XOTC:SITO Single Touch Systems Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x           QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended June 30, 2012

o           TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from ____________ to ____________
 
Commission file number:  000-53744
 
Single Touch Systems Inc.
(Exact name of small business issuer as specified in its charter)
 
Delaware
13-4122844
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
100 Town Square Place, Suite 204
Jersey City, NJ 07310
(Address of principal executive offices)
 
(201) 275-0555
(Registrants telephone number, including area code)
 
_____________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company; as defined within Rule 12b-2 of the Exchange Act.
 
o
Large accelerated filer 
 
o
Accelerated filer
 
o
Non-accelerated filer
 
x
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No
 
The number of shares outstanding of each of the issuer's classes of common equity as of July 2, 2012:  132,232,392 shares of common stock.





 
 

 

 
 
Contents
 
   
Page
   
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PART I - FINANCIAL INFORMATION
 
Item 1 - Interim Financial Statements June 30, 2012
 
SINGLE TOUCH SYSTEMS, INC
           
CONDENSED CONSOLIDATED BALANCE SHEETS
 
               
     
June 30,
   
September 30,
 
     
2012
   
2011
 
     
(Unaudited)
       
Assets
           
Current assets
           
 
Cash and cash equivalents
  $ 554,025     $ 523,801  
 
Accounts receivable - trade
    1,097,919       907,275  
 
Prepaid expenses
    91,562       93,872  
 
Other current asset
    155,000       155,000  
                   
 
Total current assets
    1,898,506       1,679,948  
                   
Property and equipment, net
    250,009       303,214  
                   
Other assets
               
 
Capitalized software development costs, net
    397,035       395,188  
 
Intangible assets:
               
 
Patents
    641,027       714,623  
 
Patent applications cost
    635,202       544,240  
 
Software license
    76,000       -  
 
Deposits and other assets
    103,328       99,481  
                   
 
Total other assets
    1,852,592       1,753,532  
                   
 
Total assets
  $ 4,001,107     $ 3,736,694  
 
 
 
 
 
See accompanying notes.
 
 
1

 
 
 
SINGLE TOUCH SYSTEMS, INC
           
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
 
             
   
June 30
   
September 30,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Liabilities and Stockholders' Equity (Deficit)
           
Current liabilities
           
Accounts payable
  $ 699,612     $ 1,178,057  
Accrued expenses
    155,279       176,232  
Accrued compensation - related party
    72,986       36,410  
Current obligation on patent acquisitions
    86,217       163,680  
Convertible debentures- unrelated  parties, including accrued interest,
               
net of discounts of $179,912
    1,400,855       -  
Convertible debentures - related party, including accrued interest,
               
net of discounts of $38,865
    492,505       -  
                 
Total current liabilities
    2,907,454       1,554,379  
                 
Long-term liabilities
               
Deferred revenue
    25,000       -  
                 
Total liabilities
    2,932,454       1,554,379  
                 
Stockholders' Equity (Defiit)
               
Preferred stock,  $.0001 par value, 5,000,000 shares authorized;
               
none outstanding
               
Common stock, $.001 par value; 200,000,000 shares authorized,
               
132,232,392 shares issued and outstanding as of June 30, 2012
               
and 130,882,392 issued and outstanding as of September 30, 2011
    132,232       130,182  
Additional paid-in capital
    124,595,958       123,446,398  
Accumulated deficit
    (123,659,537 )     (121,394,265 )
                 
Total stockholders' equity (deficit)
    1,068,653       2,182,315  
                 
Total liabilities and stockholders' equity (deficit)
  $ 4,001,107     $ 3,736,694  
 
 
 
 
 
 
See accompanying notes.
 
 
2

 
 
 
SINGLE TOUCH SYSTEMS, INC
                       
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                           
                           
                           
     
For the Three Months Ended
   
For the Nine Months Ended
 
     
June 30,
   
June 30,
 
     
2012
   
2011
   
2012
   
2011
 
                           
Revenue
                       
Wireless applications
  $ 1,585,195     $ 1,154,710     $ 4,729,691     $ 3,200,143  
                                   
Operating Expenses
                               
Royalties and application costs
    776,881       580,734       2,194,512       1,540,089  
Research and development
    17,236       7,779       70,486       40,651  
Compensation expense (including stock based
                               
 
compensation of $290,528, $260,000, $290,528, and $3,447,279 *)
    959,195       699,129       2,332,979       4,593,083  
Depreciation and amortization
    179,534       165,366       498,609       459,946  
General and administrative (including stock based
                               
 
compensation of $0, $395,100, $90,022, and $811,529 *)
    478,707       979,749       1,587,120       2,505,925  
        2,411,553       2,432,757       6,683,706       9,139,694  
                                   
Loss from operations
    (826,358 )     (1,278,047 )     (1,954,015 )     (5,939,551 )
                                   
Other Income (Expenses)
                               
Net (loss) on settlement of indebtedness
    -       -       -       (651,315 )
Interest expense
    (144,380 )     (16,580 )     (310,457 )     (34,072 )
                                   
Net (loss) before income taxes
    (970,738 )     (1,294,627 )     (2,264,472 )     (6,624,938 )
                                   
Provision for income taxes
    -       -       (800 )     (800 )
                                   
Net income (loss)
  $ (970,738 )   $ (1,294,627 )   $ (2,265,272 )   $ (6,625,738 )
                                   
Basic and diluted loss per share
  $ (0.01 )   $ (0.01 )   $ (0.02 )   $ (0.05 )
                                   
Weighted average shares outstanding
    131,710,414       128,472,131       130,779,655       126,908,269  
                                   
                                   
* For the quarters ended June 30, 2012 and 2011 and
                               
 
for the nine months ended June 30, 2012 and 2011, respectively.
                         
 
 
See accompanying notes.
 
 
3

 
 
 
SINGLE TOUCH SYSTEMS, INC
           
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
             
   
For the Nine Months Ended
 
   
June 30,
 
   
2012
   
2011
 
             
Cash Flows from Operating Activities
           
Net loss
  $ (2,265,272 )   $ (6,625,738 )
Adjustments to reconcile net loss to net cash
               
used in operating activities:
               
Depreciation expense
    82,574       70,823  
Amortization expense - software development costs
    319,498       295,285  
Amortization expense - patents
    96,537       93,838  
Amortization expense - discount of convertible debt
    188,282       -  
Stock based compensation
    380,550       4,258,808  
Loss on settlement of debt
            651,315  
(Increase) decrease in assets
               
(Increase) decrease in accounts receivable
    (190,644 )     (272,970 )
(Increase) decrease in prepaid expenses
    2,309       6,811  
(Increase) decrease in deposits and other assets
    (3,847 )     11,051  
Increase (decrease) in liabilities
               
Increase (decrease) in accounts payable
    (478,443 )     (27,169 )
Increase (decrease) in accrued expenses
    15,623       56,671  
Increase (decrease) in deferred revenue expenses
    25,000       -  
Increase (decrease) in accrued interest
    122,174       5,686  
                 
Net cash used in operating activities
    (1,705,659 )     (1,475,589 )
                 
Cash Flows from Investing Activities
               
Patents and patent applications costs
    (113,902 )     (71,649 )
Purchase of property and equipment
    (29,370 )     (108,560 )
Capitalized software development costs
    (321,345 )     (401,706 )
Payment on purchase of Anywhere software license
    (30,000 )     -  
                 
Net cash used in investing activities
  $ (494,617 )   $ (581,915 )
 
 
See accompanying notes.
 
 
4

 
 
 
SINGLE TOUCH SYSTEMS, INC
           
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
 
             
   
For the Nine Months Ended
 
   
June 30,
 
   
2012
   
2011
 
             
Cash Flows from Financing Activities
               
Proceeds from issuance of common stock
    318,000       8,150  
Proceeds from issuance of convertible debt - unrelated parties
    1,500,000       -  
Proceeds from issuance of convertible debt  - related parties
    500,000       -  
Loan advances received from related parties
    -       17,685  
Fees paid pursuant to warrant settlement
    -       (30,000 )
Repayments on related party loans
    -       (790,822 )
Principal reduction on  obligation on patent purchases
    (87,500 )     (164,833 )
                 
Net cash provided by financing activities
    2,230,500       (959,820 )
                 
Net increase (decrease) in cash
    30,224       (3,017,324 )
                 
Beginning balance - cash
    523,801       4,040,169  
                 
Ending balance - cash
  $ 554,025     $ 1,022,845  
                 
                 
Supplemental Information:
               
                 
Interest expense paid
  $ -     $ 14,345  
                 
Income taxes paid
  $ 800     $ 800  
 
 
Non-cash investing and financing activities:
         
                   
 
For the nine-months ended June 30, 2012
         
                   
 
During the nine months ended June 30, 2012, the Company received $2,000,000 through the issuance of
 
convertible debt including common stock warrants to purchase 4,000,000 shares of the Company's common
 
stock at $0.25 per share. The Company recognized discounts against the principal amounts due totaling $464,252
 
with an offsetting amount charged to equity. The discount is being amortized over the one-year term of the
 
respective debt instrument. The discounts consist of the relative fair value of the warrants totaling $412,736
 
and the relative fair value of beneficial conversion features totaling $51,516.
 
 
See accompanying notes.
 
 
5

 
 
 
 
During the nine months ended June 30, 2012, the Company agreed to modify the terms of warrants granted
 
to a consultant under a new agreement replacing a prior June 2011 agreement 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 compensation expense during the period of $53,600 on the modification.
                   
 
 During the nine months ended June 30, 2012, the Company was granted a perpetual license to utilize the
 
 Anywhere software. In consideration for the license, the Company agreed to pay $30,000 and issue
 
 200,000 shares of its common stock. The license was valued at $76,000 (See Note 6). The $30,000 was
 
 paid April 2012.
         
                   
 
During the nine months ended June 30, 2012, the Company recognized stock-based compensation of
 
$326,950 on the vesting of 4,000,000 options.
         
                   
 
During the nine months ended June 30, 2012, the Company charged amortization of a beneficial conversion
 
feature on convertible debt due to a Director of $57,193 to equity.
   
                   
 
For the nine-months ended June 30, 2011
         
                   
 
During the nine months ended June 30, 2011, the Company issued 944,316 shares  of its common
 
stock through the cashless exercise of 1,050,000 warrants.
   
                   
 
During the nine months ended June 30, 2011, the Company issued 723,684 shares  of its common stock
 
 through a settlement with a former Note holder as to the number of shares he was entitled to in the original
 
conversion of his note. The Company recognized a loss of $651,315 on the issuance of the 723,684 shares.
                   
 
During the nine months ended June 30, 2011, the Company issued 3,400,000 shares  of its common stock
 
to two officers as compensation. The shares were valued at $2,960,000 and charged to operations as
 
compensation expense.
         
                   
 
In June 2011, the Company issued 100,000 shares of its common stock to its legal counsel valued at
 
$50,000, which was charged to operation.
         
                   
 
During the nine months ended June 30, 2011, the Company charged $575,857 to equity relating to
 
the amortization of discounts on related party convertible debt.
   
                   
 
During the nine months ended June 30, 2011, the Company granted options to  its officers, employees,
 
and certain consultants to purchase 21,155,000 sharers of the Company's common stock. Of the
 
options granted, 10,655,000 vested during the period and were valued at $1,248,808  which were
 
charged to operations.
         
 
 
 
See accompanying notes.
 
 
6

 
 
 
Single Touch Systems, Inc.
 
Notes to Condensed Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
 
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.
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of June 30, 2012, and the results of its operations and cash flows for the three months and nine months ended June 30, 2012 and 2011. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (“the Commission”). The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to ensure the information presented is not misleading. However, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 filed with the Commission on December 30, 2011.
 
The accompanying consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America.
 
 
2. Summary of Significant Accounting Policies
 
Reclassification
 
Certain reclassifications have been made to conform the 2011 amounts to the 2012 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 HSN, Inc. (an inactive company formed in New Jersey on August 21, 2001). Intercompany transactions and balances have been eliminated in consolidation.
 
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 a 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.
 
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
 

 
 
7

 
 
 
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 June 30, 2012 were impaired.
 
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.
 
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 Note 6).
 
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 nine months ended June 30, 2012, the Company recognized stock-based compensation expense totaling $380,550, of which $326,950 was recognized through the vesting of 4,000,000 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 12). During the nine months ended June 30, 2011, the Company recognized stock-based compensation expense totaling $4,258,808 of which $2,700,000 was recognized on the issuance of 3,000,000 shares of its common stock to its executive chairman, $260,000 was recognized on the issuance of 400,000 shares of its common stock issued to its current President, $50,000 was recognized on the issuance of 100,000 shares of its common stock to its outside legal counsel and $1,248,808 through the granting of options to management, employees, and consultants to purchase 10,655,000 shares of the Company’s common stock. (See Note 12).
 
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
 
 
 
8

 
 
 
assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. Potential common shares as of June 30, 2012 that have been excluded from the computation of diluted net loss per share amounted to  55,874,449 shares and include 18,670,175 warrants, 32,980,000 options and $2,112,137  of debt and accrued interest convertible into 4,224,274 shares of the Company’s common stock.  Potential common shares as of June 30, 2011 that have been excluded from the computation of diluted net loss per share total 61,338,486 shares and include  31,508,486 warrants and  29,830,000 options.
 
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.
 
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 three months ended June 30, 2012, approximately 99.6% 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 three months ended June 30, 2011, approximately 98.4% was generated from contracts with eight customers covered under the Company’s master services agreement with AT&T.
 
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.
 
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.
 
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.
 
Recent Accounting Pronouncements
 
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The Company does not expect the adoption of ASU 2011-12 to have a material impact on its consolidated financial statements.
 
In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.
 
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, “Testing Goodwill for Impairment” (“ASU No. 2011-08”), which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that
 
 
 
9

 
 
 
the fair value of the reporting unit is less than its carrying amount. ASU No. 2011-08 also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment becomes effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year ending September 30, 2013. Early adoption is permitted. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.
 
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financials properly reflect the change.
 
 
3. Accounts Receivable
 
Accounts receivable at June 30, 2012 consist of the following:
 
       
Due from customers
  $ 1,178,363  
Less allowance for bad debts
    (80,444 )
Accounts receivable - trade   $ 1,097,919  
 
 
4. Property and Equipment
 
The following is a summary of property and equipment at June 30, 2012:
 
Computer hardware
  $ 706,001  
Equipment
    46,731  
Office furniture
    127,669  
Property and equipment, gross     880,401  
Less accumulated depreciation
    (630,392 )
Property and equipment, net   $ 250,009  
 
Depreciation expense for the three months ended June 30, 2012 and 2011 was $29,059 and $24,286, respectively. Depreciation expense for the nine months ended June 30, 2012 and 2011 was $82,574 and $70,823, respectively.
 
 
5. Capitalized Software Development Costs
 
The following is a summary of capitalized software development costs at June 30, 2012:
 
Balance – Oct 1, 2011
  $ 395,188  
Additions
    321,345  
Amortizations
    (319,498 )
Charge offs
    -  
Balance – June 30, 2012
  $ 397,035  
 
Amortization expense for the three months ended June 30, 2012 and 2011 was $118,244 and $109,959, respectively. Amortization expense for the nine months ended June 30, 2012 and 2011 was $319,498 and $295,285, respectively.
 
Amortization expense for the remaining estimated lives of these costs are as follows:
 
Period Ending June 30,
     
2013
  $ 256,642  
2014
    140,393  
    $ 397,035  
 

 
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6. Intangible Assets
 
Patents
 
The following is a summary of capitalized patent costs at June 30, 2012:
 

Patent costs
  $ 939,534  
Less accumulated amortization
    (298,507 )
Patents   $ 641,027  
 
Amortization charged to operations for the three months ended June 30, 2012 and 2011 totaled $32,231 and $31,121, respectively. Amortization charged to operations for the nine months ended June 30, 2012 and 2011 totaled $96,537 and $93,838, respectively.
 
A schedule of amortization expense over the estimated life of the patents is as follows:
 
Period Ending June 30,
     
2013
  $ 132,392  
2014
    132,392  
2015
    132,392  
2016
    132,392  
2017
    87,057  
Thereafter
    24,402  
    $ 641,027  
 
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 7 years.
 
Software license
 
On March 30, 2012, the Company was granted a perpetual license to utilize the “Anywhere” software and related source code from Soap Box Mobile, Inc. (“Soapbox”). Under the terms of the underlying agreement, the Company issued 200,000 shares of its common stock to Soapbox and paid $30,000 in April 2012. All of the consideration paid was distributed to eight individuals comprising all of the common shareholders of Soapbox pursuant to instruction from Soapbox. The Company valued the license at $76,000, comprising of the fair value of the 200,000 shares on date of grant ($46,000) and the $30,000 of cash. The license, by its terms, has an indefinite life and is therefore not subject to amortization. The Company’s executive chairman owns a majority preferred interest in Soapbox and received no portion of the consideration paid.
 
 
7. Income Taxes
 
As of June 30, 2012, the Company has a net operating loss carryover of approximately $38,250,000 available to offset future income for income tax reporting purposes, which will expire in various years through 2032, if not previously utilized. However, 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 adopted the provisions of ASC 740-10-50, formerly FIN 48, “Accounting for Uncertainty in Income Taxes.” The Company had no material unrecognized income tax assets or liabilities for the nine months ended June 30, 2012 or for the nine months ended June 30, 2011.
 
The Company’s policy regarding interest and penalties on income tax is to expense those items as general and administrative expense but to identify them for tax purposes. During the nine months ended June 30, 2012 and 2011, there were no income tax or related interest and penalty items in the income statement or liability on the balance sheet. 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 or state income tax examination by tax authorities for years before 2007. The Company is not currently involved in any income tax examinations.
 
The provisions for income tax expense for the nine months ended June 30, 2012 and 2011 are as follows:
 
   
2012
   
2011
 
Current
           
Federal
  $ -     $ -  
State
    800       800  
Total income tax expense
  $ 800     $ 800  
 
 
 
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8. 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 is 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 is now due on or before September 15, 2012.
 
As the original and modified agreements do 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. Of the $831,394, $706,685 was allocated to the purchased patents, and $124,709 was allocated to the patent applications. The patents are being amortized over 7 years. The value assigned to the patent applications is not being amortized. Upon the issuance of a patent, its respective cost will be amortized over the patent’s estimated useful life. Costs associated with abandoned applications are charged to operations.  The Company granted the Seller a license to utilize all acquired patents over their respective lives on a worldwide basis for no consideration. In addition, the Company is required to reserve for the Seller ten abbreviated dialing codes for a five-year period. The patents have been pledged as collateral against the remaining balance due.
 
As of June 30, 2012, $812,500 of the $900,000 has been paid. The remaining payment of $87,500 is due in September 2012.  Interest accrued and charged to operations for the three months ended June 30, 2012 and 2011 totaled $1,283 and $5,685, respectively. Interest accrued and charged to operations for the nine months ended June 30, 2012 and 2011 totaled $10,037 and $27,769, respectively.
 
Following is the maturity of this obligation at June 30, 2012:
 
September 15, 2012
  $ 87,500  
Less imputed interest
     (1,283 )
 
  $ 86,217  
 
 
9. Convertible Debt
 
During the months of 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. One of the investors participated in the earlier issuance. The notes bear interest at a rate of 10% per annum. Principal and accrued interest are fully due one year from the respective date of each loan but may be extended by mutual consent of the holder and the Company. 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.  Interest accrued on the notes during the three months and nine months ended June 30, 2012 and charged to operations amounted to $49,918 and $112,137, respectively.
 
The warrants are 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.
 
Pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options,” the convertible notes were recorded net of discounts that include the relative fair value of the warrants’ and the notes’ beneficial conversion features totaling $464,252. The discounts are being amortized to either interest expense or equity (if the debt is due to a related party) over the one-year term of the various notes using the effective interest method.  The initial value of the warrants of $412,736 was calculated using the Binomial Option model with a risk-free interest rates ranging from 0.39% to 0.43%, volatility ranging from 100.79% to 103.00%, and trading prices ranging from $0.22 to $0.35 per share. The beneficial conversion feature of $51,516 was calculated pursuant to ASC Topic 470-20 using trading prices ranging from $0.26 to $0.35 per share and an effective conversion price $0.0322 per share.
 
Amortization of the discounts for the three months ended June 30, 2012 totaled $117,284 of which $93,179 was charged to interest expense and $24,105 was charged to equity. Amortization of the discounts for the nine months ended June 30, 2012 totaled $245,475 of which $188,282 was charged to interest expense and $57,193 was charged to equity.
 
The balance of these convertible notes at June 30, 2012 is as follows:
 
Principal balance
  $ 2,000,000  
Accrued interest
    112,137  
      2,112,137  
Less discount
    (218,777 )
    $ 1,893,360  
 
 
 
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10. Related Party Transactions
 
On June 30, 2011, the Company entered into an agreement with its executive chairman whereby the Company was granted an option to acquire his majority interest in Soapbox. Under the terms of the option grant, the Company was required to pay a deposit of $155,000 which will be refunded in the event the acquisition does not close. Under the original option agreement the term was six months, during which both parties would perform due diligence necessary to determine the value of his majority interest and perform other actions necessary to complete the acquisition. The option has been extended to September 30, 2012.
 
As discussed in Note 9, a Company director provided $500,000 of the $2,000,000 received in the Company’s convertible debt issuance. As part of the consideration received for the $500,000, the director received 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.
 
 
11. Fair Value
 
The Company’s financial instruments at June 30, 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.
 
The Company complies with the provisions of ASC No. 820-10 (“ASC 820-10”), “Fair Value Measurements and Disclosures.”  ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
 
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.
 
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:
 
June 30, 2012:
 
   
Fair Value Measurements
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
 
Liabilities
                       
Obligation on patent
                       
acquisitions
    -     $ 86,217       -     $ 86,217  
Convertible debentures     -     $ 2,112,137       -     $ 2,112,137  
 
 
12. Stockholders’ Equity
 
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 June 30, 2012, 1,350,000 shares of the Company’s common stock were issued through the exercise of 1,350,000 common stock warrants. The Company received $278,000 through the various exercises.
 
 
 
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Warrants
 
As indicated in Note 9, the Company issued warrants to eight investors to purchase a total of 4,000,000 shares of the Company’s common stock at a price of $0.25 per share. The warrants expire at various dates through February 2015.
 
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.
 
Options
 
During the nine months ended June 30, 2012, the Company granted options to a director to purchase 200,000 shares of the Company’s common stock at $0.225 per share. The Company valued the options at $6,410 using a Binomial Option model based upon an expected life of 5 years, a risk free interest rate of 0.90%, and expected volatility of 102.42%. At the date of grant, the Company’s common stock had a trading price of $0.22 per share. The Company is charging the $6,410 to operations as compensation expense based upon the vesting of the respective options.
 
During the nine months ended June 30, 2012, the Company recognized stock-based compensation of $326,950 on the vesting of 4,000,000 options including the 200,000 options granted to the above indicated director, 1,500,000 options granted  to the Company’s Executive Chairman and 1,500,000 options granted to the Company’s President.
 
A summary of outstanding stock warrants and options is as follows:
 
   
Number
   
Weighted Average
 
   
of Shares
   
Exercise Price
 
Outstanding – September 30, 2011
    49,810,986     $ 0.81  
Granted
    4,200,000       0.25  
Exercised
    (1,850,000 )     (.17 )
Forfeiture
    (510,811 )     (1.50 )
Outstanding – June 30, 2012
    51,650,175     $ 0.78  
 
Of the 51,650,175 options and warrants outstanding exercisable, 40,350,175 are fully vested and currently available for exercise. In addition, at June 30, 2012, the Company has $2,112,137 of debt and accrued interest outstanding that is convertible into 4,224,274 shares of the Company’s common stock.
 
 
13. Commitments and Contingency
 
Operating Leases
 
The Company leases office space in Encinitas, California; Rogers, Arkansas; Jersey City, New Jersey; and Boise, Idaho. The Encinitas lease expires on May 31, 2013. The Rogers office is leased for a term of five years, effective January 1, 2012. The Boise lease expires on October 14, 2012.  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 three months ended June 30, 2012 and 2011 was $52,966 and $29,088, respectively. Rent expense for the nine months ended June 30, 2012 and 2011 was $151,402 and $87,076 respectively. Minimum future rental payments under non-cancellable operating leases with terms in excess of one year as of June 30, 2012 for the next five years and in the aggregate are:

2013
  $ 152,640  
2014
    154,877  
2015
    157,563  
2016
    160,271  
2017
     23,215  
 
  $ 648,566  
 
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.
 
 
 
 
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management's Discussion and Analysis should be read in conjunction with Single Touch's financial statements and the related notes thereto. The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report on Form 10-Q. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Report on Form 10-Q.
 
The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended September 30, 2011.
 
Critical Accounting Policies and Estimates
 
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 accounting principles generally accepted in the United States.  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.
 
Revenue Recognition
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.

Non-monetary Consideration Issued for Services
We value all services rendered and property exchanged for our common stock at the quoted price of the shares issued at date of issuance or at the fair value of the services rendered or property, whichever is more readily determinable. All other services or property provided in exchange for other non-monetary consideration are valued at either the fair value of the services or property received or the fair value of the consideration relinquished, whichever is more readily determinable.
 
Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Accounting Standards Codification (“ASC’) Topic 505-50, “Equity Based Payments to Non Employees.” The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with ASC Topic 505, an asset acquired in exchange for the issuance of fully-vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we record the fair value of non-forfeitable common stock issued for future consulting services as prepaid services in our consolidated balance sheet.

Conventional Convertible Debt
When the convertible feature of the 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”). We record a BCF as a debt discount pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options.” In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. We amortize 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.
 


 
15

 
 
 
Software Development Costs
We account for our software development costs in accordance with ASC Topic 985-20, “Cost of Software to be Sold, Leased, or Otherwise Marketed.” Under ASC Topic 985-20, we expense software development costs as incurred until we determine that the software is technologically feasible. Once we determine that the software is technologically feasible, we amortize the costs capitalized over the expected useful life of the software.

Fair Value Measurement
The Company complies with the provisions of ASC No. 820-10, “Fair Value Measurements and Disclosures.”  ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
 
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, that 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.
 
Overview
 
Single Touch Systems Inc. is an innovative mobile media solutions provider serving retailers, advertisers and brands. Through patented technologies and a modular, adaptable platform, our 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.

Our solution is designed to drive return on investment for high-volume clients and/or customized branded advertisers. Our platform and tools are designed to enable large brands or anyone with substantial reach to utilize the mobile device as a new means to communicate. Communication might be in the form of a reminder message, a coupon, an advertisement or a voice call. Regardless of the form, our platform can drive value and cost savings for companies large and small, and we provide the ability to drive contextually relevant advertising messages to the right audience.

Our business has focused on leveraging our solution in the areas of messaging/notifications and Abbreviated Dial Codes. These solutions are enhanced when we deploy imbedded advertisements, sponsorship and couponing.

“The vast mobile messaging industry worldwide, currently generating revenues in excess of USD 150 billion, and set to continue growing to more than USD 233 billion by 2014.” (1)

“Short Messaging Service, simply known as SMS, has established itself as the simplest, easiest and most economical means of personalized one-to-one communication – with SMS volume growth statistics attesting to its popularity.” (1)

“The performance of SMS over the last five years has been staggering and remains so mainly because it is cheap, easy to use, convenient, discreet and universally acceptable to some 4 billion consumers worldwide. SMS continues to grow in all markets.” (1)  “In 2011 worldwide SMS traffic topped 8 trillion messages” (2)
 
 
 

(1)  
Source: Portio Research Mobile Factbook 2011
(2)  
Source: GSM Associates
 
 
 
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We have developed and are deploying advertisements, sponsorships and couponing within our product offerings. This development is significant in that our per-message revenue increases significantly for each message that includes an advertisement or sponsorship. We see these expanded offerings, including those not based directly on messaging volume, as important steps in our continued program to creating both consumer and advertiser demand for our mobile media platform, accessing mobile notifications, advertisements, sponsorships, coupons and commerce transactions from the mobile phone.

Currently, over 90% of our revenues are paid to us through AT&T Services, Inc., and the bulk of that revenue comes from notifications sent on behalf of Walmart. These programs and related services continue to develop nationwide, and we continue to experience increasing activity in these programs that have caused our AT&T revenues to grow.

We have a portfolio of intellectual property relevant to our industry related to mobile search, commerce, advertising and streaming media. This portfolio represents our many years innovation in the wireless industry through patented technology developed by us as well as patented technology we purchased from Microsoft and others.

We have law firms engaged to protect our patented technology against unauthorized users and infringers. We have sent letters of notification to several companies making them aware of our patent portfolio and have commenced  litigation. We will continue to identify, notify, and, where circumstances warrant, prosecute companies we believe may be infringing on the intellectual property protected by our growing patent portfolio.
 
As we expand operational activities, we may continue to experience operating losses and/or negative cash flows from operations and may be required to obtain additional financing to fund operations.

Throughout our history our operations have been constrained by our ability to raise funds, and our liquidity has been an ongoing issue. We have received debt and equity investments both from insiders and from private investors. We have always had negative cash flows from operations and net operating losses, although the size of the net operating losses has been magnified by a variety of non-cash accounting charges. As we expand operational activities, we may continue to experience operating losses and/or negative cash flows from operations and may be required to obtain additional financing to fund operations.

Our operating history makes predictions of future operating results difficult to ascertain. Our revenue is concentrated with a single customer. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in our stage of development. Such risks include, but are not limited to, an evolving business model and the management of growth. To address these risks we must, among other things, diversify our customer base, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.


 
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Results of Operations
 
Results of Operations for the Three Months Ended June 30, 2012 and June 30, 2011
 
During the three-month period ended June 30, 2012, the Company had an increase in revenue of approximately 37% over revenue generated during the same three-month period in the previous year ($1,585,195 in 2012 compared to $1,154,710 in 2011).   The growth, all of which is organic, is attributable to continuing mobile adoption and new programs for existing and new client relationships. The Company’s net loss for the three months ended June 30, 2012 was $970,738.  This is lower than the net loss incurred during three months ended June 30, 2011 of $1,294,627. Under the metrics employed by management to evaluate the underlying business explained below, Adjusted EBITDA, that underlying loss was reduced by $101,245 from the quarter ended June 30, 2011 to the quarter ended June 30, 2012.

We define Adjusted EBITDA as consolidated operating income before depreciation, amortization of intangible assets, stock-based compensation, and special charges.  We use Adjusted EBITDA to evaluate the underlying performance of our business, and a summary of Adjusted EBITDA, reconciling GAAP amounts (i.e., items reported in accordance with U.S. Generally Accepted Accounting Principles) to Adjusted EBITDA amounts (i.e., items included within Adjusted EBITDA as defined directly above) for the three months ended June 30, 2012 and 2011 follows:
 
   
For the Three Months Ended June 30,
                         
                                                             
   
2012
   
2011
   
GAAP
   
Adjusted EBITDA
 
         
Adjust-
   
Adjusted
         
Adjust-
   
Adjusted
   
Change
   
Change
 
   
GAAP
   
ments
   
EBITDA
   
GAAP
   
ments
   
EBITDA
    $       %     $       %  
                                                                 
Revenue
                                                               
Wireless Applications
  $ 1,585,195           $ 1,585,195     $ 1,154,710           $ 1,154,710     $ 430,485       37 %   $ 430,485       37 %
                                                                             
Operating Expenses
                                                                           
Royalties and Application Costs
  $ 776,881           $ 776,881     $ 580,734           $ 580,734     $ 196,147       34 %   $ 196,147       34 %
Research and Development
  $ 17,236           $ 17,236     $ 7,779           $ 7,779     $ 9,457       122 %   $ 9,457       122 %
Compensation expense (including
          $ -                   $ -                                  
   stock-based compensation)
  $ 959,195     $ (290,528 )   $ 668,667 *   $ 699,129     $ (260,000 )   $ 439,129 *   $ 260,066       37 %   $ 229,538       52 %
Depreciation and amortization
  $ 179,534     $ (179,534 )   $ -     $ 165,366     $ (165,366 )   $ -     $ 14,168       9 %                
General and administrative (including
    $ -                     $ -                                  
   stock-based compensation)
  $ 478,747             $ 478,747     $ 979,749     $ (395,100 )   $ 584,649     $ (501,002 )     -51 %   $ (105,902 )     -18 %
    $ 2,411,593     $ (470,062 )   $ 1,941,531     $ 2,432,757     $ (820,466 )   $ 1,612,291     $ (21,164 )     -1 %   $ 329,240       20 %
                                                                                 
Loss from Operations/Adjusted EBITDA
  $ (826,398 )   $ 470,062     $ (356,336 )   $ (1,278,047 )   $ 820,466     $ (457,581 )   $ 451,649       -35 %   $ 101,245       -22 %
 
 
Royalties and Application Costs represent the direct out-of-pocket costs associated with revenue. Royalties and Application Costs vary substantially in line with revenue and totaled $776,881 in 2012, compared to $580,734 in 2011, an increase of 34%.  Because a portion of Royalties and Application Costs are fixed and all such costs are being monitored and reduced wherever possible, they grew at a lesser percentage than revenue.
 
Research and Development expenses grew from $7,779 in 2011 to $17,236 in 2012, and adjusted Compensation expense grew from $439,129 to $668,667.  The former reflects the growing investment in technologies that we anticipate will generate revenues for years to come while the latter reflects the increased headcount necessary to support our expanding business.   
 

 
18

 
 
 
General and Administrative expenses for the three months ended June 30, 2012 and 2011 both on a GAAP and on an Adjusted EBITDA basis, consist of the following:
 
   
For the Three Months Ended June 30,
                         
                                                         
   
2012
   
2011
   
GAAP
   
Adjusted EBITDA
 
       
Adjust-
 
Adjusted
         
Adjust-
   
Adjusted
   
Change
   
Change
 
   
GAAP
 
ments
 
EBITDA
   
GAAP
   
ments
   
EBITDA
    $       %     $       %  
                                                             
Professional Fees
  $ 143,217       $ 143,217 *   $ 254,309     $ (50,000 )   $ 204,309 *   $ (111,092 )     -44 %   $ (61,092 )     -30 %
Travel
  $ 82,006       $ 82,006     $ 116,169             $ 116,169     $ (34,163 )     -29 %   $ (34,163 )     -29 %
Consulting expense
  $ 125,345       $ 125,345 *   $ 513,620     $ (345,100 )   $ 168,520 *   $ (388,275 )     -76 %   $ (43,175 )     -26 %
Office rent
  $ 52,966       $ 52,966     $ 29,088             $ 29,088     $ 23,878       82 %   $ 23,878       82 %
Insurance expense
  $ 33,565       $ 33,565     $ 19,132             $ 19,132     $ 14,433       75 %   $ 14,433       75 %
Equipment lease
            $ -                     $ -     $ -             $ -          
Trade shows
  $ 2,949       $ 2,949                     $ -     $ 2,949             $ 2,949          
Telephone
  $ 14,565       $ 14,565     $ 13,725             $ 13,725     $ 840       6 %   $ 840       6 %
Office expense
  $ 8,554       $ 8,554     $ 1,079             $ 1,079     $ 7,475       693 %   $ 7,475       693 %
Other
  $ 15,580       $ 15,580     $ 32,627             $ 32,627     $ (17,047 )     -52 %   $ (17,047 )     -52 %
Total General and Administrative Expenses
  $ 478,747  
 $                  -
  $ 478,747     $ 979,749     $ (395,100 )   $ 584,649     $ (501,002 )     -51 %   $ (105,902 )     -18 %
                                                                           
* Adjustments for each of these items represents the elimination of stock-based compensation included within the GAAP expense amount to arrive at the Adjusted EBITDA amount.
 
 
The diminution in adjusted Professional Fees, from $204,309 in 2011 to $143,217 in 2012, reflects management performing services previously outsourced.    The same is true for the $43,175 diminution on adjusted Consulting expense over the two periods.  Travel has been curtailed to the extent possible, resulting in $34,163 expense reduction over the two periods.  Office rent has increased due to the opening of the New Jersey office at the very end of the fiscal year ended September 30, 2011, and Insurance expense has increased $14,433 over the two periods due largely to revenue growth.

Results of Operations for the Nine Months Ended June 30, 2012 and June 30, 2011

Our revenues grew 48%, from $3,200,143 in 2011 to $4,729,691 in 2012.   At the same time Royalties and Application Costs rose only 42%, from $1,540,089 to $2,194,512, over the same period.   Scale economies, absorption of fixed-cost capacity, cost controls, and more premium revenue are translated into margin betterment.
 
 
 
19

 
 
 
   
For the Nine Months Ended June 30,
                         
                                                             
   
2012
   
2011
   
GAAP
   
Adjusted EBITDA
 
         
Adjust-
   
Adjusted
         
Adjust-
   
Adjusted
   
Change
   
Change
 
   
GAAP
   
ments
   
EBITDA
   
GAAP
   
ments
   
EBITDA
    $       %     $       %  
                                                                 
Revenue
                                                               
Wireless Applications
  $ 4,729,691     $ -     $ 4,729,691     $ 3,200,143     $ -     $ 3,200,143     $ 1,529,548       48 %   $ 1,529,548       48 %
                                                                                 
Operating Expenses
                                                                               
Royalties and Application Costs
  $ 2,194,512     $ -     $ 2,194,512     $ 1,540,089     $ -     $ 1,540,089     $ 654,423       42 %   $ 654,423       42 %
Research and Development
  $ 70,486     $ -     $ 70,486     $ 40,651     $ -     $ 40,651     $ 29,835       73 %   $ 29,835       73 %
Compensation expense (including
                                                                         
   stock-based compensation)
  $ 2,332,979     $ (290,528 )   $ 2,042,451 *   $ 4,599,166     $ (3,447,279 )   $ 1,151,887 *   $ (2,266,187 )     -49 %   $ 890,564       77 %
Depreciation and amortization
  $ 498,609     $ (498,609 )   $ -     $ 459,947     $ (459,947 )   $ -     $ 38,662       8 %                
General and administrative (including
                                                                         
   stock-based compensation)
  $ 1,587,195     $ (90,022 )   $ 1,497,173     $ 2,491,291     $ (811,529 )   $ 1,679,762     $ (904,096 )     -36 %   $ (182,589 )     -11 %
    $ 6,683,781     $ (879,159 )   $ 5,804,622     $ 9,131,144     $ (4,718,755 )   $ 4,412,389     $ (2,447,363 )     -27 %   $ 1,392,233       32 %
                                                                                 
Loss from Operations/Adjusted EBITDA
  $ (1,954,090 )   $ 879,159     $ (1,074,931 )   $ (5,931,001 )   $ 4,718,755     $ (1,212,246 )   $ 3,976,911       -67 %   $ 137,315       -11 %
 
 
   
For the Nine Months Ended June 30,
                         
                                                             
   
2012
   
2011
   
GAAP
   
Adjusted EBITDA
 
         
Adjust-
   
Adjusted
         
Adjust-
   
Adjusted
   
Change
   
Change
 
   
GAAP
   
ments
   
EBITDA
   
GAAP
   
ments
   
EBITDA
    $       %     $       %  
                                                                 
Professional Fees
  $ 491,995     $ (30,012 )   $ 461,983 *   $ 679,327     $ (50,000 )   $ 629,327 *   $ (187,332 )     -28 %   $ (167,344 )     -27 %
Travel
  $ 301,233     $ -     $ 301,233     $ 260,373     $ -     $ 260,373     $ 40,860       16 %   $ 40,860       16 %
Consulting expense
  $ 399,165     $ (60,010 )   $ 339,155 *   $ 1,273,410     $ (766,300 )   $ 507,110 *   $ (874,245 )     -69 %   $ (167,955 )     -33 %
Office rent
  $ 151,402     $ -     $ 151,402     $ 87,078     $ -     $ 87,078     $ 64,324       74 %   $ 64,324       74 %
Insurance expense
  $ 93,615     $ -     $ 93,615     $ 56,572     $ -     $ 56,572     $ 37,043       65 %   $ 37,043       65 %
Equipment lease
  $ -     $ -     $ -     $ 45,000     $ -     $ 45,000     $ (45,000 )     -100 %   $ (45,000 )     -100 %
Trade shows
  $ 18,944     $ -     $ 18,944     $ -     $ -     $ -     $ 18,944             $ 18,944          
Telephone
  $ 45,594     $ -     $ 45,594     $ 31,005     $ -     $ 31,005     $ 14,589       47 %   $ 14,589       47 %
Office expense
  $ 26,472     $ -     $ 26,472     $ 4,670     $ -     $ 4,670     $ 21,802       467 %   $ 21,802       467 %
Other
  $ 58,775     $ -     $ 58,775     $ 53,856     $ -     $ 53,856     $ 4,919