NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Organization, History and Business |
Single Touch Systems, Inc. (“the Company”) 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.
The Company is a technology based mobile solutions provider serving businesses, advertisers and brands. Through patented technologies and a modular, adaptable platform, Single Touch's multi-channel messaging gateway enables marketers to reach consumers on all types of connected devices, with information that engages interest, drives transactions and strengthens relationships and loyalty.
| 2. | Summary of Significant Accounting Policies |
Reclassification
Certain reclassifications have been made to conform the 2012 amounts to the 2013 classifications for comparative purposes.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Single Touch Systems Inc. and its wholly- owned subsidiaries, Single Touch Interactive, Inc., and Single Touch Interactive R&D IP, Inc. (formed in Nevada on October 8, 2012). Intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
For purpose of the statements of cash flows, 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 is reported at the customers’ outstanding balances, less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.
Allowance for Doubtful Accounts
An allowance for doubtful accounts on accounts receivable 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 individual customers. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired.
Property and Equipment
Property and equipment are stated at cost. Major renewals and improvements are charged to 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 | 2- 3 years | |
| Equipment | 5 years | |
| Computer hardware | 5 years | |
| Office furniture | 7 years | |
Long-Lived Assets
The Company accounts for its 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 cost carrying value of an asset may no longer be appropriate. The Company assesses 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. The Company determined that none of its long-term assets at September 30, 2013 or September 30, 2012 were impaired.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Royalties
The Company’s agreements with licensors and developers generally provide it with exclusive publishing rights and require it to make advance royalty payments that are recouped against royalties due to the licensor or developer based on product sales. Prepaid royalties are amortized on a software application-by-application basis, based on the greater of the proportion of current year sales to total current and estimated future sales or the contractual royalty rate based on actual net product sales. The Company continually evaluates the recoverability of prepaid royalties and charges to operations the amount that management determines is probable that will not be recouped at the contractual royalty rate in the period in which such determination is made or at the time the Company determines that it will cancel a development project. Prepaid royalties are classified as current and non-current assets based upon estimated net product sales within the next year.
Capitalized Software Development Costs
The Company capitalizes internal software development costs subsequent to establishing technological feasibility of a software application. Capitalized software development costs represent the costs associated with the internal development of the Company’s software applications. Amortization of such costs is recorded on a software application-by-application basis, based on the greater of the proportion of current year sales to total of current and estimated future sales for the applications or the straight-line method over the remaining estimated useful life of the software application. The Company continually evaluates the recoverability of capitalized software costs and will charge to operations amounts that are deemed unrecoverable for projects it abandons.
Convertible Debentures
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense or equity (if the debt is due to a related party), over the life of the debt using the effective interest method.
Capital Lease
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.
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 year ended September 30, 2013 or for the year ended September 30, 2012. The Company recognizes income tax interest and penalties as a separately identified component of general and administrative expense. During the year ended September 30, 2013 and 2012, there were no income tax, or related interest and penalty items in the income statement, or liabilities on the balance sheet.
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 and the acquisition of a software license (See Notes 5 and 7).
Revenue Recognition
Revenue is derived on a per message/notification basis through the Company’s patented technologies and a modular, adaptable platform designed to create multi-channel messaging gateways for all types of connected devices. The Company also earns revenue for services, such as programming, licensure on Software as a Service (“SaaS”) basis, and on a performance basis, such as when a client acquires a new customer through our platform. Revenue is recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as revised by SAB No. 104. As such, the Company recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectability is probable. Sales are recorded net of sales discounts.
Stock Based Compensation
The Company accounts for stock-based compensation under ASC Topic 505-50, formerly Statement of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment” and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An amendment to SFAS No. 123.” These standards define a fair-value-based method of accounting for stock-based compensation. In accordance with SFAS Nos. 123R and 148, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using the Binomial or Black-Scholes option-pricing models, 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 year ended September 30, 2013, the Company recognized stock-based compensation expense totaling $2,242,606, of which $1,349,809 was recognized through the vesting of 5,832,400 common stock options, $489,726 was recognized as additional compensation on the modification of 17,134,334 previously granted options, and $403,071 from the amortization of prepaid consulting fees compensated through the granting of 5,750,000 options (See Note 5). During the year ended September 30, 2012, the Company recognized stock-based compensation expense totaling $502,591, of which $448,991 was recognized through the vesting of 6,700,666 common stock options and $53,600 was recognized as compensation on the modification of 1,000,000 warrants granted to a consultant under a new agreement replacing a prior agreement (See Note 13).
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. 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 earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. Potential common shares as of September 30, 2013 that have been excluded from the computation of diluted net loss per share amounted to 56,560,952 shares and include 16,516,000 warrants, 34,188,952 options and $3,928,000 of debt and accrued interest convertible into 7,856,000 shares of the Company’s common stock. Of the 56,560,952 potential common shares at September 30, 2013, 2,916,334 shares were not vested. Potential common shares as of September 30, 2012 that have been excluded from the computation of diluted net loss per share amounted to 64,174,869 shares and include 23,116,595 warrants, 32,210,000 options and $4,424,137 of debt and accrued interest convertible into 8,848,274 shares of the Company’s common stock.
Concentration of Credit Risk
The Company primarily transacts its business with one financial institution. The amount on deposit in that one institution may from time to time exceed the federally-insured limit.
Of the Company’s revenue earned during the year ended September 30, 2013, approximately 99% was generated from contracts with ten customers covered under the Company’s master services agreement with AT&T. Of the Company’s revenue earned during the year ended September 30, 2012, approximately 99.7% was generated from contracts with eleven customers covered under the Company’s master services agreement with AT&T.
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, 2013 and 2012, one customer accounted for 99% and 93% of the Company’s net accounts receivable balance, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Recent Accounting Pronouncements
Our Company has not identified any recently issued accounting pronouncements that are expected to have a material impact on our Company's financial statements.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable consist of the following:
| | | September 30, | |
| | | 2013 | | | 2012 | |
| Due from customers | | $ | 1,350,705 | | | $ | 1,184,610 | |
| Less allowance for bad debts | | | (2,878 | ) | | | (98,770 | ) |
| | | $ | 1,347,827 | | | $ | 1,085,840 | |
The following is a summary of property and equipment:
| | | September 30, | |
| | | 2013 | | | 2012 | |
| Computer hardware | | $ | 756,197 | | | $ | 709,826 | |
| Equipment | | | 46,731 | | | | 46,731 | |
| Office furniture | | | 127,669 | | | | 127,669 | |
Equipment held under capital Lease | | | 53,112 | | | | - | |
| | | | 983,709 | | | | 884,226 | |
| Less accumulated depreciation | | | (744,894 | ) | | | (655,727 | ) |
| | | $ | 238,815 | | | $ | 228,499 | |
Depreciation expense for the year ended September 30, 2013 and 2012 was $89,168 and $107,909, respectively.
During the three months ended December 31, 2012, the Company's Executive Chairman personally granted an option to a third party to purchase a total of 5,750,000 shares of the Company’s common stock that he owned in exchange for consulting services provided by the third party that directly benefit the Company (the “Chairman Options”). Of the 5,750,000 Chairman Options, 3,750,000 have an exercise price of $0.295 per share and 2,000,000 have an exercise price of $0.48 per share. The Chairman Options expire two years from date of grant. The Company recorded the $847,300 fair value of the Chairman Options as contributed capital with an offset to prepaid consulting expense that is being amortized to operations over the two-year term of the consulting agreement. The Company’s value of $847,300 was determined using a Binomial Option model based upon an expected life of 5 years, trading prices ranging from $0.30 to $0.46 per share, a risk free interest rate ranging from 0.25% to 0.30%, and expected volatility ranging from 89.348% to 90.201%.
In September 2013, the Company, its Executive Chairman and the above-indicated third party entered into an agreement, whereby the Company granted options to the third party that have the same terms as the Chairman Options in exchange for the third party’s assignment of its interest in the Chairman Options to the Company. The Company valued the options granted to the third party in September 2013 at $718,871 and added the cost to the remaining unamortized prepaid consulting expense from the Chairman Options. The total is being amortized to operations over the remaining term of the consulting agreement. Consulting fees charged to operations for the year ended September 30, 2013 was $403,071. As of September 30, 2013, the unamortized prepaid consulting expense was $1,163,100. Amortization expense for the remaining terms of the option grants is as follows:
| Year Ending September 30, | | | |
| 2014 | | $ | 1,081,553 | |
| 2015 | | | 81,547 | |
| | | $ | 1,163,100 | |
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 6. | Capitalized Software Development Costs |
The following is a summary of capitalized software development costs:
| | | September 30, | |
| | | 2013 | | | 2012 | |
| Beginning balance | | $ | 383,227 | | | $ | 395,188 | |
| | | 399,682 | | | | 434,915 | |
| Amortization | | | (439,334 | ) | | | (446,876 | ) |
| Charge offs | | | - | | | | - | |
| Ending balance | | $ | 343,575 | | | $ | 383,227 | |
Amortization expense for the remaining estimated lives of these costs is as follows:
| Year Ending September 30, | | | |
| 2014 | | $ | 200,479 | |
| 2015 | | | 143,096 | |
| | | $ | 343,575 | |
Patents
The following is a summary of capitalized patent costs:
| | | September 30, | |
| | | 2013 | | | 2012 | |
| Patent costs | | | 939,535 | | | | 939,535 | |
| Amortization | | | (471,698 | ) | | | (337,479 | ) |
| | | $ | 467,837 | | | $ | 602,056 | |
Amortization expenses for the year ended September 30, 2013 and 2012 was $134,219 and $135,508, respectively.
Amortization expense over the estimated remaining lives of the patents is as follows:
| Year Ending September 30, | | | |
| 2014 | | $ | 134,219 | |
| 2015 | | | 134,219 | |
| 2016 | | | 130,787 | |
| 2017 | | | 62,449 | |
| 2018 | | | 6,163 | |
| | | $ | 467,837 | |
In January 2011, the Company was issued US Patent 7,865,181 “Searching for mobile content” and US Patent 7,865,182 “Over the air provisioning of mobile device settings.” The costs associated with these patents, totaling $29,254, are being amortized over the patent’s estimated useful life of seven years.
In September 2011, the Company was issued US Patent 8,015,307 “System and method for streaming media.” The costs associated with these patents totaling $8,115 are being amortized over the patent’s estimated useful life of seven years.
In October 2011, the Company was issued US Patent 8,041,341 “System of providing information to a telephony subscriber.” The costs associated with this patents totaling $22,940 are included above and are being amortized over the patent’s estimated useful life of seven years.
Software license
On March 30, 2012, the Company acquired an exclusive perpetual license to utilize the “Anywhere” software and related source code from Soap Box Mobile, Inc. (“Soapbox”), a company in which the Company’s Executive Chairman owned a majority preferred interest at the time of the license grant. The Company paid $785,000 in cash and 200,000 shares of Company common stock for the exclusive perpetual license, of which the Executive Chairman received $755,000 under terms of a November 27, 2012 agreement. The Company has valued the license at $831,000, which consists of the $785,000 in cash consideration and the $46,000 fair value assigned to the 200,000 shares of Company common stock. The perpetual license is a long-term asset that is not subject to amortization.
On November 27, 2012, the Company entered into a Settlement and Mutual Special Release with the Company’s Executive Chairman and agreed to pay him $755,000 for his full release from any claims related to the March 30, 2012 Soapbox agreement and included a perpetual exclusive license to utilize “Anywhere.” The $755,000 was capitalized and included in the cost of the software license.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases certain computer hardware under a capital lease that expires in 2016. The equipment has a cost of $53,111 and was not place in service at September 30, 2013.
Minimum future lease payments under the capital lease at June 30, 2013 for each of the next three years and in the aggregate are as follows:
| Year Ending September 30, | | | |
| 2014 | | $ | 17,098 | |
| 2015 | | | 17,098 | |
| 2016 | | | 12,823 | |
| Total minimum lease payments | | $ | 47,019 | |
| Less amount representing interest | | | (1,310 | ) |
Present value of net minimum lease payments | | $ | 45,709 | |
The effective interest rate charged on the capital lease is approximately 2.25% per annum. The lease provides for a $1 purchase option. Interest charged to operation for the years ended September 30, 2013 and 2012 was $241 and $0, respectively.
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:
| | | September 30, | |
| | | 2013 | | | | 2012 | |
| | | | | | | | |
| U.S statutory rate | | | 34 | % | | | 34 | % |
| Less valuation allowance | | | (34 | )% | | | (34 | )% |
| Effective tax rate | | | 0 | % | | | 0 | % |
The significant components of deferred tax assets and liabilities are as follows:
| | | September 30, | |
| Deferred tax assets | | 2013 | | | 2012 | |
| Stock based compensation | | $ | 1,507,017 | | | $ | 1,490,573 | |
| Net operating losses | | | 16,243,572 | | | | 14,486,166 | |
| Property and equipment | | | 2,681 | | | | 2,681 | |
| Intangible assets | | | 585,457 | | | | 50,480 | |
| Amortization - intangible assets | | | - | | | | 66,314 | |
| | | | 18,338,727 | | | | 16,096,214 | |
| Deferred tax liability | | | | | | | | |
| Depreciation expense | | | (20,710 | ) | | | (44,768 | ) |
| Amortization - intangible assets | | | (94,432 | ) | | | - | |
| Net deferred tax assets | | | 18,223,585 | | | | 16,051,446 | |
| Less valuation allowance | | | (18,223,585 | ) | | | (16,051,446 | ) |
| Deferred tax asset - net valuation allowance | | $ | - | | | $ | - | |
The net increase in the valuation allowance for the year ended September 30, 2013 was $(2,172,139).
The Company has a net operating loss carryover of approximately $47,775,000 available to offset future income for income tax reporting purposes that expire in various years through 2033, 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.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years beginning on October 1, 2009 or California state income tax examination by tax authorities for years beginning on October 1, 2008. We are not currently involved in any income tax examinations.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 10. | Obligation on Patent Acquisitions |
On March 15, 2010, the Company purchased six patents and three patent applications from an unrelated third party (the “Seller”) for $900,000 of which $550,000 was paid on the execution of the purchase agreement. Pertaining to the agreement, $175,000 was due on or before March 15, 2011, which was paid, and the final installment of $175,000 was due on or before March 15, 2012. The terms of the agreement were modified on March 1, 2012 whereby the remaining $175,000 became payable in two installments. Under the modified terms, an installment of $87,500 became due on or before March 15, 2012 and was paid. The fourth and final installment of $87,500 was paid on October 15, 2012.
As the original and modified agreements did not provide for any stated interest on the payments, the Company was required to impute interest on the payment stream. The Company present valued the payments at $831,394 using an effective interest rate of 15% in its computation. Interest accrued and charged to operations for the year ended September 30, 2013 and 2012 totaled $0 and $11,320, respectively.
During November and December 2011, the Company received a total of $1,800,000 in consideration for issuing convertible notes and warrants to purchase 3,600,000 shares of the Company’s common stock to seven investors including a Company director. In February 2012, the Company received from two investors an additional $200,000 in consideration for issuing convertible notes and warrants to purchase 400,000 shares of the Company’s common stock. The notes bear interest at a rate of 10% per annum. Under the original terms of the promissory notes, principal and accrued interest were fully due one year from the respective date of each loan and could be extended by mutual consent. Outstanding principal and the first year’s accrued interest are convertible into shares of the Company’s common stock at a conversion rate of $0.50 per share. In September 2012, holders of nine notes with a face amount of $1,700,000 agreed to modify the terms of their notes and extend the maturity date of their notes to August 31, 2014. Of the remaining notes with an original principal of $300,000, $200,000 paid in December 2012, and $100,000 that would otherwise been due in February 2013 was converted, together with $10,000 of interest, into 220,000 shares of the Company’s common stock in February 2013. The expiration dates of common stock warrants issued in connection with the modified notes were also extended to September 7, 2015. The modification of the terms of the convertible debt did not extinguish any portion of debt; therefore no gain or loss was recorded due to the modifications.
In connection with the Company’s private offering dated September 7, 2012, the Company received a total of $3,000,000 in consideration for issuing convertible notes and warrants to purchase 6,000,000 shares of the Company’s common stock to 64 investors. The notes bear interest at a rate of 10% per annum, and interest is payable semi-annually. Principal and any unpaid accrued interest are fully due two years from the respective date of each loan. Outstanding principal is convertible into shares of the Company’s common stock at a conversion rate of $0.50 per share. The aforementioned warrants are fully exercisable into common shares commencing on the date of each loan at a price of $0.25 per share and expire three years from the respective date of grant.
In connection with the private offering, the Company incurred offering costs totaling $424,843 including the fair value of warrants issued to the Placement Agent to purchase 479,920 shares of the Company’s common stock at a purchase price of $0.304 per share. The value of the warrants of $166,319 was calculated using the Binomial Option model with a risk-free interest rates ranging from 0.31% to 0.34%, volatility ranging from 94.17% to 95.23%, and trading prices ranging from $0.28 to $0.33 per share. The $424,843 is being amortized over the two-year term of the related debt using the effective interest method.
The convertible notes were recorded net of discounts that include the relative fair value of the warrants, the notes’ beneficial conversion features, and the above indicated loan fee, all totaling $1,530,415. The discounts are being amortized to either interest expense (if the debt is due to an unrelated party) or equity (if the debt is due to a related party) over the term of the various notes using the effective interest method. The initial value of the warrants of $1,124,773 issued to investors was calculated using the Binomial Option model with a risk-free interest rates ranging from 0.31% to 0.43%, volatility ranging from 94.17% to 103.00%, and trading prices ranging from $0.22 to $0.35 per share. The beneficial conversion feature of $51,516 was calculated using trading prices ranging from $0.26 to $0.35 per share and an effective conversion price $0.0322 per share.
During the year ended September 30, 2013, the Note holders converted debt and accrued interest totaling $1,052,000 into 2,104,000 shares of the Company’s common stock and exercised warrants for the issuance of 689,000 common shares. The Company received a total of $131,100 on the exercise of the warrants.
Interest expense on the convertible debt for the year ended September 30, 2013 and 2012 was $444,995 and $165,794, respectively. Amortization of the discounts for the year ended September 30, 2013 totaled $833,904 of which $825,708 was charged to interest expense and $8,196 was charged to equity. Amortization of the discounts for the year ended September 30, 2012 totaled $390,602 of which $311,006 was charged to interest expense and $79,596 was charged to equity.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discount amortization expense for the year ended September 30, 2013 includes $197,827 of the remaining unamortized portion of discounts attributable the $1,052,000 of debt converted during the period that was charged to operations upon the conversions.
The balance of these convertible notes at September 30, 2013 and 2012 is as follows:
| | | September 30, | |
| | | 2013 | | | 2012 | |
| Principal balance | | $ | 3,758,000 | | | $ | 4,312,000 | |
| Accrued interest | | | 337,498 | | | | 165,794 | |
| | | | 4,095,498 | | | | 4,477,794 | |
| Less discounts | | | (376,627 | ) | | | (970,761 | ) |
| | | | 3,718,871 | | | | 3,507,033 | |
| Less current portion | | | (3,278,278 | ) | | | (294,241 | ) |
| Long-term portion | | $ | 440,593 | | | $ | 3,212,792 | |
The following are maturities of the principal balance of the convertible debt:
| September 30, | | | |
| 2014 | | $ | 440,593 | |
| 12. | Related Party Transactions |
On November 11, 2011, the Company granted a Company director, 200,000 stock options exercisable at $0.225 per share that fully vest on date of grant.
On August 23, 2012, the Company granted three, Company directors, a total of 550,000 stock options exercisable at a price $0.325 per share that expire on August 23, 2017 and immediately vested upon grant.
As discussed in Note 9, a Company director provided $500,000 to the Company in exchange for $500,000 convertible note and warrants to purchase 1,000,000 common shares of the Company’s common stock for a period of three years at a price of $0.25 per share. The $500,000 note, as well as the first year’s interest on the note, is convertible into the Company’s common shares at a conversion rate of $0.50 per share.
On March 30, 2012, the Company acquired an exclusive perpetual license to utilize the “Anywhere” software and related source code from Soap Box Mobile, Inc. (“Soapbox”), a company in which the Company’s Executive Chairman owned a majority preferred interest. The Company paid $785,000 in cash and 200,000 shares of Company common stock for the exclusive perpetual license at the time of the license grant, of which the Executive Chairman received $755,000 under terms of a November 27, 2012 agreement. (See Note 10 – “Related Party Transactions” and Note 6 “Intangible Assets” – Software License).
As discussed in Note 10, a Company director provided $500,000 to Company in exchange for a $500,000 convertible note and warrants to purchase 1,000,000 common shares of the Company’s common stock for a period of three years at a price of $0.25 per share. The $500,000 note, as well as the first year’s interest on the note, is convertible into the Company’s common shares at a conversion rate of $0.50 per share.
On November 30, 2012, the Company agreed to modify the terms of common stock options previously granted to ’s Chief Executive Officer. Under the modified terms, the 50,000 stock options with an exercise price of $1.375 per share were reduced to 40,000 common stock options with an exercise price of $0.469 per share and 4,200,000 common stock options with an exercise price of $0.90 per share were reduced to 3,570,000 common stock options with an exercise price of $0.469 per share.
On November 30, 2012, the Company’s Chief Executive Officer agreed to modify the terms of common stock options previously granted to him. Under the modified terms, options 3,000,000 common stock options with an exercise price of $0.90 per share were reduced to 2,550,000 common stock options with an exercise price of $0.469 per share.
On November 30, 2012, the Company’s former Chief Financial Officer agreed to modify the terms of common stock options previously granted to him. Under the modified terms, 1,000,000 common stock options with an exercise price of $0.90 per share were reduced to 850,000 common stock options with an exercise price of $0.469 per share.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 30, 2012, a Company Director also agreed to modify the terms of common stock options previously granted to him. Under the modified terms, 3,000,000 common stock options with an exercise price of $0.90 per share were reduced to 2,550,000 common stock options with an exercise price of $0.469 per share.
During the three months ended December 31, 2012, the Company's Executive Chairman personally granted an option to a third party to purchase a total of 5,750,000 shares of the Company’s common stock that he owned in exchange for consulting services provided by the third party that directly benefit the Company (the “Chairman Options”). Of the 5,750,000 Chairman Options, 3,750,000 have an exercise price of $0.295 per share and 2,000,000 have an exercise price of $0.48 per share. The Chairman Options expire two years from date of grant. The Company recorded the $847,300 fair value of the Chairman Options as contributed capital with an offset to prepaid consulting expense that is being amortized to operations over the two-year term of the consulting agreement.
In September 2013, the Company, its Executive Chairman and the above-indicated third party entered into an agreement, whereby the Company granted options to the third party that have the same terms as the Chairman Options in exchange for the third party’s assignment of its interest in the Chairman Options to the Company. The Company valued the options granted to the third party in September 2013 at $718,871 and added the cost to the remaining unamortized prepaid consulting expense from the Chairman Options (See Note 5)
On November 29, 2012, the Company granted a Director 200,000 fully vested stock options exercisable at $0.389 per share.
On December 6, 2012, the Company granted its Executive Chairman 2,099,400 fully vested stock options exercisable at $0.469 per share.
On December 10, 2012, the Company granted a Director 200,000 fully vested stock options exercisable at $0.446 per share.
On March 29, 2013, the Company a Director 200,000 fully vested stock options exercisable at $0.687 per share.
On April 16, 2013, the Company granted a Director 50,000 fully vested stock options exercisable at $0.676 per share.
On May 1, 2013, the Company granted a Director 200,000 fully vested stock options exercisable at $0.705 per share.
On August 27, 2013, the Company granted a Director 250,000 fully vested stock options exercisable at $0.604 per share.
On August 27, 2013, the Company granted another Director 50,000 fully vested stock options exercisable at $0.604 per share.
During the year ended September 30, 2013, a former Director, received 490,588 shares of the Company’s common stock through the cashless exercise of 1,550,000 stock options. In addition, the Company issued the former director 281,448 common shares at price of $0.469 per share upon exercise of the former Director’s stock options and received $131,999 in proceeds.
The Company’s financial instruments at September 30, 2013 and 2012 consist principally of notes payable and convertible debentures. Notes payable and convertible debentures are financial liabilities with carrying values that approximate fair value. The Company determines the fair value of notes payable and convertible debentures based on the effective yields of similar obligations.
The Company believes all of the financial instruments’ recorded values approximate fair market value because of their nature and respective durations.
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.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company utilizes the best available information in measuring fair value. The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as follows:
| September 30, 2013: | | | | | | | | | | | | |
| | | Fair Value Measurements | | | Total Fair | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Value | |
| Liabilities | | | | | | | | | | | | |
| Convertible debentures | | $ | - | | | $ | 3,718,871 | | | | - | | | $ | 3,718,871 | |
| Obligation under capital lease | | $ | - | | | $ | 45,709 | | | | - | | | $ | 45,709 | |
| | | | | | | | | | | | | | | | | |
| September 30, 2012: | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements | | | Total Fair | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Value | |
| Liabilities | | | | | | | | | | | | | | | | |
| Obligation on patent acquisitions | | $ | - | | | $ | 87,500 | | | | - | | | $ | 87,500 | |
| Convertible debentures | | | | | | $ | 3,507,033 | | | | - | | | $ | 3,507,033 | |
Common Stock
The holders of the Company's common stock are entitled to one vote per share of common stock held.
In September 2013, the Company increased the number of its authorized common shares to 300,000,000.
During the year ended September 30, 2013, the Company issued a total of 4,747,839 shares of its common stock of which 689,000 shares were issued through the exercise of warrants for $131.100, 2,104,000 shares of its common stock were issued through the conversion of $1,052,000 of principal and accrued interest on convertible debt, 498,791 shares were issued in cashless exercises of 1,590,000 common stock options, 956,048 shares were issued on the exercise of 956,048 common stock options, and 500,000 shares of common stock were issued for $245,000. The 956,048 common shares were issued through various exercises from employees, and a consultant from which the Company received $448,386.
During the year ended September 30, 2012, the Company issued a total of 2,290,000 shares of its common stock of which 1,850,000 shares were issued through the exercise of warrants for $318,000, 200,000 shares of its common stock were issued for the acquisition of the Anywhere software license as discussed in Note 6 and was valued at $46,000, and 240,000 were issued to a consultant for financial advisory services valued at $43,200.
Warrants
As indicated in Note 10, the Company issued warrants to seventy-one investors to purchase a total of 10,000,000 shares of the Company’s common stock at a price of $0.25 per share as part of the $2,000,000 private placement completed in February 2012 and the $3,000,000 private placement completed in October 2012. The warrants expire at various dates through September 2015. During the year ended September 30, 2013, Warrant holders exercised 689,000 warrants in the purchase of 689,000 common shares at a total purchase price of $131,100.
In March 2012, the Company agreed to modify the terms of warrants granted to a consultant under a new agreement that replaced a prior agreement in June 2011 to purchase 1,000,000 shares of the Company's common stock. Under the modified terms, the exercise price was reduced from $0.80 per share to $0.40 per share and the expiration date of the warrants was extended from June 14, 2014 to December 14, 2014. The Company recognized consultant’s compensation expense during the period of $53,600 on the modification.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options
In November 2012, the Company modified the terms of stock options granted to certain employees, officers, directors, and active third-party service providers. Under the modified terms, the Company reduced the number of shares to be purchased under these option grants from a total of 17,134,334 shares to a total of 14,534,934 shares with a reduction in the purchase price on these grants from original prices ranging from $1.375 to $0.90 per share to $0.469 per share. A breakdown of the modified grants is as follows:
| | | Shares under | | | Shares under | |
| | | Original | | | Modified | |
| | | Grant | | | Grant | |
| Employees | | | 5,809,334 | | | | 4,914,934 | |
| Officers and directors | | | 11,300,000 | | | | 9,600,000 | |
| Consultant | | | 25,000 | | | | 20,000 | |
| | | | 17,134,334 | | | | 14,534,934 | |
In addition to reducing the number of options previously granted at the reduced purchase price, the Executive Chairman and Chief Executive Officer voluntarily agreed to amend their stock options to defer vesting of already vested options related to their employment agreements and half of their unvested options for an additional six months. The Company accounted for the modification to the option grants pursuant to ASC Topic 718-20-35 and recognized $489,726 as additional compensation that was charged to operations during the three months ended December 31, 2012.
On November 29, 2012, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.389 per share expiring five years from date of grant. The 200,000 options were valued at $26,760 under a Binomial Option Model using a trading price of $0.25 per share, a risk free interest rate of 0.63%, and volatility of 98.76%. The options immediately vested, and the $26,760 was fully charged to operations on the date of grant
On December 6, 2012, the Company granted options to its Executive Chairman to purchase 2,099,400 shares of the Company common stock at a purchase price of $0.469 per share expiring five years from date of grant. The 2,099,400 options were valued at $636,328 under a Binomial Option Model using a trading price of $0.46 per share, a risk free interest rate of 0.60%, and volatility of 98.54%. The options immediately vested, and the $636,328 was fully charged to operations on the date of grant.
On December 6, 2012, the Company granted options to an employee to purchase 500,000 shares of the Company common stock at a purchase price of $0.469 per share expiring five years from date of grant. The 500,000 options were valued at $151,550 under a Binomial Option Model using a trading price of $0.46 per share, a risk free interest rate of 0.60%, and volatility of 98.54%. The options immediately vest and the $151,550 was fully charged to operations on the date of grant.
On December 10, 2012, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.446 per share expiring five years from date of grant. The 200,000 options were valued at $50,220 under a Binomial Option Model using a trading price of $0.40 per share, a risk free interest rate of 0.62%, and volatility of 98.32%. The options immediately vest and the $50,220 was fully charged to operations on the date of grant.
On March 29, 2013, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.6870 per share expiring five years from date of grant. The 200,000 options were valued at $85,960 under a Binomial Option Model using a trading price of $0.67 per share, a risk free interest rate of 0.76%, and volatility of 97.10%. The options immediately vest and the $85.960 was fully charged to operations on the date of grant.
On April 16, 2013, the Company granted options to a Director to purchase 50,000 shares of the Company common stock at a purchase price of $0.676 per share expiring five years from date of grant. The 50,000 options were valued at $19,295 under a Binomial Option Model using a trading price of $0.75 per share, a risk free interest rate of 0.71%, and volatility of 96.65%. The options immediately vest and the $19.295 was fully charged to operations on the date of grant.
On May 1, 2013, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.705 per share expiring five years from date of grant. The 200,000 options were valued at $84,600 under a Binomial Option Model using a trading price of $0.67 per share, a risk free interest rate of 0.65%, and volatility of 96.28%. The options immediately vest and the $84,600 was fully charged to operations on the date of grant.
On August 27, 2013, the Company granted options to a Director to purchase 250,000 shares of the Company common stock at a purchase price of $0.604 per share expiring five years from date of grant. The 250,000 options were valued at $95,200 under a Binomial Option Model using a trading price of $0.60 per share, a risk free interest rate of 1.56%, and volatility of 94.1497%. The options immediately vest and the $95,200 was fully charged to operations on the date of grant.
On August 27, 2013, the Company granted options to a Director to purchase 50,000 shares of the Company common stock at a purchase price of $0.604 per share expiring five years from date of grant. The 50,000 options were valued at $19,040 under a Binomial Option Model using a trading price of $0.60 per share, a risk free interest rate of 1.56%, and volatility of 94.1497%. The options immediately vest and the $95,200 was fully charged to operations on the date of grant.
As discussed in Note 5, on September 11, 2013, the Company granted 5,750,000 options to a third party and valued the options at $718,871 using a Binomial Option model based upon an expected terms ranging from 1.08 years to 1.25 years, trading price of $0.52, a risk free interest of 0.12%, and expected volatility of 56.624%.
On August 23, 2012, the Company granted options to three directors to purchase a total of 550,000 shares of the Company’s common stock at $0.325 per share. The Company valued the options at $26,716 using a Binomial Option model based upon an expected life of five years, a risk free interest rate of 0.71%, and expected volatility of 100.95% and a market discount of 75%. At the date of grant, the Company’s common stock had a trading price of $0.30 per share. The Company is charged the $26,716 to operations as compensation expense based upon the vesting of the respective options.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended September 30, 2013, the Company recognized stock-based compensation expense totaling $2,242,606, of which $1,349,809 was recognized through the vesting of 5,832,400 common stock options, $489,726 was recognized as additional compensation on the modification of 17,134,334 previously granted options, and $403,071 from the amortization of prepaid consulting fees compensated through the granting of 5,750,000 options. During the year ended September 30, 2012, the Company recognized stock-based compensation expense totaling $502,591, of which $448,991 was recognized through the vesting of 6,700,666 common stock options and $53,600 was recognized as compensation on the modification of 1,000,000 warrants granted to a consultant under a new agreement replacing a prior agreement.
A summary of outstanding stock warrants and options is as follows:
| | | | | | Weighted Average | |
| | | of Shares | | | Exercise Price | |
| Outstanding – September 30, 2011 | | | 49,810,986 | | | $ | .82 | |
| Granted | | | 9,743,920 | | | $ | .23 | |
| Exercised | | | (1,850,000 | ) | | $ | (.17 | ) |
| Cancelled | | | (2,378,311 | ) | | $ | (.32 | ) |
| Outstanding – September 30, 2012 | | | 55,326,595 | | | $ | .75 | |
| Granted | | | 25,520,414 | | | $ | .43 | |
| Exercised | | | (3,235,048 | ) | | $ | (.41 | ) |
| Cancelled | | | (27,907,009 | ) | | $ | (.93 | ) |
| Outstanding – September 30, 2013 | | | 49,704,952 | | | $ | .48 | |
Of the 49,704,952 options and warrants outstanding, 46,788,618 are fully vested and currently available for exercise.
| 15. | Commitments and Contingency |
Operating Leases
The Company leases office space in Encinitas, California; Rogers, Arkansas; Jersey City, New Jersey; and Boise, Idaho. The Encinitas office is leased for a term commencing on July 3, 2013 and expires on July 31, 2016. The Rogers office is leased for a term of five years, effective January 1, 2012. The Boise lease is currently being leased on a month-to-month basis. The Jersey City lease expires on June 30, 2016 and the Company has the option to lease the Jersey City offices for an additional five years. In addition to paying rent, the Company is also required to pay its pro rata share of the property’s operating expenses. Rent expense for the year ended September 30, 2013 and 2012 was $217, 817 and $205, 638, respectively. Minimum future rental payments under non-cancellable operating leases with terms in excess of one year as of September 30, 2013 for the next five years and in the aggregate are:
| | $ | 195,653 | |
| 2015 | | | 199,547 | |
| 2016 | | | 167,206 | |
| 2017 | | | 11,608 | |
| 2018 | | | - | |
| | | $ | 574,014 | |
Licensing Fee Obligations
The Company has entered into various licensing agreements that require the Company to pay fees to the licensors on revenues earned by the Company utilizing the related license. The amounts paid on each license vary depending on the terms of the related license.
From October 1, 2013 through December 6, 2013, the Company received a total of $1,825,451 through the issuance of 5,322,976 shares of its common stock. Of the 5,322,976 common shares issued, 1,725,000 common shares were issued to a consultant through the exercise of 1,725,000 stock warrants at $0.08 per share, a total of $138,000, common shares were issued to various Company employees through the exercises of 1,819,424 stock options at $0.469 per share 758,552 common shares were issued to a former director through the exercise of 796,476 stock options at $0.469 per share, and 1,020,000 common shares were issued to the Company’s Executive Chairman through the exercise of 1,020,000 stock options at $0.469 per share.
On October 10, 2013, we entered into a Consulting Agreement with Peter D. Holden whereby Mr. Holden will give us advice and support in connection with our review, analysis and development of our intellectual property and receive $13,000 in monthly compensation and a grant of options to purchase 500,000 shares of our common stock at a price of $0.609 per share. The options expire on October 10, 2016 and immediately vested upon grant. Either party may terminate the Consulting Agreement with ten days prior written notice.
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 15, 2013, the Company’s Chief Financial Officer submitted his resignation, which took effect on October 31, 2013, and pursuant to a Separation Agreement, 200,000 of the 425,000 options that were subject to the November 2012 program are immediately fully vested and the remaining 225,000 options are cancelled.
On October 18, 2013, the Company entered into an employment agreement with a new Chief Financial Officer that is effective on November 1, 2013 and calls for successive one-year renewals unless either party elects against renewal. The Company agreed to grant 25,000 shares of its common stock under its 2009 Employee and Consultant Stock Plan, subject to the restriction that the 25,000 shares shall be forfeited to us if the employment ceases for any reason; provided, that such restriction and risk of forfeiture shall cliff-lapse on the 180th day after his start date at the Company. The Company agreed to grant stock options under our 2010 Stock Option Plan to purchase 750,000 shares of common stock at a strike price equal to the closing price of the Company’s stock on October 31, 2013 of $0.62, with the scheduled expiration date of the stock options to be November 1, 2018. The stock options vest annually in equal installments of 250,000 over a three year period commencing on November 1, 2014.
On November 12, 2013, the Company entered into Patent License and Settlement Agreement with a unrelated third party regarding a patent dispute. Under the terms of the settlement, the Company granted the third party a non-exclusive, non-transferable (except as limited by the Agreement), royalty free, fully paid-up. Worldwide license for a period of ten years. As consideration for entering into the agreement and related license, the third party agreed to pay the Company a total of $750,000, of which $100,000 was paid on November 19, 2013. $200,000 is to be paid on the first anniversary of the effective date of the agreement, $225,000 is to be paid on the second anniversary of the effective date of the agreement and $225,000 is to be paid on the third anniversary of the effective date of the agreement.
From October 1, 2013 to date, the Company repurchased 189,600 shares of its common stock in the open market at an average price of $0.53 per share for a total cost of $100,985.
In December 2013, the Company issued 141,981 shares of its common stock to various employees through cashless exercises of 1,166,476 common stock options.
