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FUNCTION (X) INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following management's discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction with the
historical audited financial statements and footnotes of the Company included in
its Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Our
future results of operations may change materially from the historical results
of operations reflected in our historical financial statements.
Overview
Function(x) was incorporated in Delaware in July 1994, and was formerly known as
Gateway Industries, Inc.
In February 2011, Function (X) Inc. 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 and changed its name to
Function(x) Inc. on June 22, 2011 and now conducts its business under the name
Function(x) Inc., with the ticker symbol FNCX. We have three wholly owned
subsidiaries, Project Oda, Inc., Viggle, Inc. and Fn(x) I Holding
Corporation. 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.
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--------------------------------------------------------------------------------The Company's New Line of Business
General: The Company's business is built on a simple concept: Watch TV. Earn
Rewards. The business, which operates under the name Viggle, is a loyalty
program that rewards our users for watching television. Users receive points for
checking in to and interacting with their favorite TV shows and can then redeem
these points for real items such as movie tickets, music and gift cards. We 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 purchase gift cards from vendors that we will
issue to users upon the redemption of their points. The Company has not
generated any revenue to date, and there is no guarantee that we will be able to
do so in the future.
Our Loyalty Program: The Company's loyalty program will be delivered to
consumers in the form of a free application, or app, that works on multiple
device types, including mobile phones, tablets and laptops. 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 over 100 English and Spanish
television channels within the United States. We are able to verify TV check-ins
across broadcast, cable, online, satellite, time-shifted and on-demand content.
The ability to verify check-ins is critical because users are rewarded points
for each check in. Users can redeem the points within the app's rewards
catalogue for items that have a monetary value such as movie tickets, music and
gift cards.
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. In addition to rewards, there will also be
sweepstakes opportunities and instant win games for higher value prizes or
unique experiences. Our product will be limited to participants who are 13 years
of age or older.
Our Technology: We have completed a first version of the application, which has
been approved by Apple. We launched the app to the public in the Apple iTunes
App Store on January 25, 2012. The approved version of the app works on Apple
iOS devices such as the iPhone, iPad and iPod Touch. We have been successfully
testing the app with employees of the Company as well as friends and family of
our employees for several months, and although we have launched the app to the
public, there is no guarantee how successful the launch will be or how
effectively the technology will perform. We will continuously test the
application with a goal of improving overall performance and usability.
The iOS release will be followed by a version of the application for use on
Android smartphones and tablets which we anticipate to be within the first
calendar quarter of 2012. In order to complete the Android version of the
application, we must complete the conversion and testing of our existing
software used for the Apple application on Android smartphones and tablets. 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.
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
there are no material steps required prior to the launch of our mobile
applications. Our plan is to expand our 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.
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--------------------------------------------------------------------------------The technology supporting our unique feature of digital fingerprinting and our
matching technology is subject to a currently unissued but pending patent.
[[Image Removed]]Business Revenue: We plan to generate revenue from advertising sales. Although
the application is now available to the public, we have not yet generated any
revenues. Advertising will be sold primarily 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. 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.
Advertising sales will result from direct outreach by our internal sales team to
companies, networks and advertising agencies. User acquisition will be driven
through regular marketing strategies such as banner and mobile advertising,
direct response, and search engine marketing. Like many applications, the
Company's application integrates into users' existing social media networks,
making it possible for users to share their activity with friends, family and
followers, which helps to drive customer awareness and acquisition. The social
media experience within the Company's application is therefore important, and
will be complementary to the core value proposition of generating revenue
through advertising sales.
Initially, we anticipate revenues to be generated substantially in the United
States.
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--------------------------------------------------------------------------------Target Consumer: While most people watch television, we are targeting male and
female consumers between the ages of 18-49. This target audience was selected
due to the amount of television they consume on a weekly basis as well as the
likelihood that they will have smartphones and other wireless devices such as
tablets and laptops with them while viewing television. To build our user base,
we will target this audience using traditional media techniques such as direct
response, banner, and mobile advertising, public relations, search engine
optimization and search engine marketing across online, broadcast and print
media outlets.
When a user signs up for and downloads our app, we collect the user's email, zip
code and television provider. 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.
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.
Commercializing the Product: We have hired personnel with diverse backgrounds in
general management and in digital media and entertainment, along with
specialists in product development, editorial, graphic design, software
engineering, marketing, analytics, sales, business development, human resources,
finance and legal for the purpose of developing the business plan, building the
product, generating ad sales with brand and network marketers, acquiring and
retaining customers.
Seasonality: We expect our business to be affected by regular retail seasonality
and by the normal rhythm of TV industry programming. Retail seasonality will
impact how much brand marketers will spend to market their products and services
at different points throughout the year. TV industry seasonality will impact our
business because the amount network marketers will spend to promote certain TV
programming will change during series premieres, summer time, ratings weeks or
around major TV events such as the Super Bowl, Oscars, or Grammys. We believe
revenues will be slowest during the summer, or the third calendar quarter.
Variable expenses associated with marketing, future product releases, consumer
incentives and advertising services will fluctuate in relation to revenue, but
not necessarily by the same percentage.
WatchPoints Acquisition: The acquisition on September 29, 2011 of the
WatchPoints assets owned by Mobile Messaging Systems LLC included patent
applications for pending and unissued patents related to their own audio
fingerprinting technology, the aggregation of users based on specific television
programming and opportunities for enhanced user content engagement
experiences. Each of these patent applications, if granted, would complement the
Company's intended business.
TIPPT Acquisition: The Company acquired a 65% interest in TIPPT Media Inc., a
Delaware corporation ("TIPPT"), as more fully described in Note 5,
"Acquisitions". TIPPT has been developing a conceptual business plan to sell
coupons and discount codes on behalf of third parties to promote products
through a variety of internet-based electronic means of communication. When and
if TIPPT develops into an operating business, the Company believes that there
may be synergy and complements between the two businesses, but TIPPT will
operate separately.
Loyalize Acquisition: The purchase of the Loyalize business, as discussed more
fully in Note 5, "Acquisitions", allows the Company to accelerate the
integration of add-on features to its core Viggle product through use of the
acquired software and the employment by the Company of a team of 13 employees,
including software engineers, who had been involved in the development of the
Loyalize technology.
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--------------------------------------------------------------------------------Competition: The market for digital and social media applications is intensely
competitive and subject to rapid change. New competitors may be able to launch
new businesses at relatively low cost. Many consumers maintain simultaneous
relationships with multiple digital brands and products and can easily shift
consumption from one provider to another. Additionally, the "Social TV" category
is nascent and has yet to attract the attention of the mainstream consumer and
marketers. Many of our competitors are larger, more established and well-funded
and have a history of successful operations. Although the Company launched its
first version of the application on January 25, 2012, there can be no guarantee
of how successful the launch will be or how effectively the technology will
perform.
While there are a variety of companies currently in the market that offer either
manual check-in or audio verification, we believe our application differs
significantly because (a) we offer users real, as opposed to virtual, rewards
such as movie tickets, music and gift cards, (b) other companies do not
currently position themselves as a loyalty program for television, and (c) we
offer a comprehensive range of features and functionality, such as automatic
check-ins using audio verification, in-app digital advertising engagements (such
as games or videos, real-time polls and quizzes) and full social media
integration. Such integration makes it easy for users to share what they are
doing within the application with their social network and to follow
show-specific commentary on Twitter and Facebook. We also offer the user a
listing of current or upcoming shows for which they can set reminders, learn
more information and indicate their support of the show by "liking" it.
Other companies in the "Social TV" market focus on the simple ability of a user
to communicate their television viewing activity to others in the user's social
media circles. Instead of real rewards, these other companies offer their users
virtual points, leader board status, digital badges or stickers. We believe that
our target market will be motivated by the ability to earn real rewards on a
frequent basis and to interact in real time via show-specific polls, quizzes,
videos and games.
Our principal competitors can be grouped into the following categories:
? Companies that do not offer audio sampling or matching technology. With
these products, users have to manually enter information into the app
about what they are watching or doing. Users are primarily incentivized
with status and/or virtual goods, such as digital badges or
stickers. Companies in this category include: Get Glue, Miso, Kiip,
ScreenTribe, Tuner Fish, Yap, Zee Box, Nielson's RewardTV.com and
CrowdTwist. Except for ScreenTribe and Nielson's RewardTV.com, none of
these companies provide real rewards.
? Companies that deliver many of the same social sharing features as those
listed above and also utilize audio sampling and matching so users can
identify and share what they are doing automatically. Companies in this
category include: Shazam, IntoNow and Umami. None of these companies
provide a continuous real rewards program. Their offers are made on a
limited one-off basis.
? Companies that offer non-branded or white label features and
functionality as components of a third party brand's products. Companies
in this category include: Ex-Machina, BunchBall, Zeitera and GraceNote.
None of these companies offer a cohesive product with the breadth and
focus of our application, nor do they directly offer real rewards.
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Recent Acquisitions
TIPPT Media Inc.
On December 23, 2011, in furtherance of its business plan, the Company obtained
a sixty-five (65%) percent ownership interest in TIPPT Media Inc., a Delaware
corporation ("TIPPT"), which will sell coupons and/or discount codes on behalf
of third parties to promote products via a variety of internet-based methods of
electronic communications. To date, TIPPT has been a concept and developing
business plan, and TIPPT has no customers and has not generated any revenues. In
consideration for its investment in TIPPT, the Company paid $2,000 in cash,
forgave the repayment of a $250 promissory note owed to the Company by TIPPT
LLC, a Delaware limited liability company and the minority stockholder of TIPPT,
and agreed to issue a warrant to purchase 1 million shares of the Company's
common stock at an exercise price equal to 115% of the 20-day trading average of
the Company's common stock if certain performance conditions are met within four
months of the closing of the transaction. The Company deems it probable that
these performance conditions will be met. The shares of common stock
exercisable under the warrant were valued at $2,378 using the Black Scholes
valuation model. The Company recorded the value of these shares of common stock
to intangible assets and current liabilities and will reclassify the liability
to equity upon meeting the performance conditions. The warrant value will be
marked to market until the warrants are earned. At December 31, 2011, the
Company recorded a mark to market valuation increase of $324 recorded in general
and administrative expenses on the Consolidated Statement of Operations.
In connection with the transaction, the Company entered into a five-year line of
credit agreement, pursuant to which the Company may provide advances to TIPPT to
finance its working capital obligations, in an aggregate principal amount not to
exceed $20,000, with an interest rate not to exceed four percent (4%) per
annum. The amounts to be drawn under the line of credit are determined by the
CEO of TIPPT based on a budget that is evaluated quarterly and approved by the
TIPPT board of directors, a majority of which are elected by the Company. In
addition, the Company entered into a stockholders agreement with TIPPT, LLC
regarding, among other things, restrictions on the transfer of shares in TIPPT
and the potential exchange under certain circumstances of all or a portion of
the 35% interest in TIPPT held by TIPPT LLC into the Company's common stock.
The descriptions of the Line of Credit Agreement and the Stockholders Agreement
herein are not complete, and are qualified by reference to, and should be read
in conjunction with, the full text of each of the Line of Credit Agreement and
the Stockholders Agreement, a copy of which are filed herewith as Exhibit 10.15
and Exhibit 10.16, respectively, and are incorporated by reference herein.
Loyalize
In furtherance of its business plan, the Company, through a newly created wholly
owned subsidiary, FN(x) I Holding Corporation ("FN(x) I"), purchased from
Trusted Opinion Inc. ("Trusted Opinion"), substantially all of its assets,
including certain intellectual property and other assets relating to the
"Loyalize" business owned by Trusted Opinion, pursuant to an asset purchase
agreement dated December 31, 2011 among the Company, FN(x) I and Trusted Opinion
(the "Asset Purchase Agreement"). In consideration for its purchase of the
Loyalize assets, the Company agreed to pay Trusted Opinion $3,000 in cash and
agreed to deliver 275,038 shares of the Company's common stock.
The Loyalize business consists of technology that enables brands and content
providers to engage with nationwide audiences during live TV shows by providing
games, polls, real-time discussions and sharing features for smartphones,
tablets, laptops and on connected TVs. The purchase of such business allows the
Company to accelerate the integration of add-on features to its core Viggle
product through use of the acquired software and the employment by the Company
of a team of 13 employees, including software engineers, who had been involved
in the development of the Loyalize technology. Because the Company had intended
to extend its Viggle product into this area, and not start a standalone
business, these hires filled a need that the Company had.
The foregoing description of the Asset Purchase Agreement is not complete and is
qualified by reference to, and should be read in conjunction with, the full text
of the Asset Purchase Agreement, a copy of which is filed herewith as Exhibit
10.16 and incorporated herein by reference.
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--------------------------------------------------------------------------------WatchPoints
On September 29, 2011 in furtherance of its business plan, the Company, through
its wholly-owned subsidiary, Project Oda, Inc., purchased certain assets of
Mobile Messaging Solutions, Inc.'s WatchPoints business. The consideration for
such transaction consisted of $2,500 in cash and 200,000 shares of the Company's
common stock with a fair value of $8.00 per share on the date of the transaction
and direct transaction costs of $120. The WatchPoints business is involved in
developing, selling, maintaining and improving an interactive broadcast
television application utilizing audio recognition technology. The assets
purchased, and the related value allocated to each, include intellectual
property ($4,209) and certain computer-related equipment ($11). The intellectual
property included patent filings for audio verification technology and the
provision of value-added programming/services based on such verification and
trademarks for the "WatchPoints" name. The value allocated to the intellectual
property will be amortized over the expected useful life of the Company's
software product. The Company also paid Kai Buehler, the CEO of WatchPoints, a
$300 finder's fee, which was expensed in the first quarter ended September 30,
2011, and appointed him as a full-time Senior Vice President of the Company.
The WatchPoints intellectual property we acquired consists of the
WatchPoints-related domain names, the WatchPoints trademark and certain United
States patent applications. No issued patents were acquired. The WatchPoints
technology and patent filings include applications for the
following: identification of broadcast programs using digitized audio
signatures; automatic grouping of users related to specific broadcast
programming; and opportunities for enhanced consumer content experiences such as
polls and games. The patent applications that we acquired relate only to
pending, unissued patents. There is no assurance that the patent applications
will be granted or that modifications may not be required by the United States
Patent Office. Any patent that issues from these acquired applications would be
enforceable until early May 2030, provided that all maintenance fees are paid in
a timely fashion.
The foregoing description of the asset purchase agreement is not complete and is
qualified by reference to, and should be read in conjunction with, the full text
of the agreement, a copy of which is filed herewith as Exhibit 10.10 and
incorporated herein by reference.
The Recapitalization
As previously disclosed, on February 7, 2011, Function(x) Inc. (formerly
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
120,000,000 newly issued shares of common stock of the Company in a private
placement transaction at a price of $0.03 per share (on a post-split basis as
described below), as a result of which Sillerman and the other investors
acquired approximately 99% of the outstanding shares of common stock, with
Sillerman (together with Robert F.X. Sillerman personally) directly or
indirectly beneficially owning more than a majority of the outstanding shares of
common stock. Upon consummation, the proceeds of the private placement of $3,600
($220 in cash and $3,380 in five-year promissory notes with interest accruing at
the annual rate equal to the long-term Applicable Federal Rate in effect as of
the date of the Recapitalization Agreement, which was 4.15% per annum) were
received.
On February 16, 2011, immediately after the Recapitalization was consummated,
the Company issued 13,232,597 shares of common stock to an institutional
investor (for $10,000) at a price of approximately $0.76 per share, and 940,000
shares of common stock to an accredited investor (for $500) at a price of
approximately $0.53 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.
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--------------------------------------------------------------------------------On February 16, 2011, the Company issued a five year warrant for 100,000 shares
with an exercise price of $0.80 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 100,000 shares
of the Company's common stock.
As part of the Recapitalization, the Company also issued 250,000 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 $0.03 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.
As part of the Recapitalization, the Company effectuated a 1 for 10 reverse
split of its issued and outstanding common stock (the "Reverse Split"). The
Reverse Split became effective on February 16, 2011. Under the terms of the
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. All share and per share amounts have
been restated to reflect the Reverse Split.
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. It now conducts its business under the name Function(x) Inc.,
with the ticker symbol FNCX. We have three wholly-owned subsidiaries, Project
Oda, Inc., Viggle Inc., and Loyalize, Inc (formerly known as Fn(x)I Holding
Corporation), each a Delaware corporation, and a majority-owned subsidiary,
TIPPT Media, Inc., a Delaware corporation, which has its financial information
consolidated with Function(x) Inc.
Former Business
After our incorporation and during the period from December 1996 to March 2000,
we had no operating business or full time employees. On March 21, 2000, we
acquired Oaktree pursuant to a stock purchase agreement. Through Oaktree, we
provided cost effective marketing solutions to organizations needing
sophisticated information management tools. The purchase price of Oaktree was
approximately $4,100, consisting of $2,000 in cash, the issuance of 600,000
restricted shares of common stock of the Company and the assumption of
approximately $650 of debt, which was repaid at the closing date, plus certain
fees and expenses. In December 2007, Oaktree sold 5,624 shares of its common
stock to Marketing Data, Inc., an affiliate of an officer of Oaktree, for $1. As
a result, our ownership interest in Oaktree was reduced to 20% of Oaktree's
outstanding common stock. In connection with this transaction, we agreed to make
a capital contribution of $225 to Oaktree at closing. As a result of this
transaction, we recorded a loss on sale of subsidiary in the amount of $4,238
during the year ended December 31, 2007.
In July 2005, we sold 500,000 shares of 10% Series A Preferred Stock to Steel
Partners II, L.P., an affiliate of Jack L. Howard, a director and officer of the
Company prior to the Recapitalization, and, at the time, our largest
stockholder, for a purchase price of $1,467. In addition, we sold to Steel
Partners II warrants to purchase 1,500,000 shares of common stock, with an
exercise price of $0.22 per share, for a purchase price of $33. On May 15, 2008,
we repurchased all of the Preferred Stock and Warrants originally issued to
Steel Partners II for a purchase price of $1. None of the Warrants were ever
exercised by Steel Partners II and no dividend was paid on the Preferred Stock.
On October 24, 2010, Oaktree repurchased our remaining 20% interest in Oaktree
for $0.1. As a result, Marketing Data, Inc. owned 100% of the outstanding common
stock of Oaktree. The disposition of our interest in Oaktree enabled us to begin
to explore the redeployment of our existing assets by identifying and merging
with, or acquiring, or investing in, one or more operating businesses, which
resulted in the Recapitalization.
Consolidated Operating Results Three Months Ended December 31, 2011 Compared to
Three Months Ended December 31, 2010
There was no operating revenue for the three months ended December 30, 2011 or
December 31, 2010. Operating expenses were $16,724 for the three months ended
December 31, 2011 as against $2 for the three months ended December 31, 2010.
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--------------------------------------------------------------------------------Revenue
There was no operating revenue in the three months ended December 31, 2011 or in
the three months ended December 31, 2010.
General and Administrative Expenses
General and administrative expenses increased in the three months ended December
31, 2011 by $16,722 (including $10,076 of stock based compensation charges),
primarily due to personnel costs of $13,270 (including $9,728 of stock based
compensation charges), Board of Director fees of $467 (including $348 of stock
based compensation) , $664 of costs for developing a new product, office rents
of $189, depreciation and amortization expense of $477 and travel and
entertainment $356. General and administrative expenses in 2010 were nominal.
Interest Income, Net
We had net interest income of $55 in the three months ended December 31, 2011
versus $0 in the three months ended December 31, 2010.
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, 2011 and 2010, the Company provided a full
valuation allowance on its deferred tax assets and thus recognized no tax
benefit.
Consolidated Operating Results Six Months Ended December 31, 2011 Compared to
Six Months Ended December 31, 2010
There was no operating revenue for the six months ended December 30, 2011 or
December 31, 2010. Operating expenses were $50,654 for the six months ended
December 31, 2011 as against $2 for the six months ended December 31, 2010.
Revenue
There was no operating revenue in the six months ended December 31, 2011 or in
the six months ended December 31, 2010.
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--------------------------------------------------------------------------------General and Administrative Expenses
General and administrative expenses increased in the six months ended December
31, 2011 by $50,652, (including $39,840 of stock based compensation charges),
primarily due to personnel costs of $43,631 (including $37,975 of stock based
compensation charges), Board of Director fees of $2,076 (including $1,865 of
stock based compensation charges), $1,315 of costs for developing a new product,
office rent of $366, depreciation and amortization of $573 and travel and
entertainment of $726. General and administrative expenses in 2010 were nominal.
Interest Income, Net
We had net interest income of $95 in the six months ended December 31, 2011
versus $0 in the six months ended December 31, 2010.
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, 2011 and 2010, the Company provided a full
valuation allowance on its deferred tax assets and thus recognized no tax
benefit.
Liquidity and Capital Resources
At December 31, 2011 and 2010, we had cash balances of $17,410 and $0,
respectively. From 2007 until the Recapitalization, J. Howard, Inc., an
affiliate of Jack L. Howard, a director and officer of the Company prior to the
Recapitalization, advanced funds to the Company to support our daily
operations.
Pursuant to the Recapitalization, Sillerman, together with other investors
approved by Sillerman, invested in the Company by acquiring 120,000,000 newly
issued shares of common stock of the Company in a private placement transaction,
in which we raised $3,600 ($220 in cash and $3,380 in five-year promissory notes
with interest accruing at 4.15% per annum). In addition, 250,000 shares were
issued to J. Howard, Inc. and its designees at a fair market value of $0.03 per
share. Immediately after the recapitalization, as a result of the private
placements to Adage Capital Management LP ("Adage") and KPLB LLC ("KPLB"), both
selling stockholders (in addition to J. Howard, Inc. and its designees) in the
Form S-1 filed with the Securities and Exchange Commission on May 25, 2011 and
the Form S-1/A filed with the Securities and Exchange Commission on September
30, 2011, we have raised $10,500.
On August 25, 2011, the Company completed the placement of 14,000,000 units (the
"Units"), each Unit consisting of (i) one (1) share of common stock, $0.001 par
value per share of the Company and (ii) one (1) detachable three (3) year
warrant to purchase one (1) share of common stock of the Company with an
exercise price of $4.00 per warrant share, at a purchase price of $2.50 per
Unit, for an aggregate purchase price of $35,000 to accredited and institutional
investors. The proceeds of the offering, less expenses, are to be used for
general corporate purposes, including marketing and product development. For
more information regarding the private placement, see Note 9, Stockholders'
Equity (Deficit).
The Company's liquidity needs for calendar year 2012 will vary depending upon
the aggregate of any amount drawn under the TIPPT line of credit and other
working capital requirements. If the Company's outstanding warrants which are
exercisable at $4.00 per share as discussed more fully in Note 9 entitled
"Stockholders' Equity (Deficit)", are exercised and at least $50,000,000 of
proceeds from such exercise is received by the Company, the Company will not
need additional funds to meet its plan of operations. 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 and
TIPPT programs. In the event that the needed cash is not funded from the
exercise of the warrants, then the Company would need to raise additional
capital through either a debt or equity financing. Alternatively, the Company
would need to revise its 2012 operating 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.
32
--------------------------------------------------------------------------------Cash Flow for the Six Months Ended December 31, 2011 and 2010
Operating Activities
Cash used in operating activities of $8,966 for the six months ended December
31, 2011 consisted of $4,665 primarily related to salaries and related employee
benefits costs, $1,315 of product development costs, $1,542 of marketing-related
costs, $393 of outside legal fees, $366 of rent expense and $726 of travel and
entertainment expenses.
Investing Activities
$10,737 was used in investing activities for the six months ended December 31,
2011 consisted of $1,393 for the purchase of office and computer related
equipment, including $1,294 related to capitalized software costs and $8,050
related to the acquisitions of WatchPoints, TIPPT, and Loyalize.
Financing Activities
Cash provided by financing activities of $33,319 for the six months ended
December 31, 2011 reflects the cash from the placement of common stock and
warrants on August 25, 2011 in the amount of $33,413.
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.
Commitments and Contingencies
In connection with the acquisition of 65% of the common shares in TIPPT Media,
Inc. on December 23, 2011, the Company agreed to provide TIPPT Media, Inc. a
credit facility of $20,000, with interest to accrue at the rate of four percent
(4%) per annum and be payable at its maturity in 5 years (the "TIPPT Loan"). The
facility is secured by the remaining 35% of the common shares of TIPPT Media,
Inc owned by TIPPT, LLC, subject to release under certain circumstances
described in the loan agreement in the event the shares are converted into
common shares of FNCX. The credit facility may be drawn for approved expenses
in accordance with the budget approved at the time of the commitment, as updated
quarterly. (See Note 5, "Acquisitions"). As of December 31, 2011, no funds had
been drawn by TIPPT Media, Inc. under the TIPPT Loan.
In connection with the purchase from Trusted Opinion Inc. of the Loyalize
assets, as described in Note 5, "Acquisitions", the Company is obligated to also
fund as a purchase price adjustment the difference, if any, in the amount 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
275,038 shares on December 31, 2012, either in cash or in common shares of the
Company, at Buyer's election, provided that such additional consideration shall
not be payable until claims which remain subject to determination and secured by
all the Escrowed Shares are no longer outstanding and the additional
consideration shall be eliminated to the extent final claims exceed the value of
the shares then remaining in escrow.
There are no lawsuits and claims pending against us.
33
--------------------------------------------------------------------------------Application of Critical Accounting Policies
During the three months ended December 31, 2011, 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 year fiscal year ended June 30, 2011.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
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