UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended December 31, 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. 00-13803
 
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, NY  10010
(Address of Principal Executive Offices and Zip Code)
 
Registrant's Telephone Number, Including Area Code: (212) 231-0092
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   þ No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 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
o
Smaller reporting company 
þ
(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
 
As of  February 14, 2013, there were 82,641,753 shares of the registrant's common stock outstanding.
 


 
 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
         
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PART II. OTHER INFORMATION
           
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2

 
PART I

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
 
In addition to historical information, this Quarterly Report on Form 10-Q (this “Quarterly 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 Quarterly 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 “Part I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 1A. Risk Factors” of this Quarterly 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 Quarterly 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.
 
 
3

 
ITEM 1.  FINANCIAL STATEMENTS
 
Viggle Inc.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
 
   
December 31,
2012
   
June 30,
2012
 
   
(Unaudited)
   
(Audited)
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 238     $ 2,963  
Accounts receivable
    3,417       1,424  
Prepaid expenses
    728       1,000  
Other receivables
    330       1,290  
Total current assets
    4,713       6,677  
Restricted cash
    696       696  
Capitalized software costs, net
    3,725       4,506  
Property & equipment, net
    3,052       2,861  
Intellectual property, net
    2,495       3,217  
Goodwill
    2,953       2,953  
Other assets
    40       40  
Total assets
  $ 17,674     $ 20,950  
Liabilities and stockholder's equity
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 6,553     $ 4,838  
Reward points payable
    4,589       3,454  
Common stock warrant liability
    943       4,626  
Guarantee liability
    1,465       963  
Deferred revenue
    172       572  
Current portion of loan payable
    15,000       2,500  
Total current liabilities
    28,722       16,953  
Other long-term liabilities
    1,380       1,310  
Total liabilities
    30,102       18,263  
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 December 31, 2012 and June 30, 2012
    76       76  
Additional paid-in-capital
    151,871       135,019  
Due from executive officer
    (3,496 )     (3,426 )
Accumulated deficit
    (160,879 )     (128,982 )
Total stockholders' equity (deficit)
    (12,428 )     2,687  
Total liabilities and stockholders' equity
  $ 17,674     $ 20,950  

See accompanying notes to consolidated financial statements 
 
 
4


Viggle Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
(Unaudited)
 
   
Three Months Ended
 December 31,
   
Six Months Ended
 December 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
  $ 3,875     $     $ 5,927     $  
                                 
Cost of watchpoints and engagement points
    (1,571 )           (3,800 )      
Selling, general and administrative expenses
    (15,143 )     (16,724 )     (36,842 )     (50,654 )
Operating loss
    (12,839 )     (16,724 )     (34,715 )     (50,654 )
                                 
Other income (expense):
                               
Other income, net
    689             3,181        
Interest income (expense), net
    (236 )     55       (319 )     95  
Total other income (expense)
    453       55       2,862       95  
                                 
Net loss before provision for income taxes
    (12,386 )     (16,669 )     (31,853 )     (50,559 )
                                 
Income tax expense
    (44 )           (44 )      
                                 
Net loss
  $ (12,430 )   $ (16,669 )   $ (31,897 )   $ (50,559 )
                                 
Net loss per common share - basic and diluted
  $ (0.16 )   $ (0.22 )   $ (0.42 )   $ (0.72 )
                                 
Weighted average common shares outstanding - basic and diluted
    76,470,041       74,570,899       76,470,041       70,211,116  
 
See accompanying notes to consolidated financial statements
 
 
5


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 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                   37,532  
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  
Net loss
                      (31,897 )     (31,897 )
Interest income on notes receivable from shareholders
                             
Interest income on notes receivable from Executive Officer
                (70 )           (70 )
Employee stock options - share based compensation
          8,267                   8,267  
Restricted stock - share based compensation
          8,508                   8,508  
Notes receivable from shareholders
          77                   77  
Balance December 31, 2012
  $ 76     $ 151,871     $ (3,496 )   $ (160,879 )   $ (12,428 )
 
See accompanying notes to consolidated financial statements
 
 
6


Viggle Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)

   
Six Months Ended December 31,
2012
   
Six Months Ended December 31,
2011
 
Operating activities:
           
Net loss
  $ (31,897 )   $ (50,559 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Restricted stock based compensation
    8,508       16,972  
Employee stock options - share based compensation
    8,267       3,412  
Common stock and warrants issued in connection with Private Placements - share based compensation
          19,456  
Depreciation and amortization
    1,870       573  
Increase in fair value of Loyalize guarantee
    502        
Increase (decrease) in fair value of common stock warrants
    (3,683 )     324  
Interest income on notes receivable from shareholder and officer
    (70 )     (70 )
Income from deferred revenue contracts acquired with Loyalize acquisition
    (194 )      
Non-cash barter revenue     597        
Non-cash barter advertising expense     (597 )      
                 
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,993 )      
Other receivables
    960       (897 )
Prepaid expenses
    272       (212 )
Accounts payable and accrued expenses
    1,715       795  
Points liability
    1,135        
Deferred revenue
    (208 )      
Other liabilities
    70       1,170  
Net cash used in operating activities
    (14,746 )     (9,036 )
Investing activities:
               
Purchase of property and equipment
    (487 )     (1,393 )
WatchPoints acquisition
          (2,620 )
TIPPT acquisition
          (2,250 )
Loyalize acquisition
          (3,180 )
Capitalized software costs
    (69 )     (1,294 )
Net cash used in investing activities
    (556 )     (10,737 )
Financing activities:
               
Issuance of common stock and warrants for cash
          33,413  
Payments on loan
          (24 )
Loan from executive officer
    12,500        
Notes receivable shareholders
    77        
Net cash provided by financing activities
    12,577       33,389  
Net increase (decrease) in cash
    (2,725 )     13,616  
Cash at beginning of period
    2,963       3,794  
Cash at end of period
  $ 238     $ 17,410  
 
See accompanying notes to consolidated financial statements
 
 
7


Viggle Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
 
Supplemental cash flow information:
           
Cash paid during the year for interest
          14  
Non-cash financing activities:
               
Stock issued for WatchPoints acquisition
          1,600  
Stock issued for Loyalize acquisition
          1,719  
Loyalize guarantee
          120  
Warrants issued for TIPPT
          2,378  
Capital related to corporate jet
          336  

See accompanying notes to consolidated financial statements
 
 
8


Viggle Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(Unaudited)
 
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.
 
The financial statements for the fiscal year ended June 30, 2012 and June 30, 2011 and for the three and six months ended December 31, 2012 and 2011 reflect the results of operations of Viggle Inc. and its consolidated subsidiaries (collectively, the “Company”), each a Delaware corporation. The financial information in this report for the three and six months ended December 31, 2012 and 2011 have not been audited, but in the opinion of management all adjustments (which include normal recurring adjustments) necessary for a fair presentation have been made. The operating results for the three and six months ended December 30, 2012 and 2011 are not necessarily indicative of the results for the full year.
 
The financial statements included herein should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
 
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.

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.
 
 
9

 
On February 16, 2011, immediately after the recapitalization (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 31, 2012.  The Company has six wholly-owned subsidiaries, Function(x) Inc., Project Oda, Inc., Sports Hero Inc., Loyalize Inc., Viggle Media Inc. and VX Acquisition Corp., each a Delaware corporation.

The Company's New Line of Business
 
Our business is built on a simple concept:  to make watching TV more rewarding.  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 rewards from vendors or continue our business. 
 
3.  Summary of Significant Accounting Policies
 
Cash and Cash Equivalents and Restricted Cash
 
The Company considers all highly liquid securities purchased with 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 December 31, 2012 and June 30, 2012 is $0 and $0, respectively.

 
10

 
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 three and six months ended December 31, 2012 and 2011 were not significant.
 
Deferred Rent Payable

The Company is party to lease for office space for its corporate offices and as part 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.
 
Barter Transactions – a barter transaction represents the exchange of advertising or programming for advertising, merchandise or services. Barter transactions which exchange advertising for advertising are accounted for in accordance with EITF Issue No. 99-17 “Accounting for Advertising Barter Transactions” (ASC Topic 605-20-25), which are recorded at the fair value of the advertising provided based on the Company’s own historical practice of receiving cash for similar advertising from buyers unrelated to the counter party in the barter transactions.
 
Barter transactions which exchange advertising or programming for merchandise or services are recorded at the monetary value of the revenue expected to be realized from the ultimate disposition of merchandise or services.
 
The Company recognized barter revenue for the three and six months ended December 31, 2012 of $597 and $597 respectively. The Company recognized barter expense for the three and six months ended December 31, 2012 of $597 and $597, respectively. The Company did not recognize any barter revenue or barter expense for the three and six months ended December 31, 2011.
 
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.
 
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.
 
 
11

 
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 occurrence 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.  

There was no impairment to the Company's long-lived assets as of  December 31, 2012.
 
Internal Use Software
 
The Company recorded $2,350 of capitalized software as part of the Loyalize acquisition as of December 31, 2012 and 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 amortized.   For the three and six months ended December 31, 2012 amortization expense has been recorded of $196 and $392, respectively.  No amortization expense was recorded in the comparable periods in 2011.
 
The Company records and capitalizes computer software and, appropriately, certain internal costs have been capitalized in the amounts of $2,816 and $2,747 as of December 31, 2012 and June 30, 2012, 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 amortized.   For the three and six months ended December 31, 2012 amortization expense has been recorded of $229 and $460, respectively.  No amortization expense was recorded in the comparable periods in 2011.
 
Marketing
 
Marketing costs are expensed as incurred.  Marketing expense for the Company for the three and six months ended December 31, 2012 was $1,429 and $3,004, respectively.  Marketing expense for the Company for the three and six months ended December 31, 2011 was $820 and $1,723, respectively.
 
 
12

 
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.  The adoption of this standard did not have an 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 became effective beginning in the first calendar quarter of 2012. The adoption of this standard did not have an impact on the Company's Consolidated Financial Statements.
 
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 did not have an impact on the Company's Consolidated Financial Statements as there was no comprehensive income /(loss).

4.  Property and Equipment

Property and Equipment consists of the following:
 
   
December 31,
2012
   
June 30,
2012
 
             
Leasehold Improvements
  $ 2,024     $ 1,839  
Furniture and Fixtures
    546       441  
Computer Equipment
    974       785  
Software
    103       95  
Total
    3,647       3,160  
Accumulated Depreciation and Amortization
    (595 )     (299 )
Property and Equipment, net
  $ 3,052     $ 2,861  

Depreciation and amortization charges to selling, general and administrative expenses for the six months ended December 31, 2012 and 2011 amounted to $296 and $59, respectively.
 
 
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5.  Intellectual Property
 
       
December 31,
2012
   
June 30,
2012
 
Description
 
Amortization
Period
 
Amount
   
Accumulated
Amortization
   
Carrying
Value
   
Amount
   
Accumulated
Amortization
   
Carrying
Value
 
                                         
Intellectual Property
 
36 months
  $ 4,209     $ (1,754 )   $ 2,455     $ 4,209     $ (1,052 )   $ 3,157  
Intellectual Property
 
24 months
    80       (40 )     40       80       (20 )     60  
                                                     
Total
      $ 4,289     $ (1,794 )   $ 2,495     $ 4,289     $ (1,072 )   $ 3,217  
 
Amortization of intellectual property charges to selling, general and administrative expenses for the three and six months ended December 31, 2012 amounted to $361 and $722, respectively.  Amortization of intellectual property charges to selling, general and administrative expenses for the three and six months ended December 31, 2011 amounted to $351 and $351, respectively.  Future annual amortization expense expected is as follows:
 
Years Ending June 30,
     
2013
  $ 1,443  
2014
    1,423  
2015
    351  
2016
     
2017
     

6. Loans Payable
 
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,  agreed to provide the Company a $10,000 line of credit pursuant to a  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.  On October 25, 2012 and on December 12, 2012 the Grid Note was amended and restated to increase the amounts available for borrowing under the line of credit to $12,000 and $15,000, respectively.  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 amount 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.

As of December 31, 2012 and June 30, 2012, the Company had drawn $15,000 and $2,500, respectively on the Grid Note.  The interest expense on the Grid Note payable for the three and six months ended December 31, 2012 was $271 and $389, respectively. The interest expense on the Grid Note payable for the three and six months ended December 31, 2011 was $0 and $0, respectively.

 
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On January 4, 2013 the Grid Note was amended and restated to increase the amount available for borrowing under the line of credit to $20,000 (see Note 13).

On February 11, 2013, Sillerman Investment Company II, LLC provided an additional line of credit to the Company of up to $25,000 (See Note 13).
 
7. Commitments and Contingencies
  
In connection with the purchase from Trusted Opinion Inc. of the Loyalize assets, the Company is also obligated to 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 its 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 election, provided that such additional consideration shall not be payable until claims, if any, which remain subject to determination and which are secured by the 104,892 shares that are held in escrow are no longer outstanding, and the additional consideration shall be eliminated to the extent final claims exceed the value of the shares then remaining in escrow.  The guarantee was recorded at $120 at the time of the acquisition and subsequently has been marked to market to a fair value of $1,465 at December 31, 2012. The Company has recorded a gain of $109 and a charge of $502 which is reflected in other income,net in the Consolidated Statement of Operations for the three and six months ended December 31, 2012, respectively.  The Company has recorded a $1,465 liability for the guarantee in the Consolidated Balance Sheet as of December 31, 2012.
 
On August 17, 2012, the Company was served with a 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 other companies involving the same patent family. 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.
 
8. Stockholders’ Equity

As of December 31, 2012 and June 30, 2012, there were 300,000,000 shares of authorized common stock and 76,470,041 shares of common stock issued and outstanding. Except as otherwise provided by Delaware law, the holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders.
 
The Company's Board of Directors is authorized to issue 1,000,000 shares of preferred stock, par value $0.001 per share. We may issue shares of preferred stock in one or more series as may be determined by our Board of Directors, who may establish the designation and number of shares of any series, and may determine, alter or revoke the rights, preferences, privileges and restrictions pertaining to any wholly unissued series (but not below the number of shares of that series then outstanding). 

9. Share-Based Payments

Equity Incentive Plan
 
The 2011 Executive Incentive Plan (the "Plan") of the Company was approved on February 21, 2011 by the written consent of the holder of a majority of the Company's outstanding common stock. The Plan provides the Company the ability to grant to any officer, director, employee, consultant or other person who provides services to the Company or any related entity, options, stock appreciation rights, restricted stock awards, dividend equivalents and other stock-based awards and performance awards, provided that only employees are entitled to receive incentive stock options in accordance with IRS guidelines. The Company reserved 30,000,000 shares of common stock for delivery under the Plan.  Pursuant to the Executive Incentive Plan and the employment agreements, between February 15, 2011 and December 31, 2012, the Compensation Committee of the Company's Board of Directors authorized the grants of restricted stock and stock options described below.
 
Restricted Stock
 
The per share fair value of RSUs granted with service conditions was determined on the date of grant using the fair market value of the shares on that date and is recognized as an expense over the requisite service period.
 
 
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Shares
   
Weighted Average Grant Date Fair Value
 
Nonvested at June 30, 2012
    2,886,668       29.45  
                 
Granted
           
Vested
    (5,833 )     11.77  
Forfeited and cancelled
    (441,667 )     21.14  
Nonvested at December 31, 2012
    2,439,168       30.57  
                 
 
The total compensation was $2,890 and $8,508 for the three months and six months ended December 31, 2012 respectively.   The total compensation was $8,594 and $16,972 for the three months and six months ended December 31, 2011 respectively.  As of December 31, 2012 and June 30, 2012 there was $59,519 and $112,995 respectively in total unrecognized share-based compensation costs.
 
Stock Options
 
The following table summarizes the Company's stock option activity for three months ended December 31, 2012:
 
   
Number of Options
   
Weighted average exercise price
 
Outstanding at June 30, 2012
    3,067,503     $ 6.24  
Granted
    14,032,976          
Exercised
             
Forfeited and cancelled
    (2,061,063 )        
Outstanding at December 31, 2012
    15,039,416       1.89  
Exercisable at December 31, 2012
    5,158,019       1.78  
 
The Company is accounting for these options at fair market value of the options on the date of grant, with the value being recognized over the requisite service period.  The fair value of each option award is estimated using a Black-Scholes option valuation model.  Expected volatility is based on the historical volatility of the price of comparable companies' stock.  The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option.  The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates.  Options generally have an expiration  of 10 years and vest over a period of 3 or 4 years.  The fair value of the options granted during the three months and six months  ended December 31, 2012 and 2011 were estimated based on the following weighted average assumptions:
 
 
16


   
Three Months Ended December 31,
   
Six Months Ended December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Expected volatility
    80 %     60 %     80 %     60 %
Risk-free interest rate
    0.98 %     1.17 %     1.03 %     1.20 %
Expected dividend yield
                       
Expected life (in years)
    6.76       6.25       6.47       6.25  
Estimated fair value per option granted
  $ 0.98     $ 3.55     $ 0.99     $ 3.87  
 
The total compensation expense of $2,045 and $8,267 was included in the accompanying Statement of Operations in selling, general and administrative expenses for the three months and six months ended December 31, 2012, respectively.  The total compensation expense of $1,481 and $3,414 was included in the accompanying Statement of Operations in selling, general and administrative expenses for the three months and six months ended December 31, 2011, respectively.  14,032,976 options were granted during the six months ended December 31, 2012 and the grants provide for vesting annually in arrears over the next three years.  As of December 31, 2012, there was approximately $18,198 of total unrecognized stock-based compensation cost which will be recognized over a 3-4 year period.
 
10.  Income Taxes
 
For the three and six months ended December 31, 2012 the Company recorded an income tax provision of $44 to reflect an increase in our deferred tax liability as a result of a tax amortization causing our basis in goodwill being greater than our tax basis in the asset. For the three and six months ended December 31, 2012 and 2011, the Company did not record an income tax benefit because it has incurred taxable losses and has no history of generating taxable income and therefore the Company cannot presently anticipate the realization of a tax benefit on its Net Operating Loss carryforward.  At December 31, 2012 the Company has a Net Operating Loss carryforward of $28,700, which will begin to expire in 2030.  The Company has established a full valuation allowance against its deferred tax assets as of December 31, 2012 and 2011.

The Company has evaluated its income tax positions and has determined that it does not have any uncertain tax positions. The Company will recognize interest and penalties related to any uncertain tax positions through its income tax expense.

The Company may in the future become subject to federal, state and local income taxation though it has not been since its inception.  The Company is not presently subject to any income tax audit in any taxing jurisdiction.    

11.  Related Party Transactions

Recapitalization Notes
 
In connection with the Recapitalization, Robert F.X. Sillerman (and his spouse and entities controlled by him), and Mitchell Nelson, each executive officers of the Company, executed promissory notes in accordance with their subscription agreements for the payment of the purchase price of the shares, in the amounts of $3,242 and $10, respectively.  Each note is an unsecured five-year note 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).  Mr. Nelson satisfied his note on April 1, 2011.  The notes are due five years after issuance, with interest accrued at the rate of 4.15% per annum.  Interest income recorded on these notes for the three and six months ended December 31, 2012 was $35 and $70, respectively.   Interest income recorded on these notes for the three and six months ended December 31, 2011 was $35 and $70, respectively.
 
 
17

 
Shared Services Agreements

In an effort to economize on costs and be efficient in its use of resources, the Company entered into a shared services agreement with Circle Entertainment Inc. (“Circle”) as of February 15, 2011, pursuant to which it shares costs for legal and administrative services in support of Mitchell J. Nelson, its General Counsel and General Counsel to Circle.  The shared services agreement provides, in general, for sharing on a 50/50 basis of the applicable support provided by either company to Mr. Nelson in connection with his capacity as General Counsel, and an allocation generally based on the services provided by Mr. Nelson, which are initially estimated to be divided evenly between the companies.  The Company is responsible for advancing the salary to Mr. Nelson for both companies and will be reimbursed by Circle for such salary and benefits (but not for any bonus, option or restricted share grant made by either company, which will be the responsibility of the company making such bonus, option or restricted share grant).  The agreement provides for the Chief Executive Officer or President of each Company to meet periodically to assess whether the services have been satisfactorily performed and to discuss whether the allocation has been fair.  The Audit Committee of each company's Board of Directors will then review and, if appropriate, approve the allocations made and whether payments need to be adjusted or reimbursed, depending on the circumstances.  Because this transaction is subject to certain rules regarding “affiliate” transactions, the Audit Committee and a majority of the independent members of the Company's Board of Directors have approved the shared services agreement.  This is deemed to be an affiliate transaction because Mr. Sillerman is Chairman and Mr. Nelson is Executive Vice President and General Counsel of Circle.  For the three and six months ended December 31, 2012 the Company billed Circle $79 and $158, respectively. For the three and six months ended December 31, 2011 the Company billed Circle $78 and $157, respectively.  Such billings primarily relate to support consisting of legal and administrative services. These services are to be reviewed and, if appropriate, approved by Circle's Audit Committee and the Company's Audit Committee. The balance due from Circle as of December 31, 2012 and June 30, 2012 was $79 and $53, respectively.
 
Certain Company accounting personnel may provide personal accounting services to our Executive Chairman, Robert F.X. Sillerman.  To the extent that such services are rendered, Mr. Sillerman shall reimburse the Company therefor.  The reimbursement for any such services shall be reviewed by the Company's Audit Committee.  For the three and six months ended December 31, 2012 the Company billed Mr. Sillerman $78 and $148, respectively.  For the three and six months ended December 31, 2011 the Company billed Mr. Sillerman $27 and $41, respectively.  The balance due from Mr. Sillerman as of December 31, 2012 and June 30, 2012 was $76 and $69, respectively.
 
Consultant

Benjamin Chen, a director, has acted as a consultant to the Company in the area of technology, systems architecture and technical operations.  For the three months and six months ended December 31, 2012 he has been paid $74 and $124 for his services, respectively.  For the three months and six months ended December 31, 2011 there were no such payments made.
 
Lines of Credit

Sillerman Investment Company LLC (the “Lender”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, has advanced $15,000 to the Company as of December 31, 2012.  The advance is evidenced by a $15,000 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.  On October 25, 2012, on December 3, 2012 and on December 12, 2012 the Grid Note was amended and restated to increase the amounts available for borrowing under the line of credit to $12,000, $12,500 and $15,000, respectively.  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 Grid Note was amended and restated on January 4, 2013 to increase the amounts available for borrowing under the credit line to $20,000 (see Note 13).

On February 11, 2013, Sillerman Investment Company II, LLC provided an additional line of credit to the Company of up to $25,000 (See Note 13).

 
18

12. Fair Value Measurement

The Company values its assets and liabilities using the methods of fair value as described in ASC 820, Fair Value Measurements and Disclosures.  ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  The three levels of fair value hierarchy are described below:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers counter-party credit risk in its assessment of fair value.  Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available.

The Company has certain assets and liabilities that are required to be recorded at fair value on a recurring basis in accordance with accounting principles generally accepted in the United States.  The Company’s investment in overnight money market institutional funds, which amounted to $0 and $1,838 as of December 31, 2012 and June 30, 2012, respectively, is included in Cash and Cash Equivalents on the accompanying Consolidated Balance Sheets and is classified as a Level 1 input.  The carrying value for Cash and Cash Equivalents and Accounts Payable approximate fair value because of the immediate or short-term maturity of these financial instruments.  The Company’s debt of $15,000 due to Chief Executive Officer approximates fair value due to its short term maturity. In connection with the purchase from Trusted Opinion Inc. of the Loyalize assets, the Company may be obligated to fund a purchase price adjustment. The fair value of this obligation is $1,465 and is classified as Level 3 within the fair value hierarchy because it was valued using unobservable inputs and management's judgment due to the absence of quoted market prices and inherent lack of liquidity. The Company issued 1,709,091 warrants in connection with the May 10, 2012 PIPE.  Each warrant has a sale price of $5.50 and is exercisable into 1 share of common stock at a price of  $8.00 over a term of three years.  Further, the exercise price of the warrants is subject to "down round" protection, whereby any issuance of shares at a price below the current price resets the exercise price equal to a price equal to the price of the newly issued shares (the "Warrants").  The fair value warrants has been determined utilizing the Binomial Lattice Model in accordance with ASC 820-10, Fair Value Measurements.  The fair value of the warrants when issued was $5,281 and was $4,626 as of June 30, 2012.  The warrants were marked to market as of December 31, 2012 to a fair value of $943.   The Company recorded a gain of $581 and $3,683 to other income, net in the Consolidated Statement of Operations for the three and six months ended December 31, 2012, respectively.  The warrant liability is classified as a current liability on the Consolidated Balance Sheet as of December 31, 2012 , due to the Company's intention to retire these warrants in its next round of financing expected to close in the second calendar quarter of 2013.  The Company's  warrants were classified as Level 3 within the fair value hierarchy because they were valued using unobservable inputs and management's judgment due to the absence of quoted market prices and inherent lack of liquidity.

13.  Subsequent Events

Line of Credit Modification

On January 4, 2013 , the Company's Board of Directors approved an increase in the $15,000 line of credit grid promissory note, dated as of June, 29, 2012, and as amended and restated as of December 12, 2012,  from $15,000 to $20,000.  Advances of $1,000,  $2,000 and $2,000 were made on January 4, 2013, January 22, 2013, and February 7, 2013, respectively (see Note 6).

The Company intends to use the proceeds to fund working capital requirements and for general corporate purposes.  Because Mr. Sillerman is a director, executive officer and greater than 10% stockholder of the Company, a majority of the Company's independent directors approved the transaction.

 
19

 
Additional Line of Credit
 
On February 11, 2013, Sillerman Investment Company II, LLC (the “Lender”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, provided an additional line of credit (the “Second Line of Credit”) to the Company in the amount of up to $25,000.  The prior $20,000 line of credit (the “First Line of Credit Note”) has been fully drawn.   
 
The Second Line of Credit is evidenced by a $25,000 line of credit grid promissory note, dated as of February 11, 2013 (the “Second Line of Credit Note”).  Under the Second Line of Credit Note, the Company may, from time to time, draw on the Second Line of Credit in amounts of no less than $1,000, provided that the Company is not permitted to draw on the Second Line of Credit more than once per month.  Interest will accrue on all unpaid principal amounts drawn under the Second Line of Credit Note at a simple interest rate equal to 14% per annum, with interest being paid at maturity.
 
The Second Line of Credit Note matures on the earlier to occur of (i) February 1, 2015, and (ii) 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 such subsidiaries in an amount equal to at least the amount of principal and accrued and unpaid interest outstanding under the Second Line of Credit Note.  At maturity, the Company must pay to the Lender all principal amounts then outstanding, plus all accrued and unpaid interest thereon.  
 
The Company has also agreed that 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 such subsidiaries must first be applied toward the payment in full of all outstanding principal and accrued and unpaid interest outstanding under the Second Line of Credit Note.
 
The Company may make prepayments, in whole or in part, under the Second Line of Credit Grid Note at any time, as long as all accrued and unpaid interest thereon is paid through the prepayment date.
 
In consideration of the Lender's agreement to provide the Second Line of Credit, the Company issued to the Lender thereunder 5,000,000 shares of the Company's common stock. Such 5,000,000 shares of the Company's common stock were issued in a transaction exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereunder and Rule 506 of Regulation D promulgated thereunder.  The Company will book stock based compensation expense in the third fiscal quarter of approximately $5,000 related to the shares issued to the Lender.

Because the transactions involving the Second Line of Credit and the Second Line of Credit Note were between the Company and an affiliate of Mr. Sillerman, who is the Executive Chairman and Chief Executive Officer of the Company, the Company formed a special committee of independent directors to review the proposed transactions.  Such special committee reviewed and unanimously approved such transactions.
 
The Board of Directors also approved for purposes of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “1934 Act”), the acquisition of all of such 5,000,000 shares of the Company's common stock by the Lender, who is a director by deputization.  Such approval was given, without limitation, for purposes of securing an exemption for such acquisition of all of such 5,000,000 shares of the Company's common stock from the provisions of Section 16(b) of the Exchange Act pursuant to Rule 16b-3 thereunder.

The Company also intends to engage in negotiations with Mr. Sillerman and his affiliated entities relating to the First Line of Credit and the Second Line of Credit as soon as practicable in an attempt to restructure such indebtedness on a long term basis.

The foregoing descriptions of the Second Line of Credit and Second Line of Credit Note and the transactions contemplated thereby are not complete and are subject to and qualified in their entirety.

AdaptiveBlue, Inc.

On November 16, 2012, Viggle Inc., a Delaware corporation (“Viggle”), and VX Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Viggle (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AdaptiveBlue, Inc., a Delaware corporation (“AdaptiveBlue”), and Shareholder Representative Services LLC, a Colorado limited liability company, in its capacity as the Stockholders' Agent.  The Merger Agreement was terminated on January 13, 2013 because the transaction did not close by the Merger Agreement's outside date.  As a result of the termination, Viggle paid AdaptiveBlue $500 for its costs, fees and expenses incurred in connection with the negotiation of and performance of its obligations under the Merger Agreement.

 
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Shared Services Agreement

As of January 4, 2013, the Company entered into a shared services agreement with SFX Holding Corporation (“SFX”), pursuant to which it shares costs for legal and administrative services in support of Mitchell J. Nelson, its General Counsel.  The shared services agreement provides, in general, for sharing generally based on the services provided by Mr. Nelson. Mr. Nelson will continue to be paid by the Company, and SFX will either reimburse Circle Entertainment Inc. (which will reimburse the Company, if applicable) or reimburse the Company directly for its portion of such salary and benefits (but not for any bonus, option or restricted share grant made by either company, which will be the responsibility of the company making such bonus, option or restricted share grant).  Because this transaction is subject to certain rules regarding “affiliate” transactions, the Company's Audit Committee and a majority of the independent members of the Company's Board of Directors have approved this shared services agreement.

Issuance of Shares in Connection with Loyalize Acquisition

In connection with the purchase from Trusted Opinion Inc. of the Loyalize assets, the Company is also obligated to 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 its 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 Buyer's election.  (See Note 7)  The Company elected to pay this obligation in shares of its common stock and on February 12, 2013, issued 1,171,712 shares of its common stock in satisfaction of this obligation.

Issuance of Additional Options to Directors

On February 8, 2013, the Board of Directors also approved the issuance of 528,446 additional stock options. On February 12, 2013, the Board of Directors also approved the issuance of 50,000 additional stock options to a newly elected director. The Company expects to record a stock-based compensation charge of approximately $219 in the third quarter related to these options.
 
 
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ITEM 2.  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 unaudited consolidated financial statements and footnotes of the Company’s historical audited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report and in the Company's  Annual Report on Form 10-K filed on October 15, 2012. 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 significant 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 31, 2012, the Company changed its name to Viggle Inc.  We have six wholly owned subsidiaries, Project Oda, Inc., Sports Hero Inc., Loyalize Inc., Function(x) Inc., Viggle Media Inc. and VX Acqusition Corp.  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:  to make watching TV more rewarding.  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 rewards from vendors or continue its business. 
 
 
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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 170 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 is limited to participants who are 13 years of age or older.
 
Our 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 50 extra points so long as the user remains checked in for at least ten minutes or alternatively, the user may receive 250 extra points for watching the entire show or alternatively, the user may receive 200 extra points for watching the show live instead of time-shifted.  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 events or MyGuy real-time fantasy sports games. 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 1,336,972 reward redemptions through December 31, 2012, the average number of points used per redemption has been approximately 13,568 points and the average value of a reward for such a redemption was $7.43.

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 launched the app to the public in the Apple iTunes App Store in January, 2012. The approved version of the app works on Apple iOS devices such as the iPhone, iPad and iPod Touch.  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 new features and functionality 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 in January, 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. 
 
 
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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.
 
Since our launch in January, 2012, and through December 31, 2012, 1,732,528 users have registered for our app, of which we have deactivated 108,883 for a total of  1,623,645 registered users.  Of those, we have accumulated 746,899 registered active users as of December 31, 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 December 31, 2012, we have accumulated an average of 348,843 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 December 31, 2012, our members have checked-in to 133,341,953 TV programs and spent an average of 75 minutes of active time within the Viggle app per session.  Users have redeemed a total of 1,336,972 rewards.

Also for the three months ended December 31, 2012, of the Active Users in those months, the average number of days that such Active Users were active in each month was 9.0.  That number is derived by dividing the number of days that all Active Users were active in the month by the number of Active Users in the month.  “Active Users” for such purposes is defined as anyone who has earned or redeemed a point, other than for registration for the app, in a month.
 
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, and acquiring and retaining customers.

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:

 
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Audio fingerprinting and matching technology
Using proprietary technology, audio from approximately 170 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 third 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.

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.
 
 
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Revenue
 
The application became available to the public in January, 2012.  We have begun to generate revenue. 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 Consolidated 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.

 
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Results of Operations

Results for the Three and Six Months Ended December 31, 2012 and 2011 (amounts in thousands)
 
  
 
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2012
   
2011
   
$ Change
   
2012
   
2011
   
$ Change
 
Revenues
  $ 3,875     $     $ 3,875     $ 5,927     $     $ 5,927  
Cost of watchpoints and engagement points
    (1,571 )           (1,571 )     (3,800 )           (3,800 )
Selling, general and administrative expenses
    (15,143 )     (16,724 )     1,581       (36,842 )     (50,654 )     13,812  
Operating loss
    (12,839 )     (16,724 )     3,885       (34,715 )     (50,654 )     15,939  
Other income (expense):
                                               
Other income, net
    689             689       3,181             3,181  
Interest income (expense), net
    (236 )     55       (291 )     (319 )     95       (414 )
Total other income (expense)
    453       55       398       2,862       95       2,767  
Net loss before provision  for income taxes
    (12,386 )     (16,669 )     4,283       (31,853 )     (50,559 )     18,706  
Income tax expense
    (44 )           (44 )     (44 )           (44 )
Net loss
  $ (12,430 )   $ (16,669 )   $ 4,239     $ (31,897 )   $ (50,559 )   $ 18,662  

Consolidated Operating Results for the Three Months Ended December 31, 2012 Compared to the Three Months Ended December 31, 2011 (amounts in thousands)
 
Revenue for the three months ended December 31, 2012 was $3,875 versus $0 for the three months ended December 31, 2011. Cost of watchpoints and engagement points for the three months ended December 31, 2012 was $(1,571) and $0 for the three months ended December 31, 2011. Selling, general and administrative expenses were $(15,143) for the three months ended December 31, 2012 and $(16,724) for the three months ended December 31, 2011.
 
Revenues
 
Revenue in the three months ended December 31, 2012 increased by $3,875 primarily from the sale of advertising on the Viggle app. There was no operating revenue for the three months ended December 31, 2011.
 
Cost of Watchpoints and Engagement Points
 
Cost of watchpoints and engagement points for the three months ended December 31, 2012 increased by $(1,571) 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 three months ended December 31, 2011.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses decreased for the three months ended December 31, 2012 by $1,581 , primarily due an increase of $1,105 in technical and operating costs to run the product, $1,175 increase of professional fees, increase of $597 in marketing costs, $102 increase of office rents, $459 increase of depreciation and amortization expense and $63 increase of travel and entertainment expenses, offset by decreases in personnel costs of $(4,236) (including $4,793 of decreased stock based compensation charges), a decrease of $(467) (including $348 of decreased stock based compensation) in Board of Director fees, and a decrease in start up and development costs of $(664).

Other Income, Net

Other income, net includes gains related to the valuation of the Loyalize guarantee $109 plus a $580 gain related to the valuation of the warrants payable.

Interest Income (Expense), Net
 
We had interest income of $34 offset by interest expense related to the Grid Note of $(270) for the three months ended December 31, 2012 versus $55 of interest income for the three months ended December 31, 2011.
 
 
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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 December 31, 2012 and June 30, 2012, the Company provided a full valuation allowance on its deferred tax assets and thus recognized no tax benefit.  For the three and six months ended December 31, 2012 the Company recorded an income tax provision of $44 to reflect an increase in our deferred tax liability as a result of a tax amortization causing our basis in goodwill being greater than our tax basis in the asset.

Consolidated Operating Results for the Six Months Ended December 31, 2012 Compared to the Six Months Ended December 31, 2011 (amounts in thousands)
 
Revenue for the six months ended December 31, 2012 was $5,927 versus $0 for the six months ended December 31, 2011. Cost of watchpoints and engagement points for the six months ended December 31, 2012 was $(3,800) and $0 for the six months ended December 31, 2011. Selling, general and administrative expenses were $(36,842) for the six months ended December 31, 2012 and $(50,654) for the six months ended December 31, 2011.
 
Revenues
 
Revenue in the six months ended December 31, 2012 increased by $5,927 primarily from the sale of advertising on the Viggle app. There was no operating revenue for the six months ended December 31, 2011.
 
Cost of Watchpoints and Engagement Points
 
Cost of watchpoints and engagement points for the six months ended December 31, 2012 increased by $3,800 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 six months ended December 31, 2011.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses decreased for the six months ended December 31, 2012 by $13,812 , primarily due to increases in personnel costs of $637 (including $1,745 of decreased stock based compensation charges), an increase of $2,555 in technical and operating costs to run the product, increases of $1,281 in marketing expenses, $1,858 of professional fees, $213 of office rents, $1,297 of depreciation and amortization expense and $1,256 outside labor costs, offset by a decrease of $(19,456) of stock compensation cost (related to an Executive Officer participation in the August 2011 Private Placement), decreases of $(2,011) (including $1,865 of decreased stock based compensation) in Board of Director fees, and a decrease in start up and development costs of $(1,315).

Other Income, Net

Other income, net includes the expense related to the valuation of the Loyalize guarantee $(502) offset by a $3,683 gain related to the valuation of the warrants payable.

Interest Income (Expense), Net
 
We had interest income of $70 offset by interest expense related to the Grid Note of $(389) for the six months ended December 31, 2012 versus $95 of interest income for the six months ended December 31, 2011.
 
 
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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 December 31, 2012 and June 30, 2012, the Company provided a full valuation allowance on its deferred tax assets and thus recognized no tax benefit.  For the three and six months ended December 31, 2012 the Company recorded an income tax provision of $44 to reflect an increase in our deferred tax liability as a result of a tax amortization causing our basis in goodwill being greater than our tax basis in the asset.
 
Non-GAAP Adjusted Rewards Costs and Adjusted EBITDA
 
The Company provides a non-GAAP measure for adjusted rewards costs as an alternative view of the Company's cost of providing rewards to its users.  The Company reports rewards costs in its Consolidated Statement of Operations in both Cost of watchpoints and engagement points and in Selling, general and administrative expenses.  Management believes that due to the lack of operating history associated with user point accumulation and redemption activity, that a useful financial measure for investors is to provide to them the amount of cash the company has actually paid to provide rewards to its users.  The Company also presents Adjusted EBITDA.  Adjusted EBITDA is a non-GAAP measure that represents operating loss (as reported) plus depreciation and amortization, stock based compensation and adjustment to rewards costs.  Management uses these non-GAAP financial measures for financial and operational decision making.  Management further believes that these non-GAAP financial measures provide useful information about operating results, enhance the overall understanding of the Company’s past financial performance and allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making.
 
We exclude the following items, or make the following adjustments from one or more of our non-GAAP financial measures:
 
Stock-based compensation. The Company excludes stock-based compensation because it is non-cash in nature and because the Company believes that the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance and liquidity. The Company further believes this measure is useful to investors in that it allows for greater transparency to certain line items in its financial statements and facilitates comparisons to competitors' operating results.

Adjustments to Rewards Costs.  The Company reports rewards costs in its Consolidated Statement of Operations in both Cost of watchpoints and engagement points and in Selling, general and administrative expenses.  Management believes that due to the lack of operating history associated with user point accumulation and redemption activity, a more useful financial measure for investors is to provide to investors with the amount of cash the company has actually paid to provide rewards to its users.  This is also the measure that the Company’s management uses in its financial and operational decision-making.
 
The information on adjusted rewards costs and Adjusted EBITDA should be considered in addition to, but not in lieu of operating income prepared in accordance with generally accepted accounting principles in the United States (GAAP).  Since adjusted reward costs and Adjusted EBITDA are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and therefore, may not be comparable to the calculation of similar measures of other companies.  A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows.
 
 
29

 

     
   
Reconciliation of rewards cost to adjusted rewards costs
Adjusted Rewards Costs
 
Three Months Ended
 
Six Months Ended
Amounts in 000's
 
December 31,
 
December 31,
   
2012
   
2011
   
2012
   
2011
 
Cost of watchpoints and engagement points as reported
  $ (1,571 )   $     $ (3,800 )   $  
Selling, general and administrative expenses as reported
    (15,143 )     (16,724 )     (36,842 )     (50,654 )
Adjustment to cost of watchpoints and engagement points
    329             733        
Adjustment to Selling, general and administrative expenses
    186             403        
Adjustment to cost of watchpoints and engagement points
    (1,242 )           (3,067 )      
Adjustment to Selling, general and administrative expenses
    (14,957 )     (16,724 )     (36,439 )     (50,654 )
 
   
Reconciliation of Operating Loss to Adjusted EBITDA
Adjusted EBITDA
 
Three Months Ended
 
Six Months Ended
Amounts in 000's
 
December 31,
 
December 31,
    2012      2011      2012
 
   2011  
Revenue
 
$
3,875
     
   
$
5,927
   
 
                                 
Operating loss as reported
 
$
(12,839
)
 
$
(16,724
)
 
$
(34,715
)
 
$
(50,654
)
Add:
                               
Stock compensation costs
   
4,936
     
10,076
     
16,775
     
39,840
 
Adjustment to rewards costs
                               
Adjustment to cost of watchpoints and engagement points
   
329
     
     
733
     
 
Adjustment to Selling, general and administrative expenses
   
186
     
     
403
     
 
Depreciation and amortization costs
   
937
     
476
     
1,870
     
573
 
Adjusted EBITDA *
 
$
(6,451
)
 
$
(6,172
)
 
$
(14,934
)
 
$
(10,241
)
* Adjusted EBITA is a non-GAAP measure, but shown above it represents operating loss plus depreciation and amortization, stock based compensation and adjustment to rewards costs

 
30

 
Liquidity and Capital Resources (amounts in thousands, except share data)
 
Cash
 
At December 31, 2012 and June 30, 2012, we had cash balances of $238 and $2,963, respectively.
 
Lines of Credit

Sillerman Investment Company LLC (the “Lender”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, has advanced $15,000 to the Company as of December 31, 2012.  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.  On October 25, 2012, December 3, 2012, December 12, 2012 and on January 4, 2013 the Grid Note was amended and restated to increase the amounts available for borrowing under the line of credit to $12,000, $12,500, $15,000 and $20,000, respectively (as amended and restated, also the "Grid Note").  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 Grid Note, a copy of which is filed as Exhibit 10.34 hereto.
 
On February 11, 2013, Sillerman Investment Company II, LLC (the “Lender”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of Viggle Inc. (the “Company”), provided an additional line of credit (the “Second Line of Credit”) to the Company in the amount of up to $25,000.  The prior $20,000 line of credit, as previously described in the Company's Current Report on Form 8-K, filed on January 11, 2013, has been fully drawn (the “First Line of Credit Note”).   
 
The Second Line of Credit is evidenced by a $25,000 line of credit grid promissory note, dated as of February 11, 2013 (the “Second Line of Credit Note”).  Under the Second Line of Credit Note, the Company may, from time to time, draw on the Second Line of Credit in amounts of no less than $1,000, provided that the Company is not permitted to draw on the Second Line of Credit more than once per month.  Interest will accrue on all unpaid principal amounts drawn under the Second Line of Credit Note at a simple interest rate equal to 14% per annum, with interest being paid at maturity.
 
The Second Line of Credit Note matures on the earlier to occur of (i) February 1, 2015, and (ii) 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 such subsidiaries in an amount equal to at least the amount of principal and accrued and unpaid interest outstanding under the Second Line of Credit Note.  At maturity, the Company must pay to the Lender all principal amounts then outstanding, plus all accrued and unpaid interest thereon.  
 
The Company has also agreed that 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 such subsidiaries must first be applied toward the payment in full of all outstanding principal and accrued and unpaid interest outstanding under the Second Line of Credit 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 Second Line of Credit Note, a copy of which is filed as Exhibit 10.35 hereto.

The Company's capital requirements to fund its business plan are variable based on a few key factors: the number of users, the amount of points earned per user, 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 the introduction of specific brand offers, additional sweepstakes, and virtual rewards into our rewards catalog, but there is no guarantee we will lower our rewards costs in the next 12 months. As we increase users 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 user 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 users 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 purchase some server hardware, but we lease the majority of needed computing hardware, bandwidth, and co-location facilities.  Accordingly, we 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.

 
31


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 (January 1, 2013-December 31, 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 report, 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 report. The Company does not warrant or guarantee the foregoing.
 
The Company's current plan will require additional capital of approximately $27,000 over the next 12-month period.  We expect the $27,000 (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, marketing expenditures, server capacity, research and development, office space and capital expenditures.   As described above the Company has secured a Second Line of Credit line for $25,000.  This combined with the $2,000 drawn on the Grid Note will provide the Company with $27,000 of cash to fund its operations (see Footnotes #6 Loan Payable and #13 Subsequent Events in Notes to Consolidated Financial Statements). 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 introduce specific brand offers, additional sweepstakes, and virtual rewards into our rewards catalog 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 cost 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 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, 2012, and through December 31, 2012, 1,732,528 users have registered for our app, of which we have deactivated 108,883 for a total of 1,623,645 registered users.  Of those, we have accumulated 746,899 registered active users as of December 31, 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 December 31, 2012 we have accumulated an average of 348,843 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. 

 
32

 
Also for the three months ended December 31, 2012, of the Active Users in those months, the average number of days that such Active Users were active in each month was 9.0.  That number is derived by dividing the number of days that all Active Users were active in the month by the number of Active Users in the month.  “Active Users” for such purposes is defined as anyone who has earned or redeemed a point, other than for registration for the app, in a month

As of December 31, 2012, our members have checked-in to 133,341,953 TV programs and spent an average of 75 minutes of active time within the Viggle app per session. Users have redeemed a total of 1,336,972 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 Six Months Ended December 31, 2012 (amounts in thousands)
 
   
Six Months Ended December 31,
 
   
2012
   
2011
 
             
Net cash used by operating activities
    (14,746 )     (9,036 )
Net cash used in investing activities
    (556 )     (10,737 )
Net cash provided by financing activities
    12,577       33,389  
 
Operating Activities
 
In the six months ended December 31, 2012 net cash used in operating activities was $(14,746) including our net loss of $(31,897) and non cash charges of $15,202.  In addition cash inflows from changes in operating assets and liabilities included a decrease in other receivables of $960 due to payment received from our landlord related to leasehold improvements, a decrease in prepaid expenses of $272 related to a reduction in the number of gift cards in our rewards catalog, an increase in accounts payable and accrued expense of $1,712 primarily due to the timing in payment of invoices, an increase in points liability of $1,135 related to the increase in the number of people using our App, offset by an increase in accounts receivable of $(1,993) due to increased billings, and a decrease in deferred revenue $(208) related to the reclassification of amounts to be earned in connection with a contract acquired in the Loyalize acquisition.

In the six months ended December 31, 2011 net cash used in operating activities was $(9,036)  including our net loss of $(50,559) and non cash charges of $40,667.  In addition cash inflows from changes in operating assets and liabilities included an increase in accounts payable and accrued expenses of $795 primarily due to the timing in payment of invoices, an increase in other liabilities of $1,170 related to deferred rent, offset by an increase in other receivables of $(897) due amounts received from our landlord, an increase in prepaid expenses of $(212) related to a increase in the number of gift cards in our rewards catalog.
 
Investing Activities
 
Cash used in investing activities in the six months ended December 31, 2012 was $(556) consisting of capital expenditures for computer related equipment and capitalized software costs.

Cash used in investing activities in the six months ended December 31, 2011 was $(10,737)  consisting of $(1,393) purchase of property and equipment primarily related to leasehold improvements, $(2,620) used for the WatchPoints acquisition, $(2,250) used for the TIPPT acquisition, $(3,180) used for the Loyalize acquisition and $(1,294) of capitalized software costs.
 
 
33


Financing Activities
 
Cash provided by financing activities in the six months ended December 31, 2012 of $12,577 consisted primarily of $12,500 of cash proceeds from the Grid Note.

Cash provided by financing activities in the six months ended December 31, 2011 of $33,389 consisted primarily of $33,314 proceeds from the issuance of common stock and warrants.
 
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.

Commitments and Contingencies

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 six months ended December 31, 2012, there have been no significant changes related to the Company’s critical accounting policies and estimates as disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
 
ITEM 3  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.

 
34

 
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.

ITEM 4  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities & Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of December 31, 2012, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Accounting Officer of the effectiveness of the design and operation of our disclosure controls and procedures.  Based upon that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting
 
There was no change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the three months ended December 31, 2012 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 
35

 
PART II
 
ITEM 1.  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 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.

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 such 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.
 
 
36

 
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.

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. 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. 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.
 
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.
 
 
37

 
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 February 14, 2013, approximately 60,512,455 shares of our common stock, not including currently exercisable warrants or options, 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.
 
 
38

 
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.  Mr. Sillerman is a director of Circle Entertainment Inc. (“Circle”) and Mr. Nelson is Executive Vice President, General Counsel and Corporate Secretary of Circle.  Additionally, Mr. Sillerman is also the Chairman and Chief Executive Officer 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 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 and/or SFX pursuant to the shared services agreements described in the section 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” in the Company's Annual Report on Form 10-K filed on October 15, 2012.

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.
 
 
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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.

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.

 
40

 
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, incur additional costs, or both, 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 users, registered active users or monthly 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 whom we believe to violate these terms and conditions and continually make efforts to improve our systems to detect fraud and improve our defenses. Through February 10, 2013, we have invalidated 154,823 accounts for suspicious activity of a total of 2,077,753 registered accounts.  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.
 
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.
 
 
41

 
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 initially provided documents in response to such request on July 2, 2012, and we have provided supplements and documents for additional questions, as requested.  We intend to cooperate with the SEC regarding this matter and any other requests we may receive. 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.”
 
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.
 
 
42

 
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 2.  UNREGISTERED SALE OF EQUITY AND USE OF PROCEEDS
 
The information set forth in Item 5. is included herein by reference.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable
 
ITEM 5.  OTHER INFORMATION

AdaptiveBlue, Inc.

On November 19, 2012, the Company filed a Current Report on Form 8-K describing the proposed merger with AdaptiveBlue, Inc. described in Note 13 of this Form 10-Q. For supplementary detail regarding the proposed merger, please refer to the description contained in such Form 8-K.  On January 15, 2013, the Company filed a Current Report on Form 8-K announcing that the Merger Agreement with AdaptiveBlue, Inc. had been terminated.  For supplementary detail, please refer to the description in such Form 8-K.

 
43

 
Line of Credit Modification

On January 4, 2013 , the Company's Board of Directors approved an increase in the $15,000 line of credit grid promissory note, dated as of June, 29, 2012, and as amended and restated as of December 12, 2012,  from $15,000 to $20,000.  Advances of $1,000,  $2,000 and $2,000 were made on January 4, 2013, January 22, 2013 and February 7, 2013, respectively.

The Company intends to use the proceeds to fund working capital requirements and for general corporate purposes.  Because Mr. Sillerman is a director, executive officer and greater than 10% stockholder of the Company, a majority of the Company's independent directors approved the transaction.

Additional Line of Credit
 
On February 11, 2013, Sillerman Investment Company II, LLC (the “Lender”), an affiliate of Robert F.X. Sillerman, the Executive Chairman and Chief Executive Officer of the Company, provided an additional line of credit (the “Second Line of Credit”) to the Company in the amount of up to $25,000.  The prior $20,000 line of credit (the “First Line of Credit Note”) has been fully drawn.   
 
The Second Line of Credit is evidenced by a $25,000 line of credit grid promissory note, dated as of February 11, 2013 (the “Second Line of Credit Note”).  Under the Second Line of Credit Note, the Company may, from time to time, draw on the Second Line of Credit in amounts of no less than $1,000, provided that the Company is not permitted to draw on the Second Line of Credit more than once per month.  Interest will accrue on all unpaid principal amounts drawn under the Second Line of Credit Note at a simple interest rate equal to 14% per annum, with interest being paid at maturity.
 
The Second Line of Credit Note matures on the earlier to occur of (i) February 1, 2015, and (ii) 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 such subsidiaries in an amount equal to at least the amount of principal and accrued and unpaid interest outstanding under the Second Line of Credit Note.  At maturity, the Company must pay to the Lender all principal amounts then outstanding, plus all accrued and unpaid interest thereon.  
 
The Company has also agreed that 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 such subsidiaries must first be applied toward the payment in full of all outstanding principal and accrued and unpaid interest outstanding under the Second Line of Credit Note.
 
The Company may make prepayments, in whole or in part, under the Second Line of Credit Grid Note at any time, as long as all accrued and unpaid interest thereon is paid through the prepayment date.
 
In consideration of the Lender's agreement to provide the Second Line of Credit, the Company issued to the Lender thereunder 5,000,000 shares of the Company's common stock. Such 5,000,000 shares of the Company's common stock were issued in a transaction exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereunder and Rule 506 of Regulation D promulgated thereunder.  The Company will book stock based compensation expense in the third fiscal quarter of approximately $5,000 related to the shares issued to the Lender.

Because the transactions involving the Second Line of Credit and the Second Line of Credit Note were between the Company and an affiliate of Mr. Sillerman, who is the Executive Chairman and Chief Executive Officer of the Company, the Company formed a special committee of independent directors to review the proposed transactions.  Such special committee reviewed and unanimously approved such transactions.
 
The Board of Directors also approved for purposes of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “1934 Act”), the acquisition of all of such 5,000,000 shares of the Company's common stock by the Lender, who is a director by deputization.  Such approval was given, without limitation, for purposes of securing an exemption for such acquisition of all of such 5,000 shares of the Company's common stock from the provisions of Section 16(b) of the Exchange Act pursuant to Rule 16b-3 thereunder.

The Company also intends to engage in negotiations with Mr. Sillerman and his affiliated entities relating to the First Line of Credit and the Second Line of Credit as soon as practicable in an attempt to restructure such indebtedness on a long term basis.

 
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The foregoing descriptions of the Second Line of Credit and Second Line of Credit Note and the transactions contemplated thereby are not complete and are subject to and qualified in their entirety by reference to the Second Line of Credit Note attached hereto as Exhibit 10.35 and incorporated herein by reference.

Issuance of Shares in Connection with Loyalize Acquisition

In connection with the purchase from Trusted Opinion Inc. of the Loyalize assets, the Company is also obligated to 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 its 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 Buyer's election.  (See Note 7)  The Company elected to pay this obligation in shares of its common stock and on February 12, 2013, issued 1,171,712 shares of its common stock in satisfaction of this obligation.

Issuance of Additional Options to Directors

On February 8, 2013, the Board of Directors also approved the issuance of certain additional stock options to reflect the fact that certain of the Directors have no received cash compensation.  The number of options issued to each such Director, and the exercise price of the options issued, is as follows:
 
         
Exercise Price
 
Board of Directors
 
Total
    $1.93     $1.25     $1.23  
Benjamin Chen
    89,686       7,686       32,000       50,000  
Peter Horan
    106,139       22,539       33,600       50,000  
John Miller
    113,570       24,870       38,700       50,000  
Joseph Rascoff
    114,889       25,389       39,500       50,000  
Harriet Seitler
    104,162       21,762       32,400       50,000  
 
For the 50,000 options that are issued to each Director with an exercise price of $1.23, 50% of such options are vested immediately upon issuance, and the remaining 50% will vest one year after issuance.   For the remaining options above, 25% of such options are vested immediately upon issuance, and the remaining 75% will vest annually over three years, as long as the Director is still a member of the Board.

Election of Directors
 
On February 11, 2013, pursuant to the Written Consent in Lieu of Annual Meeting previously executed by the holder of the majority of issued and outstanding shares of the Company, the following people were elected to serve on the Company's Board of Directors until the next annual meeting of stockholders and until their respective successors are duly elected and qualified:
 
Robert F.X. Sillerman
 
Benjamin Chen
 
Peter C. Horan
 
John D. Miller
 
Mitchell J. Nelson
 
Joseph F. Rascoff
 
Harriet Seitler
 
 
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Election of Additional Director

Effective February 12, 2013, the Company's Board of Directors unanimously approved an increase in the number of members of the Board of Directors from seven (7) to eight (8) members. The Board then unanimously approved the election of Birame N. Sock as a member of the Board of Directors.  Ms. Sock was recommended by the Nominating and Corporate Governance Committee of the Company's Board of Directors. As are result of the election of Ms. Sock, the Company’s Board of Directors is currently comprised of eight members.
 
Ms. Sock is the founder and the Chief Executive Officer of Third Solutions, Inc., a leading digital receipts company, which she founded in 2007.  In 2002, Ms. Sock founded Musicphone, a wireless entertainment company, which she led until its acquisition by Gracenote, Inc. in 2007. Ms. Sock served as a member of the Board of Directors of CKX Inc. from 2005 until 2006, when she became a consultant for CKX Inc. and affiliated companies.  Ms. Sock attended the University of Miami, where she studied computer science and broadcasting.
 
The Board believes Ms. Sock's experience in technology and consumer marketing will make her an excellent addition to the Board of Directors.
 
In connection with her election as a director,  Ms. Sock received a grant of 50,000 stock options under the Company’s  2011 executive incentive plan to purchase up to 50,000 shares of Company common stock at an exercise price of $1.23 per share, 25,000 of which vested at grant.  The remaining 25,000 stock options will vest one year after grant.
 
As a non-employee director of the Company, Ms. Stock will receive the same compensation paid to all non-employee directors of the Company.
 
There are no arrangements or understandings between Ms. Sock and any other person pursuant to which she  was selected as a director.  There are no transactions between Ms. Sock and the Company of the type required to be disclosed pursuant Item 404(a) of Regulation S-K.
 
ITEM 6.  EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
 
Exhibits

The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.

Exhibit Number
 
Description
     
10.29
 
Amended and Restated Line of Credit Agreement, dated October 25, 2012, between Viggle Inc. and Sillerman Investment Company LLC (1)
10.3
 
Amendment to Employment Agreement, dated October 31, 2012, between Viggle Inc. and Gregory Consiglio (2)
10.31
 
Agreement and Plan of Merger, dated as of November 16, 2012 (3)
10.32
 
Amended and Restated Line of Credit Grid Promissory Note, dated as of December 3, 2012, between Viggle Inc. and Sillerman Investment Company LLC (4)
10.33
 
Amended and Restated Line of Credit Grid Promissory Note, dated as of December 12, 2012, between Viggle Inc. and Sillerman Investment Company, LLC (5)
10.34
 
Amended and Restated Line of Credit Grid Promissory Note, dated as of January 4, 2013, between Viggle Inc. and Sillerman Investment Company, LLC (6)
10.35
 
Line of Credit Grid Promissory Note, dated as of February 11, 2013, between Viggle Inc. and Sillerman Investment Company II, LLC (7)
31.1
 
Certification of Principal Executive Officer.
31.2
 
Certification of Principal Accounting Officer
32.1
 
Section 1350 Certification of Principal Executive Officer
32.2
 
Section 1350 Certification of Principal Accounting Officer
(1)
 
Incorporated by reference to the registrant's Current Report on Form 8-K filed on November 5, 2012
(2)
 
Incorporated by reference to the registrant's Current Report on Form 8-K filed on November 5, 2012
(3)
 
Incorporated by reference to the registrant's Current report on Form 8-K filed on November 19, 2012
(4)
 
Incorporated by reference to the registrant's Current Report on Form 8-K filed on December 7, 2012
(5)
 
Incorporated by reference to the registrant's Current Report on Form 8-K filed on December 17, 2012
(6)
 
Incorporated by reference to the registrant's Current Report on Form 8-K filed on January 11, 2013
(7)
 
Filed herewith.

 
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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf of the undersigned thereunto duly authorized.
 
 
VIGGLE INC.
 
       
February 14, 2013
By:
/s/ ROBERT F.X. SILLERMAN
 
   
Robert F.X. Sillerman
 
   
Chief Executive Officer
 
   
(Principal Executive Officer)
 
 
By:
 
/s/ JOHN C. SMALL
 
 
   
John C. Small
Chief Financial Officer (Principal Accounting Officer)
   
         
 
 
 
 
 
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