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VIGGLE 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 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 Six Months Ended
December 31, 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.
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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
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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.
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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.
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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.
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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.
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