TAR SITO LendCo LLC (“TAR”), SITO Mobile, Ltd.’s (“SITO”)(NASDAQ:SITO) senior secured lender and a litigant (as described herein) against SITO, comments on a lawsuit (the “FAF Lawsuit”) recently filed by Fort Ashford Funds, LLC (“FAF”) against SITO in the Superior Court of California, Orange County.

As previously disclosed on November 20, 2017, TAR and SITO are currently involved in litigation pending in the New York Supreme Court with respect to various alleged defaults by SITO under loan documents between TAR and SITO, including defaults related to numerous disclosure obligations. TAR became aware of the FAF Lawsuit against SITO in the Superior Court of California, Orange County, information of which is publicly available. SITO has not made any disclosure regarding the FAF Lawsuit.

According to the allegations of the complaint in the FAF Lawsuit:

  • In July 2005, SITO’s predecessor company, Single Touch Systems Inc. (“Single Touch”), entered into an agreement with Panzarella Consulting, LLC (“Panzarella”), whereby Single Touch issued Panzarella warrants (the “Warrants”) entitling Panzarella to purchase 5 million shares of Single Touch common stock at a price of $0.50 per share. Pursuant to the agreement relating to the Warrants, such rights were non-cancellable, fully assignable and could not be terminated.
  • In 2007, Panzarella assigned, transferred, and sold the rights under the Warrants to Anthony G. Macaluso, a former executive of Single Touch. In July 2008, Single Touch was acquired by Hosting Site Network, Inc., including the obligation to honor the rights of Mr. Macaluso to tender the agreed purchase price and acquire 5 million shares pursuant to the Warrants.
  • Since that time, SITO has acknowledged in certain of its public filings and pronouncements the existence of the Warrants and the rights of Mr. Macaluso to acquire the shares thereunder. In 2017, Mr. Macaluso assigned his rights under the Warrants to acquire 5 million shares at the price of $0.50 per share (as adjusted) to FAF.
  • In November 2017, FAF tendered to SITO $2.5 million in exchange for the issuance of 5 million shares as specified in the agreement relating to the Warrants.
  • It appears that, despite being aware of the existence of the Warrants and the assignment of the rights thereunder to FAF, SITO has not issued the shares underlying the Warrants to FAF.

TAR believes that SITO has not disclosed to its investors the commencement and existence of the FAF Lawsuit. To TAR, such failure to disclose appears to be consistent with SITO’s failure to comply with its disclosure obligations under the loan documents between TAR and SITO, which are, among other things, the subject of the litigation between TAR and SITO.

SITO’s counsel has advised TAR that SITO believes the FAF Lawsuit is “completely frivolous” and that SITO is not required to disclose it. TAR has no view as to the merits of the allegations in the FAF Lawsuit. If such allegations are true, however, the fact that the shares subject to the Warrants have not been issued upon payment therefor would appear to raise questions about the Board’s motivation and entrenchment and would be consistent with SITO’s previous failures to disclose.

In addition to other questionable disclosure decisions by SITO’s Board, including without limitation, approving below-market equity raises and exorbitant compensation packages for management, allegedly without advising and including all Board members in such decision-making process, the decision by SITO’s Board not to report the FAF Lawsuit, arguably in violation of NASDAQ and SEC reporting requirements, appears to be yet another failure by SITO’s Board. As referenced above, TAR commenced litigation against SITO due to SITO’s default on its loan documents with TAR including:

  • Failing to comply with its obligations to use best efforts to monetize the patents that are collateral under the loan documents.
  • Failing to provide monthly (and on demand) certifications on information relating to the patent portfolio, including, among other things, the company’s efforts with respect to the monetization of such patents.
  • Failing to provide reports calculating patent monetization revenues by the 15th of every month.
  • Incurring indebtedness outside of the ordinary course of the company’s business by paying significant legal fees of a SITO stockholder.
  • Failing to provide monthly certifications regarding the company’s amount of cash and cash equivalents on hand.

It appears to TAR that SITO’s failure to disclose the FAF Lawsuit is consistent with its prior defaults under the TAR loan documents and TAR urges SITO’s Board to comply with its disclosure obligations.