Notes
to Unaudited Condensed Consolidated Financial Statements
1.
|
Organization,
History and Business
|
SITO Mobile, Ltd. (the
“Company”, “SITO”, “our”, “we”, and “us”) was incorporated in Delaware
on May 31, 2000, under its original name, Hosting Site Network, Inc. On May 12, 2008, the Company changed its name to Single Touch
Systems, Inc. and on September 26, 2014, it changed its name to SITO Mobile, Ltd.
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange
Commission regarding interim financial reporting. Certain information and disclosures normally included in the financial statements
prepared in accordance with GAAP have been condensed and omitted pursuant to such rules and regulations. As such, the information
included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed on April 2, 2018.
The
condensed consolidated balance sheet as of December 31, 2017 included herein was derived from the audited financial statements
as of that date, but does not include all disclosures, including notes, required by GAAP.
The
condensed consolidated financial statements included the accounts of SITO Mobile, Ltd. and its wholly owned subsidiaries, SITO
Mobile Solutions, Inc., SITO Mobile R&D IP, LLC, SITO Mobile Media Inc. and DoubleVision Networks Inc. (“DoubleVision”).
All intercompany transactions and balances have been eliminated in consolidation.
Going
Concern
The accompanying unaudited
condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The
Company has incurred losses since inception and has an accumulated deficit of approximately $172 million at September 30, 2018.
As shown in the accompanying financial statements during the three and nine months ended September 30, 2018, the Company incurred
net losses of $5.3 and $16.3 million, respectively, and used $13.6 million of cash for its operating activities during the nine
months ended September 30, 2018. These factors, among others, raise substantial doubt about the Company’s ability to continue
as a going concern for the next twelve months from the issuance of these financial statements.
The Company’s
existence is dependent upon management’s ability to obtain additional funding sources or to enter into large-scale, multi-year,
significant contracts. There can be no assurance that the Company’s efforts will result in the resolution of the Company’s
liquidity needs. The accompanying statements do not include any adjustments that might result should the Company be unable to
continue as a going concern. For further discussion of the Company’s ability to continue as a going concern, please refer
to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this Quarterly
Report on Form 10-Q.
Cash
and Cash Equivalents
The Company considers
cash and cash equivalents to include all stable, highly liquid investments with maturities of three months or less.
Accounts Receivable
Accounts receivable
are reported at the customers’ outstanding balances, less any allowance for doubtful accounts. Interest is not accrued on
overdue accounts receivable.
An allowance for doubtful
accounts is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management
believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off
percentages and information collected from and about individual customers. Accounts receivable are charged off against the allowance
when collectability is determined to be permanently impaired.
Property
and Equipment, net
Property
and equipment are stated at cost. Major renewals and improvements increase the asset accounts while replacements, maintenance
and repairs that do not improve or extend the lives of the respective assets are expensed. At the time property and equipment
are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts.
Gains or losses from retirements or sales are credited or charged to income.
Depreciation
is computed on the straight-line and accelerated methods for financial reporting and income tax reporting purposes based upon
the following estimated useful lives:
Software development
|
|
3 years
|
Equipment and computer hardware
|
|
5 years
|
Office furniture
|
|
5 years
|
Leasehold improvements
|
|
5 years, or lease expiration if sooner
|
Long-Lived
Assets
The
Company accounts for long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate that the historical carrying value of an asset
may no longer be appropriate. We assess recoverability of the carrying value of an asset by estimating the future net cash flows
expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value
of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or
disposable value.
Goodwill
Goodwill represents
the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350 requires that goodwill
be tested for impairment on an annual basis and between annual tests when circumstances indicate that the recoverability of the
carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including determining
the fair value. Significant judgments are required to estimate the fair value, including estimating future cash flows, determining
appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination
of fair value and/or goodwill impairment. Management considered the recoverability of the carrying amount of goodwill based on
certain triggering events identified as of September 30, 2018. Specifically, these triggering events considered were the Company’s
ability to continue as a going concern, a sustained decrease in the Company’s stock price, and changes in management. There
were no impairments recorded to goodwill for the periods presented.
Capitalized
Software Development Costs
The
Company accounts for costs incurred to develop or purchase computer software for internal use in accordance with ASC Topic 350-40
“Internal-Use Software.” As required by ASC 350-40, the Company capitalizes the costs incurred during the application
development stage, which include direct costs, including payroll and related payroll taxes and benefits. Costs incurred during
the preliminary project stage along with post-implementation stages of internal use computer software are expensed as incurred.
Capitalized development costs are amortized over a period of three years. Costs incurred to maintain existing product offerings
are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs requires considerable
judgment by management with respect to certain external factors, including, but not limited to, estimated economic life.
Patent
and Patent Application Costs
Intangible
assets include patents successfully developed and purchased which are recorded at cost. The cost of the patents are
capitalized and amortized over their useful lives.
Capital
Leases
Assets
and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair
value of the leased assets. The assets are depreciated over the lower of their related lease terms or their estimated productive
lives. Depreciation of the assets under capital leases is included in depreciation expense.
Debt
Issuance Costs
Debt issuance costs are
amortized using the effective interest method over the related term of the debt and are presented on the balance sheet as a direct
deduction from the debt liability. The amortization of deferred debt issuance costs is included in interest expense.
Income
Taxes
The
Company accounts for its income taxes under the provisions of ASC Topic 740, “Income Taxes.” The method of accounting
for income taxes under ASC 740 is an asset and liability method. The asset and liability method requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting
bases of other assets and liabilities. The Company had no material unrecognized income tax assets or liabilities for the three
and nine months ended September 30, 2018, and 2017. The Company recognizes income tax interest and penalties as
a separately identified component of general and administrative expense.
On December 22, 2017,
the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The legislation significantly
changed the U.S. tax law, including a reduction to the corporate income tax rate from a maximum of 34% to a flat 21% rate, effective
January 1, 2018. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and
liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate
impact may differ from these provisional amounts due to additional analysis and changes to estimates, additional regulatory guidance
that may be issued, changes in interpretations and assumptions the Company has made, and actions the Company may take because
of tax reform.
Issuances
Involving Non-Cash Consideration
All
issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value
of the shares issued on the date the shares were issued for such services and property. The non-cash consideration paid pertains
to consulting services, the acquisition of a software license, the acquisition of DoubleVision and assets purchased from Hipcricket,
Inc.
Revenue
Recognition and Deferred Revenue
Adoption
of ASC Topic 606, “Revenue from Contracts with Customers”
On
January 1, 2018, the Company adopted Topic 606, using the modified retrospective transition method applied to those contracts
which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under
Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting
under Topic 605. There was no adjustment to beginning accumulated deficit on January 1, 2018 due to the impact of adopting Topic
606.
Under
ASC 606, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration
that an entity expects to receive in exchange for those services. To achieve this core principal, the Company applies the following
five steps:
|
1)
|
Identify
the contract, or contracts, with a customer
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s
rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract
has commercial substance and (iii) the Company determines that collection of substantially all consideration for services that
are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
|
2)
|
Identification
of the performance obligations in the contract
|
At
contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as
a performance obligation each promise to transfer to the customer. Performance obligations promised in a contract are identified
based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can
benefit from the service either on its own or together with other resources that are readily available from third parties or from
the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable
from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment
to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria
are not met, the promised services are accounted for as a combined performance obligation.
|
3)
|
Determination
of the transaction price
|
The
transaction price is the amount that an entity allocates to the performance obligations identified in the contract and, therefore,
represents the amount of revenue recognized as those performance obligations are satisfied. The transaction price is the amount
of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
|
4)
|
Allocation
of the transaction price to the performance obligations in the contract
|
Once
a contract and associated performance obligations have been identified and the transaction price has been determined, ASC 606
requires an entity to allocate the transaction price to each performance obligation identified. This is generally done in proportion
to the standalone selling prices of each performance obligation (i.e., on a relative standalone selling price basis). As a result,
any discount within the contract generally is allocated proportionally to all of the separate performance obligations in the contract.
The Company is applying the right to invoice practical expedient to recognize revenue if the Company has a right to payment from
a customer in an amount that corresponds directly with the value of the Company’s performance completed to date. As a result,
the entity bypasses the steps of determining the transaction price, allocating that transaction price and determining when to
recognize revenue as it will recognize revenue as billed by multiplying the price assigned to the good or service, by the units.
|
5)
|
Recognition
of revenue when, or as, we satisfy a performance obligation
|
Revenue
is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer.
Control transfers either over time or at a point in time.
Revenues
are recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration
we expect to be entitled to in exchange for those services. Media placement services constitute our core revenues. Substantially
all of our revenue is recognized over time, as the services are performed. Media placement revenues are recognized as the advertisement
is displayed provided that collection of the resulting receivable is reasonably assured. Media placement revenues predominantly
contain a single performance obligation recognized over time, using an output measure to reflect progress.
For
licensing and royalties, revenue is recognized on a straight-line basis over the life of the agreement based on the contractually
determined fees.
Revenue
disaggregated by revenue source for the three and nine months ended September 30, 2018 and 2017, consist of the following:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Media placement
|
|
$
|
9,056,963
|
|
|
$
|
10,916,126
|
|
|
$
|
28,630,179
|
|
|
$
|
28,163,712
|
|
Licensing and royalties
|
|
|
-
|
|
|
|
70,726
|
|
|
|
-
|
|
|
|
130,653
|
|
Total revenue
|
|
$
|
9,056,963
|
|
|
$
|
10,986,852
|
|
|
$
|
28,630,179
|
|
|
$
|
28,294,365
|
|
Media
Placement
The
Company recognizes media placement revenue based on the activity of mobile users viewing ads through developer applications and
mobile websites. Revenues are recognized when control of the promised services is transferred to our customers, in an amount that
reflects the consideration we expect to be entitled to in exchange for those services. Media placement revenues are recognized
when the Company’s advertising services are delivered based on the specific terms of the advertising contract, which are
commonly based on the number of ads delivered, or views, clicks or actions by users on mobile advertisements. The duration of
most of the Company’s media placement services contracts is less than twelve months. Generally, there are no situations
where payment by a customer occurs either significantly before or after our performance.
Licensing
and Royalty
In
general, licensing and royalty revenue arrangements provide for the payment of contractually determined fees in consideration
for the patented technologies owned by or controlled by the Company’s operating subsidiary. The intellectual property rights
granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively
short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an
additional minimum upfront payment. Pursuant to the terms of these agreements, the Company’s operating subsidiary may have
no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases,
and other deliverables, including no express or implied obligation on the Company’s operating subsidiary’s part to
maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of
licenses, covenants-not-to-sue, releases, and other significant deliverables upon the execution of the agreement, or upon the
receipt of the minimum upfront payment for term agreement renewals. As such, when the Company has no further obligation under
the agreement, the earnings process is considered complete and revenue is recognized upon the execution of the agreement; otherwise
the Company recognizes revenue on a straight-line basis over the life of the agreement based on the contractually determined fees.
Deferred
Revenue
Deferred
revenue arises from timing differences between the delivery of services and satisfaction of all revenue recognition criteria consistent
with the Company’s revenue recognition policy. Deferred revenue results from the advance payment for services to be delivered
over a period of time, usually less than one-year increments.
Practical
Expedients and Exemptions
The
Company determined that an output method would be the best measure of progress in that it represents the most faithful depiction
of the Company’s progress towards satisfaction of its performance obligations as such method recognizes the direct measurement
of the value delivered to the customer.
We
generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs
are recorded within sales and marketing expenses.
Stock
Based Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director
services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic
505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the measurement
date. The expense is recognized over the vesting period of the award.
The
Company records compensation expense based on the fair value of the award at the reporting date.
The
value of the stock-based award is determined using the Binomial option-pricing model, whereby compensation cost is the excess
of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount
that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period
in which the Company expects to receive the benefit, which is generally the vesting period.
Loss
per Share
The Company reports
earnings (loss) per share in accordance with ASC Topic 260-10, “Earnings per Share.” Basic earnings (loss) per share
are computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased
to include the number of additional common shares that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Diluted loss per share has not been presented because the effect of the assumed
conversion of warrants and debt to purchase common shares would have an anti-dilutive effect.
Concentrations
of Credit Risk
The
Company primarily transacts its business with two financial institutions. The amount on deposit in both institutions may from
time to time exceed the federally-insured limit.
Excluding
discontinued operations, of the Company’s revenue earned during the nine months ended September 30, 2018, contracts with
one customer accounted for approximately 18% of total revenue. During the nine months ended September 30, 2017, no individual
customer accounted for more than 10% of total revenue.
The
Company’s accounts receivable are typically unsecured and are derived from U.S. customers in different industries. The Company
performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Historically, such
losses have been within management’s expectations. As of September 30, 2018, no individual customer accounted for more than
10% of the Company’s net accounts receivable balance, and as of September 30, 2017, one customer accounted for 13% of the
Company’s net accounts receivable balance.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make 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. Actual results could differ from those
estimates.
Business
Combinations
The
Company accounts for all business combinations using the acquisition method of accounting. Under this method, assets and liabilities
are recognized at fair value, at the date of acquisition. The excess of the purchase price over the fair value of assets acquired,
net of liabilities assumed is recognized as goodwill. Certain adjustments to the assessed fair values of the assets and liabilities
made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments
to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Results of operations of the acquired
entity are included in the Company’s results from the date of the acquisition onward and include amortization expense arising
from acquired tangible and intangible assets. The Company expenses all costs as incurred related to an acquisition under general
and administrative expenses in the condensed consolidated statements of operations.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements or financing activities with special purpose entities.
Recent
Accounting Pronouncements
The discussion and analysis
of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have
been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified the following accounting policies
that we believe are key to an understanding of our financial statements. These are important accounting policies that require management’s
most difficult, subjective judgments.
In
May 2014, the FASB released “
ASC 606 - Revenue from Contracts with Customers”
which was updated in August 2015;
Update 2015-14 – “
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
.”
The Company applied the accounting guidance within ASC 606 beginning with this reporting period for the three and nine months
ended September 30, 2018. We believe the key changes in the standard that impact our revenue recognition relate to the allocation
of contract revenue amongst various services and products, and the timing in which those revenues are recognized. The Company
has assessed the adoption of Topic 606 and did not make an adjustment to beginning accumulated deficit on January 1, 2018 as discussed
in Note 2 – Summary of Significant Accounting Policies.
In April 2016, the
FASB issued an Accounting Standards Update (“ASU”)
“ASU 2016–10 Revenue from Contract with Customers
(Topic 606): Identifying Performance Obligations and Licensing”
which clarifies the topics of identifying performance
obligations and licensing implementation guidance, while including implementation guidance. This updated standard affects “ASU
2014-09 Revenue from Contracts with Customers (Topic 606)”. The adoption of this standard did not have a material effect
on the Company’s condensed consolidated financial statements.
The Company adopted
the standard effective January 1, 2018, using the modified retrospective approach. There were no material changes to the Company’s
condensed consolidated financial statements as a result of adopting the standard.
In January 2016, the
FASB issued
“ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities”
which changes
requirements for the presentation and measurement of equity investments at fair value. The updated standard is effective for the
Company beginning after December 15, 2017, including interim periods within that fiscal year. The adoption of this standard did
not have a material effect on the Company’s condensed consolidated financial statements.
In
February 2016, the FASB issued
“ASU 2016-02 Leases”
which requires the Company to recognize on the balance
sheet the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The updated
standard is effective for the Company on December 15, 2018. Subsequently, in July 2018, the FASB issued
“ASU 2018-10
– Codification Improvements to Topic 842 – Leases and ASU 2018-11 – Targeted Improvements,”
to clarify
and amend the guidance in ASU 2016-02. The Company does not expect that the adoption of this standard will have a material effect
on its condensed consolidated financial statements.
In November 2016, the
FASB issued
“ASU 2016-18 - Statement of Cash Flows (Topic 230) Restricted Cash”.
The new guidance requires that
the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted
cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance
sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance
sheet. Companies will also need to disclose information about the nature of the restrictions. The guidance is effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this standard did not have
a material effect on the Company’s condensed consolidated financial statements.
In
January 2017, the FASB issued “
ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill
Impairment”
. The amendments in this update modify the concept of impairment from the condition that exists when the
carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting
unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill
by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired
in a business combination. The guidance is effective for fiscal years beginning after December 15, 2019.
In January 2017, the
FASB issued
“ASU 2017-01 - Business Combinations (Topic 805) Clarifying the Definition of a Business”.
The amendments
in this update are to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this standard
did not have a material effect on the Company’s condensed consolidated financial statements.
In
February 2018, the FASB issued “
ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income,”
which allows companies to reclassify stranded tax
effects resulting from the Act, from accumulated other comprehensive income to retained earnings. The updated standard is effective
for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption
of the amendments in this update is permitted, including adoption in any interim period. The Company is currently evaluating the
impact of adopting this guidance.
In
June 2018, the FASB issued
“ASU 2018-07 - Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting”.
The amendments in this update expand the scope of Topic 718 to include share-based
payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718
to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is,
the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments
specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used
or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic
718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.
The updated standard is effective for the Company beginning after December 15, 2018, including interim periods within that fiscal
year. Early adoption of the new guidance is permitted, but no earlier than an entity’s adoption date of Topic 606.
The Company does not expect that the adoption of this standard will have a material effect on its condensed consolidated financial
statements.
In
July 2018, the FASB issued
“ASU 2018-09 – Codification Improvements,”
to make changes to a variety of
topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. Certain items of the
amendments in ASU 2018-09 will be effective for us in annual periods beginning after December 15, 2018. The Company is currently
evaluating the effects the adoption of ASU 2018-09 will have on its condensed consolidated financial statements.
In August 2018, the
FASB issued
“ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement.”
The update amends changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement
uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year
of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This update
is effective January 1, 2020; however, early adoption is permitted upon issuance of this update. The Company does not expect that
the adoption of this standard will have a material effect on its condensed consolidated financial statements.
In August 2018, the
FASB issued
“ASU 2018-15 – Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus
of the FASB Emerging Issues Task Force),”
to align the requirements for capitalizing implementation costs incurred in
a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software. Accordingly, the ASU requires an entity in a hosting arrangement that is a service contract to
follow guidance in FASB Accounting Standard Codification Subtopic 350-40 on internal-use software to determine which implementation
costs to capitalize as an asset related to the service contract and which costs to expense. The Company is currently evaluating
the impact of adopting this guidance.
Reclassification
Certain reclassifications
have been made to conform the 2018 amounts to the 2017 classifications for comparative purposes. The expenses presented in this
Form 10-Q with respect to the three and nine months ended September 30, 2017 reflect certain reclassifications to properly
record expenses for the three and nine months ended September 30, 2018. In particular, we note that expenses associated with one
of our vendors, which were initially classified as general and administrative expenses, were reclassified to cost of revenue and
sales and marketing expenses. For the nine months ended September 30, 2018, there were no reclassifications for comparative purposes.
For the nine months ended September 30, 2017, $132,593 was reclassified from general and administrative and $52,869 from sales
and marketing to cost of revenue.
3.
|
Accounts
Receivable, net
|
Accounts
receivable consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
9,627,719
|
|
|
$
|
13,546,304
|
|
Less: allowance for bad debts
|
|
|
(502,272
|
)
|
|
|
(540,586
|
)
|
Accounts receivable, net
|
|
$
|
9,125,447
|
|
|
$
|
13,005,718
|
|
4.
|
Property
and Equipment, net
|
The
following is a summary of property and equipment:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Equipment and computer hardware
|
|
$
|
261,803
|
|
|
$
|
250,589
|
|
Office furniture
|
|
|
256,820
|
|
|
|
260,121
|
|
Leasehold improvements
|
|
|
344,025
|
|
|
|
342,230
|
|
Equipment held under capital lease
|
|
|
27,594
|
|
|
|
13,160
|
|
|
|
|
890,241
|
|
|
|
866,100
|
|
Less: accumulated depreciation
|
|
|
(510,149
|
)
|
|
|
(416,151
|
)
|
|
|
$
|
380,093
|
|
|
$
|
449,949
|
|
Depreciation
expense for the three and nine months ended September 30, 2018 was $41,014 and $122,208, respectively, as compared to $37,391
and $113,516, respectively, for the three and nine months ended September 30, 2017.
5.
|
Capitalized
Software Development Costs, net
|
The
following is a summary of capitalized software development costs:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Capitalized software development costs
|
|
$
|
3,100,092
|
|
|
$
|
3,428,846
|
|
Less: accumulated amortization
|
|
|
(2,128,829
|
)
|
|
|
(1,943,561
|
)
|
|
|
$
|
971,263
|
|
|
$
|
1,485,285
|
|
Amortization
expense for the three and nine months ended September 30, 2018 was $185,769 and $602,013, respectively, as compared to $228,782
and $666,875, respectively, for the three and nine months ended September 30, 2017.
As
of September 30, 2018, amortization expense for the remaining estimated lives of these costs is as follows:
Year Ending December 31,
|
|
|
|
2018
|
|
$
|
181,210
|
|
2019
|
|
|
508,316
|
|
2020
|
|
|
204,254
|
|
2021
|
|
|
77,483
|
|
|
|
$
|
971,263
|
|
Patents
The
following is a summary of capitalized patent costs:
|
|
September 30,
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Patent costs
|
|
$
|
2,643,356
|
|
|
$
|
2,572,939
|
|
Less: accumulated amortization
|
|
|
(2,006,003
|
)
|
|
|
(1,830,365
|
)
|
|
|
$
|
637,353
|
|
|
$
|
742,574
|
|
Amortization
expenses for the three and nine months ended September 30, 2018 was $36,037 and $175,637, respectively, as compared to $608,761
and $679,823, respectively, for the three and nine months ended September 30, 2017.
A
schedule of amortization expense over the estimated remaining lives of the patents for the next five fiscal years and thereafter
is as follows:
Year Ending December 31,
|
|
|
|
2018
|
|
$
|
36,348
|
|
2019
|
|
|
145,393
|
|
2020
|
|
|
145,393
|
|
2021
|
|
|
68,445
|
|
2022
|
|
|
61,450
|
|
Thereafter
|
|
|
180,324
|
|
|
|
$
|
637,353
|
|
Other
Intangible Assets, net
The
following is a summary of other intangible asset costs:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Technology
|
|
$
|
970,000
|
|
|
$
|
970,000
|
|
Customer relationships
|
|
|
870,000
|
|
|
|
870,000
|
|
Less: accumulated amortization
|
|
|
(875,243
|
)
|
|
|
(671,993
|
)
|
|
|
$
|
964,757
|
|
|
$
|
1,168,007
|
|
Amortization
expenses for the three and nine months ended September 30, 2018 was $67,750 and $203,250, respectively, as compared to $67,750
and $203,250, respectively, for the three and nine months ended September 30, 2017.
A
schedule of amortization expense over the estimated remaining lives of the other intangible assets for the next five fiscal years
and thereafter is as follows:
Year Ending December 31,
|
|
|
|
2018
|
|
$
|
67,750
|
|
2019
|
|
|
271,000
|
|
2020
|
|
|
187,536
|
|
2021
|
|
|
97,000
|
|
2022
|
|
|
97,000
|
|
Thereafter
|
|
|
244,471
|
|
|
|
$
|
964,757
|
|
Goodwill
There
were no changes in the carrying values of goodwill for the nine months ended September 30, 2018.
|
|
DoubleVision
|
|
|
Hipcricket, Inc.
|
|
|
Goodwill
Total
|
|
Balance as of January 1, 2018
|
|
$
|
4,549,928
|
|
|
$
|
1,894,297
|
|
|
$
|
6,444,225
|
|
No activity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of September 30, 2018
|
|
$
|
4,549,928
|
|
|
$
|
1,894,297
|
|
|
$
|
6,444,225
|
|
The
following is a summary of accrued expenses:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
4,183,895
|
|
|
$
|
4,690,512
|
|
Accrued cost of revenues
|
|
|
1,204,828
|
|
|
|
940,032
|
|
Accrued professional fees
|
|
|
363,115
|
|
|
|
764,095
|
|
Accrued legal settlement
|
|
|
-
|
|
|
|
3,500,000
|
|
Other accrued expenses
|
|
|
43,030
|
|
|
|
16,900
|
|
|
|
$
|
5,794,868
|
|
|
$
|
9,991,540
|
|
The
Company leases office equipment under capital leases that expire in 2018 through 2022. The equipment has a cost of $13,160 and $14,434,
respectively.
Minimum
future lease payments under the capital lease at September 30, 2018 for each of the next five years and in the aggregate, are
as follows:
Year Ending September 30,
|
|
|
|
2019
|
|
$
|
3,739
|
|
2020
|
|
|
3,739
|
|
2021
|
|
|
3,739
|
|
2022
|
|
|
1,246
|
|
2023
|
|
|
-
|
|
Total minimum lease payments
|
|
|
12,463
|
|
Less amount representing interest
|
|
|
(365
|
)
|
Present value of net minimum lease payments
|
|
$
|
12,098
|
|
The effective interest
rate charged on the capital leases is approximately 1.750% to 7.428% per annum. The leases provide for a $1 purchase option. Interest
charged to operations for the three and nine months ended September 30, 2018 was $55 and $182, respectively, as compared to $79
and $283, respectively, for the three and nine months ended September 30, 2017. Depreciation charged to operations for the three
and nine months ended September 30, 2018 was $1,380 and $3,899, respectively, as compared to $658 and $1,973, respectively, for
the three and nine months ended September 30, 2017.
9.
|
Discontinued
Operations
|
A
discontinued operation is a component of the Company’s business that represents a separate major line of business that had
been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets
the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative
Condensed Consolidated Statement of Operations, Condensed Consolidated Statement of Cash Flows, and Condensed Consolidated Balance
Sheets are re-presented as if the operation had been discontinued from the start of the comparative year.
On February 7, 2017,
the Company entered into an Asset Purchase Agreement to sell the Wireless Application business for $400,000, of which $310,000
was received on the closing date and the remaining $90,000 payable upon the satisfaction of certain post-closing covenants. Of
the $90,000 payable upon satisfaction of the post-closing covenants, $40,000 was earned and collected by the Company, with the
remaining $50,000 of the post-closing covenants not satisfied and therefore uncollectible, for a total sale price of $350,000.
The Company has reported the Wireless Application segment as Discontinued Operations in the Condensed Consolidated Statement of
Operations and Condensed Consolidated Statements of Cash Flows with related assets and liabilities as of September 30, 2018 and
2017, included as Assets from discontinued operations and Liabilities from discontinued operations.
The
following table presents the assets and liabilities of the Wireless Applications business, as Assets classified from discontinued
operations and Liabilities classified from discontinued operations in the Condensed Consolidated Balance Sheets:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
6,951
|
|
Other assets
|
|
|
-
|
|
|
|
3,645
|
|
Assets from discontinued operations
|
|
|
-
|
|
|
|
10,596
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
-
|
|
|
|
144,725
|
|
Accrued expenses
|
|
|
-
|
|
|
|
6,368
|
|
Deferred revenue
|
|
|
-
|
|
|
|
59,696
|
|
Liabilities from discontinued operations
|
|
$
|
-
|
|
|
$
|
210,789
|
|
The
following table presents the Discontinued Operations of the Wireless Applications business in the Condensed Consolidated Statement
of Operations:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless applications
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
53,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
-
|
|
|
|
4,793
|
|
|
|
-
|
|
|
|
235,632
|
|
Gross loss
|
|
|
-
|
|
|
|
(4,793
|
)
|
|
|
-
|
|
|
|
(182,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
-
|
|
|
|
410
|
|
|
|
-
|
|
|
|
32,980
|
|
General and administrative
|
|
|
-
|
|
|
|
1,831
|
|
|
|
-
|
|
|
|
144,786
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
2,178
|
|
|
|
-
|
|
|
|
9,279
|
|
Total operating expenses
|
|
|
-
|
|
|
|
4,419
|
|
|
|
-
|
|
|
|
187,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
-
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
56,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
2,788
|
|
|
|
-
|
|
|
$
|
(312,844
|
)
|
The
following table presents the Wireless Applications business in the Condensed Consolidated Statement of Cash Flows:
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operating activities
|
|
$
|
-
|
|
|
$
|
(206,456
|
)
|
Net cash provided by discontinued investing activities
|
|
|
-
|
|
|
|
312,947
|
|
Net cash provided by discontinued financing activities
|
|
|
-
|
|
|
|
-
|
|
Net increase in cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
106,491
|
|
On December 22, 2017,
the President of the United States signed into law the Act. The legislation significantly changed the U.S. tax law, including a
reduction to the corporate income tax rate from a maximum of 34% to a flat 21% rate, effective January 1, 2018. The Company has
recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts
in its consolidated financial statements for the year ended December 31, 2017. The total impact to the Company’s U.S. deferred
taxes and current year tax provision related to the corporate rate reduction was approximately $8.2 million. The ultimate impact
may differ from these provisional amounts due to additional analysis and changes to estimates, additional regulatory guidance that
may be issued, changes in interpretations and assumptions the Company has made, and actions the Company may take because of tax
reform.
As of September 30,
2018, the Company had a federal net operating loss carryover of approximately $60,370,288 and a state net operating loss carryover
of approximately $49,323,229 available to offset future income for income tax reporting purposes, which will expire in various
years through 2037, if not previously utilized.
The
Company’s ability to use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal
Revenue Code Section 382. A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions
of the Internal Revenue Code that are applicable if we experience an “ownership change”. That may occur, for example,
as a result of trading in our stock by significant investors as well as issuance of new equity. Should these limitations apply,
the carryforwards would be subject to an annual limitation, resulting in a substantial reduction in the gross deferred tax.
Our
policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify
them for tax purposes. During the three and nine months ended September 30, 2018 and 2017, there were no federal income tax, or
related interest and penalty items in the income statement, or liability on the balance sheet. We are not currently involved in
any income tax examinations.
On
October 3, 2014, the Company and its wholly owned subsidiaries, SITO Mobile Solutions, Inc. and SITO Mobile R&D IP, LLC, entered
into a Revenue Sharing and Note Purchase Agreement (the “NPA”) with Fortress Credit Co LLC, as collateral agent (the
“Collateral Agent,” or “Fortress”), and CF DB EZ LLC (the “Revenue Participant”) and Fortress
(the “Note Purchaser” and together with the Revenue Participant, the “Investors”).
At
the closing of the NPA, the Company issued and sold a senior secured note (the “Note”) with an aggregate original
principal amount of $10,000,000 and issued, pursuant to a Subscription Agreement, 261,954 shares of common stock to Fortress for
an aggregate purchase price of $1,000,000 or $3.817 per share (which represents the trailing 30-day average closing price). After
deducting the original issue discount of 10% on the Note and a structuring fee to the Investors, the Company received proceeds
of $8,850,000, prior to the payment of related legal and due diligence expenses.
On July 11, 2017, TAR
SITO LendCo LLC (“TAR”), acquired from Fortress Credit Opportunities V CLO Limited, CF EZ LLC, and CF DB EZ LLC all
rights, title and interest as “Purchaser” and “Revenue Participant” under the NPA and related documents.
On
August 1, 2017, the Company used approximately $4,900,000 of the proceeds of an offering of common stock and warrants to prepay
in full all outstanding principal, accrued and unpaid interest due through the date of repayment, and termination fees of $350,000
recorded as interest expense with respect to the Note. The Company has no further obligations with respect to the Note but as
of December 31, 2017, remained obligated to continue to make payment with respect to the Revenue Stream upon the terms, and subject
to the conditions, of the NPA. The Revenue Stream is the right to receive a portion of Monetization Revenues (as defined in the
NPA) totaling (i) if paid in full prior to March 31, 2018, up to $5,000,000 and (ii) otherwise, up to $7,500,000; provided, that
upon acceleration, the Revenue Stream shall represent an absolute entitlement to receive such amounts without regard to the existence
of Monetization Revenues.
Prior
to the repayment of the Note in full on August 1, 2017, the principal amount of the Note bore interest at a rate equal to LIBOR
plus 9% per annum. Such interest was payable in cash, except that 2% per annum of such interest was to be paid-in-kind, by increasing
the principal amount of the Note by the amount of such interest. The term of the Note was 42 months and the Company was required
to make, beginning in October 2015, monthly amortization payments on the Note, each in a principal amount equal to $333,334 until
the Note was paid in full. The Company was also required to apply 85% of Monetization Revenues from certain of the Company’s
patents unrelated to its core business activities (the “Patents”) to the payment of accrued and unpaid interest on,
and then to repay outstanding principal (at par) of, the Note until all amounts due with respect to the Note were paid in full.
After the repayment of the principal amount of the Note and all accrued interest thereunder, which occurred on August 1, 2017,
the Company is obligated to pay the Investors (a) 50% of Monetization Revenues until such time as the Investors have received
$2,500,000 in the aggregate with respect to the Revenue Stream, (b) 30% of the Monetization Revenues thereafter, until such time
that the Investors have received $5,000,000 in the aggregate with respect to the Revenue Stream, and (c) 10% of the Monetization
Revenues thereafter, until the Revenue Stream has been fully satisfied. In addition, upon any acceleration of the Note and Revenue
Stream, the Company is obligated to pay the Investors 100% of the Monetization Revenues until the Revenue Stream has been fully
satisfied. The Company was also required to pay $350,000 to the Note Purchaser upon repayment of the Note, which payment was also
made on August 1, 2017.
The NPA contained certain
standard Events of Default. The Company granted to the Collateral Agent, for the benefit of the Purchaser, a non-exclusive, royalty
free license (including the right to grant sublicenses) with respect to the Patents, which was evidenced by, and reflected in,
a Patent License Agreement between the Company, its subsidiary Single Touch Interactive, Inc., and Fortress. The Patent License
Agreement provides that the Collateral Agent may only use such license following an Event of Default. Pursuant to a Security Agreement
among the parties, the Company granted the Collateral Agent a first priority senior security interest in all of the Company’s
assets. The Company and the Collateral Agent assigned a value of $500,000 to the revenue sharing terms of the NPA and in accordance
with ASC 470-10-25 “Debt Recognition”, the Company recognized $500,000 as deferred revenue and a discount on the Note
that is amortized over the 42-month term of the Note using the effective interest method. For the three and nine months ended September
30, 2018, the Company recognized $0 and $0, respectively, in licensing revenue and interest expense from amortization of the deferred
revenue, as compared to $70,726 and $130,653, respectively, for the three and nine months ended September 30, 2017.
On
March 1, 2016, the Company entered into Amendment No.1 (the “Amendment”) to the NPA. Pursuant to the terms of the
Amendment, principal payment on the Note issued pursuant to the NPA was reduced from $333,333 to $175,000 for the period commencing
on the last business day of February 2016 through the last business day of February 2017 and from $333,333 to $300,000 for the
period commencing on the last business day of March 2017 to the last day of business in February 2018, with the final payment
on the last business day in March 2018 increased to repay the remaining principal in full. In consideration for the Amendment,
the Company agreed to pay a restructuring fee of $100,000 and issue 200,000 shares of its common stock with an aggregate value
of $568,000 to the Purchaser.
Interest
expense on the Note for the three and nine months ended September 30, 2018 was $0 and $0, respectively, as compared to $47,280
and $374,287, respectively, for the three and nine months ended September 30, 2017. Amortization of the discounts for the three
and nine months ended September 30, 2018 was $0 and $0, respectively, as compared to $430,108 and $794,548, respectively, for
the same periods in 2017, which was charged to interest expense. Accrual of termination fees for the three and nine months ended
September 30, 2018 was $0 and $0, respectively, as compared to $49,508 and $91,457, respectively, for the same periods in 2017,
which was charged to interest expense.
On
February 20, 2018, the Company and TAR, Mr. Julian Singer, Ms. Karen Singer and Mr. Gary Singer (collectively, the “TAR
Group”), entered into a settlement agreement, pursuant to which the NPA was terminated and discharged and all pending litigation
between the Company and the members of the TAR Group was dismissed with prejudice in exchange for a lump sum payment of $3.5 million
from the Company to the TAR Group. No future amounts are due with respect to the NPA or the Revenue Stream and the lump sum payment
has been recorded as of December 31, 2017. The settlement has been paid and no additional amounts have been recorded against the
Company’s financial statements for the three and nine months ended September 30, 2018.
12.
|
Stock
Based Compensation
|
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the vesting period of the award.
The
Company records compensation expense based on the fair value of the award at the reporting date.
The
value of the stock-based award is determined using the Binomial option-pricing model, whereby compensation cost is the excess
of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount
that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period
in which the Company expects to receive the benefit, which is generally the vesting period.
During the three
months ended September 30, 2018, the Company recognized stock-based compensation expense totaling $997,729, through the
vesting of 283,602 common stock options in connection with employee compensation. Of the $997,729 in stock-based compensation
expense, $555,959 is included in general and administrative expense, and $441,770 is included in sales and marketing
expense.
During the nine months
ended September 30, 2018, the Company recognized stock-based compensation expense totaling $3,157,883, through the vesting of 283,602
common stock options in connection with employee compensation. Of the $3,157,883 in stock-based compensation expense, $1,696,551
is included in general and administrative expense, and $1,461,332 is included in sales and marketing expense.
During the three months ended
September 30, 2017, the Company recognized stock-based compensation expense totaling $666,290, through the vesting of 475,447
common stock options in connection with employee compensation. Of the $666,290 in stock-based compensation expense, $431,185
is included in general and administrative expense, and $235,105 is included in sales and marketing expense.
During the nine months
ended September 30, 2017, the Company recognized stock-based compensation expense totaling $1,262,268, through the vesting of 475,447
common stock options. Of the $1,262,268 in stock-based compensation expense, $787,830 is included in general and administrative
expense, of which $437 is included in discontinued operations, and $474,438 is included in sales and marketing expense, of which
$54 is included in discontinued operations.
During the three months
ended September 30, 2018, the Company recognized restricted stock-based compensation expense totaling $289,277, of which $279,776
is included in general and administrative expense and $9,501 is included in sales and marketing expense. During the three months
ended September 30, 2017, the Company recognized $55,879 in restricted stock-based compensation expense, all of which is included
in general and administrative expense.
During the nine months
ended September 30, 2018, the Company recognized restricted stock-based compensation expense totaling $1,994,423, of which $1,952,400
is included in general and administrative expense and $42,023 is included in sales and marketing expense. During the nine months
ended September 30, 2017, the Company recognized $55,879 in restricted stock-based compensation expense, all of which is was included
in general and administrative expense.
13.
|
Related
Party Transactions
|
On
April 21, 2014, SITO Mobile R&D IP, LLC, the Company’s wholly-owned subsidiary, through a joint venture (the “JV”)
with Personalized Media Communications, LLC (“PMC”), entered into a Joint Licensing Program Agreement (the “JV
License Agreement”) with a national broadcasting entity (“Licensee”) pursuant to which the JV granted the Licensee
a term-limited license ( the “License”) to all patents licensable by the JV (“JV Patents”), including
an exclusive license to assert the JV Patents against certain infringing parties in the media distribution industry. In exchange
for the License, the Licensee has agreed to pay the JV an annual fee of $1,250,000 for a minimum of three years (“Annual
Fee”), subject to a right of the Licensee to renew the License for an additional four years. Under the arrangement, if the
Licensee has paid a total of $8,750,000 in license fees, either in one lump sum or after paying $1,250,000 annually for seven
years, the License would be deemed to be perpetual. For JV Patent infringement actions provided for under the License, the Licensee
will pay 20% of the gross proceeds from settlements received less any Annual Fee amounts paid, and litigation costs incurred to
the JV (“Share of Proceeds”). SITO Mobile R&D IP, LLC and PMC have agreed to serve as co-plaintiffs with the Licensee
in infringement actions under the License and the Licensee has agreed to be responsible for any out-of-pocket costs of the JV
associated with being a co-plaintiff in supporting the Licensee in such litigation, including attorneys’ fees. The Licensee
will pay the Annual Fee and any Share of Proceeds to the JV. The Company is entitled to 30% of any proceeds received by the JV.
In the event that the Licensee does not assert any infringement actions under its rights in the License prior to April 2019, the
JV may, at its sole option, choose to terminate Licensee’s exclusive right to assert infringement claims with no reduction
or adjustment to the Annual Fee. On May 23, 2017, the parties renewed the JV License Agreement for a perpetual license in exchange
for an upfront payment to the JV of $4,500,000, of which the Company received $1,350,000 and reported as earnings from the JV
in 2017. The Company’s share of the renewal fee was paid to the Note Purchaser in accordance with the terms of the NPA.
(See Note 11 – Note Payable.) As of September 30, 2018, the Company has $0 in deferred revenue under the JV License Agreement.
The
Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities
approximate their fair values because of the relatively short period of time between the origination of these instruments and
their expected realization. The Company determines the fair value of obligations under capital lease, notes payable and convertible
debentures based on the effective yields of similar obligations (Level 2).
ASC
820-10 defines fair value 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. ASC 820-10 establishes a fair value hierarchy that distinguishes between
(1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2)
an entity’s own assumptions, about market participant assumptions, which are developed based on the best information available
in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable
inputs (Level 3). The three levels of the fair value hierarchy under ASC 820-10 are described below:
|
●
|
Level
1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability
to access.
|
|
●
|
Level
2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities
in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially
the full term of the assets or liabilities.
|
|
●
|
Level
3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
|
There
have been no reclasses between Level 1, 2, or 3 inputs.
The
Company identified the warrants issued as part of the July 2017 offering as liabilities that are required to be presented on the
condensed consolidated balance sheets at fair value within Level 2 in the fair value hierarchy because we use inputs that are
observable or can be corroborated by observable data. The Company measures the fair value on a recurring basis each reporting
period for these warrants and for the three and nine months ended September 30, 2018, recorded a net gain on revaluation of the
warrants of $182,048 and $1,157,568, respectively.
Common
Stock
The holders of the Company’s common
stock are entitled to one vote per share of common stock held.
During the three months ended September
30, 2018, the Company issued 95,231 shares of common stock through the vesting of restricted
stock units.
During the nine months
ended September 30, 2018, the Company issued 3,398,007 shares of common stock of which 77,420 shares were issued upon the exercise
of stock options for which the Company received $116,251 in gross proceeds, 222,425 shares were issued to executive officers of
the Company relating to the 2017 Annual Bonus Plan, 108,162 shares were issued through the vesting of restricted stock units, and
the Company received $14,842,750 in gross proceeds, and incurred legal and accounting service fees of $1,058,249 in connection
with the registration and issuance of 2,990,000 shares of common stock.
During the three months
ended September 30, 2017, the Company issued 1,234,896 shares of common stock of which 34,896 shares were issued for options exercised,
and the Company received $5,684,069 in proceeds net of legal and accounting services in connection with the registration and issuance
of 1,200,000 shares of common stock.
During the nine months
ended September 30, 2017, the Company issued 1,269,413 shares of common stock of which 69,413 shares were issued for options exercised
for which the Company received $2,500 in gross proceeds, and the Company received $5,684,069 in proceeds net of legal and accounting
services in connection with the registration and issuance of 1,200,000 shares of common stock.
Warrants
During the three and
nine months ended September 30, 2018, no warrants were granted, exercised, or expired. The existing warrants are marked-to-market
each reporting period in accordance with ASC 718.
During the three and
nine months ended September 30, 2017, the Company granted warrants to purchase an aggregate of 320,000 shares of its common stock,
none of which have been exercised or expired.
Options
During the three and
nine months ended September 30, 2018, the Company expensed performance options that were granted to its employees as detailed below.
The Company values
options under the Binomial Option Model. The full value of option grants is charged to operations over the vesting period with
option grants that vest immediately being fully charged on the date of grant.
Stock Incentive Plans
The Company established
the 2017 Equity Incentive Plan which supersedes the 2008, 2009, and 2010 plans (collectively, the “Plans”) under which
2,500,000 shares have been reserved for the issuance of stock options, stock appreciation rights, restricted stock, stock grants
and other equity awards. The Plans are administered by the Compensation Committee of the Company’s Board of Directors (the
“Board”) which determines the individuals to whom awards shall be granted as well as the type, terms, conditions, option
price and the duration of each award. As of September 30, 2018, there were 861,631 shares available for grant under the 2017 Equity
Incentive Plan.
A stock option grant
allows the holder of the option to purchase a share of the Company’s common stock in the future at a stated price. Options,
restricted stock and restricted stock units granted under the Plans vest as determined by the Company’s Compensation Committee.
Options granted under the Plans expire over varying terms, but not more than ten years from the date of grant. Certain restricted
stock units granted to executives of the Company vest contingently dependent on the price of our common stock consistently remaining
above certain thresholds for 65 consecutive trading days. These restricted stock units do not have an expiration date.
Stock
option activity for the nine months ended September 30, 2018 and changes during the year ended December 31, 2017 is as follows:
|
|
|
Stock Option Activity Under the Plans
|
|
|
|
|
Stock
Options
|
|
|
Exercise Price per
Share
|
|
|
Weighted Average Exercise Price
|
|
|
|
Weighted Average Remaining Life (Years)
|
|
Balance - 12/31/16
|
|
|
2,293,214
|
|
|
$2.50 - $7.06
|
|
$
|
3.93
|
|
|
|
3.62
|
|
Grants
|
|
|
1,936,000
|
|
|
$2.60 - $6.66
|
|
|
5.49
|
|
|
|
|
|
Exercised
|
|
|
(158,482
|
)
|
|
$2.50 - $6.87
|
|
|
(3.53
|
)
|
|
|
|
|
Cancellations
|
|
|
(1,396,691
|
)
|
|
$2.50 - $7.06
|
|
|
(4.06
|
)
|
|
|
|
|
Balance - 12/31/17
|
|
|
2,293,214
|
|
|
$2.50 - $6.76
|
|
$
|
5.20
|
|
|
|
7.93
|
|
Grants
|
|
|
150,000
|
|
|
$2.17 - $6.01
|
|
|
4.73
|
|
|
|
|
|
Exercised
|
|
|
(77,420
|
)
|
|
$2.50 - $4.00
|
|
|
2.90
|
|
|
|
|
|
Cancellations
|
|
|
(712,859
|
)
|
|
$2.76 - $6.66
|
|
|
4.70
|
|
|
|
|
|
Balance - 09/30/18
|
|
|
1,652,935
|
|
|
$2.17 - $6.76
|
|
$
|
5.45
|
|
|
|
6.96
|
|
For the three and
nine months ended September 30, 2018 the Company recognized compensation expense related to stock option grants of $997,729 and
$3,157,883, respectively, as compared to $666,290 and $1,262,268, respectively, for the three and nine months ended September
30, 2017.
The estimated fair
value of each option award granted was determined on the date of grant using a Binomial Option model with the following assumptions
for option grants during the nine months ended September 30, 2018 and 2017, respectively.
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Weighted Average Risk-Free Interest Rate
|
|
|
2.97
|
%
|
|
|
2.22
|
%
|
Weighted Average Expected Volatility
|
|
|
94.85
|
%
|
|
|
96.70
|
%
|
Dividend Yield
|
|
|
-
|
|
|
|
-
|
|
Weighted Average Expected Option Term (Years)
|
|
|
9.27
|
|
|
|
7.64
|
|
Weighted Average Grant Date Fair Value
|
|
$
|
4.09
|
|
|
$
|
4.20
|
|
No
dividend yield was assumed because the Company has never paid a cash dividend on its common stock and does not expect to pay dividends
in the foreseeable future. Volatilities were developed using the Company’s historical volatility. The risk-free interest
rate was developed using the U.S. Treasury yield for periods equal to the expected life of stock options on the grant date. The
expected option term for grants made during 2018 and 2017 is based on the average expiration date of all stock options granted
during the respective periods. This method of determining the expected holding period was utilized because the Company does not
have sufficient historical experience from which to estimate the period.
A
summary of the Company’s non-vested options to purchase shares as of September 30, 2018 and changes during the year ended
December 31, 2017 are presented below:
|
|
Number of Options
|
|
|
Weighted Average Exercise
Price
|
|
Non-Vested Balance - 12/31/16
|
|
|
1,282,026
|
|
|
$
|
3.26
|
|
Grants
|
|
|
1,936,000
|
|
|
|
|
|
Vested
|
|
|
(244,214
|
)
|
|
|
|
|
Forfeited
|
|
|
(924,812
|
)
|
|
|
|
|
Non-Vested Balance - 12/31/17
|
|
|
2,049,000
|
|
|
$
|
6.07
|
|
Grants
|
|
|
150,000
|
|
|
|
|
|
Vested
|
|
|
(283,602
|
)
|
|
|
|
|
Forfeited
|
|
|
(546,065
|
)
|
|
|
|
|
Non-Vested Balance - 09/30/18
|
|
|
1,369,333
|
|
|
$
|
6.37
|
|
A summary
of the Company’s restricted stock activity as of September 30, 2018 and changes during the year ended December 31, 2017
are presented below:
|
|
Restricted Stock Activity
|
|
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Non-Vested Balance - 12/31/16
|
|
|
-
|
|
|
$
|
-
|
|
Grants
|
|
|
123,333
|
|
|
|
4.26
|
|
Vested
|
|
|
(8,621
|
)
|
|
|
4.35
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-Vested Balance - 12/31/17
|
|
|
114,713
|
|
|
$
|
4.25
|
|
Grants
|
|
|
2,002,983
|
|
|
|
5.46
|
|
Vested
|
|
|
(35,144
|
)
|
|
|
4.27
|
|
Forfeited
|
|
|
(278,873
|
)
|
|
|
5.72
|
|
Non-Vested Balance - 09/30/18
|
|
|
1,803,679
|
|
|
$
|
5.37
|
|
During the three months
ended March 31, 2018, the Company identified an error in the accounting for certain awards granted to employees in 2017.
This non-cash error of approximately $500,000 was determined to be immaterial and recorded as an out-of-period adjustment in the
three months ended March 31, 2018, to primarily general and administrative expenses in the accompanying condensed consolidated
statement of operations. The Company utilized the Monte Carlo valuation model to estimate the fair value of these awards which
requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and
expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based
payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application
of expense could be materially different in the future.
For the three and
nine months ended September 30, 2018, the Company recognized compensation expense related to restricted stock unit grants of $289,277
and $1,994,423, respectively, as compared to $55,879 and $55,879, respectively, for the same periods in 2017. Additional compensation
expense of approximately $1,460,232 relating to the unvested portion of restricted stock granted is expected to be recognized
over a remaining average period of 1.5 years.
Warrants
A
summary of warrant activity for the nine months ended September 30, 2018 and changes during the year ended December 31, 2017 is
as follows:
|
|
Warrants
|
|
|
Exercise Price per Share
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Life (Years)
|
|
Balance - 12/31/16
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Grants
|
|
|
320,000
|
|
|
|
6.25
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancellations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance - 12/31/17
|
|
|
320,000
|
|
|
$
|
6.25
|
|
|
$
|
6.25
|
|
|
|
4.49
|
|
Grants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancellations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance - 09/30/18
|
|
|
320,000
|
|
|
$
|
6.25
|
|
|
$
|
6.25
|
|
|
|
4.08
|
|
16.
|
Commitments
and Contingencies
|
Operating
Leases
The
Company leases office space in Jersey City, New Jersey; Chicago, Illinois; Dallas, Texas; New York, New York; Atlanta, Georgia;
Miami, Florida; Portland, Oregon; Boston, Massachusetts; and Los Angeles and San Francisco, California. The Jersey City office
lease, amended on November 6, 2014 and April 7, 2017, expires on January 31, 2020 and the Company has the option to extend the
term for an additional five years. In addition to paying rent, under the terms of the Jersey City office lease the Company is
also required to pay its pro rata share of the property’s operating expenses. The other office locations are month-to-month
commitments. Rent expense for the three and nine months ended September 30, 2018 was $153,248 and $508,386, respectively, as compared
to $125,061 and $343,405, respectively, for the three and nine months ended September 30, 2017. Minimum future rental payments
under non-cancellable operating leases with terms in excess of one year as of September 30, 2018 for the next five fiscal years
and in the aggregate are:
Remainder of 2018
|
|
$
|
82,326
|
|
2019
|
|
|
329,304
|
|
2020
|
|
|
27,442
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
|
|
$
|
439,072
|
|
Legal
In the normal course
of its business, the Company may be involved in various claims, negotiations and legal actions. As of September 30, 2018, the Company
is not aware of any asserted or un-asserted claims, negotiations or legal actions for which a loss is considered reasonably possible
of occurring and would require recognition under guidance in ASC 450 - Contingencies.
Securities Class Action Lawsuit
On February 17, 2017,
plaintiff Sandi Roper commenced a purported securities class action against us and certain of our current and former officers and
directors in the United States District Court for the District of New Jersey captioned Roper v. SITO Mobile, Ltd., Case No. 17-cv-1106-ES-MAH
(D.N.J. filed Feb. 17, 2017). On May 8, 2017, Red Oak Fund, LP, Red Oak Long Fund LP, Red Oak Institutional Founders Long Fund,
and Pinnacle Opportunities Fund, LP (collectively, “Red Oak”) were appointed lead plaintiffs. On June 22, 2017, Red
Oak filed an amended complaint, purporting to represent a class of stockholders who purchased our common stock between August 15,
2016 and January 2, 2017 (“Class Period”). The amended complaint names as defendants our directors and certain of our
officers during the Class Period. It alleges that the defendants violated section 11 of the Securities Act of 1933, as amended
(the “Securities Act”), in connection with the September 16, 2016 offering of our stock, by allegedly omitting material
information from the registration statement and prospectus, and that the individual defendants are liable as controlling persons
under section 15 of the Securities Act. The amended complaint also alleges that the defendants violated section 10(b) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and SEC Rule 10b-5 promulgated thereunder by allegedly making
materially false or misleading statements regarding its media placement revenues, and that the individual defendants are liable
as controlling persons under section 20(a) of the Exchange Act. The amended complaint seeks unspecified damages. The defendants
moved to dismiss the amended complaint on September 1, 2017. That motion is pending. Discovery has not commenced, and no trial
date has been set for this action.
TAR SITO
On November 3, 2017,
a complaint was filed against the Company in the Supreme Court of the State of New York by TAR. The complaint alleged that the
Company breached its obligations to undertake best efforts to diligently pursue the monetization of the Patents under the NPA and
to provide timely information with respect to the Company’s intellectual property to the Revenue Participant (as defined
in the NPA), in addition to other alleged minor technical and curable defaults. However, the Company’s obligation to pay
any amounts to TAR under the NPA is entirely dependent on the generation by the Company of revenues from the monetization of the
Patents, and the Company has not generated substantial revenues from these Patents to date. Notwithstanding the complaint, the
Company believes that it has diligently undertaken its best efforts to monetize the Patents (which efforts have been described
in detail to TAR in writing), and that it has fully complied with all of the covenants under the NPA and is not otherwise in default
under the NPA.
On February 20, 2018,
the Company and the TAR Group entered into a settlement agreement, pursuant to which the NPA was terminated and discharged and
all pending litigation between the Company and the members of the TAR Group was dismissed with prejudice in exchange for a lump
sum payment of $3.5 million from the Company to the TAR Group. No future amounts are due with respect to the NPA or the Revenue
Stream and the lump sum payment has been recorded as of December 31, 2017. The settlement has been paid and no additional amounts
have been recorded against the Company’s financial statements for the three and nine months ended September 30, 2018.
Fort Ashford
In November 2017, the
Company received a complaint filed by Fort Ashford Funds, LLC (“Ashford”), in the Superior Court of the State of California,
Orange County. The complaint claims that the Company issued certain warrants to Panzarella Consulting, LLC and Patrick Panzarella
(collectively, “Panzarella”) giving them the option to purchase, in the aggregate, 5,000,000 shares of the Company’s
common stock at a price of fifty cents ($.50) per share. Through a series of transfers, the purported warrants were allegedly transferred
to Ashford, which is now seeking to exercise such purported warrants or to obtain damages. However, the Company has made a thorough
inquiry into these matters, and it is unaware of the existence of any warrant or other agreement that provides that the purported
warrants exist or were ever issued to Panzarella or any other person. As of this time, the complaint has failed to provide any
evidence of the existence of the purported warrant, or the ability and right of Ashford to exercise such warrant. The Company has
asserted a number of affirmative defenses to the claim in its answer. As the case is in the initial discovery phase, no assessment
can be made at this time. The Company believes the claims are baseless and plans to defend accordingly.
Effective October 23, 2018, Chester Petrow resigned as Chief Revenue Officer of the Company. Mr. Petrow
is seeking severance compensation, pursuant to his employment agreement, following his resignation with the Company. The Company
is actively engaged in discussions with counsel for Mr. Petrow regarding these matters; however, currently no amount can be reasonably
estimated regarding the outcome of these discussions.