The Company had 97,125,063, and 77,125,063 shares of common stock issued and outstanding as of December 31, 2009 and June 30, 2009, respectively.
On October 20, 2009, we issued 20,000,000 shares of our common stock to a single accredited investor for an aggregate purchase price of $20,000. The proceeds were used for general corporate purposes. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.
NOTE 4.: FAIR VALUE MEASUREMENTS
Effective July 1, 2008, we adopted ASC 820, Fair Value Measurements and Disclosures, which provides a framework for measuring fair value. Under ASC 820 fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.
Financial assets and liabilities valued using level 1 inputs are based on unadjusted quoted market prices within active markets. Financial assets and liabilities valued using level 2 inputs are based primarily on quoted prices for similar assets or liabilities in active or inactive markets. For certain long-term debt, the fair value was based on present value techniques using inputs derived principally or corroborated from market data. Financial assets and liabilities using level 3 inputs were primarily valued using management’s assumptions about the assumptions market participants would utilize in pricing the asset or liability. Valuation techniques utilized to determine fair value are consistently applied.
The tables below presents a reconciliation of assets and liabilities measured at fair value on a recurring basis at December 31, 2009 and June 30, 2009:
| | | Fair Value Measurements Using | |
| | | Quoted Prices in Active Markets (Level 1) | |
| | | December 31, 2009 | | | June 30, 2009 | |
| | | | | | | |
| Marketable securities | | $ | 190,791 | | | $ | 39,212 | |
| | | Fair Value Measurements Using Significant | |
| | | Unobservable Inputs (Level 3) | |
| | | Derivative Liability | |
| | | December 31, 2009 | | | June 30, 2009 | |
| | | | | | | |
| Beginning balance | | $ | 4,712,227 | | | $ | — | |
| Increase (Decrease) in Derivative Liability | | | (3,795,138) | | | | 3,861,262 | |
| Initial Derivative Liability | | | — | | | | 850,965 | |
| Ending balance | | $ | 917,089 | | | $ | 4,712,227 | |
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
NOTE 5.: EARNINGS PER SHARE
Basic income (loss) per common share (“EPS”) is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if certain outstanding stock options are exercised, restrictions lapse on restricted stock awards and convertible debenture is converted. Anti-dilutive securities are excluded from diluted EPS.
The following is a reconciliation of the number of shares used in the basic and diluted EPS computations for the three and six months ended December 31, 2009.
| | | Three Months Ended 12/31/09 | | | Six Months Ended 12/31/09 | |
| | | | | | | |
| Net income (loss) attributable to common stockholders for basic computation | | | 6,711,690 | | | | 2,796,669 | |
| | | | | | | | | |
| Net income (loss) attributable to common stockholders for basic computation | | | | | | | | |
| Net income(loss) attributable to common stockholders | | | 6,711,690 | | | | 2,796,669 | |
| Diluted effective of conversion feature of notes | | | 7,193,463 | | | | 3,957,138 | |
| Net income(loss) for dilutive computation | | | (481,773 | ) | | | (1,160,469 | ) |
| | | | | | | | | |
| Basic income (loss) per common share: | | | | | | | | |
| Weighted average common shares outstanding | | | 91,093,317 | | | | 84,993,915 | |
| Basic income (loss) per common share | | $ | 0.07 | | | $ | 0.03 | |
| | | | | | | | | |
| Diluted income (loss) per common share: | | | | | | | | |
| Weighted average common shares outstanding | | | 91,093,317 | | | | 84,993,915 | |
| Dilutive effect of conversion feature of notes | | | 1,800,000,000 | | | | 1,800,000,000 | |
| Weighted average diluted common shares outstanding | | | 1,891,093,317 | | | | 1,884,993,915 | |
| Diluted income (loss) per common share | | $ | (0.00 | ) | | $ | (0.00 | ) |
As of December 31, 2009, the Company has 10,867,618 and 9,324,757 outstanding options and warrants, respectively, the effects of which are anti-dilutive at December 31, 2009.
NOTE 6.: SUBSEQUENT EVENTS
We evaluated events occurring between the end of our fiscal quarter, December 31, 2009 and February 22, 2010 when the financial statements were issued.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Special Note Regarding Forward-Looking Statements
Except for historical facts, the statements in this quarterly report are forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. We assume no obligation to update our forward-looking statements to reflect new information or developments or for any other reason, or reflect any events or circumstances after the date of this quarterly report or the date of any applicable amendment to this quarterly report. We urge readers to review carefully the risk factors described in our filings with the Securities and Exchange Commission. These documents can be read at www.sec.gov.
Our Business
Future Now Group, Inc. (the “Company”) through its wholly-owned subsidiaries, Future Now, Inc (“FNI”), Intellectual Property Licensing Group, Inc, (“IPLG”), Future Now Consulting, Inc (“FNCI”) and Elemental Business, Inc (“EBI”), provides online marketing optimization services and software solutions utilizing a proprietary methodology and supporting set of software tools that help businesses improve their online marketing to generate more sales, leads, and subscriptions. The Company’s proprietary Persuasion Architecture® framework delivers clients “blueprints” to plan, measure and improve their online sales and marketing initiatives.
Trends in our Business
The market demand for our product offering continues to grow rapidly. The down turn in the economy should only increase the demand for offerings that can improve the return on capital expenditures. Since inception we have serviced over 400 clients. However, with the January 2009 launch of our new software product, Ontarget™, which now puts our Company’s 10 years of expertise in a simple application and a price point for every small business we anticipate the number of clients to grow rapidly. If our customer base does grow at the pace we expect we will be required to continue making upfront investments in personnel necessary to support this growth. The rate at which we add new customers, along with the scale of new customer implementations, will affect the level of these upfront investments.
Results of Operations
Summary of Key Results
Total revenues, including revenues from professional services and software subscriptions for the unaudited six months ended December 31, 2009 were $534,956, as compared to the revenues of $1,311,877 for the same period ending December 31, 2009, representing a 59.2% decrease. This decrease was primarily due to our change in business model from professional services to software as a service offering.
Total operating expenses including sales and marketing expenses, stock based compensation, research and development and general and administrative expenses for the unaudited six months ended December 31, 2009 were $330,211 as compared to $1,605,296 for the same period ending December 31, 2008. Total general and administrative expenses for the six months ended December 31, 2009 were $199,466 as compared to $723,470 for the same period ended December 31, 2008.
Revenues and Cost of Revenues
Total revenue for the three months ended December 31, 2009 was $273,968 as compared to revenue of $460,179 for the same period ended December 31, 2008, representing a decrease of $186,211 or 40.4% which is primary due to our change in business model. The three months ended December 31, 2009 and December 31, 2008 revenues include $77,108 in professional services, $196,860 in monthly software subscription fees, versus $8,250 and $451,929, respectively. Going forward we intend to focus most of our efforts on rapidly growing revenue from our monthly subscription-based OnTarget™ product. During the three months ended December 31, 2009 we signed on fifteen new accounts for OnTarget™.
Cost of revenues for the three months ended December 31, 2009 was $115,486, as compared to cost of revenues of $128,589 for the same period ended December 31, 2008, representing a decrease of $13,103 or 10.2%. Cost of revenues for the three months ended December 31, 2009 was 58.7% of total revenues compared with 27.9% of total revenues for the same period ended December 31, 2008. Gross margins for the three months ended December 31, 2009 was 57.8%, as compared to 72.1% for the same period ended December 31, 2008, representing an decrease of 14.3%. The decrease in our gross margins was primarily due to our change in business model and related lower revenue during the product roll-out and systems process development period.
Operating Expenses
Total operating expenses for the three months ended December 31, 2009 were $183,891 as compared to total operating expenses of $544,535 for the same period ending December 31, 2008, representing a decrease of $360,644 or 66.2%. Our total operating expenses were comprised of sales and marketing expenses, stock based compensation, research and development and general and administrative expenses. The decrease in the total operating expenses was primarily due to cost reduction efforts and lower stock based compensation. During the three months ended December 31, 2009 we recorded income of $0 in stock based compensation compared to $20,685 for the same period ended December 31, 2008. The income resulted from the reversal of $267,034 in stock-based compensation recorded in the previous quarter related to the issuance of 1,250,000 stock options to one of our officers for a personal guaranty on an account receivable factoring line.
General and administrative expenses for the three months ended December 31, 2009 were $113,954, as compared to general and administrative expenses of $368,250 for the same period ending December 31, 2008, representing a decrease of $254,296, or 69.1%. The decrease of general and administrative expenses during the three months ended December 31, 2009 was mainly due to cost reduction efforts employed by us.
Marketing and sales expenses for the three months ended December 31, 2009 were $26,185, as compared to marketing and sales expenses for the three months ended December 31, 2008 of $128,568 representing a decrease of $102,383, or 79.6%. Marketing and sales expenses as a percentage of revenue for the three months ended December 31, 2009 was 9.6% as compared to 27.9% for the same period ended December 31, 2008. The decrease was primarily due to reduced marketing efforts during the period of product definition and operating system development.
Research and development expenses for the three months ended December 31, 2009 were $43,752, as compared to $68,402 for the three months ended December 31, 2008 representing a decrease of $24,650, or 36%. Research and development expenses as a percentage of revenue for the three months ended December 31, 2009 was 16.0% as compared to 10.5% for the same period ended December 31, 2008. The increase was primarily due to decreased revenue.
Other Income and Expenses
For the three months ended December 31, 2009, we incurred interest expense of $344,798 as compared to $179,647 for the same period ended December 31, 2008. Within the interest expense for the three month period ended December 31, 2009, we recorded $220,779 in debt discount amortization and $0 in deferred offering cost amortization as compared to $101,090 and $34,860, respectively, for the same period ending December 31, 2008. For the three months ended December 31, 2009 we recorded income of $7,112,463 for the change in the fair value of a derivative liability associated with the conversion feature of notes versus $0 for the same period ending December 31, 2008.
Net Income (Loss)
Our net income for the three months ended December 31, 2009 was $6,711,690 as compared to a net loss of ($450,137), for the same period ended December 31, 2008. The increase in net income during the quarter ended December 31, 2009 was primarily attributable to cost reductions and the recording of the derivative liability associated with the conversion feature of notes.
Results of Operations for the Six Months Ended December 31, 2009 and December 31, 2008
Revenues and Cost of Revenues
Total revenues for the six months ended December 31, 2009 were $534,956 as compared to revenue of $1,311,877 for the same period ended December 31, 2008, representing a decrease of $776,921 or 59.2% primarily resulting from our change in business model. The six months ended December 31, 2009 revenues include $119,446 in professional services and $415,510 in monthly software subscription fees, versus $1,303,627 and $8,250 respectively, for the same period ended December 31, 2008. Going forward we intend to focus most of our efforts on rapidly growing revenue from our monthly subscription-based OnTarget™ product. During the six months ended December 31, 2009 we signed on 37 new accounts for OnTarget™.
Cost of revenues for the six months ended December 31, 2009 was $261,620, as compared to cost of revenues of $383,978 for the same period ended December 31, 2008, representing a decrease of $122,358, or 31.9%. Cost of revenues for the six months ended December 31, 2009 was 48.9% of total revenues compared with 29.3% of total revenues for the same period ended December 31, 2008. Gross margins for the six months ended December 31, 2009 was 51.1%, as compared to 70.7% for the same period ended December 31, 2008, representing a decrease of 19.6%. The decrease in our gross margins was primarily due to lower revenues associated with our change in business model and related product roll out.
Operating Expenses
Total operating expenses for the six months ended December 31, 2009 were $330,211 as compared to total operating expenses of $1,605,296 for the same period ending December 31, 2008, representing a decrease of $1,275,085 or 79.4%. Our total operating expenses were comprised of sales and marketing expenses, stock based compensation, research and development and general and administrative expenses. The decrease in the operating expenses during the six months ended December 31, 2008 was primarily due to cost reduction efforts, lower marketing expenses and stock based compensation. During the six months ended December 31, 2009 we recorded $0 in stock based compensation compared to $466,453 for the same period ended December 31, 2008. Stock based compensation expenses as a percentage of revenue for the six months ended December 31, 2009 was 0% as compared to 35.6% for the same period ended December 31, 2008.
General and administrative expenses for the six months ended December 31, 2009 were $199,466, as compared to general and administrative expenses of $732,470 for the same period ending December 31, 2008, representing a decrease of $533,004 or 72.8%. The decrease of general and administrative expenses during the six months ended December 31, 2008 was mainly due to cost reduction efforts employed by us.
Marketing and sales expenses for the six months ended December 31, 2009 were $49,993, as compared to marketing and sales expenses for the same period ended December 31, 2008 of $277,838 representing a decrease of $227,845 or 82.0%. Marketing and sales expenses as a percentage of revenue for the six months ended December 31, 2009 was 9.3% as compared to 21.2% for the same period ended December 31, 2008. The decrease reductions in marketing expenditures during the product definition and process standardization of our software product.
Research and development expenses for the six months ended December 31, 2009 were $80,751, as compared to $137,535 for the six months ended December 31, 2008 representing a decrease of $56,784, or 41.3%. Research and development expenses as a percentage of revenue for the six months ended December 31, 2009 was 15.1% as compared to 10.5% for the same period ended December 31, 2008. This was primarily due to decreased revenue.
Other Income and Expenses
For the six months ended December 31, 2009, we incurred interest expense of $911,028 as compared to $437,153 for the same period ended December 31, 2008. Within the interest expense for the six month period ended December 31, 2009, we recorded $652,324 in debt discount amortization and $0 in deferred offering cost amortization as compared to $179,340 and $115,398, respectively, for the same period ending December 31, 2008. For the three months ended December 31, 2009 we recorded income of $3,795,138 for the change in the fair value of a derivative liability associated with the conversion feature of notes versus $0 for the same period ending December 31, 2008.
Net Income (Loss)
Our net income for the six months ended December 31, 2009 was $2,796,669 as compared to a net loss of $960,444, for the same period ended December 31, 2008. The increase in net income during the six months ended December 31, 2009 was primarily attributable to the increase in fair value of derivation liability associated with outstanding convertible instruments and decrease operating expenses offset by lower revenue.
Liquidity and Capital Resources
Cash Flow Used in Operating Activities
Operating activities used cash of $77,221 for the six months ended December 31, 2009, as compared to $140,820 for the same period ending December 31, 2008. The decrease in cash used for operating activities for the six months ended December 31, 2008 was primarily a result of lowered operating expenses.
Cash Flow Used in Investing Activities
Investing activities used cash of $1,058 for the six months ended December 31, 2009, as compared to $0 for the same period ended December 31, 2008.
Cash Flows From Financing Activities
Net cash provided from financing activities was $65,567 for the six months ended December 31, 2009 consisting of a $25,000 loan from director and shareholder, $20,567 from a promissory note and $20,000 from the sale of 20,000,000 shares of common stock. Net cash provided from financing activities was $100,000 for the six months ended December 31, 2008 consisting of $100,000 for the sale of 555,556 shares of common stock and warrants to purchase 277,778 shares of common stock to a single accredited investor.
Off-Balance Sheet Arrangements
We have no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report, being December 31, 2009. This evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer. Based upon that evaluation, our President and Chief Executive Officer concluded that our disclosure controls and procedures are not effective as at the end of the period covered by this report.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act, is accumulated and communicated to management, including our president as appropriate, to allow timely decisions regarding required disclosure.
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any legal proceedings. From time to time, we are involved in various routine non-material legal proceedings incidental to the conduct of our business.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 13, 2009, the Company received two notices, each dated April 8, 2009. Each of the letters were written and signed on behalf of the lenders, Professional Traders Management LLC and Professional Offshore Opportunity Fund Ltd (collectively referred to as “PTM”). The letters stated that under Section 6 of the secured convertible debentures, the Company was in default for non-payment, as a result of which PTM intends to begin a foreclosure process within five (5) business days. As of the date of this filing no foreclosure process has begun and the Company is currently in the process of negotiating with PTM. The face value of the debt that is currently in default is $1,800,000.
In addition to the negotiations with PTM the Company is also in technical default of the convertible notes (the “Notes”) entered into on various dates between March 2007 and August 2007. Section 2 (c) of such Notes contains an automatic principal redemption feature (the “Redemption Feature”) whereby the Company will pay three and one-half percent of its gross revenues to redeem the Notes. The first measurement period for the redemption payment was from April 1, 2007 through March 31, 2008. In April 2008, the Company remitted a total of $75,891 in principal to the Note holders. The outstanding principal balance of the Notes as of March 31, 2009 was $374,109 and accrued interest of $13,811. For the period from April 1, 2008 through March 31, 2009 the Company reported $2,002,141 in gross revenue. As such a redemption payment of $70,074 is currently due on the Notes.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
| Exhibit No. | | Description |
| 31.1 | | Certification of Chief Executive and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification of Chief Executive and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | FUTURE NOW GROUP INC. |
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| Date: February 22, 2010 | By: /s/ William Schloth |
| | William Schloth |
| | Chief Executive Officer and Accounting Officer |
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