PINX:VGGL Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2012
 
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from_______to_______

Commission File No. 001-33902
 
Viggle Inc.
 (Exact name of Registrant as specified in its charter)
 
Delaware
 
33-0637631
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
902 Broadway
11th Floor
New York, New York 10010
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (212) 231-0092

Securities Registered Pursuant to Section 12(b) of the Act:   None
 
Securities Registered Pursuant to Section 12(g) of the Act:
 
Common Stock, par value $0.01 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o   No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  o   No  þ
  
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  o No  o NOTE:  We became subject to these reporting requirements on July 24, 2012, and the Company has filed all reports required to be filed under Section 13 or Section 15(d) since such date.
 
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 þ    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 o
Accelerated filer
 o
Non-accelerated filer
 þ
Smaller reporting company
 o
(Do not check if a smaller reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on December 31, 2011, based on the closing price of such stock on the Pink Sheets on such date, was $256,694,000.
 
As of October 15, 2012, there were 76,470,041 shares of the registrant’s common stock outstanding.
 
Documents Incorporated by Reference:   None.
 


 
 

 
 
Viggle Inc.
Annual Report on Form 10-K
June 30, 2012
 
     
Page
 
PART I
         
Item 1.
Business
    3  
Item 1A.
Risk Factors
    10  
Item 1B.
Unresolved Staff Comments
    16  
Item 2.
Properties
    17  
Item 3.
Legal Proceedings
    17  
Item 4.
Mine Safety Disclosures
    17  
           
PART II
           
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    18  
Item 6.
Selected Financial Data
    19  
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    19  
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
    31  
Item 8.
Financial Statements and Supplementary Data
    32  
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    33  
Item 9A.
Controls and Procedures
     33  
Item 9B.
Other Information
     33  
           
PART III
           
Item 10.
Directors, Executive Officers and Corporate Governance
    34  
Item 11.
Executive Compensation
    37  
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    45  
Item 13.
Certain Relationships and Related Transactions, and Director Independence
    47  
Item 14.
Principal Accountant Fees and Services
    51  
           
PART IV
           
Item 15.
Exhibits, Financial Statements and Schedules
    52  
SIGNATURES
    53  
 
 
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PART I

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
 
In addition to historical information, this Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this Annual Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Important risks that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report and in our subsequent filings with the Securities and Exchange Commission (“SEC”). Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Annual Report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders.

ITEM 1.  
BUSINESS
 
Our Business
 
General
 
Our business is built on a simple concept:  Watch TV. Earn Rewards.  Viggle provides an interactive platform to create more engagement with TV content and more targeted advertising through a loyalty program that rewards our users for watching television. We seek to enhance the consumer TV experience by helping consumers find what shows to watch, making the shows they watch more fun, interesting, and exciting, and rewarding consumers for being loyal to the shows they do watch.  Users receive points for checking in to and interacting with their favorite TV shows and can then redeem these points for real items such as movie tickets, music and gift cards.  We plan to generate revenue through advertising and the sale of merchandise related to the TV shows and other entertainment viewed by users that would appear in users' mobile devices through the use of the application. We currently do not have any agreements in place with advertisers or vendors whereby the advertisers or vendors issue rewards to our users when the users redeem their points.  We have purchased and will continue to source rewards from vendors that we will issue to users upon the redemption of their points.  The Company has only generated minimal revenue to date, and there is no guarantee that we will be able to generate sufficient revenue in the future to continue to purchase gift cards from vendors.
 
Overview of our Business
 
Our Loyalty Platform
 
Consumers can access the platform through a free application, or app, that works on multiple types of mobile phones and tablets and is distributed through the Apple App store or the Google Play store.  The consumer downloads the app and creates an account.  Viggle allows consumers to play along with TV shows, share comments through social media, answer trivia questions or polls, chat with friends, or find out more information about the show while they watch TV.
 
The user experience is simple.  While watching TV, a user taps the "check in" button which activates the device's microphone.  Viggle collects an audio sample of what the user is watching on television and uses proprietary technology to convert that sample into a digital fingerprint. Within seconds, that proprietary digital fingerprint is matched against a database of reference fingerprints that are collected from approximately 185 English and Spanish television channels within the United States. We are able to verify TV check-ins across broadcast, cable, online, satellite, time-shifted and on-demand content. The ability to verify check-ins is critical because users are rewarded points for each check in. Users can redeem the points within the app's rewards catalogue for items that have a monetary value such as movie tickets, music and gift cards or for charitable donations.  Once a customer has "checked-in" to a show, the application provides a set of optional games, tools, and information to enhance the TV experience.

 
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Viggle points can be earned through a variety of activities.  In addition to television show check-in points, users can earn additional points by engaging with brand or network sponsored games, videos, polls or quizzes related to the show that they are watching. There are sweepstakes opportunities and instant win games for higher value prizes or unique experiences in addition to rewards. Our product is limited to participants who are 13 years of age or older.
 
Since our launch on January 25, 2012, and through June 30, 2012, 921,262 users have registered for our app, of which we have deactivated 34,339 for a total of 886,923 registered users.  Of those, we have accumulated 701,689 registered active users as of June 30, 2012.  Registered active users are computed by determining those users that are both registered on the Viggle app and have earned points within the preceding 90 days.  In addition, for the three months ended June 30, 2012, we have accumulated an average of 290,904 monthly active users.  Monthly active users are computed by determining those users that are both registered on the Viggle app and that have earned or redeemed points, other than points received for registering for the Viggle app, in the particular month.  As of June 30, 2012, our members have checked-in to 52,079,652 TV programs, spent an average of 88 minutes of active time within the Viggle app per session, completed an average of 26.0 engagements per day. Such number is derived by dividing the average number of engagements each day by the total number of active users each day. Active users are defined as those who earned a point or redeemed a point that day. Users have redeemed a total of 822,362 rewards.  It is not possible to earn points on the Viggle app without registering.  In order to avoid double-counting and limit the instances of fraud, the app is limited to five accounts per device (so as to allow for use by family members sharing a device), users are limited to a maximum of 6,000 points per day and users are not able to share or combine points with different users or devices.  While it is possible for users to establish multiple accounts which could overstate our actual number of registered active users and permit those fraudulent users to attempt to evade our rules in an effort to accumulate excess points by checking-in to TV shows at the same time on different devices, we monitor for such activity and, when discovered, take corrective action according to our published terms and conditions.
 
Our Technology
 
The first version of the application was approved by Apple and launched to the public in the Apple iTunes App Store on January 25, 2012. It has been updated periodically.  The approved version of the app works on Apple iOS devices such as the iPhone, iPad and iPod Touch.  On June 27, 2012, we released a version of the application for use on Android smartphones and tablets.  Although we have launched the app to the public, there is no guarantee how effectively the technology will perform. We continuously test and update the application with a goal of improving overall performance and usability. 
 
We will consider adding versions for other mainstream mobile operating systems such as Windows Phone and Blackberry based on demand and other business factors. Distribution of the product will occur via regular online marketplaces for content and applications used by such mobile operating systems, and will include iTunes for iOS devices or the Android marketplace for devices using the Android operating system.
 
 
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The back-end technology for the application has been designed to accommodate the significant numbers of simultaneous check-ins required to support primetime television audiences. This back-end technology is currently operational and we have the capacity to support simultaneous check-ins around major television events such as the Super Bowl. In addition to our own dedicated co-location facilities on the east and west coasts, we are using third-party cloud computing services from Amazon Web Services to help us scale our technical capacity as efficiently as possible.
 
The technology supporting our unique feature of digital fingerprinting and our matching technology is subject to a currently unissued but pending patent.
 
Revenue
 
The application became available to the public on January 25, 2012.  We have begun to generate revenues. Advertising is sold direct to brand marketers and television networks or through advertising agencies by our dedicated sales team.  Our focus is on brand marketers that are most relevant to our target demographic of consumers between the ages of 18-49, and are active in television, digital and retail marketing. Our sales team is also briefing large advertising and media agencies on our capabilities so that they might recommend integration of our application into their client proposals.  We have and plan to generate revenue from standard mobile media advertising sales and affiliate programs: (i) when our users click and view advertisements in our application, (ii) when our users complete an engagement (defined as a poll or quiz or game or slide show) appearing in our application that is created by an advertising agency or the Company's brand partners or by our team; and (iii) through affiliate or bounty commissions to third parties if our users purchase items or subscribe to services after clicking from our application to other applications and/or websites.  With the exception of one-time sponsorships with advertisers (which are charged a separate and specific fee), all advertising is serviced via a third-party advertising server for billing and verification purposes.  Revenues are generated by measuring delivered impressions on a cost per thousand (CPM) basis and completed engagements on a cost per engagement (CPE) basis.  Therefore, our sales team contracts with brand advertisers to deliver a specific number of impressions and/or engagements for a specific price per thousand impressions (CPM) and/or per completed engagement.  The third-party ad server then serves the ads and/or engagements within the application during the course of using the Viggle app.  As impressions and engagements are delivered and completed, we bill brand partners or advertising agencies on a monthly basis for the media delivered at our contracted rates. 
 
Initially, we anticipate revenues to be generated substantially in the United States.
 
Target Consumer 
 
While most people watch television, we are targeting male and female consumers between the ages of 18-49.  This target audience was selected due to the amount of television they consume on a weekly basis as well as the likelihood that they will have smartphones and other wireless devices such as tablets and laptops with them while viewing television. To build our user base, we will target this audience using traditional media techniques such as direct response, banner, and mobile advertising, public relations, search engine optimization and search engine marketing across online, broadcast and print media outlets. 
 
When a user signs up for and downloads our app, we collect the user's email, zip code, television provider and date of birth. The email enables us to verify the user and reduces the chance of fraud. The zip code allows us to present a relevant list of cable and satellite providers to the user to deliver the correct channel listing data. Knowing the television provider in turn helps us to increase the rate of success for television show matching. We encourage the user to provide additional information such as their physical mailing address.  Knowing the user's birthday allows us to verify that the user is at least 13 years old. The physical mailing address is required for the delivery of physical goods selected by the user in the application rewards catalog.  This information also helps us better target relevant advertising to the user. We manage this information in adherence with standard privacy policies and regulations.
 
Competition
 
The market for digital and social media applications is intensely competitive and subject to rapid change.  New competitors may be able to launch new businesses at relatively low cost.  Many consumers maintain simultaneous relationships with multiple digital brands and products and can easily shift consumption from one provider to another. Additionally, the “Social TV” category is nascent and has yet to attract the attention of the mainstream consumer and marketers.  Many of our competitors are larger, more established and well-funded and have a history of successful operations.  Although the Company launched its first version of the application on January 25, 2012, there can be no guarantee of how successful the product will be or how effectively the technology will perform.
 
 
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While there are a variety of companies currently in the market that offer either manual check-in or audio verification, we believe our application, if it performs as expected, will differ significantly because (a) we offer users real, as opposed to virtual, rewards such as movie tickets, music and gift cards, and (b) we drive our customers to engage and interact with TV shows for longer periods of time.  We offer a comprehensive range of features and functionality, such as automatic check-ins using audio verification, in-app digital advertising engagements (such as games or videos, real-time polls and quizzes) and full social media integration that reward our users for being more loyal to their TV shows and find more enjoyment at the same time. Such integration makes it easy for users to share what they are doing within the application with their social network and to follow show-specific commentary on Twitter and Facebook. We also offer the user a listing of current or upcoming shows for which they can set reminders, learn more information and indicate their support of the show by “liking” it.  
 
Other companies in the “Social TV” market focus on the simple ability of a user to communicate their television viewing activity to others in the user's social media circles.  Instead of real rewards, these other companies offer their users virtual points, leader board status, digital badges or stickers. We believe that our target market will be motivated by the ability to earn real rewards on a frequent basis and to interact in real time via show-specific polls, quizzes, videos and games.
 
Our principal competitors can be grouped into the following categories:
 
  
Companies that do not offer audio sampling or matching technology. With these products, users have to manually enter information into the app about what they are watching or doing. Users are primarily incentivized with status and/or virtual goods, such as digital badges or stickers.  Companies in this category include: Get Glue, Miso, Kiip, Win-View, ScreenTribe, TV Guide, Yap.TV, Nielsen's RewardTV.com and CrowdTwist.  Except for ScreenTribe and Nielsen's RewardTV.com, none of these companies provide real rewards.
 
  
Companies that deliver many of the same social sharing features as those listed above and also utilize audio sampling and matching so users can identify and share what they are doing automatically.  Companies in this category include: Shazam, Zeebox, ConnecTV, IntoNow, and WinView. None of these companies provide a continuous real rewards program.  Their offers are made on a limited one-off basis.
 
  
Companies that offer non-branded or white label features and functionality as components of a third party brand's products. Companies in this category include: Ex-Machina, Civolution, Wio, Media-Sync, BunchBall, Zeitera, Audible Magic, I.TV, digit, Umami, tvtak,  and GraceNote. None of these companies offer a cohesive product with the breadth and focus of our application, nor do they directly offer real rewards.
 
Since we have only recently launched our application, we have limited experience in its actual performance and there is no assurance it will perform as we expect or that users will prefer our application over the applications of our competitors.
 
The Company’s Formation and Former Line of Business
 
Viggle Inc. was incorporated in Delaware in July 1994, and was formerly known as Function(x) Inc., Function (X) Inc., and Gateway Industries, Inc.  We had no operating business or full-time employees from December 1996 to March 2000, when we acquired all of the outstanding common stock of Oaktree.  Through Oaktree, we provided cost effective marketing solutions to organizations needing sophisticated information management tools.  All of the following amounts, other than share information, set forth in this section appear in thousands.

We acquired Oaktree on March 21, 2000 pursuant to a stock purchase agreement.  The purchase price of Oaktree was approximately $4,100, consisting of $2,000 in cash, the issuance of 600,000 restricted shares of common stock of the Company and the assumption of approximately $650 of debt, which was repaid at the closing date, plus certain fees and expenses.  In December 2007, Oaktree sold 5,624 shares of its common stock to Marketing Data, Inc., an affiliate of an officer of Oaktree, for $1.  As a result, our ownership interest in Oaktree was reduced to 20% of Oaktree’s outstanding common stock.  In connection with this transaction, we agreed to make a capital contribution of $225 to Oaktree at closing.  As a result of this transaction, we recorded a loss on sale of subsidiary in the amount of $4,238 during the year ended December 31, 2007.

In July 2005, we sold 500,000 shares of 10% series A preferred stock to Steel Partners II, L.P. (“Steel Partners II”), an affiliate of Jack L. Howard, who was at the time our Chairman of the Board and Chief Executive Officer and our largest stockholder, for a purchase price of $1,467.  In addition, we sold to Steel Partners II warrants to purchase 1,500,000 shares of common stock, with an exercise price of $0.22 per share, for a purchase price of $33.  On May 15, 2008, we repurchased all of the preferred stock and warrants originally issued to Steel Partners II for a purchase price of $1,000.  None of the warrants were ever exercised by Steel Partners II and no dividend was paid on the preferred stock.

On October 24, 2010, Oaktree repurchased our remaining 20% interest in Oaktree for $0.10.  As a result, Marketing Data, Inc. owned 100% of the outstanding common stock of Oaktree.  From October 2010, after the Company completed the disposition of its interest in Oaktree Systems, Inc. (“Oaktree”) through the date of the Recapitalization in February 2011, the Company was not active and had no operating business.

 
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The Recapitalization
 
As previously disclosed, on February 7, 2011, Viggle Inc. (formerly Function(x) Inc., Function (X) Inc., and Gateway Industries, Inc., the “Company”) entered into the Agreement and Plan of Recapitalization (the “Recapitalization Agreement”, a copy of which is listed as and incorporated by reference herewith as Exhibit 10.1) by and among the Company, Sillerman Investment Company LLC, a Delaware limited liability company (“Sillerman”), and EMH Howard LLC, a New York limited liability company (“EMH Howard”).   

On February 16, 2011, the Company effectuated a 1 for 10 reverse split of its issued and outstanding common stock (the “ 1 for 10 Reverse Split”).  Under the terms of the 1 for 10 Reverse Split, each share of common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one-tenth of one share of common stock, without any action by the stockholder. Fractional shares were rounded up to the nearest whole share.
On June 7, 2012, the Company effectuated a 1 for 2 reverse split (the “1 for 2 Reverse Split”). Under the terms of the 1 for 2 Reverse Split, each share of common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one-half of one share of common stock, without any action by the stockholder. Fractional shares were rounded up to the nearest whole share.
 
All of the following amounts, other than share information, set forth in this section appear in the thousands.  All share amounts and per share prices in this document from this point forward reflect both the 1 for 10 split effectuated on February 16, 2011 and the 1 for 2 split effectuated on June 7, 2012 as described above.

Pursuant to the Recapitalization Agreement, Sillerman, together with other investors approved by Sillerman, invested in the Company by acquiring 60,000,000 newly issued shares of common stock of the Company in a private placement transaction at a price of $0.06 per share, as a result of which Sillerman and the other investors acquired approximately 99% of the outstanding shares of common stock, with Sillerman (together with Robert F.X. Sillerman personally) directly or indirectly beneficially owning more than a majority of the outstanding shares of common stock. Upon consummation, the proceeds of the private placement of $3,600 ($220 in cash and $3,380 in five-year promissory notes with interest accruing at the annual rate equal to the long-term Applicable Federal Rate in effect as of the date of the Recapitalization Agreement, which was 4.15% per annum) were received.
 
On February 16, 2011, immediately after the Recapitalization was consummated, the Company issued 6,616,299 shares of common stock to an institutional investor (for $10,000) at a price of approximately $1.52 per share, and 470,000 shares of common stock to an accredited investor ($500) at a price of approximately $1.06 per share. The shares of common stock issued in such placements were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an exemption from registration for transactions not involving a public offering under Section 4(2) of the Securities Act, and the safe harbors for sales under Section 4(2) provided by Regulation D promulgated pursuant to the Securities Act.  Transfer of the shares was restricted by the Company in accordance with the requirements of the Securities Act.

On February 16, 2011, the Company issued a five year warrant for 50,000 shares with an exercise price of $1.60 per share to Berenson Investments LLC.  Berenson & Company, LLC, an affiliate of Berenson Investments LLC, was the financial advisor to Sillerman in connection with the Recapitalization.  On May 9, 2011, Berenson Investments LLC exercised the warrant and paid $80 for 50,000 shares of the Company's common stock.
 
As part of the Recapitalization, the Company also issued 125,000 shares to J. Howard, Inc., an entity affiliated with Jack L. Howard, a director and officer of the Company prior to the Recapitalization, and its designees (which included former directors of the Company) in connection with partially extinguishing outstanding debt of $171 owed to J. Howard, Inc. The fair market value of the shares at issuance was $0.06 per share.  The remaining debt of $163 was satisfied on February 15, 2011 by payment to J. Howard, Inc. in such amount.  In addition, J. Howard, Inc. was paid $37 to be used for payment of expenses incurred in connection with the Recapitalization on behalf of the Company.
 
 
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The newly recapitalized company changed its name to Function (X) Inc. effective as of the date of the Recapitalization and changed its name to Function(x) Inc. on June 22, 2011 and changed its name to Viggle Inc. on May 29, 2012.  It now conducts its business under the name Viggle Inc., with the ticker symbol VGGL.  The Company has five wholly-owned subsidiaries, Function(x) Inc., Project Oda, Inc., Sports Hero Inc., Loyalize Inc. and Viggle Media Inc., each a Delaware corporation.
 
Acquisitions
 
WatchPoints Acquisition (amounts in thousands except share and per share data)
 
On September 29, 2011 in furtherance of its business plan, the Company, through its wholly-owned subsidiary, Project Oda, Inc., purchased certain assets of Mobile Messaging Solutions, Inc.'s Watchpoints business. The consideration for such transaction consisted of $2,500 in cash and 100,000 shares of the Company's common stock with a fair value of $16.00 per share on the date of the transaction. The Watchpoints business is involved in developing, selling, maintaining and improving an interactive broadcast television application utilizing audio recognition technology. The assets purchased, and the related value allocated to each, include intellectual property ($4,209) and certain computer-related equipment ($11). The intellectual property included patent filings for audio verification technology and the provision of value-added programming/services based on such verification and trademarks for the “Watchpoints” name. The value allocated to the intellectual property is being amortized over the expected useful life of the Company's software product. The Company also paid Kai Buehler, the CEO of Watchpoints, a $300 finder's fee, which was recorded to selling, general and administrative expenses in the year ended June 30, 2012, and appointed him as a full-time Senior Vice President of the Company.
 
Loyalize Acquisition (amounts in thousands except share and per share data)

On December 31, 2011, in furtherance of its business plan, the Company, through a newly created wholly owned subsidiary, FN(x) I Holding Corporation,  now known as Loyalize Inc (“FN(x)I” or “Loyalize”), purchased from Trusted Opinion Inc. (“Trusted Opinion”), substantially all of its assets, including certain intellectual property and other assets relating to the “Loyalize” business owned by Trusted Opinion, pursuant to an asset purchase agreement executed by the Company and FN(x) I on such date (the “Asset Purchase Agreement”) .  In consideration for its purchase of the such assets, the Company agreed to pay Trusted Opinion $3,000 in cash and agreed to deliver 137,519 of the Company's common shares as follows: 32,627 shares delivered directly to Seller within three business days of delivery of the financial statements and 104,892 shares (the “Escrowed Shares”) delivered within three business days of closing to American Stock Transfer and Trust Company LLC, as escrow agent, to be held until December 31, 2012 to secure certain representations, warranties and indemnities given by Trusted Opinion under the Asset Purchase Agreement.  The Company valued the 137,519 common shares as of the date of closing at $1,719 based on the $12.50 per share closing price of its common stock on the date of closing.  In addition to certain minor purchase price adjustments to be made post-closing, the Company is obligated to also fund as a purchase price adjustment the difference, if any, by which $1,839 exceeds the calculated value (computed based on the average closing price of the Company's common shares during the 20 days prior to December 31, 2012) of the 137,519 shares on December 31, 2012, either in cash or in common shares of the Company, at the Company's option.  Such additional consideration shall not be payable until claims which remain subject to determination and secured by all the Escrowed Shares are no longer outstanding.  The additional consideration shall be eliminated to the extent final claims exceed the value of the shares then remaining in escrow.
 
TIPPT Media Inc. (amounts in thousands except share and per share data)
 
The Company made an acquisition of  65% of TIPPT Media Inc., a Delaware corporation (“TIPPT”), in December 2011 and during the months following the acquisition determined that the TIPPT business did not fit into the Company's long term strategy.  Accordingly, in May 2012 the Company sold 50% of its 65% interest to TIPPT LLC.  Below is a summary of both of these transactions.

On December 23, 2011, the Company obtained a sixty-five (65%) percent ownership interest in TIPPT, which will sell coupons and/or discount codes on behalf of third parties by engaging individuals with a public profile to promote products via internet-based social networking and microblogging websites and other similar internet-based methods of electronic communications.   In consideration for its investment in TIPPT, the Company paid $2,000 in cash, forgave the repayment of a $250 promissory note owed to the Company by TIPPT LLC, a Delaware limited liability company, and the minority stockholder of TIPPT, and agreed to issue a warrant to purchase 500,000 shares of the Company's common stock at an exercise price equal to 115% of the 20-day trading average of the Company's common stock if certain performance conditions were met within four months of the closing of the transaction.   The shares of common stock exercisable under the warrant were valued at $2,378 using the Black Scholes valuation model.
 
 
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In connection with the transaction, the Company entered into a five-year Line of Credit Agreement, pursuant to which the Company may provide advances to TIPPT to finance its working capital obligations, in an aggregate principal amount not to exceed $20,000, with an interest rate not to exceed 4% per annum.  The facility is secured by the remaining 35% of the common shares of TIPPT owned by TIPPT LLC, subject to release under certain circumstances described in the loan agreement in the event the shares are converted into common shares of the Company.  The credit facility may be drawn for approved expenses in accordance with the budget approved at the time of the commitment, as updated quarterly.  In addition, the Company entered into a Stockholders Agreement with TIPPT LLC regarding, among other things, restrictions on the transfer of shares in TIPPT and the potential exchange under certain circumstances of all or a portion of the 35% interest in TIPPT held by TIPPT LLC into the Company's common stock .
 
The Company determined that immediately before the transaction , the activities of TIPPT did not constitute a business.  Therefore, the Company accounted for the TIPPT transaction as an asset acquisition in accordance with  ASC 350, Intangibles - Goodwill and Other Intangible Assets.

On May 14, 2012, the Company sold to TIPPT LLC a 50% ownership interest in TIPPT for $500, payable by a Purchase Money Note with interest accruing at 4% per annum and maturing on December 31, 2016.  The Company retained a 15% ownership interest in TIPPT.  As part of the transaction, the Company's obligation to provide advances to TIPPT under the $20,000 line of credit was terminated.  Instead TIPPT issued an Amended and Restated Promissory Note to the Company pursuant to which TIPPT agreed to pay the Company $1,201, which represents $701 that was outstanding under the line of credit on April 30, 2012 and an additional $500 that the Company agreed to loan to TIPPT.  In addition, as part of the transaction, the Company terminated the stockholders agreement and entered into an Amended and Restated Stockholders Agreement (the “Stockholders Agreement”) with TIPPT LLC to provide the Company with certain stockholder protections regarding the Company's remaining interest in TIPPT.  The Company's representatives on the TIPPT board of directors, Mr. Sillerman, Ms. Scardino, and Mr. Nelson, resigned from the TIPPT board of directors.  The Company is entitled to a board observer on the TIPPT Media Inc. board.  The warrant to purchase 500,000 shares of the Company's common stock to TIPPT LLC was never issued.
 
As part of the Company's review of the fair value of its intangible assets for the year ended June 30, 2012, the Company has 1) derecognized the $2,378 of contingent consideration attributable to the Company's warrant that was to be issued to TIPPT LLC because the warrant was never issued; and 2) performed a review of the fair value of the remaining $2,250 carrying value of such agreement.  The Company has taken an impairment charge for the full carrying value of such agreement.  Accordingly, the carrying value as of June 30, 2012 is zero.  Also, the Company has fully reserved the $500 Purchase Money Note and the $1,201 relating to the Amended and Restated Promissory Note described above.
 
Intellectual Property

As of June 30, 2012,  the Company has filed to protect its initial trademarks and has filed patents to protect its technology, which are currently pending.  We anticipate that there will be patent and other filings in the future.  We intend to protect any intellectual property rights we may acquire in the future through a combination of patent, trademark, copyright, rights of publicity, and other laws, as well as licensing agreements and third party nondisclosure and assignment agreements.  Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.

Employees
 
As of June 30, 2012, the Company had a total of 88 full-time employees.  Management considers its relations with its employees to be very good.
 
Principal Executive Offices
 
The principal executive offices of the Company are located at 902 Broadway, 11th Floor, New York, New York 10010 and our telephone number is (212) 231-0092.
 
 
9

 
 
Available Information
 
The Company is subject to the informational requirements of Section15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) and electronically files reports and other information with, and electronically furnishes reports and other information to, the Securities and Exchange Commission. Such reports and other information filed or furnished by the Company may be inspected and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The Securities and Exchange Commission also maintains an Internet site that contains reports, proxy statements and other information about issuers, like us, who file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission’s website is http://www.sec.gov.
 
In addition, the Company makes available free of charge through its website, http://www.viggle.com, its Annual Reports on Form 10-K and quarterly reports on Form 10-Q (commencing March 30, 2011), current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission. This reference to our Internet website does not constitute incorporation by reference in this report of the information contained on or hyperlinked from our Internet website and such information should not be considered part of this report.
 
ITEM 1A.  
RISK FACTORS
 
Various portions of this report contain forward-looking statements that involve risks and uncertainties. Actual results, performance or achievements could differ materially from those anticipated in these forward-looking statements as a result of certain risk factors, including those set forth below and elsewhere in this report.
 
Since we have a limited operating history and minimal revenues to date, we may be unable to achieve or maintain profitability.  The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a small developing company.
 
We have limited financial resources and minimal revenues to date. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a small developing company starting a new business enterprise and the highly competitive environment in which we will operate. Since we have a limited operating history, we cannot assure you that our business will be profitable or that we will ever generate sufficient revenues to fully meet our expenses and totally support our anticipated activities.
 
Our ability to continue as a business and implement our business plan will depend on our ability to raise sufficient debt or equity.   There is no assurance such debt and/or equity offerings will be successful or that we will remain in business or be able to implement our business plan if the offerings are not successful.
 
If we are unable to successfully develop and market our products or our products do not perform as expected, our business and financial condition will be adversely affected.
 
With the release of any new product release, we are subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in development and implementation, and failure of products to perform as expected. In order to introduce and market new or enhanced products successfully with minimal disruption in customer purchasing patterns, we must manage the transition from existing products in the market. There can be no assurance that we will be successful in developing and marketing, on a timely basis, product enhancements or products that respond to technological advances by others, that our new products will adequately address the changing needs of the market or that we will successfully manage product transitions. Further, failure to generate sufficient cash from operations or financing activities to develop or obtain improved products and technologies could have a material adverse effect on our results of operations and financial condition.
 
In addition, our technology is under continual development. While certain aspects of the product may currently be functioning on a basic level, we must perform more testing to ensure that the different components work together effectively and the audio sampling and matching technology being developed by us is accurate, performs well and integrates with metadata and points systems.  Although the product has been launched for use on Apple iOS and Android devices, there is no assurance that the product will generate sufficient income from brand and network advertisers, which could have a material adverse effect on our results of operations and financial condition.

 
10

 
 
Since there is substantial doubt as to the Company's ability to continue as a going concern, as noted in BDO's opinion for the fiscal year ended 6/30/2012,  it may be difficult for the Company to effectuate its business plan.
 
The Company has incurred losses since its inception and has not yet been successful in establishing profitable operations. Our financial statements have been prepared on a going concern basis.  Unanticipated costs and expenses, or the inability to generate revenues, could require additional financing; which would be sought through equity or debt financing, or asset sales. The fact that there are going concern considerations may make raising additional funds or obtaining loans more difficult. To the extent financing is not available, the Company may not be able to, or may be delayed in, implementing its business plan, developing its property and/or meeting its obligations. This could result in the entire loss of any investment in shares of the Company's common stock. The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate additional means of financing in order to satisfy its working capital and other cash requirements. Details regarding these concerns are included in the notes to the most recent Financial Statements included in this filing (for the fiscal year ended June 30, 2012).
 
We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing capital stock that would dilute your ownership.
 
We have financed our operations, and we expect to continue to finance our operations, acquisitions and develop strategic relationships, by issuing equity or convertible debt securities, which could significantly reduce the percentage ownership of our existing stockholders. Furthermore, any newly issued securities could have rights, preferences and privileges senior to those of our existing stock. Moreover, any issuances by us of equity securities may be at or below the prevailing market price of our common stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of stock to decline. We may also raise additional funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our shares of common stock. The holders of any debt securities or instruments we may issue would have rights superior to the rights of our common stockholders.
 
Our common stock price may fluctuate significantly and you may lose all or part of your investment.
 
Because we are a newly operating company, there are few objective metrics by which our progress may be measured. Consequently, we expect that the market price of our common stock will likely fluctuate significantly. There can be no assurance whether or when we will generate revenue from the license, sale or delivery of our unique products and services. In the absence of product revenue as a measure of our operating performance, we anticipate that investors and market analysts will assess our performance by considering factors such as:
 
  
announcements of developments related to our business;
 
  
developments in our strategic relationships with companies;
 
  
our ability to enter into or extend investigation phase, development phase, commercialization phase and other agreements with new and/or existing partners;
 
  
announcements regarding the status of any or all of our collaborations or products;
 
  
market perception and/or investor sentiment regarding our products and services;
 
  
announcements regarding developments in the digital and mobile technology and the broadcast and entertainment industries in general;
 
  
the issuance of competitive patents or disallowance or loss of our patent or trademark rights; and
 
  
quarterly variations in our operating results.
 
We will not have control over many of these factors but expect that our stock price may be influenced by them. As a result, our stock price may be volatile and you may lose all or part of your investment.
 
 
11

 
 
The market for purchases and sales of our common stock may be very limited, and the sale of a limited number of shares could cause the price to fall sharply.
 
Our securities are very thinly traded. Accordingly, it may be difficult to sell shares of the common stock without significantly depressing the value of the stock. Unless we are successful in developing continued investor interest in our stock, sales of our stock could continue to result in major fluctuations in the price of the stock.

Since we do not intend to declare dividends for the foreseeable future, and we may never pay dividends, you may not realize a return on your investment unless the price of our common stock appreciates and you sell your common stock.
 
We will not distribute cash to our stockholders until and unless we can develop sufficient funds from operations to meet our ongoing needs and implement our business plan. The time frame for that is inherently unpredictable, and you should not plan on it occurring in the near future, if at all.  Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time.  Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment.  Investors seeking cash dividends should not purchase our common stock.
 
Since we are controlled by current insiders and affiliates of the Company, you and our other non-management shareholders will be unable to affect the outcome in matters requiring shareholder approval.
 
As of October 15, 2012, approximately 55,512,455 shares of our common stock, not including currently exercisable warrants, are owned by Sillerman and current affiliates and insiders representing control of approximately 73% of the total voting power, with Sillerman, together with Robert F.X. Sillerman personally, directly or indirectly beneficially owning more than a majority of the outstanding shares of common stock.  As a result, Sillerman essentially has the ability to elect all of our directors and to approve any action requiring stockholder action, without the vote of any other stockholders.  It is possible that the interests of Sillerman could conflict in certain circumstances with those of other stockholders.  Such concentrated ownership may also make it difficult for our shareholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into other transactions that require shareholder approval.  These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
 
We rely on key members of management, the loss of whose services could adversely affect our success and development.
 
Our success depends to a certain degree upon certain key members of the management. These individuals are a significant factor in our growth and ability to meet our business objectives.  In particular, our success is highly dependent upon the efforts of our executive officers and our directors, particularly Robert F.X. Sillerman, our Executive Chairman, Chief Executive Officer, and a Director.  The loss of our executive officers and directors could slow the growth of our business, or it may cease to operate at all, which may result in the total loss of an investor's investment.
 
Compensation may be paid to our officers, directors and employees regardless of our profitability, which may limit our ability to finance our business plan and adversely affect our business.
 
Robert F.X. Sillerman, our Executive Chairman and Chief Executive Officer and a director and other officers are receiving compensation and any other current or future employees of our company may be entitled to receive compensation, payments and reimbursements regardless of whether we operate at a profit or a loss. Any compensation received by Mr. Sillerman or any other senior executive in the future will be determined from time to time by the board of directors or our Compensation Committee.  Such obligations may negatively affect our cash flow and our ability to finance our business plan, which could cause our business to fail.
 
Some of our officers and directors may have conflicts of interest in business opportunities that may be disadvantageous to us.
 
Robert F.X. Sillerman, our Executive Chairman and director, and Mitchell Nelson, our Executive Vice President, General Counsel, Secretary and director, are each engaged in other business endeavors, including serving as executive officers of Circle Entertainment Inc. (“Circle”).  Additionally, Mr. Sillerman is also the Chairman of SFX Holding Corporation ("SFX"), a new company in the live entertainment business.  Under Mr. Sillerman's employment agreement with the Company, he is obligated to devote his working time to the Company's affairs, but may continue to perform his responsibilities as an executive officer of Circle, as well as devote time to other outside non-competitive businesses.  Mr. Sillerman has agreed to present to the Company any business opportunities related to or appropriate for the Company's business plan.  Pursuant to Mr. Nelson's employment agreement, he is obligated to devote such time and attention to the affairs of the Company as is necessary for him to perform his duties as Executive Vice President and General Counsel.  He is also entitled to perform similar functions for Circle pursuant to the shared services agreement described in the section of entitled “Certain Relationships and Related Transactions” below.  Although Circle, SFX, and the Company have generally different business plans, interests and programs, it is conceivable there may be a conflict of interest in determining where a potential opportunity should be brought.  Conflicts of interest are prohibited as a matter of Company policy, except under guidelines approved by the board of directors, as set forth in the Company's Code of Business Conduct and Ethics.  The Company's Code of Business Conduct and Ethics also sets forth the procedures to follow in the event that a potential conflict of interest arises.  For a description of the Company's Code of Business Conduct and Ethics, please see the section entitled “Corporate Governance” below.

 
12

 
 
Our business and growth may suffer if we are unable to attract and retain key officers or employees.
 
Our success depends on the expertise and continued service of our Executive Chairman and Chief Executive Officer, Robert F.X Sillerman, and certain other key executives and technical personnel. It may be difficult to find a sufficiently qualified individual to replace Mr. Sillerman or other key executives in the event of death, disability or resignation, resulting in our being unable to implement our business plan and the Company having no operations or revenues.
 
Furthermore, our ability to expand operations to accommodate our anticipated growth will also depend on our ability to attract and retain qualified media, management, finance, marketing, sales and technical personnel.  However, competition for these types of employees is intense due to the limited number of qualified professionals.  Our ability to meet our business development objectives will depend in part on our ability to recruit, train and retain top quality people with advanced skills who understand our technology and business.  The Company believes that it will be able to attract competent employees, but no assurance can be given that the Company will be successful in this regard. If the Company is unable to engage and retain the necessary personnel, its business may be materially and adversely affected.
 
We are uncertain of our ability to manage our growth.
 
Our ability to grow our business is dependent upon a number of factors including our ability to hire, train and assimilate management and other employees, the adequacy of our financial resources, our ability to identify and efficiently provide such new products and services as our customers may require in the future and our ability to adapt our own systems to accommodate expanded operations.
 
Because of pressures from competitors with more resources, we may fail to implement our business strategy profitably.
 
The digital and mobile technology business is highly fragmented and extremely competitive and subject to rapid change. The market for customers is intensely competitive and such competition is expected to continue to increase. We believe that our ability to compete depends upon many factors within and beyond our control, including the timing and market acceptance of new solutions and enhancements to existing businesses developed by us, our competitors, and their advisers.  Viggle is an entertainment company that utilizes digital media and Smartphone technology.  If we are successful, larger and more established entertainment companies with significantly greater resources may try to enter the market with similar technologies, and may be in better competitive positions than we are.  Many consumers maintain simultaneous relationships with multiple digital brands and products and can easily shift consumption from one provider to another.  Our principal competitors are in segments such as the following:
 
  
Applications promoting social TV experiences and discussions; and
 
  
White label providers of social media and media-specific applications.
 
In addition, new competitors may be able to launch new businesses at relatively low cost.  In addition, either existing or new competitors may develop new technologies, and our existing and potential advertisers may shift their advertising expenditures to these new technologies. Therefore, we cannot be sure that we will be able to successfully implement our business strategy in the face of such competition.
 
We may be unable to compete with larger or more established companies in two industries.
 
We face a large and growing number of competitors in the digital and mobile technology and entertainment industries.  If we successfully marry digital and mobile technology and entertainment, we will have competitors from both the digital and mobile and the entertainment industries. Many of these competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition, and more established relationships in the industry than does the Company. As a result, certain of these competitors may be in better positions to compete with us for customers and audiences. Further, our current and/or future competitors in the digital and mobile technology may develop or license technology that is similar to the Viggle app. We cannot be sure that we will be able to compete successfully with existing or new competitors.

 
13

 
 
If our products do not achieve market acceptance, we may not have sufficient financial resources to fund our operations or further development.
 
While we believe that a viable market exists for the products we are developing, there can be no assurance that such technology will prove to be an attractive alternative to conventional or competitive products in the markets that we have identified for exploitation. In the event that a viable market for our products cannot be created as envisaged by our business strategy or our products do not achieve market acceptance, we may need to commit greater resources than are currently available to develop a commercially viable and competitive product. There can be no assurance that we would have sufficient financial resources to fund such development or that such development would be successful. Further, our business plan requires the use of capital resources to purchase rewards for our rewards program, as discussed more fully below in the section entitled “Our Business.”  In addition, as we grow our number of registered active users, our rewards costs will increase.  We will need to increase our revenue per registered active user in order to cover our rewards costs and to become profitable, and there is no guarantee that we will be able to do so. There is no guarantee that we will have sufficient resources to fund our rewards program, which will have a material adverse effect on our business plan and operations.  In addition, if our products do not generate sufficient revenues, or we are unable to raise additional capital, we may be unable to fund our operations.  Our ability to raise additional funds will depend on financial, economic and other factors, many of which are beyond our control. There can be no assurance that, when required, sufficient funds will be available to us on satisfactory terms.

Our business will suffer if our network systems fail or become unavailable.
 
A reduction in the performance, reliability and availability of our network infrastructure would harm our ability to distribute our products to our users, as well as our reputation and ability to attract and retain users and content providers. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. Our systems could also be subject to viruses, break-ins, sabotage, acts of terrorism, acts of vandalism, hacking, cyber-terrorism and similar misconduct. We might not carry adequate business interruption insurance to compensate us for losses that may occur from a system outage. Any system error or failure that causes interruption in availability of products or an increase in response time could result in a loss of potential customers or content providers, which could have a material adverse effect on our business, financial condition and results of operations. If we suffer sustained or repeated interruptions, then our products and services could be less attractive to our users and our business would be materially harmed.
 
If we fail to detect fraud, including click fraud, other invalid clicks on ads, or improper engagements, we could lose the confidence of our current and potential advertiser clients, which would cause our business to suffer.
 
We are exposed to the risk of fraudulent and other invalid clicks or conversions that advertisers may perceive as undesirable. When a user signs up for and downloads our app, we collect the user’s email, zip code and television provider. The email enables us to verify the user and reduces the chance of fraud. While our terms and conditions limit one account per person and we have specific controls in place to avoid fraud, such as limiting the number of accounts allowed per device and the number of points per day, there is no guarantee that our controls will be effective. As a result, estimates of our registered active users may be inflated as there may be some instances of double-counting users. We are aware that some people will attempt to evade our rules in an effort to accumulate excess points through a multitude of methods including, but not limited to, establishing multiple accounts, mimicking app activity through “scripting,” and using multiple devices simultaneously. We monitor our users to determine if any are attempting to do so and consider this fraudulent activity a violation of our published terms and conditions. We invalidate users who violate these terms and conditions and continually make efforts to improve our systems to detect fraud and improve our defenses. To date, we have found limited inflated use in the range of one to two percent of engagements by our registered active users, and we have invalidated three to four percent of our registered active users for such suspicious activity. Invalid clicks could result from inadvertent clicks or click fraud, where a mobile device user intentionally clicks on ads for reasons other than to access the underlying content of the ads. If fraudulent or other malicious activity is perpetrated by others, and we are unable to detect and prevent it, the affected advertisers may experience or perceive a reduced return on their investment. High levels of invalid click activity could lead to dissatisfaction with our advertising services, refusals to pay, refund demands or withdrawal of future business. If fraudulent or other malicious activity occurs, and we are unable to detect and prevent it, we could also experience increased costs relating to awarding points as a result of these activities. Any of these occurrences could damage our brand and lead to a loss of advertisers and revenue and increased costs.
 
 
14

 
 
We may be unable to protect our intellectual property rights from third-party claims and litigation, which could be expensive, divert management's attention, and harm our business.
 
Our success is dependent in part on obtaining, maintaining and enforcing our proprietary rights and our ability to avoid infringing on the proprietary rights of others. We seek patent protection for those inventions and technologies for which we believe such protection is suitable and is likely to provide a competitive advantage to us.   Because patent applications in the United States are maintained in secrecy until either the patent application is published or a patent is issued, we may not be aware of third-party patents, patent applications and other intellectual property relevant to our products that may block our use of our intellectual property or may be used in third-party products that compete with our products and processes. In the event a competitor or other party successfully challenges our products, processes, patents or licenses or claims that we have infringed upon their intellectual property, we could incur substantial litigation costs defending against such claims, be required to pay royalties, license fees or other damages or be barred from using the intellectual property at issue, any of which could have a material adverse effect on our business, operating results and financial condition.
 
We also rely substantially on trade secrets, proprietary technology, nondisclosure and other contractual agreements, and technical measures to protect our technology, application, design, and manufacturing know-how, and work actively to foster continuing technological innovation to maintain and protect our competitive position.  We cannot assure you that steps taken by us to protect our intellectual property and other contractual agreements for our business will be adequate, that our competitors will not independently develop or patent substantially equivalent or superior technologies or be able to design around patents that we may receive, or that our intellectual property will not be misappropriated.
 
The SEC opened a formal order of investigation relating to a matter regarding certain dealings in our securities by an unaffiliated third party. In addition, we have also received an informal request from the SEC for the voluntary production of documents and information concerning certain aspects of our business and technology. Although we have provided documents in response to the SEC's request, there is no assurance that the SEC will not take any action against us.

The SEC opened a formal order of investigation relating to a matter regarding certain dealings in our securities by an unaffiliated third party. We have also received an informal request from the staff of the SEC, dated June 11, 2012, for the voluntary production of documents and information concerning certain aspects of our business and technology. We provided documents in response to such request on July 2, 2012, and supplements, as requested, and we intend to cooperate with the SEC regarding this matter. However, there is no assurance that the SEC will not take any action against us. A determination by the SEC to take action against us could be costly and time consuming, could divert the efforts and attention of our directors, officers and employees from the operation of our business and could result in sanctions against us, any or all of which could have a material adverse effect on our business and operating results.
 
Our Common Stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell companies.
 
Under a regulation of the SEC known as “Rule 144,” a person who has beneficially owned restricted securities of an issuer and who is not an affiliate of that issuer may sell them without registration under the Securities Act provided that certain conditions have been met. One of these conditions is that such person has held the restricted securities for a prescribed period, which will be 6 months or 1 year, depending on various factors. The holding period for our common stock would be 1 year if our common stock could be sold under Rule 144. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell company (other than a business combination related shell company) or that has been at any time previously a shell company. The SEC defines a shell company as a company that has (a) no or nominal operations and (b) either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. Until the Recapitalization, we were a shell company.
 
The SEC has provided an exception to this unavailability if and for as long as the following conditions are met:
 
 
The issuer of the securities that was formerly a shell company has ceased to be a shell company,
 
 
The issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act,
 
 
The issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on Form 8-K; and
 
 
At least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status as an entity that is not a shell company known as “Form 10 Information.”
 
 
15

 
 
As a result, although we have filed “Form 10 Information” as of July 24, 2012, stockholders who receive our restricted securities will be able to sell them pursuant to Rule 144 without registration only as long as we continue to meet those requirements and are not a shell company. No assurance can be given that we will continue to meet these requirements or that we will not again be a shell company. Furthermore, any non-registered securities we sell in the future or issue for acquisitions or to consultants or employees in consideration for services rendered, or for any other purpose will have limited or no liquidity until and unless such securities are registered with the Commission and/or until a year after we have complied with the requirements of Rule 144. As a result, it may be harder for us to fund our operations, to acquire assets and to pay our consultants with our securities instead of cash. Furthermore, it will be harder for us to raise funding through the sale of debt or equity securities unless we agree to register such securities with the Commission, which could cause us to expend additional resources in the future. In addition, if we are unable to attract additional capital, it could have an adverse impact on our ability to implement our business plan and sustain our operations.  Our status as a former “shell company” could prevent us from raising additional funds, engaging consultants, and using our securities to pay for any acquisitions, which could cause the value of our securities, if any, to decline in value or become worthless.
 
Changes to federal, state or international laws or regulations applicable to our business could adversely affect our business.
 
Our business is subject to a variety of federal, state and international laws and regulations, including those with respect to privacy, advertising generally, consumer protection, content regulation, intellectual property, defamation, child protection, advertising to and collecting information from children, taxation, employment classification and billing. These laws and regulations and the interpretation or application of these laws and regulations could change. In addition, new laws or regulations affecting our business could be enacted. These laws and regulations are frequently costly to comply with and may divert a significant portion of management's attention. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business.
 
 There are many federal, state and international laws that may affect our business including measures to regulate consumer privacy, the use of copyrighted material, the collection of certain data, network neutrality, patent protection, cyber security, child protection, subpoena and warrant processes, taxes and tax reporting (including issuing 1099’s to our users), gift cards, employee classification and others. If we fail to comply with these applicable laws or regulations we could be subject to significant liabilities which could adversely affect our business.

In addition, most states have enacted legislation governing the breach of data security in which sensitive consumer information is released or accessed. If we fail to comply with these applicable laws or regulations we could be subject to significant liabilities which could adversely affect our business.
 
Many of our potential partners are subject to industry specific laws and regulations or licensing requirements, including in the following industries: pharmaceuticals, online gaming, alcohol, adult content, tobacco, firearms, insurance, securities brokerage, real estate, sweepstakes, free trial offers, automatic renewal services and legal services. If any of our advertising partners fail to comply with any of these licensing requirements or other applicable laws or regulations, or if such laws and regulations or licensing requirements become more stringent or are otherwise expanded, our business could be adversely affected. Furthermore, these laws may also limit the way we advertise our products and services or cause us to incur compliance costs, which could affect our revenues and could further adversely impact our business.
 
There are a number of significant matters under review and discussion with respect to government regulations which may affect the business we intend to enter and/or harm our customers, and thereby adversely affect our business, financial condition and results of operations.
 
ITEM 1B. 
UNRESOLVED STAFF COMMENTS

None.

 
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ITEMS 2.  
PROPERTIES
 
The following table sets forth certain information with respect to the Company’s principal  locations as of June 30, 2011.
 
Location
 
Name of Property
 
Type/Use of Property
 
Approximate Size
 
Owned or Leased
902 Broadway
11th Floor
New York, NY
 
Corporate Office
 
Headquarters
 
16,500 sq. ft.
 
Leased until April 2022
333 Bryant Street    
San Francisco, CA
 
Satellite Office
 
Technology
 
2,773 sq. ft.
 
Leased until April 2015
2058 Broadway
Santa Monica, CA
 
Satellite Office
 
Sales/Technology
 
3,200 sq. ft.
 
Leased unitl March 2016
 
ITEM 3.  
LEGAL PROCEEDINGS

On August 17, 2012, the Company was served with patent infringement lawsuit filed on August 13, 2012 by Blue Spike, LLC ("Blue Spike") in the United States District Court for the Eastern District of Texas, Tyler Division (Civil Action No. 6:12-CV-526). The lawsuit claims patent infringement under U.S. Patent numbers 7,346,472, 7,660,700, 7,949,494, and 8,214,715 in connection with the Company's audio recognition technology.

Blue Spike has commenced suits against numerous companies involving the same patent family, including Peer Media Technologies, Inc., The Echo Nest Corporation, Free Stream Media Corp., iPharro Media GmbH, iPharro Media, Inc., Shazam Entertainment, Ltd., Texas Instruments Incorporated, BIO-Key International, Inc., TuneSat, LLC, Vercury Inc., and SoundHound.

The Company denies that it is infringing any valid, enforceable claims of the asserted patents and intends to vigorously defend itself against the lawsuit. The Company filed its answers on October 3, 2012.

We are subject to litigation and other claims that arise in the ordinary course of business. While the ultimate result of our outstanding legal matters cannot presently be determined, the Company does not expect that the ultimate disposition will have a material adverse effect on our results of operations or financial condition. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome will not have a material adverse effect upon our financial condition and results of operations.
 
ITEM 4.  
MINE SAFETY DISCLOSURES
 
Not applicable

 
17

 

PART II
 
ITEM 5.  
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock currently trades in the over the counter market and is quoted on the OTC QB Electronic Quotation Service under the symbol “VGGL.”
 
The following table sets forth the high and low bid prices of our common stock during the calendar year ended December 31, 2010 and through the second calendar quarter ended June 30, 2012.  The high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.
 
2010 (1)
 
High
   
Low
 
First quarter
  $ 0.70     $ 0.40  
Second quarter
  $ 0.70     $ 0.10  
Third quarter
  $ 0.20     $ 0.16  
Fourth quarter
  $ 0.60     $ 0.18  
2011
               
First quarter(1)(2)
  $ 56.00     $ 0.02  
Second quarter
  $ 25.00     $ 16.60  
Third quarter
  $ 21.40     $ 9.50  
Fourth quarter
  $ 18.00     $ 9.00  
2012
               
First quarter
  $ 17.80     $ 11.00  
Second quarter
  $ 5.45     $ 2.50  
 
(1
)
On February 16, 2011, the Company effectuated a 1 for 10 reverse split of its issued and outstanding common stock.  On June 7, 2012, the Company effectuated a 1 for 2 reverse split (the "1 for 2 Reverse Split") of its issued and outstanding common stock. The high and low bid prices before February 16, 2011 are listed to reflect both the 1 for 10 reverse split and the 1 for 2 reverse split on a retroactive basis.
 
(2
)
For the period January 1, 2011 to February 15, 2011 (pre reverse splits), the high bid was $9.00 and the low bid was $0.02. For the period February 16, 2011 to June 6, 2012 (post 1 for 10 reverse split), the high bid was $56.00 and the low bid was $16.00.
 
As of October 12, 2012, there were 146 holders of record of our common stock.
 
Dividend Policy
 
We currently intend to retain any future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. There are no outstanding preferred shares for our Company.  The terms of any future debt agreements we may enter into could prohibit or restrict the payment of cash dividends on our common stock.
 
 
18

 
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The table below shows information with respect to our equity compensation plans and individual compensation arrangements as of June 30, 2012.

 
Plan Category
 
(a)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
   
(b)
Weighted-Average Exercise Price of Outstanding Options Warrants, and Rights
   
(c)
Number of
Securities
Remaining
Available For
Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
 
      (#)    
($)
      (#)  
Equity compensation plans approved by security holders (1)
    5,954,168       6.24       9,045,832  
Equity compensation plans not approved by security holders (none)
                 

(1) 2,886,668 includes restricted shares which are not currently vested, and there is no exercise price for these.

For a description of our Executive Equity Incentive Plan, see Note 10 to our audited Consolidated Financial Statements included elsewhere in this report.

ITEM 6.  
SELECTED FINANCIAL DATA
 
The following selected consolidated financial and other data should be read in conjunction with, and are qualified by reference to, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the accompanying notes included elsewhere in this report. The consolidated balance sheet as of June 30, 2010 was derived from our audited consolidated financial statements not included in this report. The consolidated statements of operations data for the fiscal years ended June, 2012, 2011 and 2010 and the consolidated balance sheet data as of June 30, 2012 and 2011 was derived from our audited consolidated financial statements included in this report. The registrant was inactive for the fiscal years ending June 30, 2009 and 2008: accordingly no financial data is included for those periods.  The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.
 
     
Fiscal Year Ended June 30,
 
    2012     2011     2010     2009 (1)     2008 (1)  
    (in thousands except share and per share data)  
Statement of Operations Data:                                        
Revenues
  $ 1,735     $     $     $     $  
Cost of watchpoints and engagement points
    (5,639 )                        
Selling, general and administrative
    (92,572 )     (19,970 )     (9 )            
Loss from operations
    (96,476 )     (19,970 )     (9 )            
Other income (expense)
    (35 )     62                    
Net Loss
  $ (96,511 )   $ (19,908 )   $ (9 )   $     $  
                                         
Net loss per common share - basic and diluted
  $ (1.31 )   $ (0.40 )   $
(0.04
 
)   $     $  
                                         
Weighted average common shares outstanding - basic and diluted
    73,801,034       50,354,024       209,600              
                                         
Balance Sheet Data:                                        
Total assets   $ 20,950     $ 6,471     $                  
Long-term liabilities    
1,310
     
1,233
     
                 
Total stockholders' equity    
2,687
     
4,084
     
(78
)                
 
(1) Registrant was inactive.
 
ITEM 7.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the historical audited consolidated financial statements and footnotes of the Company’s historical audited consolidated financial statements and notes thereto included elsewhere in this Annual Report. Our historical results of operations reflected in our historical audited consolidated financial statements are not indicative of our future results of operations as we have entered a new line of business from which we do not currently generate revenue.
 
Overview
 
Viggle Inc. was incorporated in Delaware in July 1994, and was formerly known as Function (x) Inc, Function (X) Inc. and Gateway Industries, Inc.
 
In February 2011, the Company completed a Recapitalization with Sillerman and EMH Howard.  The newly recapitalized company changed its name to Function (X) Inc. effective as of the date of the Recapitalization, changed its name to Function(x) Inc. on June 22, 2011. On May 29, 2012, the Company changed its name to Viggle Inc.  We have five wholly owned subsidiaries, Project Oda, Inc., Sports Hero Inc., Loyalize Inc., Function(x) Inc. and Viggle Media Inc.  Upon completion of the Recapitalization, the Company changed course after being inactive from October 2010.  The Recapitalization and the resulting change in management were the initial steps in the Company developing a new operating business. Its new direction is intended to provide a platform for investments in media and entertainment, with a particular emphasis on digital and mobile technology.
 
Our business is built on a simple concept:  Watch TV. Earn Rewards.  Viggle provides an interactive platform to create more engagement with TV content and more targeted advertising through a loyalty program that rewards our users for watching television. We seek to enhance the consumer TV experience by helping consumers find what shows to watch, making the shows they watch more fun, interesting, and exciting, and rewarding consumers for being loyal to the shows they do watch.  Users receive points for checking in to and interacting with their favorite TV shows and can then redeem these points for real items such as movie tickets, music and gift cards.  We plan to generate revenue through advertising and the sale of merchandise related to the TV shows and other entertainment viewed by users that would appear in users' mobile devices through the use of the application. We currently do not have any agreements in place with advertisers or vendors whereby the advertisers or vendors issue rewards to our users when the users redeem their points.  We have purchased and will continue to source rewards from vendors that we will issue to users upon the redemption of their points.  The Company has only generated minimal revenue to date, and there is no guarantee that we will be able to generate sufficient revenue in the future to continue to purchase gift cards from vendors. 
 
 
19

 
 
The Company's loyalty program is delivered to consumers in the form of a free application, or app, that works on multiple device types, including mobile phones and tablets.  The user experience is simple.  The consumer downloads the app, creates an account and while watching TV, taps the check in button.  Using the device's microphone, the application collects an audio sample of what the user is watching on television and uses proprietary technology to convert that sample into a digital fingerprint. Within seconds, that proprietary digital fingerprint is matched against a database of reference fingerprints that are collected from approximately 185 English and Spanish television channels within the United States. We are able to verify TV check-ins across broadcast, cable, online, satellite, time-shifted and on-demand content. The ability to verify check-ins is critical because users are rewarded points for each check in. Users can redeem the points within the app's rewards catalogue for items that have a monetary value such as movie tickets, music, gift cards and charitable contributions.
 
In addition to television show check-in points, users can earn additional points by engaging with brand or network sponsored games, videos, polls or quizzes related to the show that they are watching and by inviting friends or sharing their activities via social media. There are sweepstakes opportunities and instant win games for higher value prizes or unique experiences in addition to rewards. Our product will is limited to participants who are 13 years of age or older.
 
Our loyalty program is designed to give users rewards for checking-in to television shows and for performing other engagements within the Viggle app.  For example, when a user checks-in to a television program, that user will receive approximately 60 points for each hour checked in.  In addition, users may earn additional points for checking into certain specified shows or performing certain engagements within the app, such as participating in a poll or quiz or viewing an advertisement.  For example, if a user checks into a show for which we are rewarding extra points, the user may receive 250 extra points so long as the user remains checked in for at least ten minutes, or alternatively, the user may receive, for example, 2 points per minute watched, instead of the usual one point per minute watched.  This would also apply to participating in a poll or interactive game or other engagement to which extra points have been allocated, such as our Viggle Live Super Bowl or Oscar experience. The number of points that a user may earn in a day may be capped.  For example, we currently cap the number of points a user earns at 6,000 per day.  We may change from time to time the number of points that a user may earn for checking into shows and for engaging in certain actions on our app, and the daily cap on points.
 
Our rewards catalog consists primarily of gift cards for consumer goods in amounts ranging from $5.00 to $25.00.   There are other rewards, primarily physical products, that can be earned for significantly more reward points, and offers that deliver meaningful discounts to our users for fewer points.   For example, a $5.00 Starbucks gift card can be earned for 12,500 points, a $25.00 Best Buy Gift card can be earned for 62,500 points, a Kindle Fire for 375,000 points, and an offer of 20% off a purchase at Fanatics.com for 3,000 points.  From time to time we may change the rewards offered and the number of points required to earn any given reward.  For the 822,362 reward redemptions through June 30, 2012, the average number of points used per redemption has been approximately 10,356 points and the average value of a reward for such a redemption was $6.59.

The loyalty program for which the rewards are the incentive is designed to constantly attract new users and to increase the number of active users in a manner that can be marketed to advertisers.  The success of the marketing will depend on being able to show the number of active users in the program. We further anticipate that the number of active users will depend on the availability of rewards and the ability of users to accumulate points and redeem their points for rewards.
 
We have completed a first version of the application, which has been approved by Apple.  We launched the app to the public in the Apple iTunes App Store on January 25, 2012. The approved version of the app works on Apple iOS devices such as the iPhone, iPad and iPod Touch.  We have been successfully testing the app with employees of the Company as well as friends and family of our employees for several months, and although we have launched the app to the public, there is no guarantee how successful the launch will be or how effectively the technology will perform.  We will continuously test and update the application with a goal of improving overall performance and usability. We have also recently launched a platform developer kit to allow third party developers to create functionality accessible from within the Viggle app.
 
The first version of the application was approved by Apple and launched to the public in the Apple iTunes App Store on January 25, 2012. It has been updated periodically.  The approved version of the app works on Apple iOS devices such as the iPhone, iPad and iPod Touch.  On June 27, 2012, we released a version of the application for use on Android smartphones and tablets.  Although we have launched the app to the public, there is no guarantee how effectively the technology will perform. We continuously test and update the application with a goal of improving overall performance and usability. 
 
We will consider adding versions for other mainstream mobile operating systems such as Windows Phone and Blackberry based on demand and other business factors. Distribution of the product will occur via regular online marketplaces for content and applications used by such mobile operating systems, and will include iTunes for iOS devices or the Android marketplace for devices using the Android operating system.
 
 
20

 
 
Since our launch on January 25, 2012, and through June 30, 2012, 921,262 users have registered for our app, of which we have deactivated 34,339 for a total of 886,923 registered users.  Of those, we have accumulated 701,689 registered active users as of June 30, 2012.  Registered active users are computed by determining those users that are both registered on the Viggle app and have earned points within the preceding 90 days.  In addition, for the three months ended June 30, 2012, we have accumulated an average of 290,904 monthly active users.  Monthly active users are computed by determining those users that are both registered on the Viggle app and that have earned or redeemed points, other than points received for registering for the Viggle app, in the particular month. As of June 30, 2012, our members have checked-in to 52,079,652 TV programs, spent an average of 88 minutes of active time within the Viggle app per session, and completed an average of 26.0 engagements per day. Such number is derived by dividing the average number of engagements each day by the total number of active users each day. Active users are defined as those who earned a point or redeemed a point that day. Users have redeemed a total of 822,362 rewards.
 
The back-end technology for the application has been designed to accommodate the significant numbers of simultaneous check-ins required to support primetime television audiences. This back-end technology is currently operational and we have the capacity to support simultaneous check-ins around major television events such as the Super Bowl. In addition to our own dedicated co-location facilities on the east and west coasts, we are using third-party cloud computing services from Amazon Web Services to help us scale our technical capacity as efficiently as possible.
 
The technology supporting our unique feature of digital fingerprinting and our matching technology is subject to a currently unissued but pending patent.
 
While most people watch television, we are targeting male and female consumers between the ages of 18-49.  This target audience was selected due to the amount of television they consume on a weekly basis as well as the likelihood that they will have smartphones and other wireless devices such as tablets and laptops with them while viewing television. To build our user base, we will target this audience using traditional media techniques such as direct response, banner, and mobile advertising, public relations, search engine optimization and search engine marketing across online, broadcast and print media outlets.
 
When a user signs up for and downloads our app, we collect the user's email, zip code, television provider and date of birth. The email enables us to verify the user and reduces the chance of fraud. The zip code allows us to present a relevant list of cable and satellite providers to the user to deliver the correct channel listing data. Knowing the television provider in turn helps us to increase the rate of success for television show matching. We encourage the user to provide additional information such as their birthday and physical mailing address.  The user's birthday information helps us verify that a user is at least 13 years old. The physical mailing address is required for the delivery of physical goods selected by the user in the application rewards catalogue.  This information also helps us better target relevant advertising to the user. We manage this information in adherence with standard privacy policies and regulations.
 
We have hired personnel with diverse backgrounds in general management and in digital media and entertainment, along with specialists in product development, editorial, graphic design, software engineering, marketing, analytics, sales, business development, human resources, finance and legal for the purpose of developing the business plan, building the product, generating ad sales with brand and network marketers, acquiring and retaining customers.

The acquisition on September 29, 2011 of the Watchpoints assets owned by Mobile Messaging Solutions, Inc (see Note 4 in Notes to Consolidated Financial Statements for a more complete description of the transaction) included patent applications regarding their own audio fingerprinting technology, the aggregation of users based on specific programming and opportunities for enhanced user content engagement experiences.  The patent applications that we acquired relate only to pending, unissued patents.  Each of these patents complements the Company's intended business for the initial product.
 
The acquisition of the Loyalize business (see Note 4 in Notes to Consolidated Financial Statements for a more complete description of the transaction) allows the Company to accelerate the integration of add-on features to its core application through use of the acquired software and the employment by the Company of a team of 13 employees, including software engineers, who had been involved in the development of the Loyalize technology.

On December 23, 2011, the Company purchased a 65% ownership interest in TIPPT as a second line of business that would bring additional revenues to the Company.  The Company believed that the TIPPT concept of having celebrities endorse products via social media could generate excellent revenues through TIPPT's agreement with 100 Mile Group, LLC, which had good relationships with celebrities.  The Company believed that this was an opportune time to launch this type of business given the broad expansion of social media and a quick ramp-up of signing celebrities with significant numbers of social media followers would be possible.  Five months into the investment, the Company concluded that it was taking much longer for TIPPT to sign up such celebrities and that there would be delays in TIPPT executing its proposed business concept.  Therefore, the Company decided to modify its investment in TIPPT.  The Company negotiated an arrangement to permit TIPPT to continue to develop its business while the Company would reduce its investment and terminate the $20 million line of credit, thereby limiting its losses and allowing the use of its capital for Viggle purposes.

On May 14, 2012, the Company sold to TIPPT LLC a 50% ownership interest in TIPPT for $500 (payable by a Purchase Money Note with interest accruing at 4% per annum and maturing on December 31, 2016), retained a 15% ownership interest in TIPPT, and terminated the Company's obligation to provide advances to TIPPT under the $20,000 line of credit.  The outstanding balance of the line of credit, which was $701, and a new advance of $500 made in connection with the transaction were evidenced by a $1,201 promissory note.  TIPPT is a startup company and as such does not have the current financial resources to repay the promissory notes.  However, if the TIPPT management team is successful in executing its business plan, the promissory notes may be repaid and the Company may realize a return of (and on) its investment.  The Company negotiated this arrangement on an arm's length basis and believes it is an appropriate resolution of the matter (see Note 4 in Notes to Consolidated Financial Statements for a more complete description of the transaction).
 
 
21

 
 
Going Concern
 
Our Consolidated Financial Statements, and the auditor's report on the financial statements, include a disclosure paragraph regarding the uncertainty of our ability to remain a going concern, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant revenue or earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders and the ability of the Company to obtain necessary equity or debt financing to continue development of its new business and to generate revenue. Management intends to raise additional funds through equity and/or debt offerings until sustainable revenues are developed. There is no assurance such equity and/or debt offerings will be successful or that development of the new business will be successful.
 
Operations
 
The back-end technology for the application has been designed to accommodate the significant numbers of simultaneous check-ins required to support primetime television audiences. This back-end technology is currently operational and we have the capacity to support simultaneous check-ins around major television events such as the Super Bowl. In addition to our own dedicated co-location facilities on the east and west coasts, we are using third-party cloud computing services from Amazon Web Services to help us scale our technical capacity as efficiently as possible.  The following are the primary components of our technical operations:

Audio fingerprinting and matching technology
Using proprietary technology, audio from approximately 185 English and Spanish television channels within the United States is sampled in real-time and converted into digital fingerprints that can be used to uniquely identify each individual television program.   These fingerprints are then stored in a reference database in leased cloud infrastructure.

When a user attempts to check into a television program from the user's smartphone or tablet, the Viggle application uses the same proprietary technology to collect an audio sample of what that user is watching and converts that sample into a digital fingerprint which can be matched against the reference database to identify the program the user is watching

Points ledger
The points ledger is proprietary software used to track user accrual of rewards points.   Whenever a user earns points for activities within Viggle, a transaction is written to the ledger to provide details on how many points were added to the user's account, the activity for which the points were awarded, the timestamp of the transaction, and other pertinent information required to provide effective controls and auditability.   Likewise, when a user redeems for a reward, a transaction is written to the ledger to provide appropriate details on the redemption.   The ledger is hosted on leased hardware in a co-location facility in the United States.

Event processor
The event processor is proprietary software which continually monitors user activity within Viggle and identifies when a user should be awarded points for a completed action e.g., watching a TV program or engaging with an advertisement.   The event processor then triggers a ledger transaction to add points to a user account.   The event processor is hosted on leased hardware in a co-location facility in the United States.

Rewards management platform
Viggle's rewards management platform is proprietary software used to securely manage rewards inventory and redemptions.   Rewards inventory, primarily digital redemption codes, is loaded into the rewards management platform and can then be priced and made available for redemption by Viggle users via the Viggle mobile application.   When a user redeems a reward, the points price of that reward is removed from the user's account via a ledger transaction, the rewards code is sent to the user, and inventory of that reward is reduced to reflect the transaction.   The rewards management platform is hosted on leased hardware in a co-location facility in the United States.

Ad serving technology
Viggle uses 3rd party ad serving technology to manage advertising campaigns, serve ads to users within the Viggle application, and report on the delivery of these advertisements.   Viggle has also created proprietary software, hosted on leased hardware in our co-location facility, which integrates with the 3rd party technology to define a number of Viggle points available to a user for completing an ad view and subsequently interfacing with the event processor to assign these points upon each completed ad view.

 
22

 
 
Other administrative tools
Viggle has also created a set of other proprietary tools used to manage the user experience within Viggle (e.g., editorial tools for promoting individual television programs to users), support customer service inquiries, and enable other administrative activities.   These tools are hosted on leased hardware in a co-location facility in the United States.
 
The technology supporting our unique feature of digital fingerprinting and our matching technology is subject to a currently unissued but pending patent.
 
Like many applications, the Company's initial product integrates into users' existing social media networks, making it possible for users to share their activity with friends, family and followers. The social media experience within the Company's product is important, and will be complementary to the core value proposition of generating revenue through advertising sales.
 
Revenue
 
The application became available to the public on January 25, 2012.  We have begun to generate revenues. Advertising is sold primarily direct to brand marketers and television networks by our dedicated sales team.  Our focus is on brand marketers that are most relevant to our target demographic of consumers between the ages of 18-49, and are active in television, digital and retail marketing. Our sales team is also briefing large advertising and media agencies on our capabilities so that they might recommend integration of our application into their client proposals.  We have and plan to generate revenue from standard mobile media advertising sales and affiliate programs: (i) when our users click and view advertisements in our application, (ii) when our users complete an engagement (defined as a poll or quiz or game or slide show) appearing in our application that is created by an advertising agency or the Company's brand partners or by our team; and or (iii) through affiliate or bounty commissions to third parties if our users purchase items or subscribe to services after clicking from our application to other applications and/or websites.  With the exception of one-time sponsorships with advertisers (which are charged a separate and specific fee), all advertising is serviced via a third-party advertising server for billing and verification purposes.  Revenues are generated by measuring delivered impressions on a cost per thousand (CPM) basis and completed engagements on a cost per engagement (CPE) basis.  Therefore, our sales team contracts with brand advertisers to deliver a specific number of impressions and/or engagements for a specific price per thousand impressions (CPM) and/or per completed engagement (CPE).  The third-party ad server then serves the ads and/or engagements within the application during the course of using the Viggle app.  As impressions and engagements are delivered and completed, we will bill brand partners or advertising agencies on a monthly basis for the media delivered at our contracted rates.
 
Regarding television marketers, we are focusing on TV networks and producers based on their relevance to our target audience, their reach and popularity. We are prioritizing networks and shows that we know to be actively engaged in digital extensions, such as Social TV or second screen technology.  Additionally, we expect to gain revenue from the sale of television show related merchandise such as show music, DVDs and apparel, all of which is featured within the application and sold through online retail partners such as iTunes and Amazon.
 
Initially, we anticipate revenues to be generated substantially in the United States.

Watchpoints and Engagement Points
 
The Company issues points to its users as an incentive to utilize the Viggle app and its features.  Users can redeem these points for rewards.  The Company records the cost of these points based on the weighted average cost of redemptions during the period.   Points earned but not redeemed are classified as a liability.
 
Users earn points for various activities and the Company reports points earned for checking into shows and points earned for engaging in advertiser sponsored content as a separate line in its statement of operations ("Cost of watchpoints and engagement points").  All other points earned by users are reflected as a marketing expense in selling, general and administrative expense.

 
23

 

Results of Operations

Results for the Years Ended June 30, 2012 and 2011 (amounts in thousands)
 
  
 
 
Year Ended
June 30,
2012
   
Year Ended
June 30,
2011
   
Variance
 
Revenues
  $ 1,735     $     $ 1,735  
Cost of watchpoints and engagement points
    (5,639 )           5,639  
Selling, general and administrative expenses
    (92,572 )     (19,970 )     72,602  
Operating loss
    (96,476 )     (19,970 )     (76,506 )
Other income:
                       
Other expense, net
   
(188
)    
     
(188
)
Interest income, net
    153       62       91  
Total other income (expense)
    (35 )     62       (97 )
Net Loss
  $ (96,511 )   $ (19,908 )   $ (76,603 )
 
Consolidated Operating Results for the Year Ended June 30, 2012 Compared to the Year Ended June 30, 2011 (amounts in thousands)
 
Operating revenue for the year ended June 30, 2012 was $1,735 versus $0 for the year ended June 30, 2011. Cost of watchpoints and engagement points for the year ended June 30, 2012 was $(5,639) and $0 for the year ended June 30, 2011. Selling, general and administrative expenses were $(92,572) for the Year ended June 30, 2012 as against $(19,970) for the year ended June 30, 2011.
 
Revenues
 
Operating revenue in the year ended June 30, 2012 increased by $1,735 primarily from the sale of advertising on the Viggle app. There was no operating revenue for the year ended June 30, 2011.
 
Cost of Watchpoints and Engagement Points
 
Cost of watchpoints and engagement points for the year ended June 30, 2012 increased by $5,639 primarily due to the cost of Viggle reward points earned by users of the application for checking into shows and engaging with advertising content.  There were no such costs for the year ended June 30, 2011.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased in the year ended June 30, 2012 by $72,602 (including $44,681 of stock based compensation charges), primarily due to increases in personnel costs of $53,801 (including $42,127 of stock based compensation charges), Board of Directors fees of $2,860 (including $2,554 of stock based compensation), $2,819 of technical and operating costs to run the product, $4,462 of marketing expenses, $1,267 of professional fees, $744 office rents, $2,260 depreciation and amortization expense, $572 travel and entertainment,  $3,511 of costs of charges related to TIPPT and $328 of state and local taxes. 
 
Other Expense, Net
 
Other expense includes the costs related to the valuation of the Loyalize guarantee of $843 offset by a $655 gain related to the valuation of the warrants payable.
 
Interest Income, Net
 
We had net interest income of $153  in the year ended June 30, 2012 versus $62 in the year ended June 30, 2011.
 
 
24

 
 
Income Taxes
 
The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes.  Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse.  A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.  We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date.  For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.  For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements. At June 30, 2012 and 2011, the Company provided a full valuation allowance on its deferred tax assets and thus recognized no tax benefit.
 
Results for the Year Ended June 30, 2011 and 2010  (amounts in thousands)

   
Year Ended
June 30,
2011
   
Year Ended
June 30,
2010
   
Variance
 
Revenues
  $     $     $  
General and Administrative Expenses
    (19,970 )     (9 )     19,961  
Operating Loss
    (19,970 )     (9 )     (19,961 )
Other Income
                       
Interest income, net
    62             62  
Total Other Income
    62             62  
Net Loss
  $ (19,908 )   $ (9 )   $ (19,899 )
 
Revenues
 
There were no revenues in the prior year.  The Company did not generate revenue since changing its line of business in 2011.
 
General and Administrative Expenses

Operating expenses increased $19,961 in 2011 as compared to 2010 primarily due to personnel costs ($12,325, including $10,772 in non-cash stock based compensation), developing a new product ($2,150), and the other costs associated with a startup company ($5,482).  Operating expenses in 2010 were nominal.

Interest Income, Net
 
Net interest income increased $62 in 2011 as compared to 2010 primarily due to notes receivable issued for common stock as part of the Recapitalization.  There was no interest income in 2010.

Liquidity and Capital Resources (amounts in thousands, except share data)
 
Cash
 
At June 30, 2012 and 2011, we had cash balances of $2,963 and $3,794, respectively.  

From 2007 until the Recapitalization, J. Howard, Inc., an affiliate of Jack L. Howard, a director and officer of the Company prior to the Recapitalization, advanced funds to the Company to support our daily operations. 
 
Pursuant to the Recapitalization, Sillerman, together with other investors approved by Sillerman, invested in the Company by acquiring 60,000,000 newly issued shares of common stock of the Company in a private placement transaction, in which we raised $3,600 ($220 in cash and $3,380 in five-year promissory notes with interest accruing at 4.15% per annum).
 
As a result of the private placements to Adage and KPLB, both selling stockholders in the Form S-1 filed with the Securities and Exchange Commission (the “SEC”) on May 25, 2011, we raised $10,500.  The S-1 went effective as of July 24, 2012.
 
On August 25, 2011, the Company completed the placement of 7,000,000 units (the “Units”), each Unit consisting of (i) one (1) share of common stock, $0.001 par value per share of the Company and (ii) one (1) detachable three (3) year warrant to purchase one (1) share of common stock of the Company with an exercise price of $8.00 per warrant share, at a purchase price of $5.00 per Unit, for an aggregate purchase price of $35,000 to accredited and institutional investors.  The three-year warrants are callable by the Company after February 26, 2012 if a registration statement for the resale of the shares of common stock issuable upon exercise of the warrants has been declared effective for 30 days and the closing bid price of such shares equals at least $8.00 per share for a period of at least 20 consecutive trading days after effectiveness of such registration statement.  The proceeds of the offering, less expenses, are to be used for general corporate purposes, including marketing and product development.
 
On May 10, 2012, the Company completed the placement of 1,709,091 units (the “Private Placement Units”) to accredited and institutional investors at an aggregate purchase price of $9,400.  Each Private Placement Unit consists of (i) one (1) share of common stock, $0.001 par value per share of the Company and (ii) one (1) detachable three (3) year warrant to purchase one (1) share of common stock of the Company with an exercise price of $8.00 per warrant share, at a purchase price of $5.50 per Private Placement Unit.  If the Company sells shares of its common stock for the purpose of raising capital at a price below $8.00 per share before the expiration of the exercise period of the warrant, the exercise price of all warrants will be adjusted to the lowest price at which the shares were sold.  The proceeds of the offering, less expenses, are to be used for general corporate purposes, including marketing and product development.
 
The Company filed an S-1 registration statement on July 31, 2012 for the common shares and the shares underlying the warrants which are the subject of the PIPE and is required to use commercially reasonable efforts thereafter to have the registration statement declared effective within 120 days.
 
 
25

 
 
Line of Credit
 
On June 29, 2012, Sillerman Investment Company LLC (the “Lender”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, advanced $2,500 to the Company.  The advance is evidenced by a $10,000 line of credit grid promissory note, dated as of June 29, 2012, that was executed and delivered by the Company in favor of the Lender (the “Grid Note”) on July 6, 2012.  Under the Grid Note, the Company may periodically draw on the line of credit in amounts of no less than $100, and interest will accrue on all unpaid principal amounts at a simple interest rate equal to 9% per annum.  The Company is not permitted to make draws more than once per month.  The Grid Note matures on the earlier to occur of (i) June 29, 2013 or (ii) upon the receipt of net proceeds by the Company or any of its wholly-owned subsidiaries from one or more debt or equity offerings by the Company or any of its wholly-owned subsidiaries in an amount equal to at least the amount of principal and accrued and unpaid interest outstanding under the Grid Note.  At maturity, the Company must pay to the Lender all principal amounts then outstanding, plus accrued and unpaid interest thereon.  All net proceeds received by the Company or any of its wholly owned subsidiaries from any debt or equity offering by the Company or any of its wholly-owned subsidiaries must first be applied toward the payment in full of all outstanding principal and accrued but unpaid interest outstanding under the Grid Note.  The Company may make prepayments in whole or in part under the Grid Note at any time, provided accrued, but unpaid interest is paid through the prepayment date.

The Company intends to use the proceeds from the Grid Note to fund working capital requirements and for general corporate purposes.  Because the Lender is an affiliate of the Company's Executive Chairman and Chief Executive Officer, a majority of the Company's independent directors approved the Grid Note.
 
The foregoing description of the line of credit is not complete and is qualified by reference to, and should be read in conjunction with, the full text of the Line of Credit Grid Promissory Note, a copy of which is filed as Exhibit 10.24 hereto.
 
The Company's capital requirements to fund its business plan are variable based on a few key factors: the number of members, the amount of points earned per member, the amount of points redeemed for rewards, and our cost to purchase, acquire, and/or trade for rewards.  These factors combine to determine our rewards cost for the next 12 months. Rewards costs are expected to be the largest cost to our business for the foreseeable future, and therefore, controlling these costs will have the greatest impact on our liquidity and capital resources. We anticipate the ability to lower rewards cost through greater purchasing power garnered through higher volume purchases of gift cards and merchandise for our Rewards Catalog, but there is no guarantee we will lower our rewards costs in the next 12 months. As we increase members of the Viggle app, we expect to generate revenue from the sale of digital media within our application and expect these sales to be a source of liquidity within the next 12 months. However, there is no guarantee that revenues will exceed rewards cost in the next 12 months or ever. We have the ability to control rewards cost through the restriction of new member acquisition, the limitation of point earning opportunities within the application, and the re-pricing of points in terms of how many are needed to redeem for purchased rewards within the application. In respect to our operating costs, employee salaries, the amount of marketing expenditures, leases of office space, and research & development costs constitute the majority of our monthly operating  expenses. With the exception for leased office space, our operating costs are expected to increase as we add members in order to sell more advertising, to create new features and functionality on the platform, to acquire new rewards, and to market the Viggle app over the next 12 months.  The overall level of expenses will be reflective of management's view of the current opportunities for the Viggle app within the marketplace.  Even though we utilize significant computing resources to run our mobile platform, we do not invest in computer hardware but instead we lease our hardware, bandwidth, and co-location facilities and accordingly can limit the cost of these servers to be in line with user growth.  The Company plans to carefully manage its growth and related costs to ensure it has sufficient capital resources to meet the goals of business plan for the next twelve months.

The Company's 12-Month Plan for its Business (amounts in thousands)
 
The Company has projected the plan for its business for the next 12 months (September 1, 2012-August 30, 2013), which is subject to change resulting from both internal and external circumstances.   The 12-month plan of the Company has not been reviewed for consistency with US GAAP, and has been prepared on a modified accrual basis.  The Company's 12-month plan is based on assumptions and is subject to risks and uncertainties.  Our 12-month plan represents our estimates and assumptions only as of the date of this prospectus, and our actual future results may be materially different from what we set forth below.
 
There is no assurance that the plan set forth will be successful. If implemented, actual results may vary significantly from the plan described in this prospectus. The Company does not warrant or guarantee the foregoing.
 
 
26

 
 
The Company's current plan will require additional capital of approximately $22,000 over the next 12-month period.  We expect the $22,000 (in excess of cash currently held by the Company) will be required to cover the fixed expenses and capital needs of the Company, including employee payroll, server capacity, research and development, office space and capital expenditures.  We have not included our marketing costs as part of the $22,000 as such costs are expected to vary significantly in our attempt to increase our user base. In addition, we may need funding to cover rewards costs, although we anticipate generating sufficient revenue over the next 12 months to cover such costs.  However, because there is no guarantee that we will be able to do so, we may need to raise capital in addition to the $22,000 to cover cash required to fund rewards.  We believe revenue will continue to improve over the next twelve months as we contract to sell more advertising within the application. Additionally, we believe that as our user base grows we may be able to increase purchasing power to help reduce cash required to fund rewards.  In addition, as our app becomes more popular we plan to increase the number of points needed to redeem certain rewards which in turn should reduce the cash required to fund rewards.  In June, we increased our revenue and added new rewards to the catalog which required less cash to purchase than some of our previous rewards.  This enabled us to reduce our cash outlay for rewards. As we continue to add new items to our rewards catalog, we will focus on how those items are priced in points with the goal of reducing our cash outlay for rewards.  Although the increase in revenue and the addition of lower costs rewards suggest that we should be able reduce our cash funding requirements over the next 12 months, there is no guarantee that we will be successful. Our ability to sell increasing amounts of advertising is dependent on the amount of registered active users and the activity of those users within the application.  It may be challenging to grow revenue as Viggle faces many competitors seeking to gather revenue in the same manner.  Advertising budgets can shift rapidly and the benefits previously seen by advertisers could shift away from mobile platforms to something new.  We may not be able to deliver enough users to our advertisers to grow revenue.  The level of engagement activity currently seen within Viggle may slow and the potential revenue per user would fall accordingly.  In addition, growing our user base makes us a more attractive to advertisers, but will also increase our total rewards cost as new users earn points within Viggle.  We will need to increase our revenue per user above the average cash cost per user in order to achieve profitability.  There is no guarantee that we will be able to do so. Our ability to purchase rewards for greater discounts as we buy more may not be sustainable and we may reach a floor on the level of discounting.  We have no plan to adjust the overall points pricing within our rewards catalog; however, we may find a wholesale re-pricing necessary to reduce the cash needed to fund our rewards program.  Adjusting the points needed to redeem for a reward may decrease our funding requirements, but may have the counter-balancing effect of discouraging user acceptance and satisfaction.
  
The actual amount of funds required may vary depending upon the number of users, the rewards offered, the marketing and related expenses, the development costs for the launch of the product, and the speed with which prospective users enroll in the Viggle app program.  In the event that the required cash is not funded from revenue, the Company will need to raise additional capital through either a debt or equity financing.  Alternatively, the Company would need to revise its business plan to reduce its spending rate and delay certain projects that are part of its business plan based on the amount of capital available until additional capital is raised.
 
Since our launch on January 25, 2012, and through September 30, 2012, 1,219,388 users have registered for our app, of which we have deactivated 75,609 for a total of 1,143,779 registered users.  Of those, we have accumulated 525,106 registered active users as of September 30, 2012.  Registered active users are computed by determining those users that are both registered on the Viggle app and have earned points within the preceding 90 days.  In addition, for the three months ended September 30, 2012, we have accumulated an average of 287,366 monthly active users.  Monthly active users are computed by determining those users that are both registered on the Viggle app and that have earned or redeemed points, other than points received for registering for the Viggle app, in the particular month.  As of September 30, 2012, our members have checked-in to 93,058,804  TV programs, spent an average of 83 minutes of active time within the Viggle app per session, completed an average of 19.4 engagements per day. Such number is derived by dividing the average number of engagements each day by the total number of active users each day. Active users are defined as those who earned a point or redeemed a point that day. Users have redeemed a total of 1,108,867 rewards.  It is not possible to earn points on the Viggle app without registering.  In order to avoid double-counting and limit the instances of fraud, the app is limited to five accounts per device (so as to allow for use by family members sharing a device), users are limited to a maximum of 6,000 points per day and users are not able to share or combine points with different users or devices.  While it is possible for users to establish multiple accounts which could overstate our actual number of registered active users and permit those fraudulent users to attempt to evade our rules in an effort to accumulate excess points by checking-in to TV shows at the same time on different devices, we monitor for such activity and, when discovered, take corrective action according to our published terms and conditions.
 
Cash Flows for the Year Ended June 30, 2012 (amounts in thousands)
 
Operating Activities
 
Cash used in operating activities of $32,580 for the year ended June 30, 2012 consisted of $13,227 primarily related to salaries and related employee benefits costs, $5,132 for cost rewards (primarily gift cards), $3,103 of technical and operating costs to run the product, $5,467 of marketing-related costs, $5,448 of outside labor and professional fees, $814 of rent expense and $1,767 of travel and entertainment expenses.
 
Investing Activities
 
$13,517 was used in investing activities for the year ended June 30, 2012, which consisted of $3,033 used for the purchase of property and equipment, $2,430 used for capitalized software costs, $8,055 used for the acquisitions of WatchPoints, TIPPT, and Loyalize.
 
 
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Financing Activities
 
Cash provided by financing activities of $45,266 for the year ended June 30, 2012 reflects the proceeds from the August 25 and May 10  private placements of common stock and warrants of $42,813 and $2,500 of proceeds from the Grid Note, offset by $50 of cash used to repay the loan related to our interest in the corporate jet.
 
Cash Flows for Year Ended June 30, 2011
 
Operating Activities
 
Cash used in operating activities of $5,645 for the year ended June 30, 2011 consisted primarily of salaries and other expenses for operating the Company.
 
Investing Activities
 
Cash used in investing activities of $1,330 for the year ended June 30, 2011 primarily reflects $695 for the letter of credit lease deposit, $317 for capitalized software costs, and $235 for purchase of an interest in a G-IV jet (see Note 12 to the Consolidated Financial Statements), and investment in Company product.
 
Financing Activities
 
Cash provided by financing activities of $10,769 for the year ended June 30, 2011 reflects proceeds from the issuance of common stock as part of the Recapitalization.
 
Dividends
 
We have no intention of paying any cash dividends on our common stock for the foreseeable future. The terms of any future debt agreements we may enter into are likely to prohibit or restrict the payment of cash dividends on our common stock.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material impact on the Company.
 

 
28

 
 
Contractual Obligations and Commitments
 
The following summarizes our contractual obligations as of June 30, 2012 (amounts in thousands):
 
Payments due by period
 
 
Total
 
1 year
 
2-3 years
 
4-5 years
 
More than 5 years
 
                     
Operating lease obligations
  $ 8,819     $ 2,216     $ 1,683     $ 1,403     $ 3,517  
Grid note payable
    2,500       2,500                          
                                         
Total
  $ 11,319     $ 4,716     $ 1,683     $ 1,403     $ 3,517  

On August 17, 2012, the Company was served with patent infringement lawsuit filed on August 13, 2012 by Blue Spike, LLC ("Blue Spike") in the United States District Court for the Eastern District of Texas, Tyler Division (Civil Action No. 6:12-CV-526). The lawsuit claims patent infringement under U.S. Patent numbers 7,346,472, 7,660,700, 7,949,494, and 8,214,715 in connection with the Company's audio recognition technology.

Blue Spike has commenced suits against numerous companies involving the same patent family, including Peer Media Technologies, Inc., The Echo Nest Corporation, Free Stream Media Corp., iPharro Media GmbH, iPharro Media, Inc., Shazam Entertainment, Ltd., Texas Instruments Incorporated, BIO-Key International, Inc., TuneSat, LLC, Vercury Inc., and SoundHound.

The Company denies that it is infringing any valid, enforceable claims of the asserted patents and intends to vigorously defend itself against the lawsuit. The Company filed its answer on October 3, 2012.

We are subject to litigation and other claims that arise in the ordinary course of business. While the ultimate result of our outstanding legal matters cannot presently be determined, the Company does not expect that the ultimate disposition will have a material adverse effect on our results of operations or financial condition. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. As such, there can be no assurance that the final outcome will not have a material adverse effect upon our financial condition and results of operations.

Application of Critical Accounting Policies

During the year ended June 30, 2012, the Company commenced operations and accordingly implemented new accounting policies related to revenue recognition to the Company’s critical accounting policies and estimates as disclosed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Quarterly Report on Form 10-Q for the nine months ended March 31, 2012.

The following accounting policies require significant management judgments and estimates:
 
Revenue Recognition
 
Advertising Revenue:  We generate advertising revenue primarily from display and video advertising, which is typically sold on a cost-per-thousand impressions, or CPM basis, and completed engagements on a cost per engagement (CPE) basis.  Advertising campaigns typically range from one to 12 months, and advertisers generally pay us based on a minimum of delivered impressions or the satisfaction of other criteria, such as click-throughs.
 
 
29

 
 
The Company recognizes revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. For all revenue transactions, the Company considers a signed agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement.
 
Deferred Revenue:  Our deferred revenue consists principally of both prepaid but unrecognized revenue and advertising fees received or billed in advance of the delivery or completion of the delivery of services.  Deferred revenue is recognized as revenue when the services are provided and all other revenue recognition criteria have been met.

Impairment of Long-Lived Assets.

The Company applies the provisions of ASC 360, “Property, Plant, and Equipment”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.  In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets.  Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal.  

Based on the Company's review of the fair value of its intangible assets for the year ended June 30, 2012, the Company has 1) derecognized the $2,378 of contingent consideration attributable to the Company's warrant that was to be issued to TIPPT LLC because the warrant was never issued; and 2) performed a review of the fair value of the remaining $2,250 carrying value of  the  100 Mile Group Agreement.  The Company has taken an impairment charge for the full carrying value of this agreement.  Accordingly the carrying value of such agreement as of June 30, 2012 is zero.

There was no significant impairment to the Company's long lived assets as of June 30, 2011.

Internal Use Software

The Company capitalizes costs related to the development of internal use software in accordance with ASC 350-40.  When capitalized, the Company will amortize the costs of computer software developed for internal use on a straight-line basis or appropriate usage basis over the estimated useful life of the software.   Computer software development  costs have been capitalized in the amounts of $2,430 and $317 as of June 30, 2012 and June 30, 2011, respectively.

Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes.  Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse.  A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.  We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date.  For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.  For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.

 
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Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation.  Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period.  The Company uses the Black-Scholes and Binomial Lattice Model option pricing model to determine the fair value of stock options and warrants issued.  Stock-based awards issued to date are comprised principally of restricted stock awards (RSUs), employee stock options and certain warrants purchased by an a named executive officer as part of the August 25, 2011 and May 10, 2012 private placement transactions.
 
ITEM 7A.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk arising from changes in market rates and prices, interest rates and the market price of our common stock. To mitigate these risks, we may utilize derivative financial instruments, among other strategies. We do not use derivative financial instruments for speculative purposes.
 
We are exposed to market risk arising from changes in market rates and prices, interest rates and the market price of our common stock. To mitigate these risks, we may utilize derivative financial instruments, among other strategies. We do not use derivative financial instruments for speculative purposes. To the extent that our deposits are in excess of Federal deposit insurance program maximums, we bear that potential risk.
 
Foreign Exchange Risk
 
We presently have no operations outside the United States. As a result, we do not believe that our financial results have been or will be materially impacted by changes in foreign currency exchange rates.

Interest Rate Risk
 
Although certain subscription agreements were funded on the basis of promissory notes, the interest rate in those notes has been fixed and is not subject to variation.  To the extent that we have or maintain deposits with financial institutions that pay interest on those deposits, we have market risk.
 
 
31

 
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
Table of Contents to Financial Statements

Viggle Inc.
 
Page
 
       
Report of Independent Registered Public Accounting Firm
    F-1  
         
Consolidated Balance Sheets as of June 30, 2012 and 2011
    F-2  
         
Consolidated Statements of Operations for the years June 30, 2012, 2011 and 2010
    F-3  
         
Consolidated Statements of Stockholders’ Equity / (Deficit) for the years ended June 30, 2012, 2011 and 2010
    F-4  
         
Consolidated Statements of Cash Flows for the years ended June 30, 2012, 2011 and 2010
    F-5  
         
Notes to Consolidated Financial Statements
    F-6  

 
32

 
 
Viggle Inc.
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders
Viggle Inc.
New York, New York
 
We have audited the accompanying consolidated balance sheets of Viggle Inc. (the “Company”) as of June 30, 2012 and 2011, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Viggle Inc. at June 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and at June 30, 2012 has deficiencies in working capital and equity that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
   
/s/ BDO USA, LLP
 
 
New York, NY
October 15, 2012
 
 
F-1

 

Viggle Inc.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
 
   
June 30, 2012
   
June 30, 2011
 
Assets
 
Current assets:
           
Cash and cash equivalents
  $ 2,963     $ 3,794  
Accounts receivable
    1,424        
Prepaid expenses
    1,000       46  
Other receivables
    1,290       29  
Total current assets
    6,677       3,869  
Restricted cash
    696       695  
Interest in corporate jet, net
          1,511  
Capitalized software costs, net
    4,506       317  
Property & equipment, net
    2,861       79  
Intellectual property, net
    3,217        
Goodwill
    2,953        
Other assets
    40        
Total assets
  $ 20,950     $ 6,471  
                 
Liabilities and stockholder's equity
 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 4,838     $ 1,105  
Reward points payable
    3,454        
Common stock warrant liability
    4,626        
Guarantee liability
    963        
Deferred revenue
    572        
Current portion of loan payable
    2,500       49  
Total current liabilities
    16,953       1,154  
Loans payable, less current portion
          891  
Other long-term liabilities
    1,310       342  
Total liabilities
    18,263       2,387  
                 
Commitments and contingencies
               
Stockholders' equity:
               
Preferred stock, $0.001 par value, authorized 1,000,000 shares, no shares issued and outstanding
           
Common stock, $0.001 par value: authorized 300,000,000 shares, issued and outstanding 76,470,041 shares as of June 30, 2012 and  67,470,899 shares as of June 30, 2011
    76       67  
Additional paid-in-capital
    135,019       39,779  
Due from executive officer
    (3,426 )     (3,291 )
Accumulated deficit
    (128,982 )     (32,471 )
Total stockholders' equity
    2,687       4,084  
Total liabilities and stockholders' equity
  $ 20,950     $ 6,471  

See accompanying notes to consolidated financial statements 

 
F-2

 

Viggle Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
 
   
Year Ended
June 30, 2012
   
Year Ended
June 30, 2011
    Year Ended
June 30, 2010
 
Revenues
  $ 1,735     $     $  
Cost of watchpoints and engagement points
    (5,639 )            —  
Selling, general and administrative
    (92,572 )     (19,970 )     (9 )
Operating loss
    (96,476 )     (19,970 )     (9 )
                         
Other income (expense):
                       
            Other expense, net     (188 )            
Interest income, net
    153       62        
Total other income
    (35 )     62          
                       
Net loss
  $ (96,511 )   $ (19,908 )   $ (9 )
                         
Net loss per common share - basic and diluted
  $ (1.31 )   $ (0.40 )   $ (0.04 )
                         
Weighted average common shares outstanding - basic and diluted
    73,801,034       50,354,024       209,600  
 
See accompanying notes to consolidated financial statements

 
F-3

 

Viggle Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(amounts in thousands)
 
   
 
Common Stock
   
Additional Paid-In
Capital
   
Due from Executive Officer
   
Accumulated Deficit
   
Total
 
Balance July 1, 2009
  $ 2     $ 12,483     $     $ (12,554 )   $ (69 )
Net loss                             (9 )     (9 )
Balance July 1, 2010
    2       12,483             (12,563 )     (78 )
Net loss
                      (19,908 )     (19,908 )
Private placement of common stock and warrants for cash
    65       14,043                   14,108  
Notes receivable from stockholders
          (128 )     (3,291 )           (3,419 )
Warrants issued for services
          2,529                   2,529  
Exercise of warrants
          80                   80  
Restricted stock share based compensation
          10,772                   10,772  
Balance  June 30, 2011
    67       39,779       (3,291 )     (32,471 )     4,084  
Net loss
                      (96,511 )     (96,511 )
Private placements of common stock and warrants for cash
    9       37,523                   37,523  
Compensation charge for fair value of common stock and warrants issued in connection with private placement
          21,572                   21,572  
Interest income on notes receivable from shareholders
          (5 )                 (5 )
Interest income on notes receivable from Executive Officer
                (135 )           (135 )
Employee stock options - share based compensation
          5,916                   5,916  
Restricted stock based compensation
          26,576                   26,576  
Stock issued for WatchPoints acquisition
          1,600                   1,600  
Stock issued for Loyalize
          1,719                   1,719  
Capital contribution related to corporate jet
          336                   336  
Notes receivable from stockholders
          3                   3  
Balance June 30, 2012
  $ 76     $ 135,019     $ (3,426 )   $ (128,982 )   $ 2,687  
 
See accompanying notes to consolidated financial statements

 
F-4

 

Viggle Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands, except per share data)

   
Year Ended
June 30, 2012
   
Year Ended
June 30, 2011
    Year Ended
June 30, 2010
 
Operating activities:
                 
Net loss
  $ (96,511 )   $ (19,908 )     (9 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Restricted stock based compensation
    26,576       10,772        
Warrants issued for services
          2,529        
Employee stock options - share based compensation
    5,916              
Common stock and warrants issued in connection with Private Placements - share based compensation
    21,572              
Loss on sale of interest in corporate jet
    134              
Depreciation and amortization
    2,280       4        
Impairment of TIPPT intangible asset
    2,250              
Increase in fair value of Loyalize guarantee
    843              —  
Interest income on notes receivable from shareholder and officer
    (140 )            —  
Other
    166              
                         
Changes in operating assets and liabilities:
                       
Accounts receivable
    (1,424 )            
Other receivables
    (1,169 )     (29 )      
Prepaid expenses
    (954 )     (46 )      
Other assets
    (40 )            
Deferred revenue
    86              
Accounts payable and accrued expenses
    3,733       1,027       9  
Points liability
    3,454              
Other liabilities
    648       6        
Net cash used in operating activities
    (32,580 )     (5,645 )      
                         
Investing activities:
                       
Purchase of property and equipment
    (3,033 )     (83 )      
Increase in restricted cash
    1       (695 )      
Investment in interest in corporate jet
          (235 )      —  
WatchPoints acquisition
    (2,620 )            —  
TIPPT acquisition
    (2,250 )            
Loyalize acquisition
    (3,185 )            
Capitalized software costs
    (2,430 )     (317 )      —  
Net cash used in investing activities
    (13,517 )     (1,330 )      
Proceed from sale of interest in corporate jet     1,056                
                         
Financing activities:
                       
Issuance of common stock and warrants for cash
    42,813       10,769        
Payments on loan
    (50 )            —  
Loan from executive officer
    2,500              —  
Payments on shareholder notes
    3              —  
Net cash provided by financing activities
    45,266       10,769        —  
                         
Net increase (decrease) in cash
    (831 )     3,794        —  
Cash at beginning of period
    3,794              —  
Cash at end of period
  $ 2,963     $ 3,794        —  
                         
Supplemental cash flow information:
                       
Cash paid during the year for interest
    55              
Non-cash financing activities:
                       
Issuance of shares relating to payment of a portion of the debt due to J. Howard, Inc.
          8        
Corporate jet information:
                       
Purchase of a 9.375% interest in a G-IV jet.
          1,276        —  
Stock issued for promissory notes
          3,380        
In connection with the Recapitalization, 112,666,667 shares of the Company’s common stock were paid for through the issuance of promissory notes by investors in the aggregate amount of $3,380.  As of June 30, 2012 and June 30, 2011 principal amount of such notes outstanding was $3,364 and $3,367 respectively.
                       
Stock issued for WatchPoints acquisition
    1,600              
Stock issued for Loyalize acquisition
    1,719              —  
Capital contribution related to corporate jet
    336              —  
Loyalize guarantee
    120              —  

See accompanying notes to consolidated financial statements

 
F-5

 

Viggle Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 
1.  Basis of Presentation
 
On May 31, 2012, the Company changed its name from Function(x) Inc. to Viggle Inc.  It now conducts business under the name Viggle Inc.  

On February 16, 2011 the Company effectuated a 1 for 10 reverse split of its issued and outstanding common stock (the “ 1 for 10 Reverse Split”).  Under the terms of the 1 for 10 Reverse Split, each share of common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one-tenth of one share of common stock, without any action by the stockholder. Fractional shares were rounded up to the nearest whole share. On June 7, 2012, the Company effectuated a 1 for 2 reverse split (the “1 for 2 Reverse Split”). Under the terms of the 1 for 2 Reverse Split, each share of common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one-half of one share of common stock, without any action by the stockholder. Fractional shares were rounded up to the nearest whole share.  All share and per share amounts have been restated to reflect both the 1 for 10 and the 1 for 2 reverse splits.

Going Concern
 
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant revenue or earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the ability of the Company to obtain necessary equity or debt financing to continue development of its new business and to generate revenue. Management intends to raise additional funds through equity and/or debt offerings until sustainable revenues are developed. There is no assurance such equity and/or debt offerings will be successful or that development of the new business will be successful. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Basis of Consolidation
 
The consolidated financial statements include the accounts of Viggle Inc., and our wholly-owned subsidiaries.  All intercompany transactions and balances have been eliminated.  

2.  Organization and Background
 
Formation and Former Business

The Company was incorporated in Delaware in July 1994 and had no operating business or full-time employees from December 1996 to 2000, when it acquired all of the outstanding Common Stock of Oaktree Systems, Inc. (“Oaktree”).  Through Oaktree, the Company provided cost effective marketing solutions to organizations needing sophisticated information management tools.  In December 2007, Marketing Data, Inc. acquired an 80% interest in Oaktree for $1 and the Company’s ownership interest in Oaktree was reduced to 20% of Oaktree’s outstanding Common Stock.   On October 24, 2010, Oaktree repurchased the Company’s remaining 20% interest in Oaktree for $0.10.  As a result, Marketing Data, Inc. owned 100% of the outstanding Common Stock of Oaktree.   After the disposition of the Company’s interest in Oaktree and prior to the Recapitalization, the Company was not active and had no operating business.  After the disposition of the Oaktree interest, the Company began to explore the redeployment of its existing assets by identifying and merging with or investing in one or more operating businesses.  The Board of Directors approved the Recapitalization effecting such change.
 
 
F-6

 

The Recapitalization
 
On February 7, 2011, Viggle Inc. (formerly Function(x) Inc., Function (X) Inc., and Gateway Industries, Inc., the “Company”) entered into the Agreement and Plan of Recapitalization (the “Recapitalization Agreement"),  by and among the Company, Sillerman Investment Company LLC, a Delaware limited liability company (“Sillerman”), and EMH Howard LLC, a New York limited liability company (“EMH Howard”). 

Pursuant to the Recapitalization Agreement, Sillerman, together with other investors approved by Sillerman, invested in the Company by acquiring 60,000,000 newly issued shares of common stock of the Company in a private placement transaction at a price of $0.06 per share, as a result of which Sillerman and the other investors acquired approximately 99% of the outstanding shares of common stock, with Sillerman (together with Robert F.X. Sillerman personally) directly or indirectly beneficially owning more than a majority of the outstanding shares of common stock. Upon consummation, the proceeds of the private placement of $3,600 ($220 in cash and $3,380 in five-year promissory notes with interest accruing at the annual rate equal to the long-term Applicable Federal Rate in effect as of the date of the Recapitalization Agreement, which was 4.15% per annum) were received.
 
On February 16, 2011, immediately after the Recapitalization was consummated, the Company issued 6,616,299 shares of common stock to an institutional investor (for $10,000) at a price of approximately $1.52 per share, and 470,000 shares of common stock to an accredited investor (for $500) at a price of approximately $1.06 per share. The shares of common stock issued in such placements were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an exemption from registration for transactions not involving a public offering under Section 4(2) of the Securities Act, and the safe harbors for sales under Section 4(2) provided by Regulation D promulgated pursuant to the Securities Act.  Transfer of the shares was restricted by the Company in accordance with the requirements of the Securities Act.

On February 16, 2011, the Company issued a five year warrant for 50,000 shares with an exercise price of $1.60 per share to Berenson Investments LLC.  Berenson & Company, LLC, an affiliate of Berenson Investments LLC, was the financial advisor to Sillerman in connection with the Recapitalization.  On May 9, 2011, Berenson Investments LLC exercised the warrant and paid $80 for 50,000 shares of the Company's common stock.
 
As part of the Recapitalization, the Company issued 125,000 shares to J. Howard, Inc., an entity affiliated with Jack L. Howard, a director and officer of the Company prior to the Recapitalization, and its designees (which included former directors of the Company) in connection with partially extinguishing outstanding debt of $171 owed to J. Howard, Inc. The fair market value of the shares at issuance was $0.06 per share.  The remaining debt of $163 was satisfied on February 15, 2011 by payment to J. Howard, Inc. in such amount.  In addition, J. Howard, Inc. was paid $37 to be used for payment of expenses incurred in connection with the Recapitalization on behalf of the Company.
 
The newly recapitalized company changed its name to Function (X) Inc. effective as of the date of the Recapitalization and changed its name to Function(x) Inc. on June 22, 2011 and changed its name to Viggle Inc. on May 29, 2012. The Company has five wholly-owned subsidiaries, Function(x) Inc., Project Oda, Inc., Sports Hero Inc., Loyalize Inc. and Viggle Media Inc., each a Delaware corporation.
 
The Company's New Line of Business
 
Our business is built on a simple concept: Watch TV. Earn Rewards.  The business, which operates under the name 'Viggle', is a loyalty program that rewards our users for watching television.  Users receive points for checking in to and interacting with their favorite TV shows and can then redeem these points for real items such as movie tickets, music and gift cards.  We generate revenue through advertising and the sale of merchandise related to the TV shows and other entertainment viewed by users that would appear in users' mobile devices through the use of the application.  We currently do not have any agreements in place with advertisers or vendors whereby the advertisers or vendors issue rewards to our users when the users redeem their points.  We have purchased and will continue to purchase gift cards from vendors that we will issue to users upon the redemption of their points.  The Company has only generated minimal revenue to date, and there is no guarantee that we will be able to generate sufficient revenue in the future to continue to purchase gift cards from vendors.

 
F-7

 

3.  Summary of Significant Accounting Policies
 
Cash and Cash Equivalents and Restricted Cash
 
The Company considers all highly liquid securities purchased with remaining maturities of 90 days or less to be cash equivalents.  Cash equivalents are stated at cost which approximates market value and primarily consists of money market funds that are readily convertible into cash.  Restricted cash comprises amounts held in deposits that were required as collateral under the lease of office space.

Accounts Receivable

Accounts receivable are recorded net of an allowance for doubtful accounts.  The Company's allowance for doubtful accounts will be based upon historical loss patterns, the number of days that the billings are past due and an evaluation of the potential risk associated with delinquent accounts.  The Company will also consider any changes to the financial condition of its customers and any other external market factors that could impact the collectability of its receivables in the determination of its allowance for doubtful accounts.  Due to the limited number of accounts receivable and the historical pattern of collections the Company's allowance for doubtful accounts as of June 30, 2012 is $0.

Concentration of  Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company maintains cash and cash equivalents with domestic financial institutions of high credit quality. The Company performs periodic evaluations of the relative credit standing of all of such institutions.
 
The Company performs ongoing credit evaluations of customers to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, and review of the invoicing terms of the contract. The Company generally does not require collateral. The Company maintains reserves for potential credit losses on customer accounts when deemed necessary. Actual credit losses during the year ended June 30, 2012 were not significant.
 
Deferred Rent Payable

The Company is party to lease for office space for its corporate offices and as part of the agreement the landlord provided a rent abatement for the first 10 months of the lease.  The Company accounts for the rental expense on a straight line basis over the entire term of the lease and records a liability for the difference between payments and the expense recorded in selling general and administrative expense.
 
Revenue Recognition
 
Advertising Revenue:  We generate advertising revenue primarily from display and video advertising, which is typically sold on a cost-per-thousand impressions, or CPM basis, and completed engagements on a cost per engagement (CPE) basis.  Advertising campaigns typically range from one to 12 months, and advertisers generally pay us based on a minimum of delivered impressions or the satisfaction of other criteria, such as click-throughs.
 
The Company recognizes revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. For all revenue transactions, the Company considers a signed agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement.
 
Deferred Revenue:  Our deferred revenue consists principally of both prepaid but unrecognized revenue and advertising fees received or billed in advance of the delivery or completion of the delivery of services.  Deferred revenue is recognized as revenue when the services are provided and all other revenue recognition criteria have been met.
 
Watchpoints and Engagement Points
 
The Company issues points to its users as an incentive to utilize the Viggle app and its features.  Users can redeem these points for rewards.  The Company records the cost of these points based on the weighted average cost of redemptions during the period.   Points earned but not redeemed are classified as a liability.
 
Users earn points for various activities and the Company reports points earned for checking into shows and points earned for engaging in advertiser sponsored content as a separate line in its statement of operations ("Cost of watchpoints and engagement points").  All other points earned by users are reflected as a marketing expense in selling, general and administrative expense.
 
 
F-8

 
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 expenses during the reporting period.  These estimates include, among others, fair value of financial assets and liabilities, net realizable values on long-lived assets, certain accrued expense accounts, and estimates related to stock-based compensation.  Actual results could differ from those estimates.
 
Fair Value of Financial Instruments
 
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, receivables, accounts payable, and other current liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments.  The carrying valve of the Company's debt approximates fair value due to its short-term maturity.
 
Property and Equipment
 
Property and equipment (consisting of computers, software, furniture and fixtures, and leasehold improvements) is recorded at historical cost and is depreciated using the straight-line method over their estimated useful lives.  The useful life and depreciation method are reviewed periodically to ensure that the depreciation method and period are consistent with the anticipated pattern of future economic benefits.  Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized.  Gains and losses on disposals are included in the results of operations.  Equipment, software, furniture and fixtures are being depreciated over a useful life of three years, leasehold improvements are depreciated over a useful life of 10 years consistent with the life of the underlying lease.
 
Impairment of Goodwill and Certain Other Long-Lived Assets

As required by ASC 350, Goodwill and Other Intangible Assets, the Company tests goodwill for impairment.  Goodwill is not amortized, but instead tested for impairment at the reporting unit level at least annually and more frequently upon occurence of certain events.  The annual goodwill impairment test is a two step process.  First, the Company determines if the carrying value of its related reporting unit exceeds fair value, which would indicate that goodwill may be impaired.  If the Company then determines that goodwill may be impaired, it compares the implied fair value of the goodwill to its carry amount to determine if there is an impairment loss.
 
The Company accounts for the impairment of long-lived assets other than goodwill in accordance with ASC 360, “Property, Plant, and Equipment”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.  In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets.  Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal.  

The Company, through its acquisition of a 65% common stock interest in TIPPT, acquired identifiable intangible assets valued at $4,628. As part of the Company's review of the fair value of its intangible assets for the twelve months ended June 30, 2012, the Company has 1) derecognized the $2,378 of contingent consideration attributable to the Company's warrant that was to be issued to TIPPT LLC because the warrant was never issued; and 2) performed a review of the fair value of the remaining $2,250 carrying value of such agreement.  The Company has taken an impairment charge for the full carrying value of such agreement.  Accordingly the carrying value as of June 30, 2012 is zero (see Note 4).
 
There was no significant impairment to the Company's long-lived assets as of June 30, 2011.
 
 
F-9

 
 
Internal Use Software
 
The Company recorded $2,350 of capitalized software as part of the Loyalize acquisition as of June 30, 2012.  The Company records amortization of the software on a straight-line basis over the estimated useful life of the software.  Once revenue producing activities commenced in the third quarter of 2012, the software was placed in service and $327 of amortization expense has been recorded for the year ended June 30, 2012.  No amortization expense was recorded in 2011.
 
The Company records and capitalizes computer software and, appropriately, certain internal costs have been capitalized in the amounts of $2,747 and $317 as of June 30, 2012 and June 30, 2011, respectively, in accordance with ASC 350-40.  The Company records amortization of the software on a straight-line basis over the estimated useful life of the software. Once revenue producing activities commenced in the third quarter of 2012 the software was placed in service and $250 of amortization expense has been recorded for the year ended June 30, 2012.  No amortization expense was recorded in 2011.
 
Marketing
 
Marketing costs are expensed as incurred.  Marketing expense for the Company for the years ended June 30, 2012 and June 30, 2011 was $5,467 and $1,005, respectively.
 
Income Taxes
 
The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes.  Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse.  A valuation allowance is recorded when it is unlikely that the deferred tax assets will not be realized.  We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date.  In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.  For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.

Stock-Based Compensation
 
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation.  Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period.  The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and warrants issued.  Stock-based awards issued to date are comprised of both restricted stock awards (RSUs) and employee stock options.
 
Recently Issued Accounting Pronouncements
 
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08 Intangibles - Goodwill and Other: Testing Goodwill for Impairment.  This ASU amends FASB Codification Topic 350 to provide an option for an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether to perform the two-step goodwill impairment test.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  We do not anticipate that the adoption of this standard will have a significant impact on the Company’s Consolidated Financial Statements.

In May 2011, the Financial Accounting Standards Board (FASB) released ASU 2011-04 “Fair Value Measurement”, which amends ASC 820 “Fair Value Measurements and Disclosures”. This standard will be effective beginning in the first calendar quarter of 2012 and the Company is in the process of assessing the impact of this standard on the Company's Consolidated Financial Statements.
 
 
F-10

 
 
In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income.  The ASU amends FASB Codification Topic 220, Comprehensive Income, to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2011, and early adoption is permitted.  The adoption of this standard will not have an impact on the Company's Consolidated Financial Statements.

4.  Acquisitions
 
WatchPoints Acquisition
 
On September 29, 2011, in furtherance of its business plan, the Company, through its wholly-owned subsidiary, Project Oda, Inc., purchased certain assets of Mobile Messaging Solutions, Inc.'s Watchpoints business. The consideration for such transaction consisted of $2,500 in cash and 100,000 shares of the Company's common stock with a fair value of $16.00 per share on the date of the transaction. The Watchpoints business is involved in developing, selling, maintaining and improving an interactive broadcast television application utilizing audio recognition technology. The assets purchased, and the related value allocated to each, include intellectual property ($4,209) and certain computer-related equipment ($11). The intellectual property included patent filings for audio verification technology and the provision of value-added programming/services based on such verification and trademarks for the “Watchpoints” name. The value allocated to the intellectual property is being amortized over the expected useful life of the Company's software product. The Company also paid Kai Buehler, the CEO of Watchpoints, a $300 finder's fee, which was recorded to selling, general and administrative expenses in the year ended June 30, 2012, and appointed him as a full-time Senior Vice President of the Company.

This acquisition was considered to be an asset acquisition and has been deemed to be a defensive acquisition and the fair value of the intellectual property acquired of $4,209 is being amortized over the estimated useful life of the Company's Viggle software of three years on a straight-line basis.  Amortization expense of the intellectual property for the years ended June 30, 2012 and June 30, 2011 was $1,052 and $0, respectively.
 
TIPPT Media Inc.
 
The Company made an acquisition of  65% of TIPPT Media Inc., a Delaware corporation (“TIPPT”), in December 2011 and during the months following the acquisition determined that the TIPPT business did not fit into the Company's long term strategy.  Accordingly, in May 2012 the Company sold 50% of its 65% interest to TIPPT LLC.  Below is a summary of both of these transactions.

On December 23, 2011, the Company obtained a sixty-five (65%) percent ownership interest in TIPPT, which will sell coupons and/or discount codes on behalf of third parties by engaging individuals with a public profile to promote products via internet-based social networking and microblogging websites and other similar internet-based methods of electronic communications.   In consideration for its investment in TIPPT, the Company paid $2,000 in cash, forgave the repayment of a $250 promissory note owed to the Company by TIPPT LLC, a Delaware limited liability company, and the minority stockholder of TIPPT, and agreed to issue a warrant to purchase 500,000 shares of the Company's common stock at an exercise price equal to 115% of the 20-day trading average of the Company's common stock if certain performance conditions were met within four months of the closing of the transaction. The Company believed it was probable that the performance conditions would be met and thus the fair value of the warrants were recorded.  The shares of common stock exercisable under the warrant were valued at $2,378 using the Black Scholes valuation model.
 
In connection with the transaction, the Company entered into a five-year Line of Credit Agreement, pursuant to which the Company may provide advances to TIPPT to finance its working capital obligations, in an aggregate principal amount not to exceed $20,000, with an interest rate not to exceed 4% per annum.  The facility is secured by the remaining 35% of the common shares of TIPPT owned by TIPPT LLC, subject to release under certain circumstances described in the loan agreement in the event the shares are converted into common shares of the Company.  The credit facility may be drawn for approved expenses in accordance with the budget approved at the time of the commitment, as updated quarterly.  In addition, the Company entered into a Stockholders Agreement with TIPPT LLC regarding, among other things, restrictions on the transfer of shares in TIPPT and the potential exchange under certain circumstances of all or a portion of the 35% interest in TIPPT held by TIPPT LLC into the Company's common stock .
 
The Company determined that immediately before the transaction , the activities of TIPPT did not constitute a business.  Therefore, the Company accounted for the TIPPT transaction as an asset acquisition in accordance with ASC 350, Goodwill and Other Intangible Assets.
 
 
F-11

 
 
The total estimated purchase price for the TIPPT assets is composed of the following:
 
Cash 
 
$
2,000
 
Forgiveness Promissory Note
 
250
 
Fair Value of Common Stock Warrant 
 
2,378
 
Total Purchase Price
 
$
4,628
 
 
The purchase price had been allocated to the assets acquired (identifiable intangible assets) as of the closing date of December 23, 2011 based on their estimated fair values.
 
The fair value of assets acquired of TIPPT  at the date of acquisition were as follows;
 
Assets acquired:
 
Intellectual Property Contracts
  $ 4,628  
 
As noted above, on May 14, 2012, the Company sold to TIPPT LLC a 50% ownership interest in TIPPT for $500, payable by a Purchase Money Note with interest accruing at 4% per annum and maturing on December 31, 2016.  The Company retained a 15% ownership interest in TIPPT.  As part of the transaction, the Company's obligation to provide advances to TIPPT under the $20,000 line of credit was terminated.  Instead TIPPT issued an Amended and Restated Promissory Note to the Company pursuant to which TIPPT agreed to pay the Company $1,201, which represents $701 that was outstanding under the line of credit on April 30, 2012 and an additional $500 that the Company agreed to loan to TIPPT.  In addition, as part of the transaction, the Company terminated the stockholders agreement and entered into an Amended and Restated Stockholders Agreement (the “Stockholders Agreement”) with TIPPT LLC to provide the Company with certain stockholder protections regarding the Company's remaining interest in TIPPT.  The Company's representatives on the TIPPT board of directors, Mr. Sillerman, Ms. Scardino, and Mr. Nelson, resigned from the TIPPT board of directors.  The Company is entitled to a board observer on the TIPPT Media Inc. board.  The warrant to purchase 500,000 shares of the Company's common stock to TIPPT LLC was never issued.
 
As part of the Company's review of the fair value of its intangible assets for the twelve months ended June 30, 2012, the Company has 1) derecognized the $2,378 of contingent consideration attributable to the Company's warrant that was to be issued to TIPPT LLC because the warrant was never issued; and 2) performed a review of the fair value of the remaining $2,250 carrying value of such agreement.  The Company has taken an impairment charge for the full carrying value of such agreement.  Accordingly, the carrying value as of June 30, 2012 is zero.  Also, based on the limited financial resources of TIPPT and TIPPT LLC, the Company has fully reserved the $500 Purchase Money Note and the $1,201 relating to the Amended and Restated Promissory Note described above.
 
The Company has included the operating results of TIPPT in its consolidated financial statements since the date of acquisition.  As of June 30, 2012, the Company has written down to zero the carrying value of all of the TIPPT assets and has taken a charge of $3,511 which is included in selling, general, and administrative expense.

Loyalize Acquisition

On December 31, 2011, in furtherance of its business plan, the Company, through a newly created wholly owned subsidiary, FN(x) I Holding Corporation,  now known as Loyalize Inc (“FN(x)I” or “Loyalize”), purchased from Trusted Opinion Inc. (“Trusted Opinion”), substantially all of its assets, including certain intellectual property and other assets relating to the “Loyalize” business owned by Trusted Opinion, pursuant to an asset purchase agreement executed by the Company and FN(x) I on such date (the “Asset Purchase Agreement”) .  In consideration for its purchase of the such assets, the Company agreed to pay Trusted Opinion $3,000 in cash and agreed to deliver 137,519 of the Company's common shares as follows:  32,627 shares delivered directly to Seller within three business days of delivery of the financial statements and 104,892 shares (the “Escrowed Shares”) delivered within three business days of closing to American Stock Transfer and Trust Company LLC, as escrow agent, to be held until December 31, 2012 to secure certain representations, warranties and indemnities given by Trusted Opinion under the Asset Purchase Agreement.  The Company valued the 137,519 common shares as of the date of closing at $1,719 based on the $12.50 per share closing price of its common stock on the date of closing.  In addition to certain minor purchase price adjustments to be made post-closing, the Company is obligated to also fund as a purchase price adjustment the difference, if any, by which $1,839 exceeds the calculated value (computed based on the average closing price of the Company's common shares during the 20 days prior to December 31, 2012) of the 137,519 shares on December 31, 2012, either in cash or in common shares of the Company, at the Company's option.  Such additional consideration shall not be payable until claims which remain subject to determination and secured by all the Escrowed Shares are no longer outstanding.  The additional consideration shall be eliminated to the extent final claims exceed the value of the shares then remaining in escrow.
 
 
F-12

 
 
The Company accounted for the purchase of Loyalize using the acquisition method, and accordingly the consideration paid has been allocated to the fair value of assets acquired and liabilities assumed.
 
The total purchase price is composed of the following:
 
Cash
  $ 3,185  
Fair Value of Common Stock
    1,719  
Fair Value of Common Stock Guarantee
    120  
Total Initial Purchase Price
  $ 5,024  
 
Details of the fair values of assets acquired and liabilities assumed from Trusted Opinion are as follows:

Assets acquired:
 
Other Receivable
  $ 92  
Equipment
    33  
Intellectual Property
    80  
Capitalized Software
    2,350  
Goodwill
    2,953  
      5,508  
 
The goodwill recorded in the transaction is deductible for tax purposes.
 
Less liabilities assumed:
 
Deferred Revenue
    (484 )
         
Net assets acquired
  $ 5,024  

As of June, 30, 2012, the fair value of the intangibles is $80 and the goodwill is $2,953.
 
The following table presents the unaudited pro forma results of the Company for the years ended June 30, 2012 and 2011 as if the Trusted Opinion acquisition occurred on July 1, 2010. These results are not intended to reflect the actual operations of the Company had the acquisition occurred on July 1, 2010.
 
   
Years ended June 30
   
2012
 
2011
Revenue
  $ 1,740     $ 102  
Operating (Loss)
    (98,186 )     (22,812 )
Loss Per Share (basic and diluted)
    (1.34 )     (0.45 )

 
F-13

 

5.  Property and Equipment

Property and Equipment consists of the following:
 
   
June 30, 2012
   
June 30, 2011
 
             
Leasehold Improvements
  $ 1,839     $  
Furniture and Fixtures
    441       9  
Computer Equipment
    785       60  
Software
    95       14  
Total
    3,160       83  
Accumulated Depreciation and Amortization
    (299 )     (4 )
Property and Equipment, net
  $ 2,861     $ 79  

Depreciation and amortization charges to selling, general and administrative expenses for the years ended June 30, 2012 and 2011 amounted to $616 and $4, respectively.
 
6.  Intellectual Property
 
     
June 30, 2012
   
June 30, 2011
 
 
Description
Amortization
Period
 
 
Amount
   
Accumulated
Amortization
   
Carrying
Value
   
 
Amount
   
Accumulated
Amortization
   
Carrying
Value
 
                                       
Intellectual Property
36 months
  $ 4,209     $ (1,052 )   $ 3,157                    
Intellectual Property
24 months
    80       (20 )     60                          
                                                   
Total
    $ 4,289     $ (1,072 )   $ 3,217                      
 
Amortization of intellectual property charges to selling, general and administrative expenses for the years ended June 30, 2012 amounted to $1,072.  Future annual amortization expense expected is as follows:
 
Years Ending June 30,
     
2013
  $ 1,443  
2014
    1,423  
2015
    351  
2016
     
2017
     
 
 
F-14

 
 
7. Loans Payable
 
J. Howard, Inc. had been supporting the daily operations of the Company from 2007 until the Recapitalization.  As of December 31, 2010, the Company owed J. Howard, Inc. $82 as a result thereof, which amount was increased as of the completion of the Recapitalization on February 15, 2011 to $171.  As part of the Recapitalization, the Company issued 125,000 shares (at a fair market value of $0.06 per share) to J. Howard, Inc., a director and officer of the Company prior to the Recapitalization, and its designees (which included former directors of the Company) in connection with partially extinguishing outstanding debt owed to J. Howard, Inc.  The remaining debt of $163 was satisfied on February 15, 2011 by payment to J. Howard, Inc. in such amount.  In addition, J. Howard, Inc. was paid $37 to be used for payment of expenses incurred in connection with the Recapitalization on behalf of the Company.
 
The Company financed the purchase of a 6.25% fractional interest in a G-IV jet.  The financing of $940 provides for interest at the rate of 6% per annum, monthly payments of $9 and a balloon payment at maturity in 5 years of $661.  In June 2012 the Company agreed to sell the fractional interests back to Net Jets and repay the outstanding loan amount.   Accordingly, the amount of the loan is $0 at June 30, 2012.  The Company recorded a loss on the sale of approximately $134 and this amount is included in selling, general and administrative expenses for the year ended June 30, 2012.

On June 29, 2012, Sillerman Investment Company LLC (the “Lender”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, advanced $2,500 to the Company.  The advance is evidenced by a $10,000 line of credit grid promissory note, dated as of June 29, 2012, that was executed and delivered by the Company in favor of the Lender (the “Grid Note”) on July 6, 2012.  Under the Grid Note, the Company may periodically draw on the line of credit in amounts of no less than $100, and interest will accrue on all unpaid principal amounts at a simple interest rate equal to 9% per annum.  The Company is not permitted to make draws more than once per month.  The Grid Note matures on the earlier to occur of (i) June 29, 2013 or (ii) upon the receipt of net proceeds by the Company or any of its wholly-owned subsidiaries from one or more debt or equity offerings by the Company or any of its wholly-owned subsidiaries in an amount equal to at least the amount of principal and accrued and unpaid interest outstanding under the Grid Note.  At maturity, the Company must pay to the Lender all principal amounts then outstanding, plus accrued and unpaid interest thereon.  All net proceeds received by the Company or any of its wholly owned subsidiaries from any debt or equity offering by the Company or any of its wholly-owned subsidiaries must first be applied toward the payment in full of all outstanding principal and accrued but unpaid interest outstanding under the Grid Note.  The Company may make prepayments in whole or in part under the Grid Note at any time, provided accrued, but unpaid interest is paid through the prepayment date.

The Company intends to use the proceeds from the Grid Note to fund working capital requirements and for general corporate purposes.  Because the Lender is an affiliate of the Company's Executive Chairman and Chief Executive Officer, a majority of the Company's independent directors approved the Grid Note.

8. Commitments and Contingencies
 
Total rent expense for the Company under operating leases recorded for the years ended June 30, 2012 and 2011 was $814 and $65, respectively. The Company’s future minimum rental commitments under noncancelable operating leases are as follows:
 
 
 
(in thousands)
 
Years Ending June 30,
     
2013
  $ 2,216  
2014
    839  
2015
    844  
2016
    737  
2017
    666  
Thereafter
    3,517  
Total
  $ 8,819  
 
 
F-15

 
 
As of June 30, 2012, the Company has entered into employment contracts with certain key executives and employees, which include provisions for severance payments in the event of specified terminations of employment. Expected payments under existing employment contracts are as follows:
 
   
(in thousands)
 
Year Ending June 30,
     
2013
  $ 2,754  
2014
    2,588  
2015
    1,569  
2016
    939  
Thereafter
     
Total
  $ 7,850  
 
In connection with the purchase from Trusted Opinion Inc. of the Loyalize assets, the Company is also obligated to fund as a