UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2013
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from ________________ to _______________
 
333-147193
(Commission file number)
 
 
Single Touch Systems, Inc.
 (Exact name of registrant 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
(201) 275-0555
 (Address and telephone number of principal executive offices)
 
N/A
 (Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes x    No o

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 past 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.  Yes x     No o

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 during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files.   Yes x    No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or amendment to Form 10-K. Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x
(Do not check if a smaller reporting company)  
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of March 29, 2013, was $53,380,338.
 
As of December 5, 2013, there were 141,995,872 shares of the registrant’s common stock outstanding.
 


 
 
 
 
Single Touch Systems, Inc.

Index
 
     
Page  
Number
       
PART I.
FINANCIAL INFORMATION
   
       
  3
       
  8
       
  16
       
  16
       
  16
       
  16
       
     
       
  17
       
  19
       
  19
       
  22
       
  23
       
  24
       
  24
       
  25
       
PART III.
     
       
  25
       
Item 11.
Executive Compensation
   
       
  36
       
  37
       
  40
       
PART IV.
     
       
  41
       
  45
 
 
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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis or Plan of Operation) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risks Factors" in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission ("SEC"). Our electronic filings with the United States Securities and Exchange Commission (including our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports) are available free of charge on the Securities and Exchange Commission’s website at http://www.sec.gov. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
  
Item 1.  Description of Business

General

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 in voice or Short Message Service (SMS), an abbreviated dial code or a coupon, promotion, or an advertisement. Regardless of the form, our platform can drive value and cost savings for companies large and small and the ability to drive contextually relevant advertising messages to the right audience.  We help our clients provide smarter advertising solutions to more fully and effectively engage with their customers via their mobile devices

We maintain a website located at http://www.singletouch.net, and electronic copies of our periodic or other reports and any amendments to those reports, are available, free of charge, under the “Company” and “Investor” link on our website as soon as practicable after such material is filed with, or furnished to, the SEC.

 
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Background of Industry Growth and Potential

Across the globe, the mobile channel is growing fast. People in every country are buying more and more advanced mobile devices, and business and consumers alike are using mobile phones for everyday activities like checking the weather, taking advantages of discounts, shopping or sending and receiving financial information. As mobile adoption increases, e-Business and channel strategy professionals are challenged to determine how these devices integrate with their existing sales and service channels. Rapid adoption of the mobile channel is a critical driver of the need for e-business professionals to evolve their strategy and operations to agile commerce.

Cisco reports by the end of 2013, there will be more mobile connected devices than there are people on earth.  There are now 5 billion mobile phone users worldwide with 1.5 billion having smartphones (1). Typical mobile users check their phones now 150 times per day (1). According to Advertising Age the average US adult spends 141 minutes per day using mobile devices (2).
 
Principal Products and Services
 
Messaging and Notifications – Our Short Message Service (SMS) gateway has proven to be an excellent channel for retailers to communicate with their brand loyalists on a very personal level. This is accomplished through integration with the client’s customer relationship management (CRM) database. With such integration, retailers are able to send targeted mobile coupons and transactional messages based on a shopper’s CRM profile. Targeted mobile coupons can be sent based on past purchase behaviors making the content relevant and timely to a shopper. Transactional messages can add another layer of value by sending shipping and order pick-up alerts, as well as notifications for reorders, layaway and new product releases.  Twitter’s S-1 filing form reports “the 140 character constraint of a tweet emanates from our origins as an SMS-based messaging system, and we leverage this simplicity to develop products that seamlessly bridge our user experience across all devices” (3).
 
Abbreviated Dial Codes- These are easy to remember short phone number with natural voice interface to download content to mobile devices. Our abbreviated dial codes have been proven to have 10 times the recall of a common keyword-to-short-code solution. We have seen many of our clients using this as an on-ramp to mobility solutions. We recently announced the national launch of #TAXI in partnership with MADD (mothers against drunk driving). Forrester Research called this dial code technology one of the top 4 for CMOs to watch. We see the potential for our customers to leverage the hash tags in the social media space with the # symbol in their abbreviated dial code to enhance brand awareness.

Campaign Management and Analytics- Our anywhere management platform is an easy to use web interface that allows clients to manage and segment messaging campaigns with customized reporting tools. Our clients use this tool to drive campaigns related to in store events, product offerings, information and special sales. The message management systems enables the user to create a message, schedule its delivery time and frequency, segment audience groups for distribution and create message responders. Reporting tools are also available
 

 
(1)
Mary Meekers internet trends 2013
 
(2)
Advertising Age Mobile Fact Pack 2013
 
(3)
Twitter S-1 filing October 2013
 
 
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FollowMe- Location based Mobile App Ad Targeting. The Interactive Advertising Bureau estimates Mobile Ad spending in the US totaled $3 billion in the first half of 2013 up from $1.2 billion a year earlier. FollowMe® provides a product to deliver location based mobile ads directly to consumers’ smartphones for retailers and advertisers. We have found that by combining multiple real time bidding networks with our ability to serve coupons, ads and promotions at times and places when consumers are most interested, we can create relevant content for consumers.  FollowMe® enables advertisers to deliver targeted ads in App to the smartphones of people within close proximity of a specific location. This service is offered by partnering with TheMobile Audience, a mobile demand side platform (DSP) that enables programmatic buying of mobile media across multiple real-time bidding (RTB) networks. The product was recently used by Peter Piper Pizza a leading pizza and entertainment restaurant chain in Southwestern USA.
 
 
Competition
 
The mobile media and data communications market for products and services continue to be competitive with the rapid growth and adoption of mobile data services, along with the increased demand for mobile marketing and advertising solutions.
 
We believe we have a unique offering of services and technology that will provide us with a competitive edge.   We compete with publicly traded companies providing similar service offerings to ours, including Voltari (VLTC), Hippcricket (HIPP), and Mobivity (MFON).
 
We expect new market entrants, existing competitors and nontraditional players to introduce new products and services that compete with our products. Additionally, we face the risk that our customers may seek to develop in-house products as an alternative to those currently being provided by us.
 
Certain Agreements

Our business agreements consist primarily of customer agreements and carrier agreements. Customer agreements are typically agreements with companies which have sales relationships with the end users of the transacted media content or service application. These agreements typically involve a split of the fees received between the brand owner and us or a fixed fee per transaction. Carrier agreements are infrastructure in nature and establish the connection to the end user that enables us to deliver and collect payment for the transacted media content or service application.

We continue to expand our relationship with AT&T Services, Inc., through which we retain multiple client relationships representing nearly all of our reported revenue in the fiscal years ended in 2012 and 2013. The bulk of that revenue comes from notifications sent on behalf of several separate corporate programs for a single client. 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.

 
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Intellectual Property Development

Research and Development

During the fiscal years ended September 30, 2013 and 2012 we spent $399,682 and $434,915, respectively, on software development that was capitalized. Software development costs amortized and charged to operations in fiscal 2013 and fiscal 2012 were $439,334 and $446,876, respectively.

Our research and development activities relate primarily to general coding of software and product development. These activities consist of both new products and support or improvements to existing products.  During the fiscal years ended September 30, 2013 and 2012, we spent $65,975 and $84,658, respectively, on research and development.

We believe that we may need to increase our current level of dedicated research and development resources by adding both hardware and engineers as our business continues to develop.

Patents and Licenses for Operations

We currently hold rights to multiple patents relating to certain aspects of accessing information on a mobile device, sending information to and between mobile devices, advertising and media streaming. We believe the ownership of such patents is an important factor in our existing and future business.
 
We regularly file patent applications to protect innovations arising from our research, development and design, and are currently pursuing multiple patent applications. Over time, we have accumulated a portfolio of issued patents primarily in the U.S. No single patent is solely responsible for protecting our systems and services. We believe the duration of our patents is adequate relative to the expected lives of our systems and services.

Some of our systems and services may include intellectual property obtained from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of our systems and services. There is no guarantee that such licenses could be obtained on reasonable terms or at all. Because of technological changes in the industries in which we compete, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain components of our systems and services may unknowingly infringe existing patents or intellectual property rights of others.

Patent Portfolio Development, Protection and Licensing.

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.

In response to considerable interest from the marketplace to our patent portfolio, we established a separate subsidiary, Single Touch Interactive, Inc., dedicated to the monetization of these assets, primarily through licensing. The patents have seminal priority dates and a rich pedigree. The patents cover three broad categories:

Digital Video and Audio Streaming and Advertising- covering OTT streaming services (eg Netflix, iTunes, Amazon ) and protocols ( eg HLS, MPEG DASH) as well as the notion of dynamic advertising insertion into these streams and the billing and tracking of ad-revenues thereof. We believe this category offers the greatest near-term monetization potential.

Sending Information to and Between Mobile Devices- this covers the notion of over-the-air provisioning of smartphones and mobile devices such that the customer when transitioning over to new phones or modifying existing phones can highly customize their phones, from carrier plan to interface to smartphone design features to content and form of delivery. While still an emerging market, the New Google I Motorola X launch provides a taste of how such customer-driven customizations on phone design and features, software interface/OS, payment/carrier plan, and pre-loaded content will become an important differentia tor in future. We believe this category offers tremendous future monetization potential.

Accessing information on a Mobile Device- these patents cover features which offer users improved effectiveness in accessing information on a mobile device, whether content or services or advertising solutions. This includes everything from abbreviated dial codes for rapid access to services to providing ads and coupons to these links through to more efficient user interface features. This category of patents is core to our business and will be primarily used for defensive purposes and growth.  Our recent patent litigation with Zoove Corporation was for patents in this category.
 
 
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Of the above, we have focused our initial efforts on the first category and have committed significant resources to generating work product ( i.e. claims chart development) around leading USA based video streaming services and streaming standards solutions providers. These patents have also been mapped against Video-on-Demand and Over-the-Top Video services that are not subscription based but rather provide dynamic or adaptive ad-insertion based revenue models: examples include YouTube, Hulu Plus and new offerings by Facebook and others. In all, 30 claims charts have been developed.
 
Government Regulation
 
We provide value-added and enabling platforms for carrier-based distribution of various software and media content, as well as notifications and other communications. Applicable regulations are primarily under the Federal Communications Commission and related to the operations policies and procedures of the wireless communications carriers. Messaging and safeguarding Personal Health Information, moreover, is regulated by, among other things, the Privacy Rule of the Health Insurance Portability and Accountability Act, otherwise known as HIPAA. The wireless carriers are primarily responsible for regulatory compliance. Given the growing and dynamic evolution of digital wireless products that can be offered to consumers over a wireless communication network, regulators could impose rules, requirements and standards of conduct on third-party content and infrastructure providers such as us. We are not currently aware of any pending regulations that would materially impact our operations.

Employees

We currently have 16 full-time including our chairman, our chief executive officer, our chief financial officer, 6 persons serving as programmers and technical staff operators, 5 persons in  account management, 1 person in accounting and 1 administrative assistant. We do not have any part time employees. We expect to increase our future employee levels on an as-needed basis in connection with our expected growth.

 
7

 
 
Item 1A.  Risk Factors.
 
RISKS RELATED TO OUR BUSINESS
 
We currently rely on brand owners to use our programs to satisfy their communication needs and thereby to generate our revenues from wireless carriers indirectly.  The loss of or a change in any of these significant relationships could materially reduce our revenues.
 
Both our present and our future depend heavily on a single client relationship.  We must retain our current business with this client and expand the relationship into augmented programs, both for its own sake and as a reference point for possible similar business with other retailers and brand owners.  Our client relationships are subject to risk based on factors such as performance, reliability, pricing, competition, alternate technological solutions and changes in interpersonal relationships.
 
Our marketing and sales efforts are significantly impacted by our relationship with AT&T. We have direct to user marketing efforts but currently our primary revenue growth has been through our cooperative marketing with AT&T.
 
We have and continue to develop our relationship with AT&T as exemplified by the relations we have with their retail clients. We have cultivated and intend to work to continue to develop new products and relations with AT&T clients through coordinated marketing efforts with AT&T. This relationship has been beneficial but can be limiting as related to our independent marketing efforts as we believe we need to be careful to not conflict with the business interests of AT&T or its major clients. Should AT&T choose to promote another vendor’s products and services over our own, our current and future business could be negatively impacted. In addition, AT&T has significant influence over the pricing for many of its suppliers, including us.  We work cooperatively with AT&T to provide competitive pricing to the end users but AT&T ultimately has the final contracting authority with their clients who benefit from our products and services.
 
We have a history of operating losses and we may need additional financing to meet our future long term capital requirements.
 
We have a history of losses and may continue to incur operating and net losses for the foreseeable future. We incurred a consolidated net loss of $5,249,566 for the fiscal year ended September 30, 2013 and a consolidated net loss of $3,255,186 for the fiscal year ended September 30, 2012. As of September 30, 2013, our accumulated deficit was $129,899,017. We have not achieved profitability on an annual basis. We may not be able to reach a level of revenue to achieve profitability. If our revenues grow slower than anticipated, or if operating expenses exceed expectations, then we may not be able to achieve profitability in the near future or at all, which may depress our stock price.
 
We may require additional funds in the future to fund our business plans, either through additional equity or debt financings or collaborative agreements or from other sources. We have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all. In the event we are unable to obtain additional financing, we may be unable to implement our business plan. Even with such financing, we have a history of operating losses and there can be no assurance that we will ever become profitable.
 
We may not be able to effectively protect or monetize our patents.
 
We own a portfolio of patents related to mobile search, commerce, advertising and streaming media, which to date we have not monetized other than by using some of them in the course of our own operations.  To monetize some or all of them by sale would require access to potential buyers, which may be difficult for a smaller company such as us to obtain, and would also require completion of a buyer’s due diligence investigation into the strength of the patents, demonstration to the buyer that owning such patents would have defensive or offensive value to it, and negotiation of the price and other terms of transaction documents.
 
 
8

 
 
To monetize some or all of the patents by licensing would require similar steps.  In addition, we may not be able to monetize our patents as against companies who use our patented inventions unless they respect our ability to enforce our patents against them if they were not to agree to licenses.

To prosecute patent infringement actions, would require us to incur substantial legal fees and costs.  The outcome of litigation is never certain, and the amount of damages that might be awarded to us under any judgment is also uncertain; and even if a judgment is obtained it would be subject to appeal and to the uncertainties of collection.
 
In addition, companies whose actual or planned activities are blocked by our patents could attempt to develop technological work-arounds in order to avoid compensating us.
 
There can be no assurance that we will be able to effectively protect or monetize our patents, or that we will be able to obtain a return equal to the fair intrinsic value of the patents.  The effort to obtain monetization could entail significant expenses and also opportunity costs.
 
We currently rely on wireless carriers, especially AT&T, to market and distribute our products and services and to generate our revenues.  The loss of or a change in any of these significant carrier relationships could cause us to lose access to their subscribers and thus materially reduce our revenues.
 
Our future success is highly dependent upon maintaining successful relationships with wireless carriers.  A significant portion of our revenue has always been derived from a very limited number of carriers, and currently nearly all of our revenues are paid to us through AT&T Services, Inc.  We expect that we will continue to generate a substantial majority of our revenues through distribution relationships with a limited number of carriers for the foreseeable future.  Our failure to maintain our relationships with these carriers would materially reduce our revenues and thus harm our business, operating results and financial condition.
 
Typically, carrier agreements have a term of one or two years with automatic renewal provisions upon expiration of the initial term, absent a contrary notice from either party.  In addition, some carrier agreements, including our key agreement with AT&T Services, Inc., provide that the carrier can terminate the agreement early and, in some instances, at any time without cause, which could give them the ability to renegotiate economic or other terms.
 
Many factors outside our control could impair our ability to generate revenues through a given carrier, including the following:
 
the carrier’s preference for our competitors’ products and services rather than ours;
the carrier’s decision to discontinue the sale of some or all of our products and services;
the carrier’s decision to offer similar products and services to its subscribers without charge or at reduced prices;
the carrier’s decision to restrict or alter subscription or other terms for downloading our products and services;
a failure of the carrier’s merchandising, provisioning or billing systems;
the carrier’s decision to offer its own competing products and services;
the carrier’s decision to transition to different platforms and revenue models; and consolidation among carriers.

If any of our carriers decides not to market or distribute our products and services or decides to terminate, not renew or modify the terms of its agreement with us or if there is consolidation among carriers generally, we may be unable to replace the affected agreement with acceptable alternatives, causing us to lose access to that carrier’s subscribers and the revenues they afford us, which could materially harm our business, operating results and financial condition.
 
 
9

 
 
We may need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.
 
We may need to raise additional capital in the future, which may not be available on reasonable terms or at all.  Our present cash flow from operations is insufficient to achieve our business plan.  We may need to raise additional funds through public or private debt or equity financings to meet various objectives including, but not limited to:
 
pursuing growth opportunities, including more rapid expansion;
protecting our intellectual property from infringement;
acquiring complementary businesses;
making capital improvements to improve our infrastructure;
hiring and/or incentivizing qualified management and key employees;
developing new services, programming or products;
responding to competitive pressures; and
maintaining compliance with applicable laws.

As a result of the recent economic recession, and the continuing economic uncertainty, it has been difficult for companies, particularly smaller ones, to obtain equity or debt financing.
 
Any additional capital raised through the sale of equity or equity-backed securities may dilute current stockholders’ ownership percentages and could also result in a decrease in the fair market value of our equity securities.  The terms of those securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect.
 
Debt securities, on the other hand, are senior to common stock, might contain onerous restrictive covenants, and must be repaid when they mature; and if we do not profitably use the money raised, we may not have enough cash on hand to repay the debt upon maturity without impairing our operations.
 
If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our services, or grant licenses on terms that are not favorable to us.
 
Furthermore, any additional debt or equity or other financing that we may need may not be available on terms favorable to us, or at all.  If we are unable to obtain required additional capital, we may have to curtail our growth plans or cut back on existing business and, further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.
 
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs.  We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our reported financial results.
 
We may not be able to manage our growth effectively.
 
Our strategy envisions growing our business.  There can be no assurance that such growth will occur, either to the extent our strategy envisions or at all.  Even if we do grow, if we fail to manage our growth effectively our financial results could be adversely affected.  Growth may place a strain on our management systems and resources.  We must continue to refine and expand our business development capabilities, our systems and processes and our access to financing sources.  As we grow, we must continue to hire, train, supervise and manage new employees.  We cannot assure you that we will be able to:
 
meet our capital needs;
implement, improve and expand our operational, financial, management information, risk management and other systems effectively or efficiently or in a timely manner;
allocate our human resources optimally;
identify, hire, train, motivate and retain qualified managers and employees;
develop the management skills of our managers and supervisors; or
evolve a corporate culture that is conducive to success.
 
If we are unable to manage our growth and our operations our financial results could be adversely affected.
 
 
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If we fail to maintain an effective system of internal control over financial reporting and other business practices, and of Board-level oversight, we may not be able to report our financial results accurately or prevent and detect fraud and other improprieties.  Consequently, investors could lose confidence in our financial reporting, and this may decrease the trading price of our stock.
  
We must maintain effective internal controls to provide reliable financial reports and to prevent and detect fraud and other improprieties.  We are responsible to review and assess our internal controls and implement additional controls when improvement is needed.  Failure to implement any required changes to our internal controls or any others that we identify as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information.  Any such loss of confidence would have a negative effect on the market price of our stock.
 
Because we are relatively small, our internal control procedures may not be fully mature. We have limited internal personnel to implement procedures and must scale our procedures to be compatible with our resources. We also rely on outside professionals including accountants and attorneys to support our control procedures.
 
Sarbanes-Oxley Act requirements regarding internal control over financial reporting, and other internal controls over business practices, are costly to implement and maintain, and such costs are relatively more burdensome for smaller companies such as us than for larger companies.
 
Until fiscal 2012 we did not have an Audit Committee, a Compensation Committee or a Governance and Nominating Committee, composed of independent directors.  Accordingly, these Committees’ oversight procedures and issues familiarity may not yet be fully mature.
 
Our management ranks are thin, and losing or failing to add key personnel could adversely affect our business.
 
Our future performance depends substantially on the continued service of our senior management and other key personnel, including personnel which we need to hire.  In particular, our success depends upon the continued efforts of our senior management team.  We need to identify and hire additional senior managers to perform key tasks and roles.  We maintain a key man life insurance policy on our Executive Chairman with a $10,000,000 death benefit payable to us.
 
We are subject to competition.  And, if technological conditions change, our competitors may be better able to react than we are.
 
We have many actual and potential competitors, many of whom may have more financial, personnel, intellectual property, development and/or reputational resources than we do.  If we and our business do not grow larger, we will not be able to enjoy the brand power and economies of scale that many of our competitors do.  In addition, it is likely that our industry will be subject to rapid and profound technological changes.  Our competitors may have more ability to react to such changes than we do.
 
We may be unable to develop and introduce in a timely way new products or services.
 
The planned timing and introduction of new products and services are subject to risks and uncertainties.  Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new products and services, which could result in a loss of, or delay in, revenues.
 
We may experience unexpected expenses or delays in service enhancements if we are unable to license third-party technology on commercially reasonable terms.
 
We rely, to an extent, on technology that we license from third parties, and may find a need to license additional technology in the future.  These third-party technology licenses might not continue to be available to us on commercially reasonable terms or at all.  If we are unable to obtain or maintain these licenses on favorable terms, or at all, we could experience delays in completing and developing our products and services.
 
 
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We may not be able to adequately safeguard our intellectual property rights from unauthorized use, and we may become subject to claims that we infringe on others’ intellectual property rights.
 
We rely on a combination of patents, trade secrets, copyrights, trademarks, and other intellectual property laws, nondisclosure agreements and other arrangements with employees, actual and prospective customers and actual or prospective capital providers and their agents and advisors, and other protective measures to preserve our proprietary rights.  These measures afford only limited protection and may not preclude competitors from developing products or services similar or superior to ours.  Moreover, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
 
Although we implement protective measures and intend to defend our proprietary rights, these efforts may not be successful.  From time to time, we may litigate within the United States or abroad to enforce our issued or licensed patents, to protect our trade secrets and know-how or to determine the enforceability, scope and validity of our proprietary rights and the proprietary rights of others.  Enforcing or defending our proprietary rights can involve complex factual and legal questions and could be expensive, would require management’s attention and might not bring us timely or effective relief.
 
Furthermore, third parties may assert that our products or processes infringe their intellectual property rights.  Although there are no pending or threatened intellectual property lawsuits against us, we may face litigation or infringement claims in the future.  Infringement claims could result in substantial judgments, and could result in substantial costs and diversion of our resources even if we ultimately prevail.  A third party claiming infringement may also obtain an injunction or other equitable relief, which could effectively block our use of allegedly infringing items.  Although we may seek licenses from third parties covering intellectual property that we are allegedly infringing, we may not be able to obtain any such licenses on acceptable terms and conditions, if at all.
 
Applicable rules, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may be burdensome to us and/or make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of our business.
 
We may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for our effective management because of the rules and regulations that govern publicly-held companies.  The enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a series of rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by national securities exchanges.  (Our securities are not currently listed on any national securities exchange.)  The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting roles as directors and executive officers.
 
Further, some of these recent changes heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation and level of experience in finance and accounting matters.  We may have difficulty attracting and retaining directors with the requisite qualifications.  If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to obtain or retain listing of our common stock on any national securities exchange (assuming we elect to seek and are successful in obtaining such listing) could be adversely affected.
 
We have a history of related-party transactions.
 
Throughout our history we have engaged in related-party transactions with our directors and officers. In all related-party transactions, there is a risk that even if our personnel on the other side of the table from the related party are striving to ensure that the terms of the transaction are arms-length, the related party’s influence may be such that the transaction terms could be viewed as favorable to that related-party. We established committees comprised of independent directors in our most recent fiscal year to review proposed related-party transactions, but even such committees and procedures may be susceptible to the influences inherent to these types of transactions. Our financial statements and other disclosure in this annual report on Form 10-K provide specific information about our prior related-party transactions. We may engage in additional related-party transactions in the future.
 
 
12

 
 
RISKS RELATED TO OUR INDUSTRY
 
Demand for the services we provide is not yet well established.
 
Brand owners who are potential users of the services we provide must weigh their decisions in the light of limited budgets for marketing and notification, the inertia of dealing with well-established providers of well-established traditional modalities for marketing and notification, lack of experience with services such as ours and the perception (whether or not well founded) of technological risk and not-fully-demonstrated cost-effectiveness of our services.  There are indications that the market among major brand owners for services such as ours may be in an early stage of development.

System or network failures could reduce our sales, increase costs or result in a loss of end users of our products and services.
 
Any failure of, or technical problem with, carriers’, third parties’ or billing systems, delivery or information systems, or communications networks could result in the inability of end users to receive communications or download our products, prevent the completion of a billing transaction, or interfere with access to some aspects of our products.  If any of these systems fails or if there is an interruption in the supply of power, an earthquake, superstorm, fire, flood or other natural disaster, or an act of war or terrorism, end users might be unable to access our offerings.  For example, from time to time, our carriers have experienced failures with their billing and delivery systems and communication networks, including gateway failures that reduced the provisioning capacity of their branded e-commerce system.  Any failure of, or technical problem with, the carriers’, other third parties’ or our systems could cause us to lose end users or revenues or incur substantial repair costs and distract management from operating our business, or persuade retailers or brand owners that solutions utilizing our programs are not sufficiently reliable.  This, in turn, could harm our business, operating results and financial condition.
 
Our business depends on the growth and maintenance of wireless communications infrastructure.
 
Our success will depend on the continued growth and maintenance of wireless communications infrastructure in the United States and internationally.  This includes deployment and maintenance of reliable next-generation digital networks with the speed, data capacity and security necessary to provide reliable wireless communications services.  We have no control over this.
 
RISKS RELATED TO OUR COMMON STOCK
 
Our common stock is not traded on any national securities exchange.
 
Our common stock is currently quoted on the OTC Bulletin Board, which may increase price quotation volatility and could limit the liquidity of the common stock, all of which may adversely affect the market price of the common stock and our ability to raise additional capital.
 
Trading in our stock has been modest, so investors may not be able to sell as much stock as they want at prevailing prices.  Moreover, modest volume can increase stock price volatility.
 
The average daily trading volume in our common stock for the twelve-month period ended September 30, 2013 was approximately 185,121 shares.  If trading in our stock continues at this level, it may be difficult for investors to sell or buy substantial quantities of shares in the public market at any given time at prevailing prices.  Moreover, the market price for shares of our common stock may be made more volatile because of the relatively low volume of trading in our common stock.  When trading volume is low, significant price movement can be caused by the trading in a relatively small number of shares.
 
Applicable SEC rules governing the trading of “penny stocks” limits the trading and liquidity of the common stock which may affect the trading price of the common stock.
 
Our common stock is currently quoted on the OTC Bulletin Board and trades below $5.00 per share; therefore, our common stock is currently considered a “penny stock” and so is subject to SEC rules and regulations which impose limitations upon the manner in which such shares may be publicly traded.  These regulations require the delivery, before any transaction involving a penny stock, of a disclosure explaining the penny stock market and the associated risks; and certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction before sale.  In addition, margin regulations prevent low-priced stocks such as ours from being used as collateral for brokers’ margin loans to investors.  These regulations have the effect of limiting the trading activity of the common stock and reducing the liquidity of an investment in our common stock.  In addition, many institutional investors, as a matter of policy, do not invest in stocks which are not traded on a national securities exchange and/or which trade for less than $5.00 per share (or some lower price point).
 
 
13

 
 
Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on its market price.
 
Common stock prices are often significantly influenced by the research and reports that securities analysts publish about companies and their business.  We do not have any control over these analysts.  There is no guarantee that securities analysts will cover our common stock.  If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price.  If we are covered by securities analysts and our stock is downgraded, our stock price will likely decline.  If one or more of these analysts ceases to cover us or fails to publish regular reports on us, we can lose visibility in the financial markets, which can cause our stock price or trading volume to decline.
 
The price of our common stock has been and may continue to be volatile, which could lead to losses by investors and costly securities litigation.
 
The trading price of our common stock has been and is likely to continue to be volatile and could fluctuate in response to factors such as:
 
actual or anticipated monetizations of our patents;
actual or anticipated variations in our operating results (including whether we have achieved our key business targets and/or earnings estimates) and prospects;
announcements of technological innovations by us or our competitors;
announcements by us or our competitors of significant acquisitions, business wins, strategic partnerships, joint ventures or capital commitments;
additions or departures of key personnel;
introduction of new services by us or our competitors;
sales of our common stock or other securities in the open market (particularly if overall trading volume is not high);
general market conditions and broader political and economic conditions; and
other events or factors, many of which are beyond our control.

The stock market has experienced significant price and volume fluctuations, which have often been unrelated to the operating performance of companies, and in particular the market prices of stock in smaller companies and technology companies have been highly volatile.  The market price of our common stock at any particular time may not remain the market price in the future.  In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against that company.  Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition.
 
We do not expect any cash dividends to be paid on our common stock in the foreseeable future.
 
We have never declared or paid a cash dividend on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future.  We expect to use any future earnings, as well as any capital that may be raised in the future, to fund business growth.  Consequently, a stockholder’s only opportunity to achieve a return on investment would be for the price of our common stock to appreciate and that stockholder to sell his or her shares at a profit.  We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.
 
 
14

 
 
You may experience dilution of your ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.
 
We have aggressively issued common stock and other equity-based securities in support of our business objectives and initiatives.  In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders.  We are currently authorized to issue an aggregate of 305,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 5,000,000 shares of preferred stock with preferences and rights to be determined by our Board of Directors.  As of September 30, 2013, there were 137,220,231 shares outstanding, 50,704,952 shares reserved for issuance upon exercise of outstanding stock options and warrants, and 7,856,000 shares reserved for issuance upon conversion of outstanding convertible debt. The holders of such options, warrants, and convertible securities can be expected to exercise or convert them at a time when our common stock is trading at a price higher than the exercise or conversion price of these outstanding options, warrants, and convertible securities.  If these options or warrants to purchase our common stock are exercised, convertible debt is converted or other equity interests are granted under our 2008, 2009 or 2010 stock plans, or under other plans or agreements adopted in the future, such equity interests will have a dilutive effect on your ownership of common stock.  We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes.  Such securities may be issued at below-market prices or, in any event, prices that are significantly lower than the price at which you may have paid for your shares.  The future issuance of any such securities may create downward pressure on, or dampen any upward trend in, the trading price of our common stock.
 
We are controlled by our executive Chairman/major stockholder Anthony Macaluso.
 
Anthony Macaluso, our executive Chairman, beneficially owns approximately 26.3% of our outstanding common stock, on a Rule 13d-3 basis, as of December 5, 2013.  Such concentrated control of the Company may adversely affect the price of our common stock.  Because of his high percentage of beneficial ownership, and his positions as an officer and director, Mr. Macaluso may be able to control matters requiring the vote of stockholders, including the election of our Board of Directors and certain other significant corporate actions.  This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other stockholders and us.  This control could adversely affect the voting and other rights of our stockholders and could depress the market price of our common stock.  Actions which Mr. Macaluso determines to be in his best interest might not be in your (or even our) best interest.  If you acquire common stock, you may have no effective voice in the management of the Company.
 
Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.
 
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and/or effect changes in control.  The provisions of our charter documents include:
 
the inability of stockholders to call special meetings of stockholders;
the ability of our board of directors to amend our bylaws without stockholder approval; and
the ability of our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine.
 
In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law.  In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203.  These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.  We think Section 203 does not currently apply to us, but in the future it might apply to us.
 
 
15

 
 
Even though we are not a California corporation, our common stock could still be subject to a number of key provisions of the California General Corporation Law.
 
Under Section 2115 of the California General Corporation Law, or CGCL, non-listed corporations not organized under California law may still be subject to a number of key provisions of the CGCL.  This determination is based on whether the corporation has specific significant business contacts with California and if more than 50% of its voting securities are held of record by persons having addresses in California.  Under Section 2115, we could be subject to certain provisions of the CGCL.  Among the more important provisions are those relating to the election and removal of directors, cumulative voting, standards of liability and indemnification of directors, distributions, dividends and repurchases of shares, shareholder meetings, approval of certain corporate transactions, dissenters’ rights, and inspection of corporate records.  We have not determined whether or not we are, or will be, subject to such CGCL requirements.

Item 1B. Unresolved Staff Comments

Not Applicable.

Item 2. Properties.

Our executive offices are located at 100 Town Square Place, Suite 204, Jersey City, New Jersey 07310. We have a five-year lease for this space at a rate of $8,925 per month. The facilities comprise approximately 3,500 square feet consisting entirely of administrative office space.

We have additional offices located at 2235 Encinitas Blvd., Suite 210, Encinitas, California 92024. We have a one year lease for this space at a rate of $3,532 per month. The facilities comprise approximately 2,000 square feet consisting entirely of administrative and software development office space.

We have additional offices located at 3310 Market Street, Suite 204, Rogers, Arkansas 72758. We have a five-year lease for this space at a rate of $3,645 per month. The facilities comprise approximately 2,100 square feet consisting entirely of sales, client service, and administrative office space.

We have additional offices located at 12301 West Explorer Drive, Suite 210, Boise, Idaho 83713. We have a two-year lease for this space at a rate of $1,204 per month, which has been extended on a month-to-month basis. The facilities comprise approximately 1,445 square feet consisting entirely of software development office space.

Our servers are housed at CoreSite, 900 N. Alameda Street, Los Angeles, California 90012, Paetec, 100 W. La Palma, Anaheim, California 92801,  Fiberpipe, 10215 West Emerald Street, Boise, Idaho 83704 and CoreSite, 427 North La Salle, Chicago, Illinois 60605.
 
Item 3. Legal Proceedings.

On February 21, 2012, we filed a complaint against Zoove Corporation in the United States District Court, Northern District of California. The complaint alleged patent infringement, in which we sought preliminary and permanent injunctive relief as well as damages resulting from Zoove’s infringement of U.S. Patent No. 7,813,716 and U.S. Patent No. 8,041,341.  On November 12, 2013, we entered into a Patent License and Settlement Agreement with Zoove pursuant to which the parties agreed to settle the lawsuit and dismiss with prejudice. Pursuant to the terms of the settlement agreement, each party was granted a non-exclusive, non-transferrable (except as limited by the settlement agreement), royalty free, fully paid-up, worldwide license to certain of the other party’s technology. In addition Zoove agreed to pay us a cash fee of $750,000 to be paid over a three year period. On December 3, 2013, the Court granted the Stipulated Dismissal of Claims and Counterclaims with Prejudice.
 
On July 29, 2012, we were served a first amended complaint for Elizabeth Ibey v. Wal-Mart Stores Inc. and Single Touch Interactive Inc. The complaint is a class action pending in the United States District Court, Southern District of California and alleges violations of the Telephone Consumer Protection Act. The Plaintiff seeks damages and injunctive relief. We filed a motion to dismiss the case on September 19, 2013 and a hearing on that motion to dismiss is scheduled for December 13, 2013. 
 
 
Not applicable.
 
 
16

 
 
PART II
 
Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is quoted on the OTC Bulletin Board under the symbol “SITO”. The following table sets forth, for the fiscal quarters indicated, the high and low closing sale prices per share of our common stock. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The closing sale price of our common stock on December 6, 2013 was $0.54.

Quarter Ended
 
High
   
Low
 
                 
September 30, 2013
   
0.65
     
0.52
 
June 30, 2013
   
0.76
     
0.61
 
March 31, 2013
   
0.95
     
0.60
 
December 31, 2012
   
0.65
     
0.25
 
September 30, 2012
   
0.34
     
0.17
 
June 30, 2012
   
0.31
     
0.19
 
March 31, 2012
   
0.37
     
0.23
 
December 31, 2011
   
0.33
     
0.20
 
September 30, 2011
   
0.56
     
0.26
 
June 30, 2011
   
0.75
     
0.45
 
March 31, 2011
   
0.83
     
0.49
 
December 31, 2010
   
1.05
     
0.73
 
 
Holders

As of September 30, 2013, there were approximately 199 record holders of our common stock. This does not include the holders of approximately 77 un-exchanged stock certificates or the additional holders of our common stock who held their shares in street name as of that date.

Dividends

We have never paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future but rather intend to retain future earnings, if any, for reinvestment in our future business. Any future determination to pay cash dividends will be in compliance with our contractual obligations and otherwise at the discretion of the board of directors and based upon our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.

Transfer Agent

Our registrar and transfer agent is Continental Stock Transfer & Trust Company.

Recent Sales of Unregistered Securities

On September 11, 2013, we granted Peltz Capital Management, LLC (i) 2,000,000 options to purchase shares of our common stock at an exercise price of $0.48 per share, and (ii) 3,750,000 options to purchase shares of our common stock at an exercise price of $0.295 per share.
 
 
17

 
 
On September 19, 2013, we issued and sold 500,000 shares of our common stock to an accredited investor at a price of $0.49 or aggregate proceeds of $245,000.
 
On August 27, 2013, the Company granted options to a Director to purchase 250,000 shares of the Company’s common stock at a purchase price of $0.604 per share expiring five years from date of grant. The options immediately vested upon grant.
 
On August 27, 2013, the Company granted options to a Director to purchase 50,000 shares of the Company common stock at a purchase price of $0.604 per share expiring five years from date of grant. The options immediately vested  upon grant.
 
The issuance of the securities described above were exempt from registration under Section 4(2) of the Securities Act of 1933.
 
Equity Compensation Plan Information

The following table reflects information for equity compensation plans and arrangements for any and all directors, officers, employees and/or consultants through September 30, 2013.
 
Equity Compensation Plan Information
 
   
Number of
securities
to be issued
upon exercise of
outstanding options,
warrants and rights (a)
 
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights (b)
   
Number of
securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) (c)
 
Equity compensation plans
approved by security holders
 
6,217,000
 
$
0.54
     
2,146,797
 
Equity compensation plans
not approved by security holders
 
22,221,952
 
$
0.52
     
2,521,912
 
Total
 
28,438,952
 
$
0.52
     
4,668,709
 

In April 2008 our Board of Directors and stockholders adopted the 2008 Stock Option Plan (the “2008 Plan”) to provide participating employees, non-employee directors, consultants and advisors with an additional incentive to promote our success. The maximum number of shares of common stock which may be issued pursuant to options and awards granted under the 2008 Plan is 8,800,000. The 2008 Plan is currently administered by our Board of Directors but may be subsequently administered by a Compensation Committee designated by our Board of Directors. The 2008 Plan authorizes the grant to 2008 Plan participants of non-qualified stock options, incentive stock options, restricted stock awards, and stock appreciation rights. No option shall be exercisable more than 10 years after the date of grant. Upon separation from service, no further vesting of options can occur, and vested options will expire unless exercised within a year after separation, except as provided in individual employment agreements. No option granted under the 2008 Plan is transferable by the individual or entity to whom it was granted otherwise than by will or laws of decent and distribution, and, during the lifetime of such individual, is not exercisable by any other person, but only by him.

In December 2009 our Board of Directors adopted the 2009 Employee and Consultant Stock Plan (“2009 Plan”) to provide common stock grants to selected employees, non-employee directors, consultants and advisors. The total number of shares subject to the 2009 Plan is 2,000,000. The 2009 Plan is administered by our Board of Directors.
 
 
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In December 2010 our Board of Directors adopted the 2010 Stock Plan (“2010 Plan”) to provide common stock option grants to selected employees, non-employee directors, consultants and advisors. In June 2011, the Board increased the total number of shares subject to the 2010 Plan to 25,000,000 and to 40,000,000 in November 2013. The 2010 Plan is administered by our Board of Directors.

Item 6.  Selected Financial Data.

Not required for smaller reporting companies.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements. These forward-looking statements include, without limitation, statements containing the words “believes,”“anticipates,”“expects,”“intends,”“projects,”“will,” and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us, including sales of certain of our assets. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to those described in “Risk Factors” of the reports filed with the Securities and Exchange Commission.
 
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere herein.
 
Overview

We are 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.

Our portfolio of intellectual property represents our many years’ innovation in the wireless industry through patented technology that we developed, as well as patented technology we purchased from Microsoft and others.  We are dedicated to the monetization of our patents, primarily through licensing agreements that allow others to use our patents in exchange for royalty income and other consideration.

Throughout our history, we have been constrained by the availability of funds to develop and operate our business and intellectual property.  We have raised funds by selling shares of our stock, convertible debentures and warrants to insiders and private investors.  A variety of non-cash accounting charges have significantly increased our net losses, including charges for stock based compensation that we have paid to officers, directors, employees, consultants and key vendors who have developed our business from its start-up pre-revenue phase to a fully operational business in which we have grown annual revenues by nearly ten times in the past three years.
 
 
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During fiscal year ended September 30, 2013, we made significant progress in reducing our negative cash flows from operations as a result of 23% growth in revenues and 3% decrease in costs directly associated with revenue.  During the nine-month period from January 2013 through September 2013, on a pro-forma basis when separating out intellectual property related initiatives, our core, underlying business generated positive operating profits and positive cash flow. 
 
As we expand operational activities and seek to monetize our patented technology, 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.  We are heavily reliant on the revenue we generate from a single customer relationship. Our core mobile media business operates in a relatively new and evolving industry that seeks to gain a larger share of business spending which has traditionally been directed toward older established media solutions.  There can be no assurance that we will be successful in addressing these challenges and others that we face, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

Results of Operations
 
Results of Operations for the Fiscal Years Ended September 30, 2013 and 2012

During the fiscal year ended September 30, 2013, we increased our revenue by approximately 23% over revenue generated during the fiscal year ended September 30, 2012 ($7,784,604 in 2013 compared to $6,346,919 in 2012).   The growth is attributable to continuing mobile adoption and new programs for existing and new client relationships.  Of our revenue earned during fiscal year ended September 30, 2013, approximately 99% was generated from contracts with ten customers covered under our master services agreement with AT&T. Of our revenue earned during fiscal year ended September 30, 2012, approximately 99.7% was generated from contracts with eleven customers covered under our master services agreement with AT&T.

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 $3,328,232 in 2013, compared to $2,907,110 in 2012, an increase of 14%.   Royalties and Application Costs as a percentage of revenue decreased by 3%, from 46% to 43% from the fiscal year ended September 30, 2012 to that for 2013, attributable to the composition of message types, vendor re-negotiations, and taking in-house a number of formerly outsourced services, such as part of our colocation facilities.

Research and Development expense decreased from $84,658 in 2012 to $65,975 in 2013 while adjusted Compensation expense decreased from $2,679,008 to $2,517,682.  The small decrease to the former reflects the variance throughout any given fiscal year of the innovation process and newly placed emphasis on monetization of existing intellectual property (“IP”) rather than the creation of new IP.  Similarly, reduced adjusted Compensation expense represents a more targeted focus on the expansion of our existing mobile messaging and marketing business, as well as efficiencies gained from staff and from the expanded management team now in its second year with us.

General and administrative expense for the fiscal years ended September 30, 2013 and 2012 was $3,898,121 and $2,387,494, respectively, an increase of $1,510,627 or 63%.  The increase is largely related to an $814,861 increase in stock based compensation expense and a $336,292 increase in attorneys’ fees as part of our investment in IP monetization and $336,735 in professional fees for other corporate matters.

Interest expense for the fiscal years ended September 30, 2013 and 2012 was $1,270,944 and $488,120, respectively, an increase of $782,284 or 160%.  The increase in interest expense is attributable to our having more outstanding principal on our convertible debentures as we have increased our net borrowings over the periods.

Our net loss for the fiscal year ended September 30, 2013 was $5,249,566 as compared to a net loss of $3,255,186 for the fiscal year ended September 30, 2012, an increase of $1,994,380 or 61% that is primarily attributable to the $1,739,995 increase in stock based compensation expense for employees, directors and consultants and the $782,824 increase in interest expense on our convertible debentures, which has been partially offset by the increased revenues and reduction in the percentage of direct out-of-pocket costs associated with revenue.
 
 
20

 
 
Liquidity and Capital Resources

At September 30, 2013, we had total assets of $6,523,206 and total liabilities of $5,398,842. As of September 30, 2012, we had total assets of $5,569,755 and total liabilities of $4,661,117. The $953,451 or 17% increase in assets is primarily attributable to the $1,163,100 increase in prepaid consulting services that represents the fair value of options to purchase Company common stock given to Peltz Capital Management LLC as compensation for consulting services under a two-year consulting agreement (See Note 5 of the financial statements included in this report).  At September 30, 2013, we had cash of $1,146,995 as compared to $2,157,707 at September 30, 2012, a decrease of $1,010,712.

The $737,725 increase in liabilities in the year since September 30, 2012 is largely due to the $583,940 increase in accounts payable and the $153,642 net increase in our obligations under convertible debentures.   The increase in accounts payable is largely related to attorneys’ fees payable incurred as part of our investment in IP monetization.  During the fiscal year ended September 30, 2013, we used $1,052,030 in cash for operating activities as compared to the $2,084,247 we used for operating activities during the fiscal year ended September 30, 2012.  The 50% improvement in cash flow from operations is attributable to our increased revenues and reduction in the percentage of direct out-of-pocket costs associated with revenue.

Cash used in investing activities for the fiscal year ended September 30, 2013 totaled $1,127,791, of which $399,682 represented the capitalized internal costs of our software development and $600,000 was part of the acquisition of the Anywhere software license. We continue to invest in IP that is designed to expand our mobile communications/advertising offerings.

Cash provided from financing activities for the fiscal year ended September 30, 2013 totaled $1,169,109.  The Company received $688,000 through the issuance of the final tranche of a $3,000,000 private placement of our convertible debt and related warrants.  We paid $48,475 in cash relating to that placement. We received $824,486 from issuances of our common stock.  We paid the final $87,500 remaining on our patent purchase obligation and repaid $200,000 of principal, together with $20,000 of interest, to the one note holder from our first $2,000,000 private placement.  This note holder converted its note at a time when the conversion price ($0.50 per share) was less than our stock price, and all other such note holders from that placement have either converted such notes into shares or elected to amend and extend their notes.

Over the next twelve months we believe that existing capital and anticipated funds from operations may be sufficient to sustain our current level of operations.  Inasmuch as the Company is pursuing the monetization of its IP, which plans are subject to change, additional external financing relating to such efforts will be required. In addition, increased acceleration in our organic business and/or other economic influences might also necessitate other financing. There can be no assurance that we will be able obtain additional financing, if at all or upon terms that will be acceptable to us. There can, moreover, be no assurance of when, if ever, our operations become profitable.
 
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.
 
 
21

 
 
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 (if the debt is due to an unrelated party) 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.
 
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.
 

Not applicable.

 
22

 
 
 
INDEX TO FINANCIAL STATEMENTS
 
 
 
23

 
 

Stockholders and Directors
Single Touch Systems, Inc.
Jersey City, New Jersey

We have audited the accompanying consolidated balance sheet of Single Touch Systems, Inc. as of September 30, 2013 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended September 30, 2013.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Single Touch Systems, Inc. as of September 30, 2013 and the consolidated results of its operations, stockholders’ equity, and cash flows for year ended September 30, 2013 in conformity accounting principles generally accepted in the United States of America.

/s/ L.L. Bradford and Company, LLC
Las Vegas, Nevada
December 9, 2013

 
F-1

 
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Single Touch Systems
Encinitas, California

We have audited the accompanying consolidated balance sheets of Single Touch Systems ("the Company") as of September 30, 2012 and 2011 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the two year period ended September 30, 2012. Single Touch Systems management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Single Touch Systems as of September 30, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two year period ended September 30, 2012 in conformity with accounting principles generally accepted in the United States.


/s/ Weaver, Martin & Samyn LLC
Weaver, Martin & Samyn LLC
Kansas City, Missouri
December 31, 2012
 
 
F-2

 
 
BALANCE SHEETS        
 
   
September 30,
 
   
2013
   
2012
 
             
Assets
           
Current assets
           
Cash and cash equivalents
  $ 1,146,995     $ 2,157,707  
Accounts receivable
    1,347,827       1,085,840  
Prepaid consulting
    1,081,553       -  
Other prepaid expenses
    150,183       129,290  
                 
    Total current assets
    3,726,558       3,372,837  
                 
Property and equipment, net
    238,815       228,499  
                 
Other assets
               
Prepaid consulting  - long-term portion
    81,547       -  
Capitalized software development costs, net
    343,575       383,227  
Intangible assets:
               
  Patents
    467,837       602,056  
  Patent applications cost
    768,646       667,858  
  Software license
    831,000       76,000  
Deposit - related party
    -       155,000  
Other assets including security deposits
    65,228       84,278  
                 
    Total other assets
    2,557,833       1,968,419  
                 
    Total assets
  $ 6,523,206     $ 5,569,755  
 
See accompanying notes.
 
 
F-3

 
 
SINGLE TOUCH SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS        
 
   
September 30,
 
   
2013
   
2012
 
             
Liabilities and Stockholders' Equity
           
Current liabilities
           
Accounts payable
  $ 1,352,203     $ 768,263  
Accrued expenses
    209,323       200,591  
Accrued compensation - related party
    72,736       72,730  
Current obligation under capital lease
    16,331       -  
Current obligation on patent acquisitions
    -       87,500  
Convertible debenture - related party
    585,708          
Convertible debentures - unrelated  parties
    2,692,570       294,241  
    Total current liabilities
    4,928,871       1,423,325  
                 
Long-term liabilities
               
Deferred revenue
    -       25,000  
Obligation under capital lease
    29,378       -  
Convertible debenture - related party
    -       527,512  
Convertible debentures - unrelated parties
    440,593       2,685,280  
    Total long-term liabilities
    469,971       3,237,792  
                 
    Total liabilities
    5,398,842       4,661,117  
                 
                 
Stockholders' Equity
               
Preferred stock, $.0001 par value, 5,000,000 shares authorized;
               
none outstanding
    -       -  
Common stock, $.001 par value; 300,000,000 shares authorized,
               
137,220,331 shares issued and outstanding as of September 30, 2013
               
and 132,472,392 shares issued and outstanding as of September 30, 2012
    137,220       132,472  
Additional paid-in capital
    130,886,161       125,425,617  
Accumulated deficit
    (129,899,017 )     (124,649,451 )
                 
    Total stockholders' equity
    1,124,364       908,638  
                 
    Total liabilities and stockholders' equity
  $ 6,523,206     $ 5,569,755  
 
See accompanying notes.
 
 
F-4

 
 
CONSOLIDATED STATEMENTS OF OPERATIONS        
 
   
For the Years Ended
 
   
September 30,
 
   
2013
   
2012
 
             
Revenue
           
Wireless applications
  $ 7,784,604     $ 6,346,919  
                 
Operating Expenses
               
Royalties and application costs
    3,328,232       2,907,110  
Research and development
    65,975       84,658  
Compensation expense (including stock based compensation of $1,290,576 in 2013 and $365,422 in 2012)
    3,808,258       3,044,430  
Depreciation and amortization
    662,721       690,293  
General and administrative (including stock based compensation of $952,030 in 2013 and $137,169 in 2012)
    3,898,121       2,387,494  
      11,763,307       9,113,985  
                 
Loss from operations
    (3,978,703 )     (2,767,066 )
                 
Other Income (Expenses)
               
Interest income
    81       -  
Interest expense
    (1,270,944 )     (488,120 )
                 
Net (loss) before income taxes
    (5,249,566 )     (3,255,186 )
                 
Provision for income taxes
    -       -  
                 
   Net loss
  $ (5,249,566 )   $ (3,255,186 )
                 
Basic and diluted loss per share
  $ (0.04 )   $ (0.02 )
                 
Weighted average shares outstanding
    133,878,896       131,192,693  
 
See accompanying notes.
 
 
F-5

 
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND SEPTEMBER 30, 2012            
 
               
Additional
             
   
Common Stock
   
Paid-in
   
Accumulated
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                               
Balance - September 30, 2011
    130,182,392     $ 130,182     $ 123,446,398     $ (121,394,265 )   $ 2,182,315  
                                         
Shares issued on exercise of options
    1,850,000       1,850       316,150       -       318,000  
Shares issued in obtaining software license from Soapbox Mobil, Inc.
    200,000       200       45,800       -       46,000  
Shares issued for services
    240,000       240       42,960       -       43,200  
Recognition of discounts  in connections with convertible debt offerings
    -       -       1,012,440       -       1,012,440  
Compensation recognized on option and warrant grants
    -       -       448,991               448,991  
Compensation recognized on modification of prior warrant grant
    -       -       53,600       -       53,600  
Loan fees recognized on warrants granted to placement agent in connection with convertible debt offerings
    -       -       138,874       -       138,874  
Amortization of beneficial conversion feature on related party debt
    -       -       (79,596 )     -       (79,596 )
Net loss for the year ended September 30, 2012
    -       -       -       (3,255,186 )     (3,255,186 )
                                         
Balance - September 30, 2012
    132,472,392     $ 132,472     $ 125,425,617     $ (124,649,451 )   $ 908,638  
                                         
Shares issued on exercise of stock options
    1,454,839       1,455       446,932               448,387  
Shares issued on exercise of stock warrants
    689,000       689       130,411               131,100  
Shares issued in debt conversions
    2,104,000       2,104       1,049,896               1,052,000  
Shares issue for cash
    500,000       500       244,500               245,000  
Recognition of discounts  in connections with convertible debt offerings
                    163,849               163,849  
Compensation recognized as contributed capital on   Executive Chairman's stock option grant for consulting services
                    847,300               847,300  
Compensation recognized on option and warrant grants
                    2,068,681               2,068,681  
Compensation recognized on modification of prior period's stock option grants
                    489,726               489,726  
Loan fees recognized on warrants granted to placement agent in connection with convertible debt offerings
                    27,445               27,445  
Amortization of beneficial conversion feature on related party debt
                    (8,196 )             (8,196 )
Net loss for the year ended September 30, 2013
                            (5,249,566 )     (5,249,566 )
                                         
Balance - September 30, 2013
    137,220,231     $ 137,220     $ 130,886,161     $ (129,899,017 )   $ 1,124,364  
 
See accompanying notes.
 
 
F-6

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS          
 
   
September 30,
 
   
2013
   
2012
 
             
Cash Flows from Operating Activities
           
Net loss
  $ (5,249,566 )   $ (3,255,186 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation expense
    89,168       107,909  
Amortization expense - software development costs
    439,334       446,876  
Amortization expense - patents
    134,219       135,508  
Amortization expense - discount of convertible debt
    825,708       311,005  
Stock based compensation
    2,242,606       502,591  
Bad debts
    -       18,326  
(Increase) decrease in assets:
               
(Increase) in accounts receivable
    (261,987 )     (196,890 )
(Increase) decrease in prepaid expenses
    (20,894 )     3,934  
Increase (decrease) in liabilities:
               
Increase (decrease) in accounts payable
    583,940       (409,794 )
Increase in accrued expenses
    8,738       60,679  
(Decrease) increase in deferred revenue
    (25,000 )     25,000  
Increase in accrued interest
    181,704       165,795  
                 
Net cash used in operating activities
    (1,052,030 )     (2,084,247 )
                 
Cash Flows from Investing Activities
               
Redemption of certificate of deposits, pledged
    19,050       19,050  
Patents and patent applications costs
    (100,789 )     (146,558 )
Purchase of property and equipment
    (46,370 )     (33,195 )
Capitalized software development costs
    (399,682 )     (434,915 )
Payment on settlement regarding Anywhere software license
    (600,000 )     (30,000 )
                 
Net cash used in investing activities
  $ (1,127,791 )   $ (625,618 )
 
See accompanying notes.
 
 
F-7

 
 
SINGLE TOUCH SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS            
 
   
September 30,
 
   
2013
   
2012
 
             
Proceeds from issuance of common stock
    824,486       318,000  
Proceeds from issuance of convertible debt - unrelated parties
    688,000       3,812,000  
Proceeds from issuance of convertible debt  - related parties
    -       500,000  
Principal reduction on obligation under capital lease
    (7,402 )     -  
Principal reduction on convertible debt
    (200,000 )     -  
Expenditures relating to private offerings
    (48,475 )     (210,049 )
Principal reduction on obligation on patent purchases
    (87,500 )     (76,180 )
                 
Net cash provided by financing activities
    1,169,109       4,343,771  
                 
Net (decrease) increase in cash
    (1,010,712 )     1,633,906  
                 
Beginning balance - cash
    2,157,707       523,801  
                 
Ending balance - cash
  $ 1,146,995     $ 2,157,707  
                 
Supplemental Information:
               
                 
Interest expense paid
  $ 263,291     $ 11,321  
Income taxes paid
  $ -     $ -  
 
Non-cash investing and financing activities:

For the year ended September 30, 2013

During the year ended September 30,2013, the Company received $688,000 through the issuance of convertible debt including common stock warrants to purchase 1,376,000 shares of the Company's common stock at $0.25 per share. The Company recognized discounts against the principal amounts due totaling $163,849 with an offsetting amount charged to equity. (See Note 10)

In connection with the above debt issuance, the Company paid placement fees that included cash totaling $48,475 and warrants to purchase 110,000 shares of the Company's common stock at $0.304 per share. The warrants were valued at $27,445. The total placement fee of $75,920 is recognized as a loan fee and is reflected in the balance sheet as an additional discount against the principal and accrued interest due on the underlying convertible debt. (See Note 10)

During the year ended September 30, 2013, the Company's Executive Chairman granted an option to a third party to purchase a total of 5,750,000 shares of the Company's common stock personally owned by him. Of the 5,750,000 options granted, 3,750,000 have an exercise price of $0.295 per share and 2,000,000 have an exercise price of $0.48 per share. The options expire two years from date of grant. The options were granted in exchange for consulting services that directly benefit the Company. Therefore, the Company recorded the fair value of the options granted of $847,300 to equity as contributed capital with an offset to prepaid expense. The $847,300 is being amortized to operations over the two-year term of the consulting agreement (See Note 13).

In September 2013, the Company, the Executive Chairman and the above indicated consultant entered into an agreement, whereby the consultant assigned his interest in the 5,750,000 options grant by the Executive Chairman to the Company in exchange for options granted by the Company directly to the consultant under the same terms and conditions as the assigned option grants. The Company considered the options its granted to the consultant in September 2013 as new grants and valued the options at $718,871. The $718,871 was added to the remaining unamortized balance of the prepaid consulting fee, and the total in being amortized to operations over the remaining term of the option grants

During the year ended September 30, 2013, the Company recognized stock-based compensation totaling $2,242,606 of which $1,349,809 was recognized on the vesting of 5,832,400 options, $489,726 was recognized as additional compensation on the November 30, 2012 modification of 17,134,334 previously granted options, and $403,071 from the above indicated amortization of prepaid consulting expense.

During the year ended September 30, 2013, debt and accrued interest totaling $1,052,000 was converted into 2,104,000 shares the Company's common stock.

See accompanying notes.
 
 
F-8

 
 
SINGLE TOUCH SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Non-cash investing and financing activities (continued):

For the year ended September 30, 2013 - continued

During the year ended September 30, 2013, the Company received $131,100 in consideration for the  exercise of 689,000 common-stock warrants (see Note 13).

During the year ended September 30, 2013, the Company issued 490,588 shares of its common stock  to a former Director through the cashless exercise of 1,550,000 common-stock options. Also during the  ended September 30, 2013, the Company issued 8,203 shares of its common stock to its Executive  Chairman through a cashless exercise of 40,000 common stock options (See Note 13)

During the year ended September 30, 2013, the Company issued 956,048 shares of its common stock  to various employees, legal counsel, and a former Director through the exercise of 956,048 common-  stock options. The Company received a total of $448,386 through these exercises (See Note 13)

During the year ended September 30, 2013, the Company issued 500,000 shares of its common stock for $245,000.

During the year ended September 30 2013, the Company charged amortization of a beneficial conversion feature on convertible debt due to a Director of $8,196 to equity.

For the year ended September 30, 2012

During the year ended September 30, 2012, the Company received $3,812,000 through the issuance of convertible debt including common stock warrants to purchase 8,624,000 shares of the Company's common stock at $0.25 per share. The Company recognized discounts against the principal amounts due totaling $1,012,440 with an offsetting amount charged to equity. (See Note 10)

In connection with the above of debt issuance, the Company paid placement fees that included cash totaling $210,049 and warrants to purchase 369,920 shares of the Company's common stock at $0.304 per share. The warrants were valued at $138,874. The total placement fee of $348,923 is recognized as a loan fee and is reflected in the balance sheet as an additional discount against the principal and accrued interest due on the underlying convertible debt. (See Note 10)

During the year ended September 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 year ended September 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 7).

During the year ended September 30, 2012, the Company issued 240,000 shares to a consulting pursuant to a service agreement. The 240,000 shares were valued at $43,000, which was originally classified to prepaid expense. The $43,000 is being amortized over the three-month life of the agreement.

During the year ended September 30, 2012, the Company recognized stock-based compensation of $448,991 on the vesting of 6,700,666 options.

During the year ended September 30, 2012, the Company charged amortization of a beneficial conversion feature on convertible debt due to a Director of $79,596 to equity.
 
See accompanying notes.

 
F-9

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Organization, History and Business

Single Touch Systems, Inc. (“the Company”) was incorporated in Delaware on May 31, 2000, under its original name, Hosting Site Network, Inc.  On May 12, 2008, the Company changed its name to Single Touch Systems, Inc.
 
The Company is a technology based mobile solutions provider serving businesses, advertisers and brands. Through patented technologies and a modular, adaptable platform, Single Touch's multi-channel messaging gateway enables marketers to reach consumers on all types of connected devices, with information that engages interest, drives transactions and strengthens relationships and loyalty.

2.
Summary of Significant Accounting Policies

Reclassification

Certain reclassifications have been made to conform the 2012 amounts to the 2013 classifications for comparative purposes.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Single Touch Systems Inc. and its wholly- owned subsidiaries, Single Touch Interactive, Inc., and Single Touch Interactive R&D IP, Inc. (formed in Nevada on October 8, 2012). Intercompany transactions and balances have been eliminated in consolidation.
 
Cash and Cash Equivalents

For purpose of the statements of cash flows, the Company considers cash and cash equivalents to include all stable, highly liquid investments with maturities of three months or less.

Accounts Receivable

Accounts receivable is reported at the customers’ outstanding balances, less any allowance for doubtful accounts.  Interest is not accrued on overdue accounts receivable.

Allowance for Doubtful Accounts

An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses.  Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers.  Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired.

Property and Equipment

Property and equipment are stated at cost.  Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs that do not improve or extend the lives of the respective assets are expensed.  At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts.  Gains or losses from retirements or sales are credited or charged to income.

Depreciation is computed on the straight-line and accelerated methods for financial reporting and income tax reporting purposes based upon the following estimated useful lives:

Software development
2- 3 years
 
Equipment
5 years
 
Computer hardware
5 years
 
Office furniture
7 years
 

Long-Lived Assets

The Company accounts for its long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.  If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.  The Company determined that none of its long-term assets at September 30, 2013 or September 30, 2012 were impaired.

 
F-10

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Prepaid Royalties

The Company’s agreements with licensors and developers generally provide it with exclusive publishing rights and require it to make advance royalty payments that are recouped against royalties due to the licensor or developer based on product sales. Prepaid royalties are amortized on a software application-by-application basis, based on the greater of the proportion of current year sales to total current and estimated future sales or the contractual royalty rate based on actual net product sales. The Company continually evaluates the recoverability of prepaid royalties and charges to operations the amount that management determines is probable that will not be recouped at the contractual royalty rate in the period in which such determination is made or at the time the Company determines that it will cancel a development project. Prepaid royalties are classified as current and non-current assets based upon estimated net product sales within the next year.

Capitalized Software Development Costs

The Company capitalizes internal software development costs subsequent to establishing technological feasibility of a software application. Capitalized software development costs represent the costs associated with the internal development of the Company’s software applications. Amortization of such costs is recorded on a software application-by-application basis, based on the greater of the proportion of current year sales to total of current and estimated future sales for the applications or the straight-line method over the remaining estimated useful life of the software application. The Company continually evaluates the recoverability of capitalized software costs and will charge to operations amounts that are deemed unrecoverable for projects it abandons.

Convertible Debentures

If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”).  A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense or equity (if the debt is due to a related party), over the life of the debt using the effective interest method.

Capital Lease

Assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the leased assets. The assets are depreciated over the lower of their related lease terms or their estimated productive lives. Depreciation of the assets under capital leases is included in depreciation expense.

Income Taxes

The Company accounts for its income taxes under the provisions of ASC Topic 740, “Income Taxes.” The method of accounting for income taxes under ASC 740 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities. The Company had no material unrecognized income tax assets or liabilities for the year ended September 30, 2013 or for the year ended September 30, 2012. The Company recognizes income tax interest and penalties as a separately identified component of general and administrative expense. During the year ended September 30, 2013 and 2012, there were no income tax, or related interest and penalty items in the income statement, or liabilities on the balance sheet.

Issuances Involving Non-cash Consideration

All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services and property. The non-cash consideration paid pertains to consulting services and the acquisition of a software license (See Notes 5 and 7).

Revenue Recognition

Revenue is derived on a per message/notification basis through the Company’s patented technologies and a modular, adaptable platform designed to create multi-channel messaging gateways for all types of connected devices. The Company also earns revenue for services, such as programming, licensure on Software as a Service (“SaaS”) basis, and on a performance basis, such as when a client acquires a new customer through our platform. Revenue is recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as revised by SAB No. 104. As such, the Company recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectability is probable. Sales are recorded net of sales discounts.

Stock Based Compensation

The Company accounts for stock-based compensation under ASC Topic 505-50, formerly Statement of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An amendment to SFAS No. 123.”  These standards define a fair-value-based method of accounting for stock-based compensation. In accordance with SFAS Nos. 123R and 148, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using the Binomial or Black-Scholes option-pricing models, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. During the year ended September 30, 2013, the Company recognized stock-based compensation expense totaling $2,242,606, of which $1,349,809 was recognized through the vesting of 5,832,400 common stock options, $489,726 was recognized as additional compensation on the modification of 17,134,334 previously granted options, and $403,071 from the amortization of prepaid consulting fees compensated through the granting of 5,750,000 options (See Note 5). During the year ended September 30, 2012, the Company recognized stock-based compensation expense totaling $502,591, of which $448,991 was recognized through the vesting of 6,700,666 common stock options and $53,600 was recognized as compensation on the modification of 1,000,000 warrants granted to a consultant under a new agreement replacing a prior agreement (See Note 13).
 
 
F-11

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loss per Share

The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. Potential common shares as of September 30, 2013 that have been excluded from the computation of diluted net loss per share amounted to 56,560,952 shares and include 16,516,000 warrants, 34,188,952 options and $3,928,000  of debt and accrued interest convertible into  7,856,000 shares of the Company’s common stock.  Of the 56,560,952 potential common shares at September 30, 2013, 2,916,334 shares were not vested. Potential common shares as of September 30, 2012 that have been excluded from the computation of diluted net loss per share amounted to 64,174,869 shares and include 23,116,595 warrants, 32,210,000 options and $4,424,137 of debt and accrued interest convertible into 8,848,274 shares of the Company’s common stock.

Concentration of Credit Risk

The Company primarily transacts its business with one financial institution. The amount on deposit in that one institution may from time to time exceed the federally-insured limit.

Of the Company’s revenue earned during the year ended September 30, 2013, approximately 99% was generated from contracts with ten customers covered under the Company’s master services agreement with AT&T. Of the Company’s revenue earned during the year ended September 30, 2012, approximately 99.7% was generated from contracts with eleven customers covered under the Company’s master services agreement with AT&T.

The Company’s accounts receivable are typically unsecured and are derived from U.S. customers in different industries. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Historically, such losses have been within management’s expectations. As of September 30, 2013 and 2012, one customer accounted for 99% and 93% of the Company’s net accounts receivable balance, respectively.
 
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Recent Accounting Pronouncements

Our Company has not identified any recently issued accounting pronouncements that are expected to have a material impact on our Company's financial statements.
 
 
F-12

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.
Accounts Receivable

Accounts receivable consist of the following:

   
September 30,
 
   
2013
   
2012
 
Due from customers
  $ 1,350,705     $ 1,184,610  
Less allowance for bad debts
    (2,878 )     (98,770 )
    $ 1,347,827     $ 1,085,840  
 
4.
Property and Equipment

The following is a summary of property and equipment:

   
September 30,
 
   
2013
   
2012
 
Computer hardware
  $ 756,197     $ 709,826  
Equipment
    46,731       46,731  
Office furniture
    127,669       127,669  
Equipment held under capital Lease
    53,112       -  
      983,709       884,226  
Less accumulated depreciation
    (744,894 )     (655,727 )
    $ 238,815     $ 228,499  

Depreciation expense for the year ended September 30, 2013 and 2012 was $89,168 and $107,909, respectively.

5.
Prepaid Consulting

During the three months ended December 31, 2012, the Company's Executive Chairman personally granted an option to a third party to purchase a total of 5,750,000 shares of the Company’s common stock that he owned in exchange for consulting services provided by the third party that directly benefit the Company (the “Chairman Options”). Of the 5,750,000 Chairman Options, 3,750,000 have an exercise price of $0.295 per share and 2,000,000 have an exercise price of $0.48 per share. The Chairman Options expire two years from date of grant.  The Company recorded the $847,300 fair value of the Chairman Options as contributed capital with an offset to prepaid consulting expense that is being amortized to operations over the two-year term of the consulting agreement. The Company’s value of $847,300 was determined using a Binomial Option model based upon an expected life of 5 years, trading prices ranging from $0.30 to $0.46 per share, a risk free interest rate ranging from 0.25% to 0.30%, and expected volatility ranging from 89.348% to 90.201%.

In September 2013, the Company, its Executive Chairman and the above-indicated third party entered into an agreement, whereby the Company granted options to the third party that have the same terms as the Chairman Options in exchange for the third party’s assignment of its interest in the Chairman Options to the Company. The Company valued  the options granted to the third party in September 2013 at $718,871 and added the cost to the remaining unamortized prepaid consulting expense from the Chairman Options.  The total is being amortized to operations over the remaining term of the consulting agreement. Consulting fees charged to operations for the year ended September 30, 2013 was $403,071. As of September 30, 2013, the unamortized prepaid consulting expense was $1,163,100. Amortization expense for the remaining terms of the option grants is as follows:

Year Ending September 30,
     
2014
  $ 1,081,553  
2015
    81,547  
    $ 1,163,100  
 
 
F-13

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6.
Capitalized Software Development Costs

The following is a summary of capitalized software development costs:
 
   
September 30,
 
   
2013
   
2012
 
Beginning balance
  $ 383,227     $ 395,188  
Additions
    399,682       434,915  
Amortization
    (439,334 )     (446,876 )
Charge offs
    -       -  
Ending balance
  $ 343,575     $ 383,227  

Amortization expense for the remaining estimated lives of these costs is as follows:

Year Ending September 30,
     
2014
  $ 200,479  
2015
    143,096  
    $ 343,575  
 
7.
Intangible Assets

Patents

The following is a summary of capitalized patent costs:
 
   
September 30,
 
   
2013
   
2012
 
Patent costs
    939,535       939,535  
Amortization
    (471,698 )     (337,479 )
    $ 467,837     $ 602,056  

Amortization expenses for the year ended September 30, 2013 and 2012 was $134,219 and $135,508, respectively.

Amortization expense over the estimated remaining lives of the patents is as follows:

Year Ending September 30,
     
2014
  $ 134,219  
2015
    134,219  
2016
    130,787  
2017
    62,449  
2018
    6,163  
    $ 467,837  

In January 2011, the Company was issued US Patent 7,865,181 “Searching for mobile content” and US Patent 7,865,182 “Over the air provisioning of mobile device settings.” The costs associated with these patents, totaling $29,254, are being amortized over the patent’s estimated useful life of seven years.

In September 2011, the Company was issued US Patent 8,015,307 “System and method for streaming media.” The costs associated with these patents totaling $8,115 are being amortized over the patent’s estimated useful life of seven years.

In October 2011, the Company was issued US Patent 8,041,341 “System of providing information to a telephony subscriber.” The costs associated with this patents totaling $22,940 are included above and are being amortized over the patent’s estimated useful life of seven years.
 
Software license

On March 30, 2012, the Company acquired an exclusive perpetual license to utilize the “Anywhere” software and related source code from Soap Box Mobile, Inc. (“Soapbox”), a company in which the Company’s Executive Chairman owned a majority preferred interest at the time of the license grant.  The Company paid $785,000 in cash and 200,000 shares of Company common stock for the exclusive perpetual license, of which the Executive Chairman received $755,000 under terms of a November 27, 2012 agreement.  The Company has valued the license at $831,000, which consists of the $785,000 in cash consideration and the $46,000 fair value assigned to the 200,000 shares of Company common stock.  The perpetual license is a long-term asset that is not subject to amortization.

On November 27, 2012, the Company entered into a Settlement and Mutual Special Release with the Company’s Executive Chairman and agreed to pay him $755,000 for his full release from any claims related to the March 30, 2012 Soapbox agreement and included a perpetual exclusive license to utilize “Anywhere.” The $755,000 was capitalized and included in the cost of the software license.
 
 
F-14

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
8.
Capital Lease
 
The Company leases certain computer hardware under a capital lease that expires in 2016. The equipment has a cost of $53,111 and was not place in service at September 30, 2013.

Minimum future lease payments under the capital lease at June 30, 2013 for each of the next three years and in the aggregate are as follows:

Year Ending September 30,
     
2014
  $ 17,098  
2015
    17,098  
2016
    12,823  
Total minimum lease payments
  $ 47,019  
Less amount representing interest
    (1,310 )
Present value of net minimum lease payments
  $ 45,709  

The effective interest rate charged on the capital lease is approximately 2.25% per annum. The lease provides for a $1 purchase option. Interest charged to operation for the years ended September 30, 2013 and 2012 was $241 and $0, respectively.

9.
Income Taxes

Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
 
The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:

   
September 30,
 
   
2013
      2012  
               
U.S statutory rate
    34 %     34 %
Less valuation allowance
    (34 )%     (34 )%
Effective tax rate
    0 %     0 %
 
The significant components of deferred tax assets and liabilities are as follows:
 
   
September 30,
 
Deferred tax assets
 
2013
   
2012
 
Stock based compensation
  $ 1,507,017     $ 1,490,573  
Net operating losses
    16,243,572       14,486,166  
Property and equipment
    2,681       2,681  
Intangible assets
    585,457       50,480  
Amortization - intangible assets
    -       66,314  
      18,338,727       16,096,214  
Deferred tax liability
               
Depreciation expense
    (20,710 )     (44,768 )
Amortization - intangible assets
    (94,432 )     -  
Net deferred tax assets
    18,223,585       16,051,446  
Less valuation allowance
    (18,223,585 )     (16,051,446
Deferred tax asset - net valuation allowance
  $ -     $ -  

The net increase in the valuation allowance for the year ended September 30, 2013 was $(2,172,139).

The Company has a net operating loss carryover of approximately $47,775,000 available to offset future income for income tax reporting purposes that expire in various years through 2033, if not previously utilized. The Company’s ability to use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years beginning on October 1, 2009 or California state income tax examination by tax authorities for years beginning on October 1, 2008.  We are not currently involved in any income tax examinations.
 
 
F-15

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
10.
Obligation on Patent Acquisitions

On March 15, 2010, the Company purchased six patents and three patent applications from an unrelated third party (the “Seller”) for $900,000 of which $550,000 was paid on the execution of the purchase agreement. Pertaining to the agreement, $175,000 was due on or before March 15, 2011, which was paid, and the final installment of $175,000 was due on or before March 15, 2012. The terms of the agreement were modified on March 1, 2012 whereby the remaining $175,000 became payable in two installments. Under the modified terms, an installment of $87,500 became due on or before March 15, 2012 and was paid. The fourth and final installment of $87,500 was paid on October 15, 2012.

As the original and modified agreements did not provide for any stated interest on the payments, the Company was required to impute interest on the payment stream. The Company present valued the payments at $831,394 using an effective interest rate of 15% in its computation.  Interest accrued and charged to operations for the year ended September 30, 2013 and 2012 totaled $0 and $11,320, respectively.

11.
Convertible Debt

During November and December 2011, the Company received a total of $1,800,000 in consideration for issuing convertible notes and warrants to purchase 3,600,000 shares of the Company’s common stock to seven investors including a Company director.  In February 2012, the Company received from two investors an additional $200,000 in consideration for issuing convertible notes and warrants to purchase 400,000 shares of the Company’s common stock. The notes bear interest at a rate of 10% per annum. Under the original terms of the promissory notes, principal and accrued interest were fully due one year from the respective date of each loan and could be extended by mutual consent. Outstanding principal and the first year’s accrued interest are convertible into shares of the Company’s common stock at a conversion rate of $0.50 per share. In September 2012, holders of nine notes with a face amount of $1,700,000 agreed to modify the terms of their notes and extend the maturity date of their notes to August 31, 2014. Of the remaining notes with an original principal of $300,000, $200,000 paid in December 2012, and $100,000 that would otherwise been due in February 2013 was converted, together with $10,000 of interest, into 220,000 shares of the Company’s common stock in February 2013. The expiration dates of common stock warrants issued in connection with the modified notes were also extended to September 7, 2015. The modification of the terms of the convertible debt did not extinguish any portion of debt; therefore no gain or loss was recorded due to the modifications.

In connection with the Company’s private offering dated September 7, 2012, the Company received a total of $3,000,000 in consideration for issuing convertible notes and warrants to purchase 6,000,000 shares of the Company’s common stock to 64 investors.  The notes bear interest at a rate of 10% per annum, and interest is payable semi-annually. Principal and any unpaid accrued interest are fully due two years from the respective date of each loan. Outstanding principal is convertible into shares of the Company’s common stock at a conversion rate of $0.50 per share. The aforementioned warrants are fully exercisable into common shares commencing on the date of each loan at a price of $0.25 per share and expire three years from the respective date of grant.

In connection with the private offering, the Company incurred offering costs totaling $424,843 including the fair value of warrants issued to the Placement Agent to purchase 479,920 shares of the Company’s common stock at a purchase price of $0.304 per share. The value of the warrants of $166,319 was calculated using the Binomial Option model with a risk-free interest rates ranging from 0.31% to 0.34%, volatility ranging from 94.17% to 95.23%, and trading prices ranging from $0.28 to $0.33 per share. The $424,843 is being amortized over the two-year term of the related debt using the effective interest method.

The convertible notes were recorded net of discounts that include the relative fair value of the warrants, the notes’ beneficial conversion features, and the above indicated loan fee, all totaling $1,530,415. The discounts are being amortized to either interest expense (if the debt is due to an unrelated party) or equity (if the debt is due to a related party) over the term of the various notes using the effective interest method.  The initial value of the warrants of $1,124,773 issued to investors was calculated using the Binomial Option model with a risk-free interest rates ranging from 0.31% to 0.43%, volatility ranging from 94.17% to 103.00%, and trading prices ranging from $0.22 to $0.35 per share. The beneficial conversion feature of $51,516 was calculated using trading prices ranging from $0.26 to $0.35 per share and an effective conversion price $0.0322 per share.

During the year ended September 30, 2013, the Note holders converted debt and accrued interest totaling $1,052,000 into 2,104,000 shares of the Company’s common stock and exercised warrants for the issuance of 689,000 common shares. The Company received a total of $131,100 on the exercise of the warrants.

Interest expense on the convertible debt for the year ended September 30, 2013 and 2012 was $444,995 and $165,794, respectively. Amortization of the discounts for the year ended September 30, 2013 totaled $833,904 of which $825,708 was charged to interest expense and $8,196 was charged to equity. Amortization of the discounts for the year ended September 30, 2012 totaled $390,602 of which $311,006 was charged to interest expense and $79,596 was charged to equity.
 
 
F-16

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Discount amortization expense for the year ended September 30, 2013 includes $197,827 of the remaining unamortized portion of discounts attributable the $1,052,000 of debt converted during the period that was charged to operations upon the conversions.
 
The balance of these convertible notes at September 30, 2013 and 2012 is as follows:
 
   
September 30,
 
   
2013
   
2012
 
Principal balance
  $ 3,758,000     $ 4,312,000  
Accrued interest
    337,498       165,794  
      4,095,498       4,477,794  
Less discounts
    (376,627 )     (970,761 )
      3,718,871       3,507,033  
Less current portion
    (3,278,278 )     (294,241 )
Long-term portion
  $ 440,593     $ 3,212,792  
 
The following are maturities of the principal balance of the convertible debt:

September 30,
     
2014
  $ 440,593  
 
12.
Related Party Transactions

On November 11, 2011, the Company granted a Company director, 200,000 stock options exercisable at $0.225 per share that fully vest on date of grant.

On August 23, 2012, the Company granted three, Company directors, a total of 550,000 stock options exercisable at a price $0.325 per share that expire on August 23, 2017 and immediately vested upon grant.

As discussed in Note 9, a Company director provided $500,000 to the Company in exchange for $500,000 convertible note and warrants to purchase 1,000,000 common shares of the Company’s common stock for a period of three years at a price of $0.25 per share. The $500,000 note, as well as the first year’s interest on the note, is convertible into the Company’s common shares at a conversion rate of $0.50 per share.

On March 30, 2012, the Company acquired an exclusive perpetual license to utilize the “Anywhere” software and related source code from Soap Box Mobile, Inc. (“Soapbox”), a company in which the Company’s Executive Chairman owned a majority preferred interest.  The Company paid $785,000 in cash and 200,000 shares of Company common stock for the exclusive perpetual license at the time of the license grant, of which the Executive Chairman received $755,000 under terms of a November 27, 2012 agreement. (See Note 10 – “Related Party Transactions” and Note 6 “Intangible Assets” – Software License).

As discussed in Note 10, a Company director provided $500,000 to Company in exchange for a $500,000 convertible note and warrants to purchase 1,000,000 common shares of the Company’s common stock for a period of three years at a price of $0.25 per share. The $500,000 note, as well as the first year’s interest on the note, is convertible into the Company’s common shares at a conversion rate of $0.50 per share.

On November 30, 2012, the Company agreed to modify the terms of common stock options previously granted to ’s Chief Executive Officer. Under the modified terms, the 50,000 stock options with an exercise price of $1.375 per share were reduced to 40,000 common stock options with an exercise price of $0.469 per share and 4,200,000 common stock options with an exercise price of $0.90 per share were reduced to 3,570,000 common stock options with an exercise price of $0.469 per share.

On November 30, 2012, the Company’s Chief Executive Officer agreed to modify the terms of common stock options previously granted to him. Under the modified terms, options 3,000,000 common stock options with an exercise price of $0.90 per share were reduced to 2,550,000 common stock options with an exercise price of $0.469 per share.

On November 30, 2012, the Company’s former Chief Financial Officer agreed to modify the terms of common stock options previously granted to him. Under the modified terms, 1,000,000 common stock options with an exercise price of $0.90 per share were reduced to 850,000 common stock options with an exercise price of $0.469 per share.

 
F-17

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
On November 30, 2012, a Company Director also agreed to modify the terms of common stock options previously granted to him. Under the modified terms, 3,000,000 common stock options with an exercise price of $0.90 per share were reduced to 2,550,000 common stock options with an exercise price of $0.469 per share.

During the three months ended December 31, 2012, the Company's Executive Chairman personally granted an option to a third party to purchase a total of 5,750,000 shares of the Company’s common stock that he owned in exchange for consulting services provided by the third party that directly benefit the Company (the “Chairman Options”). Of the 5,750,000 Chairman Options, 3,750,000 have an exercise price of $0.295 per share and 2,000,000 have an exercise price of $0.48 per share. The Chairman Options expire two years from date of grant.  The Company recorded the $847,300 fair value of the Chairman Options as contributed capital with an offset to prepaid consulting expense that is being amortized to operations over the two-year term of the consulting agreement.

In September 2013, the Company, its Executive Chairman and the above-indicated third party entered into an agreement, whereby the Company granted options to the third party that have the same terms as the Chairman Options in exchange for the third party’s assignment of its interest in the Chairman Options to the Company. The Company valued  the options granted to the third party in September 2013 at $718,871 and added the cost to the remaining unamortized prepaid consulting expense from the Chairman Options (See Note 5)

On November 29, 2012, the Company granted a Director 200,000 fully vested stock options exercisable at $0.389 per share.

On December 6, 2012, the Company granted its Executive Chairman 2,099,400 fully vested stock options exercisable at $0.469 per share.

On December 10, 2012, the Company granted a Director 200,000 fully vested stock options exercisable at $0.446 per share.

On March 29, 2013, the Company a Director 200,000 fully vested stock options exercisable at $0.687 per share.

On April 16, 2013, the Company granted a Director 50,000 fully vested stock options exercisable at $0.676 per share.

On May 1, 2013, the Company granted a Director 200,000 fully vested stock options exercisable at $0.705 per share.
 
On August 27, 2013, the Company granted a Director 250,000 fully vested stock options exercisable at $0.604 per share.

On August 27, 2013, the Company granted another Director 50,000 fully vested stock options exercisable at $0.604 per share.

During the year ended September 30, 2013, a former Director, received 490,588 shares of the Company’s common stock through the cashless exercise of 1,550,000 stock options. In addition, the Company issued the former director 281,448 common shares at price of $0.469 per share upon exercise of the former Director’s stock options and received $131,999 in proceeds.

13.
Fair Value

The Company’s financial instruments at September 30, 2013 and 2012 consist principally of notes payable and convertible debentures. Notes payable and convertible debentures are financial liabilities with carrying values that approximate fair value.  The Company determines the fair value of notes payable and convertible debentures based on the effective yields of similar obligations.

The Company believes all of the financial instruments’ recorded values approximate fair market value because of their nature and respective durations.

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, which  are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820-10 are described below:

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
 
 
F-18

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
The Company utilizes the best available information in measuring fair value. The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as follows:

September 30, 2013:
                       
   
Fair Value Measurements
    Total Fair  
   
Level 1
   
Level 2
   
Level 3
   
Value
 
Liabilities
                       
Convertible debentures
  $ -     $ 3,718,871       -     $ 3,718,871  
Obligation under capital lease
  $ -     $ 45,709       -     $ 45,709  
                                 
September 30, 2012:
                               
 
  Fair Value Measurements     Total Fair  
   
Level 1
   
Level 2
   
Level 3
   
Value
 
Liabilities
                               
Obligation on patent acquisitions
  $ -     $ 87,500       -     $ 87,500  
Convertible debentures
          $ 3,507,033       -     $ 3,507,033  
 
14.
Stockholders’ Equity

Common Stock

The holders of the Company's common stock are entitled to one vote per share of common stock held.

In September 2013, the Company increased the number of its authorized common shares to 300,000,000.

During the year ended September 30, 2013, the Company issued a total of 4,747,839 shares of its common stock of which 689,000 shares were issued through the exercise of warrants for $131.100, 2,104,000 shares of its common stock were issued through the conversion of $1,052,000 of principal and accrued interest on convertible debt, 498,791 shares were issued in cashless exercises of 1,590,000 common stock options, 956,048 shares were issued on the exercise of 956,048 common stock options, and 500,000 shares of common stock were issued for $245,000. The 956,048 common shares were issued through various exercises from employees, and a consultant from which the Company received $448,386.

During the year ended September 30, 2012, the Company issued a total of 2,290,000 shares of its common stock of which 1,850,000 shares were issued through the exercise of warrants for $318,000, 200,000 shares of its common stock were issued for the acquisition of the Anywhere software license as discussed in Note 6 and was valued at $46,000, and 240,000 were issued to a consultant for financial advisory services valued at $43,200.

Warrants

As indicated in Note 10, the Company issued warrants to seventy-one investors to purchase a total of 10,000,000 shares of the Company’s common stock at a price of $0.25 per share as part of the $2,000,000 private placement completed in February 2012 and the $3,000,000 private placement completed in October 2012. The warrants expire at various dates through September 2015. During the year ended September 30, 2013, Warrant holders exercised 689,000 warrants in the purchase of 689,000 common shares at a total purchase price of $131,100.

In March 2012, the Company agreed to modify the terms of warrants granted to a consultant under a new agreement that replaced a prior agreement in June 2011 to purchase 1,000,000 shares of the Company's common stock. Under the modified terms, the exercise price was reduced from $0.80 per share to $0.40 per share and the expiration date of the warrants was extended from June 14, 2014 to December 14, 2014.  The Company recognized consultant’s compensation expense during the period of $53,600 on the modification.
 
 
F-19

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Options

In November 2012, the Company modified the terms of stock options granted to certain employees, officers, directors, and active third-party service providers. Under the modified terms, the Company reduced the number of shares to be purchased under these option grants from a total of 17,134,334 shares to a total of 14,534,934 shares with a reduction in the purchase price on these grants from original prices ranging from $1.375 to $0.90 per share to $0.469 per share. A breakdown of the modified grants is as follows:

   
Shares under
   
Shares under
 
   
Original
   
Modified
 
   
Grant
   
Grant
 
Employees
    5,809,334       4,914,934  
Officers and directors
    11,300,000       9,600,000  
Consultant
    25,000       20,000  
      17,134,334       14,534,934  

In addition to reducing the number of options previously granted at the reduced purchase price, the Executive Chairman and Chief Executive Officer voluntarily agreed to amend their stock options to defer vesting of already vested options related to their employment agreements and half of their unvested options for an additional six months. The Company accounted for the modification to the option grants pursuant to ASC Topic 718-20-35 and recognized $489,726 as additional compensation that was charged to operations during the three months ended December 31, 2012.

On November 29, 2012, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.389 per share expiring five years from date of grant. The 200,000 options were valued at $26,760 under a Binomial Option Model using a trading price of $0.25 per share, a risk free interest rate of 0.63%, and volatility of 98.76%. The options immediately vested, and the $26,760 was fully charged to operations on the date of grant

On December 6, 2012, the Company granted options to its Executive Chairman to purchase 2,099,400 shares of the Company common stock at a purchase price of $0.469 per share expiring five years from date of grant. The 2,099,400 options were valued at $636,328 under a Binomial Option Model using a trading price of $0.46 per share, a risk free interest rate of 0.60%, and volatility of 98.54%. The options immediately vested, and the $636,328 was fully charged to operations on the date of grant.

On December 6, 2012, the Company granted options to an employee to purchase 500,000 shares of the Company common stock at a purchase price of $0.469 per share expiring five years from date of grant. The 500,000 options were valued at $151,550 under a Binomial Option Model using a trading price of $0.46 per share, a risk free interest rate of 0.60%, and volatility of 98.54%. The options immediately vest and the $151,550 was fully charged to operations on the date of grant.

On December 10, 2012, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.446 per share expiring five years from date of grant. The 200,000 options were valued at $50,220 under a Binomial Option Model using a trading price of $0.40 per share, a risk free interest rate of 0.62%, and volatility of 98.32%. The options immediately vest and the $50,220 was fully charged to operations on the date of grant.

On March 29, 2013, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.6870 per share expiring five years from date of grant. The 200,000 options were valued at $85,960 under a Binomial Option Model using a trading price of $0.67 per share, a risk free interest rate of 0.76%, and volatility of 97.10%. The options immediately vest and the $85.960 was fully charged to operations on the date of grant.

On April 16, 2013, the Company granted options to a Director to purchase 50,000 shares of the Company common stock at a purchase price of $0.676 per share expiring five years from date of grant. The 50,000 options were valued at $19,295 under a Binomial Option Model using a trading price of $0.75 per share, a risk free interest rate of 0.71%, and volatility of 96.65%. The options immediately vest and the $19.295 was fully charged to operations on the date of grant.

On May 1, 2013, the Company granted options to a Director to purchase 200,000 shares of the Company common stock at a purchase price of $0.705 per share expiring five years from date of grant. The 200,000 options were valued at $84,600 under a Binomial Option Model using a trading price of $0.67 per share, a risk free interest rate of 0.65%, and volatility of 96.28%. The options immediately vest and the $84,600 was fully charged to operations on the date of grant.

On August 27, 2013, the Company granted options to a Director to purchase 250,000 shares of the Company common stock at a purchase price of $0.604 per share expiring five years from date of grant. The 250,000 options were valued at $95,200 under a Binomial Option Model using a trading price of $0.60 per share, a risk free interest rate of 1.56%, and volatility of 94.1497%. The options immediately vest and the $95,200 was fully charged to operations on the date of grant.

On August 27, 2013, the Company granted options to a Director to purchase 50,000 shares of the Company common stock at a purchase price of $0.604 per share expiring five years from date of grant. The 50,000 options were valued at $19,040 under a Binomial Option Model using a trading price of $0.60 per share, a risk free interest rate of 1.56%, and volatility of 94.1497%. The options immediately vest and the $95,200 was fully charged to operations on the date of grant.

As discussed in Note 5, on September 11, 2013, the Company granted 5,750,000 options to a third party and valued the options at $718,871 using a Binomial Option model based upon an expected terms ranging from 1.08 years to 1.25 years, trading price of $0.52,  a risk free interest of 0.12%, and expected volatility of 56.624%.

On August 23, 2012, the Company granted options to three directors to purchase a total of 550,000 shares of the Company’s common stock at $0.325 per share. The Company valued the options at $26,716 using a Binomial Option model based upon an expected life of five years, a risk free interest rate of 0.71%, and expected volatility of 100.95% and a market discount of 75%.  At the date of grant, the Company’s common stock had a trading price of $0.30 per share. The Company is charged the $26,716 to operations as compensation expense based upon the vesting of the respective options.

 
F-20

 
 
SINGLE TOUCH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
During the year ended September 30, 2013, the Company recognized stock-based compensation expense totaling $2,242,606, of which $1,349,809 was recognized through the vesting of 5,832,400 common stock options, $489,726 was recognized as additional compensation on the modification of 17,134,334 previously granted options, and $403,071 from the amortization of prepaid consulting fees compensated through the granting of 5,750,000 options. During the year ended September 30, 2012, the Company recognized stock-based compensation expense totaling $502,591, of which $448,991 was recognized through the vesting of 6,700,666 common stock options and $53,600 was recognized as compensation on the modification of 1,000,000 warrants granted to a consultant under a new agreement replacing a prior agreement.

A summary of outstanding stock warrants and options is as follows:
 
 
 
Number
   
Weighted Average
 
   
of Shares
   
Exercise Price
 
Outstanding – September 30, 2011
    49,810,986     $ .82  
Granted
    9,743,920     $ .23  
Exercised
    (1,850,000 )   $ (.17 )
Cancelled
    (2,378,311 )   $ (.32 )
Outstanding – September 30, 2012
    55,326,595     $ .75  
Granted
    25,520,414     $ .43  
Exercised
    (3,235,048 )   $ (.41 )
Cancelled
    (27,907,009 )   $ (.93 )
Outstanding – September 30, 2013
    49,704,952    <