SITO SITO Mobile Ltd

Notes to Unaudited Consolidated Financial Statements

1. Organization

SITO Mobile, Ltd. (“SITO” or 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. and on September 26, 2014, it changed its name to SITO Mobile, Ltd.

SITO develops customized, data-driven solutions for brands that span all forms of media and provides strategic insights. The Company implements platforms that provide an in-depth understanding of customer interests, actions, and experiences that assist brands in maximizing their targeted market penetration and that provide location-based data to its customers.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying Unaudited 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”). All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States of America (“US GAAP”) requires management to make estimates and form 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 may differ from those estimates.

Generally, the Company makes significant estimates in connection with establishing the allowance for doubtful accounts, the recovery of capitalized software development costs, other intangible assets, and goodwill.

Basis of Presentation

The accompanying Unaudited Consolidated Financial Statements have been prepared in accordance with US GAAP and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the unaudited consolidated financial information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year-ended December 31, 2018 filed on April 1, 2019.

The consolidated balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by US GAAP.

Certain reclassifications of prior-period financial statement reported amounts have been made to conform to the current period’s presentation.

Going Concern

The accompanying Unaudited Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

The Company has sustained net losses since inception and has experienced negative cash flows from operations. As of September 30, 2019, the Company has an accumulated deficit of approximately $203.2 million and an approximate working capital deficiency of $12.7 million; working capital is computed by excluding from current liabilities the note payable, net of $3.2 million, the warrant liability of $0.2 million, and deferred revenue of $0.03 million, which approximate amounts are presented on the Unaudited Consolidated Balance Sheet as of September 30, 2019. As shown in the Unaudited Consolidated Statement of Operations and the Unaudited Statement of Cash Flows, the Company incurred an approximate net loss of $30.3 million and negative cash flows from operations of approximately $3.6 million for the nine-months ended September 30, 2019, respectively. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the issuance of these Unaudited Consolidated Financial Statements.

In June through August 2019, the Company sold $3.05 million of original issue discount promissory notes for net cash proceeds of $2.5 million. The Company is currently in technical default on its obligation to remit the principal value of the Notes plus accrued interest. The Company is in discussions with the Note Holders to refinance the Notes, which discussions are on-going. In the interim, the Company continues to accrue interest at the stated rate of the original obligations, which interest is added to the principal amount owed in the month following accrual. As of February 5, 2020, the principal balance due the Note Holders is approximately $3.9 million.

Management has implemented a plan to reduce expenditures, the most significant of which has been a reduction in workforce of approximately 70% that has resulted in reduced expenditures of approximately $360 thousand per each semimonthly pay cycle; management continues to monitor and/or reduce expenditures in other non-critical areas. Additionally, management continues to execute the Company’s plan to seek longer and more profitable customer agreements and has obtained additional funding of approximately $2.75 million during the nine-months ended September 30, 2019 (see Notes Payable discussion herein).

The Company’s existence is dependent upon management’s ability to identify additional sources from which to obtain funding and/or to enter into significant (e.g., large-scale, multi-year) contracts to generate profits and increase cash flows. There can be no assurance that the Company’s efforts will result in the resolution of the Company’s financing needs. These Unaudited Consolidated Financial Statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

NASDAQ Listing Deficiencies

On July 5, 2019, the Company received written notification from NASDAQ informing it that its stock had traded under $1.00 for thirty (30) consecutive business days, and that if its stock does not trade at or above $1.00 for ten (10) consecutive business days during the next 180 days, the Company’s stock would be delisted absent meeting other conditions for delaying delisting.

The 180 days to regain compliance ended on January 2, 2020, during which time the Company’s stock failed to meet the minimum closing bid price of $1.00 for ten (10) consecutive business days. On January 6, 2020, since the Company’s stock closing bid price did not meet NASDAQ’s minimum, the Company received notification that its stock would be delisted. On January 13, 2020, in accordance with NASDAQ Listing Rules, the Company requested a hearing with the NASDAQ Listing Council to seek a 180-day extension to correct the minimum bid price deficiency. If, at the conclusion of the 180-day extension period, the Company has not achieved compliance, the Company’s stock will be delisted. The Company was granted a hearing by NASDAQ’s Listing Council, which hearing is scheduled for February 20, 2020; however, there can be no assurance that the Listing Council will grant the Company a 180-day extension, or that the Company will be successful in regaining compliance with NASDAQ Listing Rules. Among the deficiencies to be cured are: (i) realizing a stock closing minimum bid price equal to or greater than $1.00 for ten (10) consecutive business days, which may be accomplished by enacting a reverse stock-split; if such, is approved by the Company’s stockholders, (ii) holding its 2019 annual shareholder meeting, which was adjourned pending resolution of certain SEC matters related to the failed merger with MediaJel, Inc. (see Business Combinations), and other Listing Rules as may be applicable.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Revenue Recognition and Deferred Revenue

Adoption of Accounting Standards Codification (“ASC”) - Topic 606 (“Topic 606”), “Revenue from Contracts with Customers”

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective transition method applied to those contracts, which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with US GAAP Topic 605 and the methodologies adopted by the Company thereunder. There was no adjustment to the accumulated deficit at January 1, 2018 attributable to the impact of adopting Topic 606.

Topic 606 requires that revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration that an entity expects to receive in exchange for those services. To achieve this core principal, Topic 606 follows a five-step approach:

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to those services, (ii) the contract has commercial substance and (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer such goods or deliver such services to the customer. To be separately recognized, performance obligations must be distinct. For a performance obligation to be distinct, both the following criteria must exist: (i) the customer can benefit from the service either on its own or together with other resources that are readily available from the Company or third parties and (ii) the goods or services are separately identifiable from other promises in the contract. If these criteria are not met, the promised services are accounted for as a combined performance obligation.

The transaction price is the amount of total contract consideration the Company expects to receive for carrying out its contractual obligations.

Once a contract and associated performance obligations have been identified and the transaction price has been determined, Topic 606 requires an entity to allocate the transaction price to each performance obligation. To allocate the transaction price to each identified performance obligation, the Company must accurately estimate the stand-alone selling price of each performance obligation. As a practical expedient, Topic 606 allows the Company to recognize revenue when it invoices a customer, if the right to payment from such customer corresponds directly with the value of the Company’s performance completed to date.

Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control transfers either over time or at a point in time.

Media placement services constitute the Company’s core business from which it derives substantially all its revenue from contracts with customers. Media placement contracts with customers predominantly contain a single performance obligation for which the related revenues are recognized over time, using an output measure to reflect progress. The Company invoices its customers as it performs its contractual obligations and therefore has adopted the aforementioned Topic 606 revenue recognition “right to invoice” practical expedient.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Media Placement

The Company’s media placement contracts with customers generally provide for the measurement of services based on the activity of users viewing ads through developer applications and websites. User activity consists of views, clicks, or actions on advertisements placed by the Company. Based on the specific terms of the media placement contracts with customers, revenues are recognized as the Company’s advertising services are delivered, that is, when the Company has a right to invoice for its services. Most of the Company’s media placement services contracts have a performance term of less than twelve months and, generally, customer payments are received in a timely manner from the invoice date.

Media placement revenue for the three- and nine-months ended September 30, 2019 and 2018 was approximately $2.8 million and $9.1 million and $25.1 million and $28.6 million, respectively.

Deferred Revenue

In certain situations, the Company will receive advances of its media placement services, which advances are recognized as deferred revenue in the consolidated balance sheets. As the Company delivers the contracted media placement services, deferred revenues are recognized in the Unaudited Consolidated Statement of Operations.

Sales commissions are generally expensed as incurred because the amortization period would be one year or less and the Company’s revenues are not given to significant cyclical fluctuation. Sales commissions are recognized in sales and marketing expenses in the accompanying Unaudited Consolidated Statement of Operations.

Cash and Cash Equivalents

The Company considers all liquid investments with an original maturity of three months or less or three months to maturity when purchased to be cash equivalents. As of September 30, 2019 and December 31, 2018, the Company did not have any cash equivalents.

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 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 the historical write-off of receivables as a percentage of accounts receivable, as well as revenue and information collected from individual customers. Accounts receivable are charged off against the allowance for doubtful accounts when such amounts are deemed uncollectable.

Property and Equipment, net

Property and equipment is stated at cost. Major renewals and improvements are capitalized, 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 sold or disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses on sales or disposals of property and equipment are recognized in earnings.

Long-Lived Assets

The Company accounts for long-lived assets in accordance with ASC 360-10 “Impairment or Disposal of Long-Lived Assets”. ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable or exceeds its fair value. The recoverability of the carrying value of an asset is assessed by estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the future undiscounted cash flows are less than the carrying value of the asset, an impairment loss is recognized equal to the amount by which the asset’s carrying value exceeds its fair value.

Goodwill

Goodwill represents the future economic benefits to be derived from non-individually identified or separately recognized assets acquired in a business combination. Goodwill generally may be computationally defined as the excess of the fair value of the consideration transferred over the acquisition-date fair values of the identifiable assets acquired less the liabilities assumed and any noncontrolling interest in the acquired assets.

ASC 350-20 requires that goodwill be tested at least annually for impairment. Application of the goodwill impairment test requires judgment, including determining the fair value. Significant judgments are required to estimate the fair value, including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment. The Company has evaluated qualitative and quantitative factors (e.g., events, conditions) as of September 30, 2019 and December 31, 2018 and determined that at the later date that goodwill as reported has been impaired and, as such, an impairment in the approximate amount of $6.4 million has been recognized during the three- and nine-months ended September 30, 2019.

Capitalized Software Development Costs

The Company accounts for costs incurred to develop or purchase computer software for internal use in accordance with ASC Topic 350-40 “Internal-Use Software”. As required by ASC 350-40, the Company capitalizes the costs incurred during the application development stage, which include direct costs, including payroll and related payroll taxes and benefits. Costs incurred during the preliminary project stage along with post-implementation stages of internal use computer software are expensed as incurred. Capitalized development costs are amortized over a period of three years. Costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of software development costs requires considerable judgment with respect to certain external factors, including, but not limited to, the three year estimated economic life assigned to the asset class. Amortization expense associated with capitalized software is recorded as a cost of revenue.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

In June 2019, based on perceived cost-benefit relationships, the Company decided on a strategic direction to adopt and employ already existing third-party software platforms used in the servicing of customer accounts, rather than to continue developing, bettering, and maintaining existing platforms. Management believes its internally developed software has market value, but there is no immediate plan to license or sell the software, nor has a definitive acquirer been identified.

As such, management has determined to impair the asset fully as the originating projects have been discontinued during June 2019 and there is no immediate plan to employ the software in the foreseeable future. A loss on impairment of approximately $1.9 million has been recognized during the nine-months ended September 30, 2019.

Patent and Patent Application Costs

Intangible assets are recorded at cost and include patents developed and purchased. The cost of patents is amortized over their useful lives.

Patents are an integral investment, which protects management's rights of ownership over the underlying communications related intellectual property. The patents continue to have value to the Company and represent an investment in technologies that potentially benefit mobile communication companies and users.

Leases

The Company reviews and evaluates its contracts to determine if any contain leases. As of September 30, 2019 and December 31, 2018, the Company has agreements with two providers that have been determined to contain leases. One of the agreements is for the Company’s primary office space and the other is for office equipment. In accordance with ASC Topic 842, which the Company adopted as of January 1, 2018, a contract contains a lease if it conveys a right to direct the use of an identified asset and derive substantially all the economic benefits from the use thereof. If a contract is determined to contain a lease, it is further evaluated for purposes of classifying the arrangement as a finance lease. Any arrangement that does not meet the criteria to be accounted for as a finance lease is an operating lease.

Income Taxes

The Company accounts for its income taxes under the provisions of ASC Topic 740 “Income Taxes”. The accounting for income taxes under ASC Topic 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 assets and liabilities. The Company had no material unrecognized income tax assets or liabilities for the three- and nine-months ended September 30, 2019 and 2018, respectively. When incurred, the Company recognizes income tax interest and penalties as a separately identified component of general and administrative expense.

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) and forfeitures are recognized as they occur. US GAAP 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 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.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

The value of stock-based awards is determined using the Binomial option-pricing model. The Binomial option-pricing model determines compensation cost as the excess of the fair value of the award 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 a straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. In the case that the requisite service period is not completed or the grantee terminates their relationship with the Company, the stock award granted may be forfeited and, if forfeited, the accumulated amount of compensation cost recognized for that award is reversed in the period of forfeiture.

Loss per Share

The Company reports loss per share in accordance with ASC 260-10 “Earnings per Share”. Basic loss per share is computed by dividing the loss applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of common stock outstanding plus any dilutive potential common shares outstanding during the period using the treasury stock method. Potential dilutive common shares include stock options, restricted stock units, and warrants outstanding. Certain of the options and warrants outstanding at September 30, 2019 would have a dilutive effect if converted to common shares; however, as the Company is in a loss position from its operations, the effect of conversion is not applicable to the loss per share of $0.85 and $1.18 for the three- and nine-months ended September 30, 2019, respectively. There were no dilutive securities outstanding as of September 30, 2018 and, therefore, basic and diluted loss per share for the three- and nine-months then ended of $0.20 and $0.65, respectively, were the same.

Concentrations of Credit Risk

The Company’s primary banking relationship is with Wells Fargo Bank. The amount on deposit with Wells Fargo Bank may from time to time exceed federally insured limits.

For the three-months ended September 30, 2019, the Company derived approximately $1.8 million or 64.1% of total revenue from three customers and for the three-months ended September 30, 2018, no one customer accounted for a significant amount of total revenue.

For the nine-months ended September 30, 2019, the Company derived approximately $10.4 million or 41.5% of total revenue from one customer and for the nine-months ended September 30, 2018, the Company derived approximately $5.3 million or 18.5% of total revenue from one customer.

During the nine-months ended September 30, 2019, the Company obtained an approximate $10.4 million contract for media placement services, of which approximately $8.2 million of revenue was recognized during the three-months ended June 30, 2019 and the balance was recognized during the three-months ended March 31, 2019. At contract outset, as is normal and customary, management considered many factors in accepting and contractually committing itself, including the Company’s ability to deliver its contractual performance obligations and the probability of collection of its contractually stipulated compensation, which probability considers the likelihood of and customer’s ability to pay. At the time, nothing came to the Company’s attention that would have altered its assessment at contract initiation that the customer would not uphold its contractual obligation to pay for the services received. On October 7, 2019, the Company filed a complaint for judgment against the customer for payment under the contract, which matter is more fully discussed throughout these notes to the Unaudited Consolidated Financial Statements.

The Company’s accounts receivable is typically unsecured and 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, excluding the aforementioned significant receivable in litigation, such losses have been within management’s expectations of 3% of accounts receivable and 1% of year-to-date revenue.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

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 fair value of the consideration transferred over the acquisition-date fair values of the identifiable assets acquired less the liabilities assumed and any noncontrolling interest in the acquired assets is recognized as goodwill. Certain adjustments to the assessed fair values of the assets acquired and liabilities assumed are made subsequent to the acquisition date, but within the measurement period, which is up to one year; such adjustments are recorded as adjustments to goodwill. Any adjustments to the assets acquired and liabilities assumed subsequent to the measurement period are recorded in income. Results of operations of acquired entities are included in the Company’s results of operations as of the date of acquisition. The Company expenses all acquisition related costs as incurred, which costs are classified as general and administrative expenses in the Unaudited Consolidated Statements of Operations.

In September 2019, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with MediaJel, Inc. (“MediaJel”) (collectively, the “Parties”), whereby the Company was to acquire 100% of the equity interests of MediaJel in exchange for an approximate 43% equity interest in the combined entity (i.e., an all-stock transaction). In December 2019, the Parties mutually entered into discussions to terminate the Agreement, which discussions are on-going.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements or financing activities with special purpose entities.

Recent Accounting Pronouncements

Recently Adopted Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) released ASC 606 “Revenue from Contracts with Customers” which was updated in August 2015 by ASU 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The Company applied the accounting guidance within ASC Topic 606 beginning with the reporting period for the three- and nine-months ended September 30, 2018. The Company believes the key changes in the standard that affect its revenue recognition relate to the allocation of contract revenue amongst various services and products, and the timing of which those revenues are recognized. The Company adopted ASC Topic 606 effective January 1, 2018 and did not adjust its accumulated deficit as of January 1, 2018, as discussed in the Summary of Significant Accounting Policies footnote disclosure herein.

In April 2016, the FASB issued ASU 2016–10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, which provides clarification and guidance for identifying performance obligations and licensing arrangements. This updated standard affects ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”.

The Company adopted ASC Topic 606 using the modified retrospective approach. There were no material changes to the Company’s Unaudited Consolidated Financial Statements resulting from adoption of this standard.

Leases

In February 2016, the FASB issued ASU 2016-02 “Leases”, amended by ASU 2018-11 “Leases: Targeted Improvements”, which provides new accounting and disclosure guidance for leasing activities, most significantly requiring that lessees recognize assets and liabilities for all leases with lease terms greater than twelve months and to provide additional disclosures. The Company adopted ASU 2016-02, which is included in the ASC Topic 842, as of January 1, 2018 using a retrospective approach. A retrospective approach applies the adopted standard to each prior period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the beginning of the earliest comparative period presented.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Adoption of ASC Topic 842 resulted in the Company recognizing a $311.7 thousand operating lease Right-of-Use (“ROU”) asset and current and non-current operating lease liabilities of $334.6 thousand on the Consolidated Balance Sheet at December 31, 2018, which resulted in a $22.8 thousand increase to the accumulated deficit as of that date. Other than first-time recognition of operating leases on its consolidated balance sheet, the implementation of ASC Topic 842 did not have a material impact on the Company’s Unaudited Consolidated Financial Statements. See the Leases footnote for additional disclosures.

Comprehensive Income

In February 2018, the FASB issued ASU 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The updated standard was effective for fiscal years beginning after December 15, 2018 and interim periods occurring within the year of effectiveness. The Company does not have any transactions that require the reporting of comprehensive income under the standard.

Stock Compensation

In June 2018, the FASB issued ASU 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The requirements of Topic 718 apply to nonemployee awards, except for specific guidance on inputs to an option-pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).

ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606 “Revenue from Contracts with Customers”. The Company adopted ASU 2018-07 effective January 1, 2019 and notes that the standard did not have a material effect on its Unaudited Consolidated Financial Statements.

Pronouncements Not Yet Adopted

Intangibles

In January 2017, the FASB issued ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment”. The amendments in this update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods occurring within the year of effectiveness. When effective, the Company does not anticipate that ASU 2017-04 will have a material impact on its Unaudited Consolidated Financial Statements. See the Intangible Assets - Goodwill footnote for additional disclosure.

In August of 2018, the FASB issued ASU 2018-15 “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which is effective for the Company for periods beginning after December 31, 2019 including interim periods. This ASU provides guidance and establishes the accounting for fees paid in a cloud computing arrangement (i.e., hosting arrangement) that includes a software license. The Company has several arrangements that may be subject to this standard, which may require recognizing intangible assets for software licenses that may exist and corresponding liabilities for payments made over time. If the Company’s cloud computing arrangements do not include software licenses, the arrangements are service contracts the fees for which are expensed as incurred, which is how the Company currently accounts for these arrangements. The Company is currently in process of reviewing and assessing ASU 2018-15 to determine its impact, if any, on the Company’s Unaudited Consolidated Financial Statements.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 amends several aspects of the measurement of credit losses on financial assets, including replacing the existing incurred credit loss model with the Current Expected Credit Losses (“CECL”) model. There are few exceptions to the financial assets that are within the scope of ASU 2016-13; however, as currently applicable to the Company, trade receivables is the most significantly affected class of financial assets. The CECL model requires that financial assets (i.e., trade receivables) be presented at the net amount expected to be collected, based on pooling financial assets that share similar characteristics (e.g., type, term, geography, industry, effective interest rate), but does not prescribe a specific methodology for measuring the allowance for expected credit losses. For example, the Company may use a loss-rate methodology or an aging schedule, or a combination thereof, which process is not significantly different from currently employed. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; however, at its July 2019 meeting, the FASB proposed a three-year deferral to the effective date of ASU 2016-13 that will affect smaller reporting companies, which is the Company’s current SEC filing classification. If approved, the ASU will be effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact, if any, that ASU 2016-13 will have on its Unaudited Consolidated Financial Statements and related disclosures.

3. Accounts Receivable, net

Accounts receivable consist of the following:

Included in accounts receivable at and recognized in revenues during the nine-months ended September 30, 2019 is $10.42 million attributable to an advertising insertion order to buy digital media device placement for advertising of the movie After on behalf of and under contract with Aviron Pictures LLC (“Aviron”) (the “Aviron Receivable”). The Company billed and recognized revenues of $2.24 million and $8.18 million during the three-months ended March 31, 2019 and June 30, 2019, respectively. Aviron has not remitted payment contractually stipulated and, as such, on October 7, 2019, the Company filed suit in the Superior Court of the State of California, City of Los Angeles in an attempt to recover that to which it is contractually entitled.

On December 13, 2019, Aviron filed a counterclaim denying, among other items, all allegations of breach of contract, the substance of the contract it had entered into with the Company on March 20, 2019, and the services that the Company had provided, delivered, and paid for with its own funds. The Company has provided all documentation to Aviron’s attorney in substantiating the Company’s claims and its contractual performance thereunder and has attempted multiple times to reach a reasonable resolution of the matter. To date, Aviron has been unwilling to reach an accommodation.

On December 17, 2019, a significant creditor sued Aviron and its founder and managing member for default and fraudulent activities. Per its filing, the creditor, who has a senior claim it purports to have filed (e.g., UCC filing), has a one hundred percent (100%) claim to the assets of Aviron, affiliates, and related entities under the terms of its financing agreements. In its suit, the creditor is seeking injunctive relief to immediately replace the managing member of Aviron, put in place a new Chairman and managing member, and take full control of Aviron’s business and operations.

Since the creditor’s lawsuit filing, the managing member sued by the creditor has been terminated from Aviron and the individual that the creditor seeks to put in place is a known turnaround specialist. Additionally, there are other additional lawsuits filed by other third parties seeking recompense for dealings with Aviron, some of which are associated with the movie After.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Given the aforementioned qualitative facts that have developed, management, recognizing that the Company is an unsecured creditor, acknowledges that there is a significant degree of uncertainty surrounding the Aviron Receivable. As such, management has established a specific reserve for uncollectability of the Aviron Receivable in the amount of $10.42 million representing the total amount of the Aviron Receivable, which s reflected in accounts receivable, net at September 30, 2019.

4. Property and Equipment, net

The following is a summary of property and equipment:

Depreciation expense for the three- and nine-months ended September 30, 2019 and 2018 was $62.9 thousand and $40.1 thousand and $166.4 thousand and $122.2 thousand, respectively.

On January 31, 2020, the Company’s operating leases at the Newport Office Center VIII, Jersey City, New Jersey expired. The Company determined not to renew its leases, rather opting to obtain less expensive space for a reduced workforce resulting from management’s restructuring and reorganization efforts. Management determined it to be more cost effective to abandon the office furniture, as no buyers were interested in finalizing a purchase nor were any parties interested in removing the items. The remaining equipment and computer hardware will be donated to a charitable organization, as such equipment was determined to have little resale value, but such entities have expressed interest in disposing of the items. Due to the abandonment of the property and equipment, a loss on abandonment of $125.3 thousand was recognized in the Unaudited Consolidated Statement of Operations for the three- and nine-months ended September 30, 2019 representing the realizable carrying value of such assets that remain in use through the termination of the lease on January 31, 2020.

5. Capitalized Software Development Costs, net

The following is a summary of capitalized software development costs:

Amortization expense for the three- and nine-months ended September 30, 2019 and 2018 was zero and $185.8 thousand and $318.1 thousand and $602 thousand, respectively.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Based on certain developments in June 2019, management strategically decided to adopt and employ already existing third-party software platforms. Although management believes that the internally developed software has market value, there is no immediate plan to license or sell the software. As such, management recognized a full impairment of the asset as the originating projects have been discontinued during the nine-months ended September 30, 2019 and there is no immediate plan to employ the software in the foreseeable future. 

6. Intangible Assets

Amortization expense for the three- and nine-months ended September 30, 2019 and 2018 was $43 thousand and $36 thousand and $124.8 thousand and $175.6 thousand, respectively. The Company generally amortizes patent costs over a seven-year useful life.

As of September 30, 2019, a schedule of amortization expense over the estimated remaining lives of the patents for the next five fiscal years and thereafter is as follows:

Patents are an integral investment, which protects the Company’s rights of ownership over the underlying communications related intellectual property. The patents continue to have value to the Company and represent an investment in technologies that potentially benefit mobile communication companies and users.

Amortization expense for the three- and nine-months ended September 30, 2019 and 2018 was $24.3 thousand and $67.8 thousand and $159.8 thousand and $203.3 thousand, respectively. The Company generally amortizes its technology assets over a 10-year useful life.

During the nine-months ended September 30, 2019, the Company determined that its customer relationships no longer had value and, therefore, recognized an impairment loss of $177.5 thousand representing the remaining carrying value of these intangible assets.

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 remaining technology assets represent an investment in software related to supporting operations and potentially licensable programs. These mobile advertising technologies comprise an integral component of the Company’s service infrastructure.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Goodwill

During the three-months ended September 30, 2019, the Company determined that the goodwill value associated with DoubleVision and Hipcricket, Inc., which acquisitions were consummated in years past, is fully impaired, as the entities no longer generate revenue and the assets associated therewith have been absorbed into and consumed by the Company. Therefore, during the three- and nine-months ended September 30, 2019, the Company recognized a loss on impairment of goodwill of $6.4 million as presented in its Unaudited Consolidated Statements of Operations.

7. Accrued Expenses

The following is a summary of accrued expenses:

8. Leases

Operating Leases

The Company reviews and evaluates its contracts to determine if any contain leases. As of September 30, 2019 and December 31, 2018, the Company has agreements with two providers that have been determined to contain leases. One of the agreements is for the Company’s primary office space and the other is for office equipment. In accordance with ASC Topic 842, which the Company adopted as of and for the year beginning January 1, 2018, a contract contains a lease if it conveys a right to direct the use of an identified asset and derive substantially all the economic benefits from the use thereof. If a contract is determined to contain a lease, it is further evaluated for purposes of classifying the arrangement as a finance lease. Any arrangement that does not meet the criteria to be accounted for as a finance lease is an operating lease.

Right-of-Use (“ROU”) assets represent the quantification of the Company’s rights to use the identified leased assets. Effective with the Company’s adoption of ASU 2016-02, ROU assets are recognized for the present value of future lease payments increased by any lease payments occurring prior to the lease commencement date, less any lease incentives received, and increased for any initial direct costs incurred. The present value of future operating lease payments are recognized as liabilities and presented according to its classification as current or noncurrent, separately distinguishing between finance and operating lease liabilities and ROU assets.

The present value of future lease payments is determined using the discount rate implicit in the lease. However, if the discount rate implicit in the lease is not readily determinable, which is often the case, the Company expects to use its collateralized incremental borrowing rate for similar amounts and terms to determine the present value of future lease payments. For adoption of ASU 2016-02, the operating future lease payments were discounted using a 10.1% weighted average effective rate.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

Leases with an initial term of twelve months or less are classified as short-term leases and are not recognized on the consolidated balance sheets. As of September 30, 2019 and December 31, 2018, the Company does not have any short-term leases.

The following table summarizes the Company’s operating lease ROU assets:

The Company maintains office space at 100 Town Square Place, Jersey City, New Jersey. The office lease at this location was first entered into in August 2011 and, as the Company grew, in November 2014 and April 2017 the lease was amended to extend the term and include additional leased space. The Company has a single lease with the lessor for three spaces (described above) that under ASC 2016-02 are accounted for separately. The lease expired effective January 31, 2020.

For the three- and nine-months ended September 30, 2019 and 2018, operating lease expense of $76.6 thousand and $76.6 thousand and $229.8 thousand and $229.8 thousand was recognized in the Unaudited Consolidated Statements of Operations, respectively. Operating lease expense is recognized on a straight-line basis, based on the term of the lease including any extension options the Company is reasonably certain to exercise. The total straight-line monthly rent expense is $25.5 thousand.

The following table provides a summary of the Company’s finance lease ROU assets:

The Company maintains an office equipment lease with a single vendor that is classified as a finance lease and bears interest at 1.75% per annum. The lease provides the Company an option to purchase the leased equipment at expiration at the equipment’s then-fair market value. If not exercised, the Company has the right to return the leased equipment. The Company intends to return the equipment. The lease expires in 2022.

The Company had a finance lease ROU asset for another piece of office equipment, which lease was set to expire on October 20, 2018. However, by actions taken in conjunction with the lessor, the Company took ownership of the equipment in February 2018. As of September 30, 2019 and December 31, 2018, the finance lease ROU asset has been reclassified to property, plant and equipment in the consolidated balance sheets.

Prior to adoption of ASU 2016-02, the Company’s finance leases (previously, capital leases) were included in property, plant and equipment in the consolidated balance sheets and the associated liabilities for the minimum future payments under these leases were classified as either current or long-term liabilities.

Finance lease ROU assets, net are included in Other assets on the Unaudited Consolidated Balance Sheet of the Company at September 30, 2019 and the Consolidated Balance Sheet at December 31, 2018.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

For the three- and nine-months ended September 30, 2019 and 2018, finance lease expense consisted of $0.9 thousand and $2.7 thousand and $0.9 thousand and $2.2 thousand of amortization of ROU assets and an insignificant amount of interest expense of less than $0.2 thousand in each period, respectively.

The following table summarizes future commitments under operating and finance leases as of September 30, 2019 and December 31, 2018:

The future commitments under operating and finance leases represent the Company’s undiscounted cash flow future obligations as of September 30, 2019 and December 31, 2018. The discounted operating and finance lease liabilities presented on the consolidated balance sheets of the Company as of September 30, 2019 and December 31, 2018 are less the interest component of $2.7 thousand and $0.2 thousand and $20.2 thousand and $0.3 thousand resulting in lease liabilities of $106.5 thousand and $8.5 thousand and $334.6 thousand and $11.2 thousand, respectively.

Finance lease liabilities of $3.6 thousand and $5.0 thousand and $3.6 thousand and $7.6 thousand are included in Other current and long-term liabilities on the consolidated balance sheets of the Company at September 30, 2019 and December 31, 2018, respectively.

9. Notes Payable

In June 2019, the Company implemented a plan providing for the issuance of up to $7.3 million of non-convertible, secured, senior subordinated notes payable (the “Notes”). The Notes are original issue discount certificates offered at an approximate 18% discount in a private placement ended August 27, 2019 and, at issuance, were senior to all obligations of the Company other than a single factoring arrangement that has subsequently been terminated. As such, the certificates sold are senior to all existing encumbrances of the Company. As of September 30, 2019, the Company has issued $3.05 million of Notes for net cash proceeds of $2.5 million.

In connection with the sale of the Notes, the Company issued one thousand warrants to purchase an equivalent number of shares of the Company’s common stock for each $1 thousand of purchase price received.

As of September 30, 2019, the Company has approximately $3.07 million of Notes principal outstanding. The Notes were issued on various dates ranging from June 24, 2019 through August 23, 2019 and have a 90-day maturity that began on dates ranging from September 22, 2019 through November 21, 2019.

The Company is currently in technical default on its obligation to remit the principal value of the Notes plus accrued interest. The Company is in discussions with the Note Holders to refinance the Notes, which discussions are on-going. In the interim, the Company continues to accrue interest at the stated rate of the original obligations, which interest is added to the principal amount owed in the month following accrual. As of February 5, 2020, the principal balance due the Note Holders is approximately $3.9 million.

Additionally, on August 19, 2019 the Company sold a $250 thousand promissory note to MediaJel, Inc. which note with interest accrued thereon is due and payable on February 19, 2020. The note bears interest at 10% per annum and, as of September 30, 2019, has principal and interest due of approximately $253 thousand.

The Company carried no debt as of December 31, 2018.

The Notes were issued as original issue discount certificates. Each $1 thousand of cash value received by the Company will be settled at maturity for $1.2 thousand, resulting in a contractual effective interest rate of 20.09%.

Additionally, each purchaser of the Notes received 1,000 warrants per $1 thousand cash value paid that entitles the holder to acquire an equivalent number of shares of the Company’s common stock at $1 dollar per share. As of September 30, 2019, there are 2.5 million warrants outstanding. The warrants expire two years from the date of issuance, which is the same as the related Note’s issuance date.

The Company assessed that the warrants are detachable instruments based on their surviving the maturity of the associated debt. As such, the Company valued the warrants using a Black-Scholes option pricing model using a closing share price at the date of grant ranging from $0.66 dollar to $0.79 dollar, a $1 dollar exercise price, a two-year term, a two-year historical volatility rate based on the common stock’s closing price each trading day of the two-year period prior to issuance ranging from 94.7% to 95.9%, and a risk free interest discount rate ranging from 4.53% to 5.64%. Based on the model and assumptions applied, the computed fair value of each warrant certificate granted ranged in value from $0.28 dollar to $0.37 dollar, resulting in a total value assigned to the warrants of $841.5 thousand that was added to the original issue discount of $548.8 thousand, the total of which has been accreted to the value of the Notes through maturity.

For the three- and nine-months ended September 30, 2019, the Company recognized $1.3 million and $1.3 million and $0.3 thousand and $0.3 thousand of interest expense related to the Notes and to the MediaJel borrowing, respectively.

10. Income Taxes

As of September 30, 2019, the Company had a federal net operating loss carryforward (“NOL”) of approximately $74.4 million, comprised of $47.1 million of losses generated prior to January 1, 2018 and expiring in various years through 2037 and $27.3 million of losses generated that can be carried forward indefinitely. The Company has a state NOL carryforward of approximately $54.6 million available to offset future income for income tax reporting purposes, which will expire in various years through 2038, if not utilized.

The Company’s ability to use the NOL carryforward may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382. A limitation may apply to the use of the NOL and tax credit (if any) carryforwards, under provisions of the Internal Revenue Code that are applicable, if it experiences an “ownership change”. That may occur, for example, as a result of trading in the Company’s stock by significant investors as well as the issuance of new equity, by successfully completing an acquisition resulting in a significant dilution of existing shares, or being acquired. Should these limitations apply, the NOL carryforwards would be subject to an annual limitation, resulting in a substantial reduction in the gross deferred tax asset.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

The Company’s 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, 2019 and 2018, there was no federal income tax expense required in the Unaudited Consolidated Statements of Operations, nor was an income tax liability required to be recorded on the Unaudited Consolidated Balance Sheet at September 30, 2019 or the Consolidated Balance Sheet at December 31, 2018. However, an IRS penalty of $26 thousand and related interest expense of $0.1 thousand, respectively, that was recorded for a civil penalty due to an error in payroll tax reporting by the Company’s payroll processing company is reflected in the Unaudited Consolidated Statement of Operations for the nine-months ended September 30, 2019. We are not currently involved in any income tax examinations.

11. 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). US GAAP 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, compensation expense is determined at the “measurement date” for share-based payments to consultants and other third parties. The expense is recognized over the vesting period of the award.

The Company records compensation expense based on the fair value of the award at the reporting date. The value of the stock-based award is determined using the Binomial option-pricing model, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on a straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.

During the three- and nine-months ended September 30, 2019 and 2018, the Company recognized the following stock-based compensation expense:

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

12. Fair Value

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.

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 has identified the warrants issued in July 2017 as liabilities required to be presented at fair value on the consolidated balance sheets. The warrant liability is measured within Level 2 of the fair value hierarchy because its value is determined based on inputs that are observable or can be corroborated by observable data, but which financial instruments are not listed on a public exchange. The Company measures the fair value of the warrant liability each reporting period. For the three-and nine-months ended September 30, 2019 and 2018, a net loss of $14.6 thousand and a net gain of $14.5 thousand and a net gain of $182 thousand and $1.2 million was recorded, respectively, on the revaluation of the warrant liability.

13. Stockholders’ Equity

Common Stock

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

No shares of the Company’s common stock were issued during the three-month period ended September 30, 2019.

During the nine-months ended September 30, 2019, the Company issued approximately one hundred thirteen (113) thousand shares of common stock attributable to an accelerated vesting of restricted stock units (“RSUs”) granted to satisfy the settlement of an executive’s separation agreement signed on February 7, 2019. The granted RSUs were valued at the Company’s common stock closing price on February 7, 2019 of $1.98 per share, as quoted on the NASDAQ stock exchange.

During the three-months ended September 30, 2018, the Company issued approximately ninety-five (95) thousand shares of its common stock due to the full vesting of restricted stock units.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

During the nine-months ended September 30, 2018, the Company issued approximately 3.4 million shares of common stock. Of the total shares of common stock issued during the nine-months ended September 30, 2018, approximately 3.0 million shares of common stock were issued in a registered offering resulting in $14.9 million in gross proceeds less legal and accounting fees of $1.1 million, approximately 222.4 thousand shares of common stock were issued at a value of $894.2 thousand as 2017 compensation to certain executives, approximately 77.4 thousand shares of common stock were issued upon the exercise of stock options for which the Company received $116.3 thousand in gross proceeds, and approximately 108.2 thousand shares of common stock were issued on vesting of restricted stock units (“RSU”) for which the value was recognized in equity as the RSUs vested.

Warrants

In connection with the promissory notes sold by the Company from June through August 2019, the Company issued 2.5 million warrants that allow the holders of the certificates to purchase an equal number of shares of the Company’s common stock for $1 dollar each. The warrants have a two-year term expiring between June 24 and August 23, 2021. The warrants are not transferrable and do not provide any settlement options, other than exercise, and are considered equity instruments for accounting and financial reporting purposes.

Stock Incentive Plans

The Company established the 2017 Stock Incentive Plan while closing the 2008, 2009, and 2010 plans (collectively, the “Plans”) under which 2.5 million shares have been reserved for the issuance of stock options, stock appreciation rights, restricted stock, stock grants and other equity awards. The Plans are administered by the Compensation Committee of the Board of Directors, which determines the individuals to whom awards shall be granted as well as the type, terms, conditions, option price and the duration of each award. As of September 30, 2019, there are approximately 1.0 million shares available to grant under the 2017 Stock Incentive Plan.

A stock option grant allows the holder of the option to purchase a share of the Company’s common stock in the future at a stated price. Options, restricted stock and RSUs granted under the Plans vest as determined by the Company’s Compensation Committee. Options granted under the Plans expire over varying terms, but not more than ten years from the date of grant. Certain RSUs granted to executives of the Company vest contingently on the price of the Company’s common stock consistently remaining above certain thresholds for 65 consecutive trading days. These RSUs do not have an expiration date.

Stock option activity for the three-months ended September 30, 2019 and 2018 is as follows:

For the three- and nine-months ended September 30, 2019 and 2018, the Company recognized net compensation expense related to stock option awards of $224.4 thousand and $997.7 thousand and $1 million and $3.2 million, respectively.

The estimated fair value of each option award granted was determined on the date of grant using a Binomial option-pricing model with the following assumptions for any options granted during the three- and nine-months ended September 30, 2019 and 2018, respectively.

The risk-free interest rate was developed using the U.S. Treasury yield for periods equal to the expected life of the stock options on the grant date. Volatility was developed using the Company’s historical stock price volatility.

No dividend yield was assumed because the Company has never paid a cash dividend on its common stock and does not expect to pay dividends in the foreseeable future. The expected option term for grants made during 2019 and 2018 is based on the average expiration date of all stock options granted during each respective period.

A summary of the Company’s non-vested stock options activity for the nine-months ended September 30, 2019 and 2018 is presented below:

A summary of the Company’s RSU activity for the nine-months ended September 30, 2019 and 2018 is presented below:

During the three-months ended March 31, 2018, the Company identified an error in the accounting for certain RSU awards granted to employees in 2017. This non-cash error of approximately $500 thousand was determined to be immaterial and recorded as an out-of-period adjustment, primarily to general and administrative expenses in the accompanying Unaudited Consolidated Statement of Operations for the nine-months ended September 30, 2018. The Company utilized the Monte Carlo valuation model to estimate the fair value of these awards, which required the Company to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term, and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

For the three- and nine-months ended September 30, 2019 and 2018, the Company recognized net compensation expense related to RSU awards of $91.6 thousand and $289.3 thousand and $378.2 thousand and $2.0 million, respectively.

SITO MOBILE, LTD.

Notes to Unaudited Consolidated Financial Statements

14. Warrants

Warrants

There has been no activity in or with the warrants accounted for as liabilities for the three- and nine-months ended September 30, 2019 and 2018. Following is a summary of the warrants accounted for as liabilities as of and for the nine-months ended September 30, 2019:

15. Commitments and Contingencies