| Summary of Significant Accounting Policies | 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” Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date 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” 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” In February 2016, the FASB issued “ASU 2016-02 Leases” “ASU 2018-10 – Codification Improvements to Topic 842 – Leases and ASU 2018-11 – Targeted Improvements,” In November 2016, the FASB issued “ASU 2016-18 - Statement of Cash Flows (Topic 230) Restricted Cash”. In January 2017, the FASB issued
“ ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment” In January 2017, the FASB issued “ASU 2017-01 - Business Combinations (Topic 805) Clarifying the Definition of a Business”. 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,” In June 2018, the FASB issued “ASU 2018-07 - Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. In July 2018, the FASB issued “ASU 2018-09 – Codification Improvements,” 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.” 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),” 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. |
