SITO MOBILE, LTD. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

☐  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to ____________

Commission file number:  001-37535

SITO MOBILE, LTD.

(Exact name of small business issuer as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes    ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒ Yes    ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes    ☒ No

The number of shares outstanding of each of the issuer’s classes of common equity as of November 14, 2017: 22,027,597 shares of common stock.

Contents

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

SITO Mobile, Ltd.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements

SITO Mobile, Ltd.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements

SITO Mobile, Ltd.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements

SITO Mobile, Ltd.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements

SITO Mobile, Ltd.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SITO Mobile, Ltd.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements

Non-cash investing and financing activities:

For the nine months ended September 30, 2017, the Company granted an aggregate of warrants to purchase an aggregate of 320,000 shares of its common stock, none of which have been exercised or expired.

SITO Mobile, Ltd.

Notes to Unaudited Condensed Consolidated Unaudited Financial Statements

SITO Mobile, Ltd. (“the Company”) was incorporated in Delaware on May 31, 2000, under its original name, Hosting Site Network, Inc. On May 12, 2008, the Company’s name was changed to Single Touch Systems, Inc. and on September 26, 2014, the Company’s name was changed to SITO Mobile, Ltd.

Reverse Stock Split

On July 29, 2015, the Company filed an amendment to its Restated Certificate of Incorporation to effect a 1-for-10 reverse split of its issued and outstanding common stock. The reverse split became effective on July 30, 2015. Unless otherwise noted, all references herein to the number of common shares, price per common share or weighted average number of common shares outstanding have been adjusted to reflect this reverse stock split on a retroactive basis.

Amendments to Articles of Incorporation or Bylaws

On March 1, 2016, the Company amended its Certificate of Incorporation to reduce the number of authorized shares of common stock from 300,000,000 to 100,000,000 shares.

On June 1, 2017, the Company amended and restated its Bylaws pursuant to a written consent of the Company’s stockholders in accordance with Section 228 of the General Corporation Law of the State of Delaware.

On August 22, 2017, the Company amended and restated its Bylaws pursuant to a written consent of the Company’s stockholders in accordance with Section 228 of the General Corporation Law of the State of Delaware.

On October 25, 2017, the Company amended the Company’s Bylaws pursuant to a written consent of the Company’s stockholders in accordance with Section 228 of the General Corporation Law of the State of Delaware.

Change in Fiscal Year

On May 5, 2016, the Company elected to transition from a September 30 year-end to a December 31 year-end.

Reclassification

Certain reclassifications have been made to conform the 2016 amounts to the 2017 classifications for comparative purposes.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of SITO Mobile, Ltd. and its wholly-owned subsidiaries, SITO Mobile Solutions Inc., SITO Mobile R&D IP, LLC, SITO Mobile Media Inc. and DoubleVision Networks Inc. (“DoubleVision”). Intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

Our consolidated financial statements include our accounts, as well as those of our wholly-owned subsidiaries. Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnote disclosures required by U.S. GAAP for complete financial statements. The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

The preparation of financial statements in conformity with U.S. GAAP requires us 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. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2017.

Cash and Cash Equivalents

The Company considers cash and cash equivalents to include all stable, highly liquid investments with maturities of three months or less.

Accounts Receivable, net

Accounts receivable are 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, net

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:

Long-Lived Assets

The Company accounts for long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical carrying value of an asset may no longer be appropriate. We assess recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350, requires that goodwill be tested for impairment on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including determining the fair value. Significant judgments required to estimate the fair value including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment. There were no impairments recorded to goodwill for the periods presented.

Capitalized Software Development Costs

The Company accounts for costs incurred to develop or purchase computer software for internal use in accordance with ASC Topic 350-40 “Internal-Use Software.” As required by ASC 350-40, the Company capitalizes the costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation, and testing.

Costs incurred during the preliminary project stage along with post-implementation stages of internal use computer software are expensed as incurred. Capitalized development costs are amortized over a period of two to three years. Costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life.

Patent and Patent Application Costs

Intangible assets include patents developed and purchased which are recorded at cost. The cost of the patents are capitalized and once issued, are amortized over their remaining useful lives. Future costs incurred for issued patents are expensed as incurred.

Capital Leases

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

Debt Issuance Costs

Deferred debt issuance costs are amortized using the effective interest method over the related term of the debt and are presented on the balance sheet as a direct deduction from the debt liability. The amortization of deferred debt issuance costs is included in interest expense.

Income Taxes

The Company accounts for its income taxes under the provisions of ASC Topic 740, “Income Taxes.” The method of accounting for income taxes under ASC 740 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities. The Company had no material unrecognized income tax assets or liabilities for the three and nine months ended September 30, 2017 or for the three and nine months ended September 30, 2016. The Company recognizes income tax interest and penalties as a separately identified component of general and administrative expense.

Issuances Involving Non-cash Consideration

All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services and property. The non-cash consideration paid pertains to consulting services, the acquisition of a software license, the acquisition of DoubleVision Networks Inc. and assets purchased from Hipcricket, Inc. 

Revenue Recognition and Deferred Revenue

The Company recognizes media placement revenue based on the activity of mobile users viewing ads through developer applications and mobile websites. Media placement revenues are recognized when the Company’s advertising services are delivered based on the specific terms of the advertising contract, which are commonly based on the number of ads delivered, or views, clicks or actions by users on mobile advertisements. At such time, the Company’s services have been provided, the fees charged are fixed or determinable, persuasive evidence of an arrangement exists, and collectability is reasonably assured.

The Company evaluates whether it is appropriate to recognize media placement revenue based on the gross amount billed to the customers or the net amount earned as revenue. When the Company is primarily obligated in a transaction, has latitude in establishing prices, is responsible for fulfillment of the transaction, has credit risk, or has several but not all of these indicators, revenue is recorded on a gross basis. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, the Company places the most weight on the analysis of whether or not it is the primary obligor in the arrangement. The Company records the net amounts as media placement revenue earned if it is not primarily obligated or does not have latitude in establishing prices or credit risk.

In general, licensing and royalty revenue arrangements provide for the payment of contractually determined fees in consideration for the patented technologies owned by or controlled by the Company’s operating subsidiary. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, the Company’s operating subsidiary may have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on the Company’s operating subsidiary’s part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of licenses, covenants-not-to-sue, releases, and other significant deliverables upon the execution of the agreement, or upon the receipt off the minimum upfront payment for term agreement renewals. As such, when the Company has no further obligation under the agreement, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all the other revenue recognition criteria have been met, otherwise the Company recognizes revenue on a straight-line basis over the life of the agreement based on the contractually determined fees. The licensing and royalty revenue arrangement was extended in the second quarter of 2017.

Deferred revenue arises from timing differences between the delivery of services and satisfaction of all revenue recognition criteria consistent with the Company’s revenue recognition policy. Deferred revenue results from the advance payment for services to be delivered over a period of time, usually less than one-year increments.

Stock Based Compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. The Company records compensation expense based on the fair value of the award at the reporting date.

The value of the stock-based award is determined using the Binomial 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.

Loss per Share

The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, “Earnings per Share.” Basic earnings (loss) per share are computed by dividing income (loss) available to common 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 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. 

On July 29, 2015, the Company filed an amendment to the Certificate of Incorporation to effect a 1-for-10 reverse split of its issued and outstanding common stock. The reverse split became effective in the market on July 30, 2015. Following the reverse split, every ten shares of the Company’s issued and outstanding common stock were automatically combined and converted into one issued and outstanding share of common stock of the Company. No fractional shares are to be issued. As a result, all prior per share calculations reflect the effects of this reverse stock split.

Concentrations of Credit Risk

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

Excluding discontinued operations, of the Company’s revenue earned during the nine months ended September 30, 2017, no individual customer accounted for more than 10% of total revenue. During the nine months ended September 30, 2016, approximately 20% was generated from contracts with advertising agencies.

The Company’s accounts receivable is 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. Excluding assets from discontinued operations as of September 30, 2017, one customer accounted for 13% of the Company’s net accounts receivable balance, and as of December 31, 2016, one customer accounted for 28% of the Company’s net accounts receivable balance.

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.

Business Combinations

The Company accounts for all business combinations using the acquisition method of accounting. Under this method, assets and liabilities are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Results of operations of the acquired entity are included in the Company’s results from the date of the acquisition onward and include amortization expense arising from acquired tangible and intangible assets. The Company expenses all costs as incurred related to an acquisition under general and administrative in the consolidated statements of operations. 

Recent Accounting Pronouncements

In May 2014, the FASB released ASC 606 - Revenue from Contracts with Customers which was updated in August 2015; Update 2015-14 – Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The Company will apply the accounting guidance within ASC 606 for our next annual reporting period beginning after December 15, 2017, including interim reporting periods within that reporting period. Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenue amongst various services and products, and the timing in which those revenues are recognized. We are still in the process of assessing the accounting update impact to potentially change the timing and presentation of certain revenues

While we continue to evaluate the impact of the new standard and available adoption methods, we believe the standard will require us to implement new revenue accounting processes, which will create more robust changes over our internal controls over revenue recognition. We are continuing to evaluate the new guidance to determine any other impacts on our consolidated financial statements.

Accounts receivable consist of the following: 

The following is a summary of property and equipment:

Depreciation expense for the three and nine months ended September 30, 2017 was $37,391 and $113,516, respectively. Depreciation expense for the three and nine months ended September 30, 2016 was $33,201 and $99,489, respectively.

The following is a summary of capitalized software development costs:  

Amortization expense for the three and nine months ended September 30, 2017 was $228,782 and $666,876, respectively. Amortization expense for the three and nine months ended September 30, 2016 was $177,449 and $463,547, respectively.

As of September 30, 2017, amortization expense for the remaining estimated lives for each of the next five fiscal years and thereafter of these costs is as follows:

Patents

The following is a summary of capitalized patent costs:

During the three months ended September 30, 2017, the useful lives of the Company’s patents were changed due to a change in accounting estimate. The change in accounting estimate gave rise to a one-time amortization expense of approximately $591,000.

Amortization expense for the three and nine months ended September 30, 2017 was $608,761 and $679,823, respectively. Amortization expense for the three and nine months ended September 30, 2016 was $52,744 and $150,863, respectively. 

A schedule of amortization expense over the estimated remaining lives of the patents for the next five fiscal years and thereafter is as follows:

Other Intangible Assets, net 

The following is a summary of other intangible asset costs:

Amortization expense for the three and nine months ended September 30, 2017 was $67,750 and $203,250, respectively. Amortization expense for the three and nine months ended September 30, 2016 was $67,750 and $207,720, respectively. 

A schedule of amortization expense over the estimated remaining lives of the other intangible assets for the next five fiscal years and thereafter is as follows:

The following is a summary of accrued expenses:  

The Company leases office equipment under a capital lease that expires in 2018. The equipment has a cost of $13,160.

Minimum future lease payments under the capital leases at September 30, 2017 for each of the next five years and in the aggregate, are as follows:

The effective interest rate charged on the capital lease is approximately 7.428% per annum. The lease provides for a $1 purchase option. Interest charged to operations for the three and nine months ended September 30, 2017 was $78 and $282, respectively. Interest charged to operations for the three and nine months ended September 30, 2016 was $140 and $465, respectively. Depreciation charged to operations for the three and nine months ended September 30, 2017 was $658 and $1,973, respectively. Depreciation charged to operations for the three and nine months ended September 30, 2016 was $658 and $1,973, respectively.

A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of Cash Flows, and Consolidated Balance Sheets are re-presented as if the operation had been discontinued from the start of the comparative year.

On February 7, 2017, the Company executed an Asset Purchase Agreement to sell the Wireless Application business for $400,000, of which $310,000 was received on the closing date and the remaining $90,000 will be paid upon the satisfaction of certain post-closing covenants. Of the $90,000 payable upon satisfaction of the post-closing covenants, $40,000 was earned and collected by the Company, with the remaining $50,000 not expected to be satisfied, for a total sale price of $350,000. The Company has reported the Wireless Application segment as Discontinued Operations in the Consolidated Statement of Operations and Consolidated Statements of Cash Flows with related assets and liabilities as of September 30, 2017 and 2016, included as Assets of business held for sale and Liabilities of business held for sale.

The following table presents the assets and liabilities of the Wireless Applications business, as Assets classified as held for sale and Liabilities classified as held for sale in the Consolidated Balance Sheets:

The following table presents the Discontinued Operations of the Wireless Applications business in the Consolidated Statement of Operations:

The following table presents the Wireless Applications business in the Consolidated Statement of Cash Flows:

As of September 30, 2017, the Company has a net operating loss carryover of approximately $39,670,211 available to offset future income for income tax reporting purposes, which will expire in various years through 2036, 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. A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code that are applicable if we experience an “ownership change”. That may occur, for example, as a result of trading in our stock by significant investors as well as issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a substantial reduction in the gross deferred tax.

Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the three and nine months ended September 30, 2017 and 2016, there were no federal income tax, or related interest and penalty items in the income statement, or liability on the balance sheet. We are not currently involved in any income tax examinations.

Schedule of short-term debt are as followed:

On October 3, 2014, the Company and its wholly owned subsidiaries, SITO Mobile Solutions, Inc. and SITO Mobile R&D IP, LLC, entered into a Revenue Sharing and Note Purchase Agreement (the “NPA”) with Fortress Credit Co LLC, as collateral agent (the “Collateral Agent,” or “Fortress”), and CF DB EZ LLC (the “Revenue Participant”) and Fortress (the “Note Purchaser” and together with the Revenue Participant, the “Investors”).

At the closing of the NPA, the Company issued and sold a senior secured note (the “Note”) with an aggregate original principal amount of $10,000,000 (the “Original Principal Amount”) and issued, pursuant to a Subscription Agreement, 261,954 new shares of common stock to Fortress for an aggregate purchase price of $1,000,000 or $3.817 per share (which represents the trailing 30-day average closing price). After deducting original issue discount of 10% on the Notes and a structuring fee to the Investors, the Company received proceeds of $8,850,000, prior to the payment of related legal and due diligence expenses.

On July 11, 2017, TAR SITO LendCo LLC (“TAR LendCo”), an entity owned and controlled by Julian Singer, the son of Karen Singer, acquired from Fortress Credit Opportunities V CLO Limited, CF EZ LLC, and CF DB EZ LLC all rights, title and interest as “Purchaser” and “Revenue Participant” under the NPA and related documents.

On August 1, 2017, the Company used approximately $4,900,000 of the proceeds of an offering common stock and warrants to prepay in full all outstanding principal, accrued and unpaid interest due through the date of repayment and termination fees payable with respect to the Note. The Company has no further obligations with respect to the Note but remains obligated to continue to make payment with respect to the Revenue Stream upon the terms, and subject to the conditions, of the NPA.

Prior to the repayment of the Note in full on August 1, 2017, the principal amount of the Note bore interest at a rate equal to LIBOR plus 9% per annum. Such interest was payable in cash, except that 2% per annum of such interest was to be paid-in-kind, by increasing the principal amount of the Note by the amount of such interest. The term of the Note was 42 months and the Company was required to make, beginning in October 2015, monthly amortization payments on the Note, each in a principal amount equal to $333,334 until the Note was paid in full. The Company was also required to apply 85% of Monetization Revenues (as defined in the NPA) from certain of the Company’s patents unrelated to its core business activities (the “Patents”) to the payment of accrued and unpaid interest on, and then to repay outstanding principal (at par) of, the Note until all amounts due with respect to the Note were paid in full. After the repayment of the principal amount of the Note and all accrued interest thereunder, which occurred on August 1, 2017, the Company is obligated to pay the Revenue Participants (a) 50% of Monetization Revenues until such time as the Revenue Participants have received $2,500,000 in the aggregate with respect to the Revenue Stream, (b) 30% of the Monetization Revenues thereafter, until such time that the Revenue Participants have received $5,000,000 in the aggregate with respect to the Revenue Stream, and (c) 10% of the Monetization Revenues thereafter, until the Revenue Stream has been fully satisfied. In addition, upon any acceleration of the Notes and Revenue Stream, the Company is obligated to pay the Revenue Participants 100% of the Monetization Revenues until the Revenue Stream has been fully satisfied. The Company was also required to pay $350,000 to the Note Purchaser upon repayment of the Note, which payment was also made on August 1, 2017.

The NPA contains certain standard Events of Default. The Company granted to the Collateral Agent, for the benefit of the Secured Parties, a non-exclusive, royalty free, license (including the right to grant sublicenses) with respect to the Patents, which is evidenced by, and reflected in, a Patent License Agreement between the Company, its subsidiary Single Touch Interactive, Inc., and Fortress. The Patent License Agreement provides that the Collateral Agent may only use such license following an Event of Default. Pursuant to a Security Agreement among the parties, the Company granted the Collateral Agent a first priority senior security interest in all of the Company’s assets. The Company and the Collateral Agent assigned a value of $500,000 to the revenue sharing terms of the NPA and in accordance with ASC 470-10-25 “Debt Recognition”, the Company recognized $500,000 as deferred revenue and a discount on the Note that is amortized over the 42-month term of the Note using the effective interest method. For the three and nine months ended September 30, 2017, the Company recognized $70,726 and $130,653, respectively, in licensing revenue and interest expense from amortization of the deferred revenue. For the three and nine months ended September 30, 2016, the Company recognized $32,934 and $107,823, respectively, in licensing revenue and interest expense from amortization of the deferred revenue.

On March 1, 2016, the Company entered into Amendment No.1 (the “Amendment”) to the NPA. Pursuant to the terms of the Amendment, principal payment on the Notes issued pursuant to the NPA was reduced from $333,333 to $175,000 for the period commencing on the last business day of February 2016 through the last business day of February 2017 and from $333,333 to $300,000 for the period commencing on the last business day of March 2017 to the last day of business on February 2018, with the final payment on the last business day on March 2018 increased to repay the remaining principal in full. In consideration for the Amendment, the Company agreed to pay a restructuring fee of $100,000 and issue 200,000 shares of its common stock with an aggregate value of $568,000 to the Purchasers.

Interest expense on the Note for the three and nine months ended September 30, 2017 was $47,280 and $374,287, respectively. Amortization of the discounts for the three and nine months ended September 30, 2017 totaled $430,108 and $794,548, respectively, which was charged to interest expense. Accrual of termination fees for the three and nine months ended September 30, 2017 was $49,508 and $91,457, respectively, which was charged to interest expense.

Interest expense on the Note for the three and nine months ended September 30, 2016 was $203,681 and $644,405, respectively. Amortization of the discounts for the three and nine months ended September 30, 2016 totaled $200,281 and $570,267, respectively, which was charged to interest expense. Accrual of termination fees for the three and nine months ended September 30, 2016 was $23,054 and $75,476, respectively, which was charged to interest expense.

During the nine months ended September 30, 2017, the Company recognized stock-based compensation expense totaling $1,318,146, through the vesting of 631,080 common stock options. Of the $1,318,146 in stock compensation expense, $843,708 is included in general and administrative expense, of which $437 is included in discontinued operations, and $474,438 is included in sales and marketing expense, of which $54 is included in discontinued operations. During the nine months ended September 30, 2016, the Company recognized stock-based compensation expense totaling $935,123, through the vesting of 700,138 common stock options. Of the $935,123 in stock compensation expense, $715,033 is included in general and administrative expense, of which $2,598 is included in discontinued operations, and $220,090 is included in sales and marketing expense, of which $1,328 is included in discontinued operations.

On April 21, 2014, SITO Mobile R&D IP, LLC, the Company’s wholly-owned subsidiary, through a joint venture (the “JV”) with Personalized Media Communications, LLC (“PMC”), entered into a Joint Licensing Program Agreement (the “JV License Agreement”) with a national broadcasting entity (“Licensee”) pursuant to which the JV granted the Licensee a term-limited license ( the “License”) to all patents licensable by the JV (“JV Patents”), including an exclusive license to assert the JV Patents against certain infringing parties in the media distribution industry.  In exchange for the License, the Licensee has agreed to pay the JV an annual fee of $1,250,000 for a minimum of three years (“Annual Fee”), subject to a right of the Licensee to renew the License for an additional four years.  Under the arrangement, if the Licensee has paid a total of $8,750,000 in license fees, either in one lump sum or after paying $1,250,000 annually for seven years, the License would be deemed to be perpetual. For JV Patent infringement actions provided for under the License, the Licensee will pay 20% of the gross proceeds from settlements received less any Annual Fee amounts paid and litigation costs incurred (“Share of Proceeds”).  SITO Mobile R&D IP, LLC and PMC have agreed serve as co-plaintiffs with the Licensee in infringement actions under the License and the Licensee has agreed to be responsible for any out-of-pocket costs of the JV associated with being a co-plaintiff in supporting the Licensee in such litigation, including attorneys’ fees. The Licensee will pay the Annual Fee and any Share of Proceeds to the JV.  The Company is entitled to 30% of any proceeds received by the JV. In the event that the Licensee does not assert any infringement actions under its rights in the License prior to April 2019, the JV may, at its sole option, choose to terminate Licensee’s exclusive right to assert infringement claims with no reduction or adjustment to the Annual Fee.  On May 23, 2017, the parties renewed the JV License Agreement for an additional four years in exchange for an upfront payment to the JV of $4,500,000, of which the Company received $1,350,000. The Company’s share of the renewal fee was paid to the Note Purchaser in accordance with the terms of the NPA.  (See Note 11 – Note Payable.)  For the three and nine months ended September 30, 2017, the Company amortized $85,068 and $226,637, respectively, in revenue under the JV License Agreement and as of September 30, 2017, the Company has $1,238,117 in deferred revenue under the JV License Agreement.

The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization. The Company determines the fair value of obligations under capital lease, notes payable and convertible debentures based on the effective yields of similar obligations (Level 2). 

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:

The Company did not identify any assets and liabilities that are required to be presented on the consolidated balance sheets at fair value. The Company does not have any assets or liabilities measured at fair value on a recurring basis at September 30, 2017. The Company did not have any fair value adjustments for assets and liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2017.

Common Stock

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

During the nine months ended September 30, 2017, the Company issued 1,269,413 shares of common stock of which 1,201,000 shares were issued upon the exercise of stock options for which the Company received $6,002,500 in gross proceeds, and 68,413 shares were issued upon the cashless exercise of 404,644 stock options.

During the nine months ended September 30, 2016, the Company issued 3,430,250 shares of its common stock of which 200,000 shares were issued to Fortress for an aggregate amount of $568,000, or $2.84 per share in consideration of the amendment to the NPA, 163,583 shares were issued upon the exercise of stock options for which the Company received $703,604 in gross proceeds, and the Company received $10,320,001 of proceeds, net of legal and accounting services in connection with the issuance of 3,066,667 shares of common stock pursuant to the Company’s registered common stock offering in August 2017.

Warrants

The Company granted an aggregate of warrants to purchase an aggregate of 320,000 shares of its common stock during the nine months ended September 30, 2017, none of which have been exercised or expired. 

During the nine months ended September 30, 2016, no warrants were granted, exercised, or expired.

Options

During the nine months ended September 30, 2017, the Company began expensing performance options that were granted to its employees.

The Company values options under the Binomial Option Model. The full value of option grants is charged to operations over the vesting period with option grants that vest immediately being fully charged on the date of grant.

A summary of outstanding stock warrants and common stock options is as follows:

Of the 2,316,780 common stock options outstanding, 631,080 options are fully vested and may currently be exercised. Of the common stock options outstanding, 20,000 options will be cancelled if not exercised during the three months ended December 31, 2017.

On July 28, 2017, the Company issued 1,200,000 shares of its common stock and warrants exercisable to purchase up to 300,000 shares of its common stock in a registered offering (the “Offering”), resulting in gross proceeds to the Company of approximately $6.0 million. The shares and warrants were sold in units, each unit consisting of one share of common stock and a warrant to purchase 0.25 of one share of common stock at an exercise price of $6.25 per share. The units issued in the Offering were sold at an offering price of $5.00 per unit. In the Offering, the Company also issued the financial advisor for the Offering warrants to purchase up to an aggregate of 20,000 shares of common stock at an exercise price of $6.25 per share as partial compensation for its services in connection with the Offering.

Operating Leases

The Company leases office space in Jersey City, New Jersey; Meridian, Idaho; Chicago, Illinois; Dallas, Texas; New York, New York; Atlanta, Georgia; and Boston, Massachusetts. The Company’s Boise office space is subject to a 38-month lease that commenced on May 1, 2014. The Jersey City office lease, amended on November 6, 2014, expires on November 30, 2018 and the Company has the option to extend the term for an additional five years. In addition to paying rent, under the terms of the Jersey City office lease the Company is also required to pay its pro rata share of the property’s operating expenses. The other office locations are month-to-month commitments. Rent expense for the three and nine months ended September 30, 2017 was $125,061 and $343,405, respectively. Rent expense for the three and nine months ended September 30, 2016 was $80,307 and $292,522, respectively. Minimum future rental payments under non-cancellable operating leases with terms in excess of one year as of September 30, 2017 for the next five fiscal years and in the aggregate are: 

Legal

In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions. As of September 30, 2017, the Company is not aware of any asserted or un-asserted claims, negotiations and legal actions for which a loss is considered reasonably possible of occurring and would require recognition under guidance in ASC 450.

A purported securities class action lawsuit was filed on February 17, 2017 in the United States District Court of New Jersey against the Company and our former Chief Executive Officer and Director, and our former Chief Financial Officer and Chief Operating Officer. The complaint alleges violations of various securities laws. This action was brought on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between February 9, 2016 and January 2, 2017 and seeks unspecified money damages. The allegations in this complaint center on allegedly materially false and/or misleading statements, misrepresenting SITO’s media placement revenues. A motion for appointment of lead plaintiff is now pending. Discovery has not commenced. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of this matter. The Company is unable at this time to determine whether the outcome of the litigation will have a material impact on its results of operations, financial condition or cash flows. As of September 30, 2017, the Company has recorded an accrual to defend this action which represent the amount incurred which is not covered by its insurance policy.

Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

On October 20, 2017, the Company’s Board of Directors approved an amendment to the Company’s By-Laws (the “By-Law Amendment”) that allows the Board to permit stockholders to participate in meetings of the Company’s stockholders by means of remote communication in accordance with the Delaware General Corporation Law. Specifically, the By-Law Amendment, which is set forth in a new paragraph under Article II - Meetings of Stockholders, Section 15 - Place of Meetings, of the Company’s By-Laws, provides that the Company’s Board of Directors may, in its sole discretion, determine that future stockholder meetings will not be held at any place, but may instead be held solely by means of remote communication in accordance with Section 211(a)(2) of the Delaware General Corporation Law, and that if authorized by the Board in its sole discretion, and subject to such guidelines and procedures as the Board may adopt, stockholders and proxy holders not physically present at a future meeting of stockholders may, by means of remote communication (a) participate in a meeting of stockholders; and (b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the Company implements reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxy holder; (ii) the Company implements reasonable measures to provide such stockholders and proxy holders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with those proceedings; and (iii) if any stockholder or proxy holder votes or takes other action at the meeting by means of remote communication, a record of that vote or other action must be maintained by the Company.

Claim filed by TAR SITO Lendco LLC

On November 3, 2017, a complaint was filed against the Company in the Supreme Court of the State of New York (the “Complaint”) by TAR SITO Lendco LLC (“TAR”), and entity that is owned and controlled by Julian Singer, the son of Karen Singer, formerly a substantial beneficial owner of the Company’s common stock, and her husband, Gary A. Singer. TAR is the “Revenue Participant” and “Collateral Agent” under the Revenue Sharing and Note Purchase Agreement as discussed above in Note 11 – Notes Payable. The Complaint alleges that the Company has breached its obligations to undertake best efforts to diligently pursue the monetization of the Patents and to provide timely information with respect to the Company’s intellectual property to the Revenue Participant, in addition to other alleged minor technical and curable defaults. However, the Company’s obligation to pay any amounts to TAR under the Agreement is entirely dependent on the generation by the Company of revenues from the monetization of the Patents, and the Company has not generated substantial revenues from these Patents to date. Notwithstanding the Complaint, the Company believes that it has diligently undertaken its best efforts to monetize the Patents (which efforts have been described in detail to TAR in writing), and that it has fully complied with all of the covenants under the Agreement and is not otherwise in default under the Agreement. The Company believes that the allegations by TAR in the Complaint are without merit, and it intends to vigorously defend against this lawsuit.

Exercise of Options

In October 2017, 77,137 shares were issued due to the exercise of various stock options.

Item 2 - 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

SITO Mobile, or the “Company,” is seeking to transform the manner in which brands connect with consumers in the real world by providing a mobile engagement platform that drives awareness, loyalty, and ultimately sales. In an increasingly mobile-first culture, the Company delivers proven location-based advertising solutions to Fortune 500 and other brands and agencies. The Company uses proprietary data to build innovative, in-house technology, arming clients with additional, important resources for successful campaigns. Using in-store targeting, proximity targeting, geo-conquesting and attribution data, our platform creates audience profiles to develop measurable, targeted campaigns for brands. The Company believes that its real-time location-based marketing technology enables it to better understand and shape the future of retail and consumer behavior. Our capabilities include:

Our portfolio of intellectual property represents years of 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.

On February 7, 2017, the Company together with its wholly-owned subsidiary, SITO Mobile Solutions, Inc., entered into an asset purchase agreement pursuant to which the Company sold certain assets related to its legacy wireless applications business which completed the Company’s exit from its legacy non-core business. There are exit and transfer activities that are expected to be completed during 2017.

The assets and liabilities of our legal wireless applications are classified as held for sale on the consolidated balance sheet as of September 30, 2017 and December 31, 2016, and the operating results of the wireless applications business are reflected as discontinued operations in the consolidated statements of earnings for the three and nine months ended September 30, 2017 and 2016.

Departure of Directors and Appointment of New Directors

On September 5, 2017, Mr. Matthew Stecker and Mr. Thomas Thekkethala informed the Company of their intent to resign from the Board of Directors of the Company (the “Board”), effective September 6, 2017. Each of Mr. Stecker’s and Mr. Thekkethala’s decision to resign did not involve any disagreement between such directors and the Company, the Company’s management, or the Board.

On September 7, 2017, per the recommendation of its Nominating and Corporate Governance Committee, the Board elected Ms. Karen Seminara Patton and Mr. Steve Bornstein to serve as directors of the Company, effective immediately. Each of Ms. Seminara and Mr. Bornstein will serve as a director until the next election of directors at the Company’s upcoming 2017 special meeting of shareholders, or until such director’s earlier death, resignation or removal. Each of Ms. Seminara and Mr. Brent Rosenthal will serve as co-chairperson of the Board’s Audit Committee. Mr. Bornstein will serve as a member of the Board’s Compensation Committee. Each of Ms. Seminara and Mr. Bornstein has been nominated for re-election by the Company’s stockholders at the upcoming special meeting of stockholders, scheduled to be held on November 30, 2017.

Results of Operations 

Results of Operations for the Three Months Ended September 30, 2017 and 2016.

The following table sets forth, for the periods indicated, certain data derived from our Statement of Operations ($ in millions):

NM: Not meaningful

The following table sets forth, for the periods indicated, the percentage of sales represented by certain items reflected in our Statement of Operations:

Earnings

The Company reported a net loss from continuing operations for the three months ended September 30, 2017 of approximately $2.7 million compared to a net loss from continuing operations for the three months ended September 30, 2016 of approximately $0.1 million, representing an increase in net loss of $2.6 million. The increase in net loss is due primarily to the $0.9 million increase in gross profit from continuing operations, offset by an increase of $1.6 million in general and administrative costs from continuing operations, $0.7 million increase in non-recurring general and administrative costs from continuing operations, $0.6 million increase in amortization expense, and $0.5 million increase in sales and marketing expense from continuing operations.

The Company reported a net loss from continuing operations on a fully diluted basis of $0.12 per share for the three months ended September 30, 2017 based on 21,597,130 weighted average shares outstanding, as compared to net income from continuing operations of $0.00 per share for the three months ended September 30, 2016, based on 17,433,011 weighted average shares outstanding. The increase in the number of weighted average shares based on our shares outstanding primarily reflects the issuance of shares of common stock, of which 4.3 million shares were issued in a direct registered public offering, 326,273 shares were issued upon the exercise of stock options, and 200,000 shares were issued to Fortress in connection with Amendment No. 1 to the Note Purchase Agreement, as described in Note 11 to our Notes to Condensed Consolidated Unaudited Financial Statements.

During 2016 we sold our SMS business. All of the results of the SMS business are reported in discontinued operations and the operating results for 2017 and 2016 exclude the SMS business. The excluded revenue for the SMS business was $0 for the three months ended September 30, 2017 and $1.8 million for the corresponding period in 2016.

Revenue

During the three months ended September 30, 2017, our revenue increased by $2.5 million, or 29% to $11.1 million as compared to $8.6 million for the three months ended September 30, 2016. This increase was primarily due to an increase in the number of campaigns and average campaign size as we continue to expand our direct sales force and increase our customer base, resulting in an $0.9 million increase in gross profit.

During the three months ended September 30, 2017, one customer accounted for 14% of the Company’s total revenues. During the three months ended September 30, 2016, one customer accounted for 21% of the Company’s total revenues from multiple advertising contracts with multiple media placement customers.

Expenses

Our cost of revenue, which represents the costs associated with media placement revenues, increased by $1.5 million, or 42%, to $5.3 million for the three months ended September 30, 2017, compared to $3.8 million for the three months ended September 30, 2016. Cost of revenue has increased faster than revenue due to the costs of acquiring new customers as we continue to diversify our customer base and enter into business with larger customers, in addition to continued depreciation and amortization expense of our mobile engagement technology platforms that we use to operate our media placement business, which is included in cost of revenue. Our technology investment that drives our revenue growth is focused on our mobile engagement platform through software development efforts. We capitalize the cost of developing our mobile engagement platform and amortize our investment over three years. For the three-month periods ended September 30, 2017 and September 30, 2016, amortization of software development costs increased 29% from $177 thousand to $229 thousand due to the increased investment in developing our platform.

Sales and marketing expense, increased $0.5 million, or 18%, to $3.4 million for the three months ended September 30, 2017. This increase is due primarily to the expansion of our direct sales force and customer management personnel, which trends in line with the increase in media placement revenue. Sales and marketing expense decreased as a percentage of revenue from 34% to 31% for the three months ended September 30, 2017 and September 30, 2016, respectively which trends with the faster growth in sales.

General and administrative expenses excluding certain non-recurring expenses, increased by approximately $1.6 million to $3.0 million for the three months ended September 30, 2017 compared to $1.4 million for the three months ended September 30, 2016. The increase in general and administrative expenses was primarily due to the increases in compensation expense for the executive team, including the expansion of non-executive headcount hires.

Amortization expense increased by approximately $0.6 million from $0.2 million to $0.7 million comparing the three months ended September 30, 2016 to the three months ended September 30, 2017 respectively due to a non-recurring change in the useful life of the patent portfolio classified as a change in accounting estimate.

Certain non-recurring expenses, which are classified in general and administrative expenses and are broken out in the table below, amounted to approximately $1.3 million for the three months ended September 30, 2017 with no prior period comparison for the prior year. Once concluded, we expect these fees will not continue as an ongoing expense. There are six major categories of these non-recurring expenses as follows:

(a) These fees represent professional fees and other costs, including, proxy solicitation, public relations and other fees incurred in responding to activists shareholder campaigns against the Company.

(b) These fees represent the legal fees and cost of the forensic accounting to determine the amounts of company funds used by our former officers for personal use during 2015 and 2016. The inquiry is complete and no significant further costs are expected.

(c) These fees primarily represents the insurance deductible, known as the retention, against our D&O insurance coverage to cover our out of pocket costs. Costs in excess of the retention are expected to be covered by our D&O Insurance. The retention is not expected to materially increase unless the settlement or judgement is beyond the coverage limits of our D&O insurance.

(d) These fees represent the cost of analysis, valuation, preparation and filing of the section 382 shareholder rights plan. This project is complete and the fee is not expected to increase.

(e) These fees represent the legal and financial advisor fees in connection with the direct registered public offering.

Results of Operations for the Nine Months Ended September 30, 2017 and 2016.

The following table sets forth, for the periods indicated, certain data derived from our Statement of Operations:

NM: Not meaningful

The following table sets forth, for the periods indicated, the percentage of sales represented by certain items reflected in our Statement of Operations (in millions):

Earnings

The Company reported a loss from continuing operations for the nine months ended September 30, 2017 of approximately $8.9 million, compared to a net loss from continuing operations for the nine months ended September 30, 2016 of $1.7 million, a difference of $7.2 million. The increase in net loss is due primarily to the $2.1 million increase in gross profit from continuing operations, offset by $2.8 million increase in general and administrative costs from continuing operations excluding certain non-recurring expenses, $2.9 million increase in sales and marketing expense from continuing operations, and a $3.7 million increase in non-recurring general and administrative costs from continuing operations, with the remaining $0.1 million decrease due to other expenses.

The Company reported a net loss from continuing operations on a fully diluted basis of $0.42 per share for the nine months ended September 30, 2017 based on 20,994,017 weighted average shares outstanding, as compared to a net loss from continuing operations of $0.1 per share for the nine months ended September 30, 2016, based on 17,714,960 weighted average shares outstanding. The increase in the number of weighted average shares based on our shares outstanding primarily reflects the issuance of shares of common stock, of which 3.1 million shares were issued in a direct registered public offering, 300,000 shares were issued upon on the exercise of stock options, and 200,000 shares were issued to Fortress in connection with Amendment No. 1 to the Note Purchase Agreement, as described in Note 11 to our Notes to Condensed Consolidated Unaudited Financial Statements.

During 2016 we sold our SMS business. All of the results of the SMS business are reported in discontinued operations and the operating results for 2017 and 2016 exclude the SMS business. The excluded revenue for the SMS business was approximately $0.1 million for the nine months ended September 30, 2017 and $4.7 million for the corresponding period in 2016.

Revenue

During the nine months ended September 30, 2017, our revenue increased by $6.5 million, or 30% to $28.5 million as compared to $22.0 million for the nine months ended September 30, 2016. This increase was primarily due to an increase in the number of campaigns and average campaign size as we continue to expand our direct sales force and increase our customer base, resulting in an $2.1 million increase in gross profit.

During the nine months ended September 30, 2017, no customer accounted for more than 10% of the Company’s total revenues. During the nine months ended September 30, 2016, one customer accounted for 20% of the Company’s total revenues from multiple advertising contracts with multiple media placement customers.

Expenses

Our cost of revenue, which represents the costs associated with media placement revenues, increased by $4.4 million, or 44%, to $14.4 million for the nine months ended September 30, 2017, compared to $10.0 million for the nine months ended September 30, 2016. Cost of revenue increased faster than the 30% growth in revenue due to the entry into a material media placement contract that contained some lower margin revenue, increased vendors costs due to the costs of acquiring customers as we continue to diversify our customer base and enter into business with larger customers, in addition to continued depreciation and amortization expense of our mobile engagement technology platforms that we use to operate our media placement business, which is included in cost of revenue. Our technology investment that drives our revenue growth is focused on our mobile engagement platform through software development efforts. We capitalize the cost of developing our mobile engagement platform and amortize our investment over three years. For the nine-month periods ended September 30, 2017 and September 30, 2016, amortization of software development costs increased 44% from $464 thousand to $669 thousand due to the increased investment in developing our platform.

Sales and marketing expense, increased $2.9 million, or 38%, to $10.6 million for the nine months ended September 30, 2017. This increase is due primarily to the expansion of our direct sales force and customer management personnel which trends in line with the increase in media placement revenue. Sales and marketing expense increased as a percentage of revenue from 35% to 37% for the nine months ended September 30, 2016 and September 30, 2017 respectively. The increase in the direct sales force and customer management personnel was made to increase sales force capacity as we continue to grow. Historically, there has been lag time between the time we add direct sales personnel and when we can leverage their productivity through increased sales. 

General and administrative expenses excluding certain non-recurring expenses, increased approximately $2.8 million to $7.0 million for the nine months ended September 30, 2017 compared to $4.2 million for the nine months ended September 30, 2016. The increase in G&A was due to the increases in compensation expense for the executive team, including the expansion of non-executive headcount hires.

Amortization expense increased by approximately $0.5 million from $0.5 million to $1.0 million comparing the nine months ended September 30, 2016 to the nine months ended September 30, 2017 respectively due to a non-recurring change in the useful life of the patent portfolio classified as a change in accounting estimate.

Non-recurring expenses, which are classified in general and administrative expenses and are broken out in the table below, amounted to approximately $3.7 million for the nine months ended September 30, 2017 with no prior period comparison for the prior year and once concluded are not expected to continue as an ongoing expense. There are six major categories of these non-recurring expenses as follows:

(a) These fees represent professional fees and other costs, including, proxy solicitation, public relations and other fees incurred in responding to activists shareholder campaigns against the Company.

(b) These fees represent the legal fees and cost of the forensic accounting to determine the amounts of company funds used by our former officers for personal use during 2015 and 2016. The inquiry is complete and no significant further costs are expected.

(c) These fees primarily represents the insurance deductible, known as the retention, against our D&O insurance coverage to cover our out of pocket costs. Costs in excess of the retention are expected to be covered by our D&O Insurance. The retention is not expected to materially increase unless the settlement or judgement is beyond the coverage limits of our D&O insurance.

(d) These fees represent the cost of analysis, valuation, preparation and filing of the section 382 shareholder rights plan. This project is complete and the fee is not expected to increase.

(e) These fees represent the legal and financial advisor fees in connection with the direct registered public offering.

Liquidity and Capital Resources

We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating activities which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of liquidity are our available cash, investments, and cash generated from continuing operations.

The following table sets forth, for the periods indicated, selected data reflected in our Balance Sheet (in millions):

At September 30, 2017, we had $2.6 million in cash, cash equivalents, and marketable securities compared to $8.7 million of cash, cash equivalents, and marketable securities at December 31, 2016. We believe that our current cash levels and our cash flows from future operations will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, and contractual obligations for the next twelve months.

At September 30, 2017, we had total assets of $27.6 million of which only a de minimus amount was classified as held for sale. We had total liabilities of $12.5 million, of which $0.2 million was classified as held for sale. The $2.4 million or 8% decrease in assets consisted of a $6.2 million decrease in cash due to use of proceeds for operations and loan prepayment fees. At December 31, 2016, we had total assets of $30.1 million, of which $0.9 million was classified as assets held for sale. We had total liabilities of $13.1 million, of which $0.6 million was classified as held for sale. Total liabilities decreased $0.6 million due to a $3.1 million increase in accounts payable, rising as a result of increased vendors fees for operations and non-recurring expenses, $2.5 million in deferred revenue due to prepayments by certain customers and the licensing of certain patents with the subsequent deferral of that revenue, in addition to an increase of $1.1 million in accrued expenses primarily due to an increase in executive compensation for new officers and a change in the commission structure for our sales team. These increases were offset by a decrease of approximately $6.9 million in notes payable due to the paydown of our debt instrument in August 2017, with the remaining difference due to changes in liabilities from discontinued operations.

A summary of our cash provided by and used in operating, investing, and financing activities is as follows for the three months ended September 30, 2017 (in millions):