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SINGLE TOUCH SYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors such as those noted under "Caution Regarding Forward-Looking Statements" on page 3 of this Annual Report on Form 10-K. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report on Form 10-K. 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. "For the first time in history with near 322 million wireless subscribers in the USA, wireless penetration exceeds the U.S. population" (1) "Short Messaging Service, simply known as SMS, sent in the USA for the 12 months ended June 2012 totaled 2.27 trillion up 3% from 2011" (1) "SMS capable handsets on carriers networks rose to 268.5 million for the same period up 7.7% from 2011" (1) "In 2011 worldwide SMS traffic topped 8 trillion messages" 9-------------------------------------------------------------------------------- Table of Contents 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. "53% of companies surveyed have or are deploying a dedicated team assigned to mobile programs, and 51% are looking for ways to further mobile marketing capabilities"(2) We have expanded our relationship with AT&T Services, Inc., through which we retain 11 client relationships representing nearly all of our reported revenue in the fiscal years ended in 2011 and 2012. The bulk of that revenue comes from notifications sent on behalf of 4 separate Walmart corporate programs. 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 rights 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 have assigned 16 of our 18 and all of our intellectual property rights to Single Touch R&D IP, Inc a wholly owned subsidiary who will conduct all research, development, patent filings, patent maintenance and who will continue to identify, notify, and, where circumstances warrant, enforce against companies we believe may be infringing on the intellectual property protected by our growing patent portfolio under the guidance of our Executive Chairman. 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. -------------------------------------------------------------------------------- (1) Source: June 2012 CTIA Semi Annual Wireless Survey (2) Source: Oct 2012 CMO Council Study 10-------------------------------------------------------------------------------- Table of Contents Results of Operations Years Ended September 30, 2012 and 2011 During the fiscal year ended September 30, 2012, the Company had an increase in revenue of approximately 39% over revenue generated during the previous fiscal year ($6,346,919 in 2012 compared to $4,579,862 in 2011). The growth, all of which is organic, is attributable to continuing consumer adoption of our programs from existing client relationships. The Company's net loss for the fiscal year ended September 30, 2012 was $3,255,186. This is lower than the net loss incurred during the fiscal year ended September 30, 2011 of $7,985,163. Under the metrics employed by management to evaluate the underlying business explained below, Adjusted EBITDA, that underlying loss was reduced by $507,464 from the fiscal year ended September 30, 2011 to the fiscal year ended September 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 fiscal years ended September 30, 2012 and 2011 follows: For the Year Ended September 30, 2012 2011 GAAP Adjusted EBITDA Adjust- Adjusted Adjust- Adjusted Change Change GAAP ments EBITDA GAAP ments EBITDA $ % $ % Revenue Wireless Applications $ 6,346,919 $ - $ 6,346,919 $ 4,579,862 $ - $ 4,579,862 $ 1,767,057 39 % $ 1,767,057 39 % Operating Expenses Royalties and Application Costs $ 2,907,110 $ - $ 2,907,110 $ 2,543,885 $ - $ 2,543,885 $ 363,225 14 % $ 363,225 14 % Research and Development $ 84,658 $ - $ 84,658 $ 78,860 $ - $ 78,860 $ 5,798 7 % $ 5,798 7 %Compensation expense (including stock-based compensation) $ 3,044,430 $ (365,422 ) $ 2,679,008 $ 5,468,643 $ (3,634,268 ) $ 1,834,375 * $ (2,424,213 ) -44 % $ 844,633 46 % Depreciation and amortization $ 690,293 $ (690,293 ) $ - $ 633,535 $ (633,535 ) $ - $ 56,758 9 % General and administrative (including stock-based compensation) $ 2,386,694 $ (137,169 ) $ 2,249,525 $ 3,161,751 $ (958,163 ) $ 2,203,588 $ (775,057 ) -25 % $ 45,937 2 % $ 9,113,185 $ (1,192,884 ) $ 7,920,301 $ 11,886,674 $ (5,225,966 ) $ 6,660,708 $ (2,773,489 ) -23 % $ 1,259,593 19 % Loss from Operations/Adjusted EBITDA $ (2,766,266 ) $ 1,192,884 $ (1,573,382 ) $ (7,306,812 ) $ 5,225,966 $ (2,080,846 ) $ 4,540,546 -62 % $ 507,464 -24 % 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 $2,907,110 in 2012, compared to $2,543,885 in 2011, an increase of 14%. Because a portion of Royalties and Application Costs are fixed and all such costs are being monitored and reduced wherever possible, net margin continues to increase. 11-------------------------------------------------------------------------------- Table of Contents Research and Development expenses grew from $78,860 in 2011 to $84,658 in 2012, and adjusted Compensation expense grew from $1,834,375 to $2,679,008. 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 while concurrently relying less on outside consultants. General and Administrative expenses for the fiscal year ended September 30, 2012 and 2011, both on a GAAP and on an Adjusted EBITDA basis, consist of the following: For the Year Ended September 30, 2012 2011 GAAP Adjusted EBITDA Adjust- Adjusted Adjust- Adjusted Change Change GAAP ments EBITDA GAAP ments EBITDA $ % $ % Professional Fees $ 779,541 $ (47,450 ) $ 732,091 * $ 821,022 $ (58,050 ) $ 762,972 * $ (41,481 ) -5 % $ (30,881 ) -4 % Travel $ 499,576 $ - $ 499,576 $ 322,951 $ - $ 322,951 $ 176,625 55 % $ 176,625 55 % Consulting expense $ 565,349 $ (89,719 ) $ 475,630 * $ 1,448,613 $ (900,113 ) $ 548,500 * $ (883,264 ) -61 % $ (72,870 ) -13 % Office rent $ 205,639 $ - $ 205,639 $ 121,681 $ - $ 121,681 $ 83,958 69 % $ 83,958 69 % Insurance expense $ 120,236 $ - $ 120,236 $ 83,953 $ - $ 83,953 $ 36,283 43 % $ 36,283 43 % Equipment lease $ - $ - $ - $ 45,000 $ - $ 45,000 $ (45,000 ) -100 % $ (45,000 ) -100 % Trade shows $ 21,213 $ - $ 21,213 $ 78,324 $ - $ 78,324 $ (57,111 ) -73 % $ (57,111 ) -73 % Telephone $ 61,729 $ - $ 61,729 $ 38,820 $ - $ 38,820 $ 22,909 59 % $ 22,909 59 % Office expense $ 31,356 $ - $ 31,356 $ 7,949 $ - $ 7,949 $ 23,407 294 % $ 23,407 294 % Other $ 102,055 $ - $ 102,055 $ 193,438 $ - $ 193,438 $ (91,383 ) -47 % $ (91,383 ) -47 % Total General and Administrative Expenses $ 2,386,694 $ (137,169 ) $ 2,249,525 $ 3,161,751 $ (958,163 ) $ 2,203,588 $ (775,057 ) -25 % $ 45,937 2 % * 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 $762,972 in 2011 to $732,091 in 2012, reflects management performing services previously outsourced. Professional Fees include amounts paid to external attorneys, and Professional Fees have been reduced during this latter fiscal year, notwithstanding the commencement during that fiscal year of two litigations against defendants that the Company contends infringed on its intellectual property. The same is true for the $72,870 diminution to adjusted Consulting expense over the two periods. Travel has increased $176,625 over the two periods, resulting from increased new business efforts, increased investor outreach, the hosting of an annual general meeting in August 2012, the addition of the New Jersey office, and travel between our four offices, a footprint now covering all of the Continental U.S. 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 $36,283 over the two periods due largely to revenue growth and additional necessary coverage. 12-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources At September 30, 2012, we had total assets of $5,569,755 and total liabilities of $4,661,117. As of September 30, 2011, we had total assets of $3,736,694 and total liabilities of $1,554,379. The increase in assets is largely due to increases in cash of $1,633,906, from $523,801 in 2011 to $2,157,707 in 2012, and additions of accounts receivable since September 30, 2011 totaling $178,565, from $907,275 in 2011 to $1,085,840 in 2012. Cash has increased largely due to $4,312,000 of capital raised in two different convertible debt offerings, less cash offering costs and costs of funding ongoing operations and capital expenditures over the twelve months ended September 30, 2012. Accounts receivable have risen along with revenue increases. The increase in liabilities is largely due to the two convertible debt issuances since September 30, 2011 (Footnote 9 of the Notes to Consolidated Financial Statements.) Accounts payable has been reduced over the same period, from $1,178,057 at September 30, 2011 to $768,263 at September 30, 2012, representing resolution of open balances with vendors and the institution of more standard payment terms over those twelve months. The reduction to Current obligation on patent acquisitions represents the issuance of the penultimate payment due to a vendor of a group of patents (Footnote 8 of the Notes to Consolidated Financial Statements.) During the fiscal year ended September 30, 2012 cash used in operating activities totaled $2,084,247. Most notably receivables increased, reflecting our growing revenue base, and we paid down trade creditor balances. Cash used in investing activities totaled $625,618, of which $434,915 represented the capitalized internal costs of our software development, $33,195 represented equipment purchases, $146,558 represented capitalized legal fees incurred in the process of applying for various patents on our technology, and $30,000 represented the expenditure of the cash component of the Anywhere purchase (Footnote 6 of the Notes to Consolidated Financial Statements.) We continue to invest in physical and intellectual property that will separate us from competitors and allow us to continue to expend our mobile communications/advertising offering. The Company obtained a $19,050 refund of cash, relating to the reduction to the security deposit on the New Jersey office. Cash provided from financing activities amounted to $4,343,771. The Company received $4,312,000 through the issuance of convertible debt, and $318,000 was received as proceeds for the exercise of warrants. We paid down half ($87,500) remaining on our patent purchase obligation and incurred $210,049 of offering costs associated with the convertible debt. We had an overall net increase in cash for the period of $1,633,906; the balance at the beginning of the fiscal year was $523,801 while the cash balance at the end of the period was $2,157,707. During the fiscal year ended September 30, 2011 cash used in operating activities totaled $1,505,289. Most notably receivables and prepaid expenses increased during a period of revenue growth. Offsetting those asset increases were increases of accounts payable and accrued expenses. Following this earlier fiscal year the Company reached more current and typical payment terms with its operating vendors. Cash used in investing activities totaled $1,059,604, of which $502,110 represented the capitalized internal costs of our software development, $196,067 represented equipment purchases, and $111,177 represented capitalized legal fees incurred in the process of applying for various patents on our technology. We also expended $155,000 on the Soapbox Anywhere option and $95,250 on the initial New Jersey office lease security deposit. Cash expended on financing activities amounted to $951,475. The Company received $17,100 from the issuance of Common Stock and $17,685 from Loans and advances from related parties. Those cash inflows were outstripped by $30,000 paid in costs of a private offering, $790,822 repaid to a related party, and $165,438 principal repaid on the patent obligation. We had an overall net decrease in cash for the period of $3,516,368; the balance at the beginning of this earlier fiscal year was $4,040,169 while the cash balance at the end of the period was $523,801. Over the twelve months following September 30, 2012 we believe that existing capital and anticipated funds will be sufficient to sustain our current level of operations. Inasmuch as the Company is pursuing the monetization of its intellectual property, which plans are subject to change, additional external financing may, however, be required. In addition, increased acceleration in our organic business and/or other economic influences might also necessitate other financing. There can, moreover, be no assurance of when, if ever, our operations become profitable. 13-------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements We have no off-balance sheet arrangements or financing activities with special purpose entities. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our 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 ours 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 in exchange 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, whichever is more readily determinable. All other services provided in exchange for other non-monetary consideration are valued at either the fair value of the services 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 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. 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. 14-------------------------------------------------------------------------------- Table of Contents Fair Value Measurement 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 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. |