| | For the Three Months Ended | | | Change | | | Change | |
| | September 30, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | 2010 | | | 2009 | | | $ | | | % | |
Operating Expenses | | | | | | | | | | | | |
Cost of Media – 3 rd party | | $ | 4,589 | | | $ | 9,911 | | | | (5,322 | ) | | | -54 | % |
Product and distribution | | | 4,396 | | | | 3,651 | | | | 745 | | | | 20 | % |
Selling and marketing | | | 938 | | | | 2,168 | | | | (1,230 | ) | | | -57 | % |
General, administrative and other operating | | | 2,597 | | | | 3,659 | | | | (1,062 | ) | | | -29 | % |
Depreciation and Amortization | | | 325 | | | | 549 | | | | (224 | ) | | | -41 | % |
| | | | | | | | | | | | | | | | |
Total Operating Expenses | | $ | 12,845 | | | $ | 19,938 | | | $ | (7,093 | ) | | | -36 | % |
| | For the Three Months Ended | | | Change | | | Change | |
| | June 30, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | 2010 | | | 2009 | | | $ | | | % | |
Operating Expenses | | | | | | | | | | | | | |
Cost of Media – 3rd party | | $ | 6,009 | | | $ | 10,472 | | | | (4,463 | ) | | | -43 | % |
Product and distribution | | | 5,128 | | | | 2,597 | | | | 2,531 | | | | 97 | % |
Selling and marketing | | | 1,337 | | | | 2,142 | | | | (805 | ) | | | -38 | % |
General, administrative and other operating | | | 2,503 | | | | 3,639 | | | | (1,136 | ) | | | -31 | % |
Depreciation and Amortization | | | 324 | | | | 1,007 | | | | (683 | ) | | | -68 | % |
| | | | | | | | | | | | | | | | |
Total Operating Expenses | | $ | 15,301 | | | $ | 19,857 | | | $ | (4,556 | ) | | | -23 | % |
Cost of Media
Cost of Media – 3rdparty decreased by $4.5$5.3 million or 43%54% to $6.0$4.6 million for the three months ended JuneSeptember 30, 2010 from $10.5$9.9 million for the three months ended JuneSeptember 30, 2009. Cost of Media – 3rdparty includes media purchased for monetization of both transactionalTransactional and marketing servicesMarketing Services and subscriptionSubscription revenues. AlthoughThe decrease in Cost of Media – 3 rd party was due to two primary factors. First, approximately 80% of the decrease in Cost of Media – 3rdparty on a year-over-year basis was primarily due to the decline in Transactional and Marketing Services related revenue from quarter to quarter,which resulted in a corresponding reduction in purchased media. Second, the levelremaining 20% of the decrease in Cost of Media – 3rdparty is also dependent upon the Company’son a year-over-year basis was due to significantly lower subscriber acquisition rates, and in turn, a lower number of subscribers acquired.
The rate of newsubscriber acquisitions is based on a number of factors, not least of which is subscriber acquisition which may move independently of revenues.cost, or “SAC.” During the quarter ended JuneSeptember 30, 2010, management moderated and limited the rate of subscriber acquisitions in response to (i) the need to preserve cash, (ii) changes in its alternative billing processes, and (iii) anticipation of improvements and enhancements to the Kazaa digital music service.
During the quarter ended September 30, 2010, the Company added approximately 113,00052,000 new subscribers, over half of which were Kazaa subscribers. This overall level of subscription-related Cost of Media – 3rd party spend and rate of customer acquisition was not sufficient to replace the Company’s existing subscriber base during the quarter.quarter: “Net Adds,” which represents the number of subscribers acquired, net of subscriber attrition, was a negative 66,000 for the three months ended September 30, 2010. Cost of media for the quarter ended JuneSeptember 30, 2010 includes a decrease of Kazaa-related Cost of Media – 3rdparty of $1.3 million.$0.5 million compared to the quarter ended September 30, 2009. We expect to recoup these Kazaa cost of media expenses from the future cash flows of the Kazaa music service, although there can be no assurance in this regard.
During the secondthird quarter of 2010, the Company estimates that its SAC per subscriber acquisition cost, or “SAC,” was approximately $14.08,$17.64, which reflects an approximate 7% improvementa 21% increase in SAC from the year ago period. SAC is dependent on a number of factors, including prevailing market conditions, the type of media, and the ability of the Company to convert leads into subscribers. The Company expects that SAC will fluctuate from period to period based on all of these factors. Management will continue to monitor SAC closely to ensure that the Company acquires customers in a cost effective manner.
Product and Distribution
Product and distribution expense increased by $2.5$0.7 million or 97%20% to $5.1$4.4 million for the three months ended JuneSeptember 30, 2010 as compared to $2.6$3.7 million for the three months ended JuneSeptember 30, 2009. Product and distribution expenses are costs necessary to provide licensed content and development and support for our products, websites and technology platforms – which drive both our Transactional and Marketing ServiceServices and Subscription-based revenues. Compared to the year ago period, in the secondthird quarter of 2010, we experienced higher product and distribution expenses of $3.2$1.4 million as a result of costs incurred to further develop the Kazaa music service and greater royalty and license expense payable to music labels,content owners, also associated with Kazaa. We expect to recoup these Kazaa product and distribution expenses from the future cash flows of the Kazaa music service, although there can be no assurance in this regard. Included in product and distribution cost is stock compensation expense of $5,000$23,000 and $61,000$32,000 for the three months ended JuneSeptember 30, 2010 and 2009, respectively.
Selling and Marketing
Selling and marketing expense decreased $0.8$1.2 million or 38%57% to $1.3$0.9 million in the three months ended JuneSeptember 30, 2010 as compared to $2.1$2.2 million for the three months ended JuneSeptember 30, 2009. This decrease in selling and marketing expense was primarily attributable to the Company’sCompany completing its efforts during the third quarter of 2010 to eliminate unprofitable or marginally profitable lead generation activities and marketing programs from its product and services offerings. The Company’s bad debt expense, a component of selling and marketing, decreased by approximately $0.5$0.3 million for the three months ended JuneSeptember 30, 2010 compared to the three months ended JuneSeptember 30, 2009. The decrease in selling and marketing was also due to a decrease in salaries and employee related costs. Included in selling and marketing cost is stock compensation expense of $13,000$11,000 and $0 for the three months ended JuneSeptember 30, 2010 and 2009 respectively.
General, Administrative and Other Operating
General and administrative expenses decreased by $1.1 million, or 29%, to $2.5$2.6 million for the three months ended JuneSeptember 30, 2010 compared to $3.6$3.7 million for the three months ended JuneSeptember 30, 2009. The decrease is primarily due to a reduction in workforce, and associated savings, a decrease in professional fees and other efforts to reduce the Company’s overall levels of overhead. The rate of decrease in general, administrative and other operating expense, on a year-over-year basis, is slower than for some other components of operating expenses because of the fixed nature of general and administrative costs, relative to the more variable based costs inherent in other categories of operating expense. Included in general and administrative expense is stock compensation expense of $0.3 million and $0.4$0.2 million for the three months ended JuneSeptember 30, 2010 and 2009 respectively.2009.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.7$0.2 million to $0.3 million for the three months ended JuneSeptember 30, 2010 compared to $1.0$0.5 million for the three months ended JuneSeptember 30, 2009 principally as a result of the decrease in amortization expense due to the full amortization of a major intangible asset in 2009.
Loss from Operations
Operating loss increaseddecreased by $1.7$1.4 million or 61%28% to $4.5$3.7 million for the three months ended JuneSeptember 30, 2010, compared to an operating loss of $2.8$5.1 million for the three months ended JuneSeptember 30, 2009. The Company’s revenue decreased by 36%38%, with a corresponding decrease in operating expenses of 23%36%. While Cost of Media – 3 rd party, is typically variable with respect to revenue, other operating expenses, in particular, General and administrative expenses tend to consist of a higher proportion of fixed costs.
Interest Income and Dividends
Interest and dividend income decreased $14,000$1,000 to $2,000$4,000 for the three months ended JuneSeptember 30, 2010, compared to $16,000$5,000 for the three months ended JuneSeptember 30, 2009. The reduction is mainly due to a decrease in the balances of cash and marketable securities at June 30, 2010 compared to June 30, 2009, as well as a reduction in market rate of return on cash and cash equivalents.immaterial.
Interest Expense
Interest expense was $26,000$1,000 for the three months ended JuneSeptember 30, 2010 and 2009.
Other (Income) Expense
Other income increased to $77,000 for the three months ended September 30, 2010. There was no other income in the three months ended September 30, 2009.
Income Taxes
Income tax expense (benefit), before noncontrolling interest and equity in loss of investee, for the three months ended JuneSeptember 30, 2010 and 2009 was $0.1 million$35,000 and ($0.9)2.7) million respectively and reflects an effective tax rate of (2%(1%) and 32%54% respectively. The Company had a loss before taxes of $4.4$3.6 million for the three months ended JuneSeptember 30, 2010 compared to $2.9$5.1 million for the three months ended JuneSeptember 30, 2009. The Company has provided a valuation allowance against its tax benefits because it is more likely than not that such benefits will not be utilized by the Company.
Subsequent to the quarter ending September 30, 2010, the Company received $2.7 million of cash refunds from the IRS relating to its $3.5 million in taxes receivable on its balance sheet as of September 30, 2010.
Equity in Loss (Earnings) of Investee
Equity in earningslosses of investee was $50,000$13,000 for the three months ended JuneSeptember 30, 2010 compared to $33,000$61,000 for the three months ended JuneSeptember 30, 2009. The Equityequity represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The company acquired its interest in TBR in the 4th Quarter 2008.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interest for the three months ended June 30, 2009 was $46,000. This related to our investment in MECC which was dissolved in June 2009.
Net Loss Attributable to Atrinsic, Inc
Net loss increased by $2.6$1.2 million to $4.5$3.6 million for the three months ended JuneSeptember 30, 2010 as compared to a net loss of $1.9$2.4 million for the three months ended JuneSeptember 30, 2009. This increase in loss resulted from the factors described above.
Results of Operations for the sixnine months ended JuneSeptember 30, 2010 compared to the sixnine months ended JuneSeptember 30, 2009.
Revenues presented by type of activity are as follows for the sixnine month periods ending JuneSeptember 30, 2010 and 2009:
| | For the Nine Months Ended | | | Change | | | Change | |
| | September 30, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | 2010 | | | 2009 | | | $ | | | % | |
| | | | | | | | | | | | |
Subscription | | $ | 15,234 | | | $ | 15,099 | | | $ | 135 | | | | 1 | % |
Transactional and Marketing Services | | $ | 16,956 | | | $ | 40,330 | | | $ | (23,374 | ) | | | -58 | % |
| | | | | | | | | | | | | | | | |
Total Revenues | | $ | 32,190 | | | $ | 55,429 | | | $ | (23,239 | ) | | | -42 | % |
| | For the Six Months Ended | | | Change | | | Change | |
| | June 30, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | 2010 | | | 2009 | | | $ | | | % | |
| | | | | | | | | | | | | |
Subscription | | $ | 10,973 | | | $ | 10,210 | | | $ | 763 | | | | 7 | % |
Transactional and Marketing Services | | $ | 12,040 | | | $ | 30,346 | | | $ | (18,306 | ) | | | -60 | % |
| | | | | | | | | | | | | | | | |
Total Revenues (1) | | $ | 23,013 | | | $ | 40,556 | | | $ | (17,543 | ) | | | -43 | % |
(1) | As described above, the Company currently aggregates revenues based on the type of user activity monetized. The Company’s objective is to optimize total revenues from the user experience. Accordingly, this factor should be considered in evaluating the relative revenues generated from our Subscriptions and from our Transactional and Marketing Services. |
Revenues decreased approximately $17.5$23.2 million or 43%42%, to $23.0$32.1 million for the sixnine months ended JuneSeptember 30, 2010, compared to $40.5$55.4 million for the sixnine months ended JuneSeptember 30, 2009.
Subscription revenue increased by approximately $0.8$0.1 million, or 7%1%, to $11.0$15.2 million for the sixnine months ended JuneSeptember 30, 2010, compared to $10.2$15.1 million for the sixnine months ended JuneSeptember 30, 2009. Subscription revenue for the sixnine months ended JuneSeptember 30, 2010 includes an increase in Kazaa revenue of $5.8$7.3 million compared to the nine months ended September 30, 2009, without which, our subscription revenue would have decreased by $5.1 million. The47%, or $7.2 million year-over-year. For the nine months ended September 30, 2010 subscription revenue increased as a result of a 58% increase in subscription revenue was principally attributable to a significant increase in average revenue per user, or “ARPU,” which increased to approximately $5.88 for the six months ended June 30, 2010, representing a 34% improvement in ARPU, compared toover the year ago period. This increase in ARPU is duesubscription revenue was offset by a lower number of subscribers for the nine months ended September 30, 2010, compared to the combinationyear ago period. As of aSeptember 30, 2010, the Company had approximately 217,000 subscribers. The increase in ARPU was the result of the higher retail price point of the Kazaa digital music subscription service relative to our other subscription products, and improvements in billing efficiency. During the greater number of Kazaa subscribers, as a proportion of our total subscriber base. As of Junenine months ended September 30, 2010, the Company had approximately 284,000 subscribers across all of its entertainment and lifestyle subscription products, compared to approximately 340,000 subscribers as of December 31, 2009. During the six months ended June 30, 2010, the Company added approximately 271,000 new subscribers. More than 50% of these324,000 new subscribers, more than half of which were new users of the Kazaa music subscription service.subscribers. As of JuneSeptember 30, 2010, the Company estimates that it has approximately 86,00064,000 Kazaa subscribers.
Transactional and Marketing services revenue is derived from our online marketing activities, which consist of targeted and measurable online campaigns and programs for marketing partners, corporate advertisers, or their agencies, to generate qualified customer leads, online responses and sales transactions , or increased brand recognition. Transactional and Marketing services revenue decreased by approximately $18.3$23.4 million or 60%58% to $12.0$17.0 million for the sixnine months ended JuneSeptember 30, 2010 compared to $30.3$40.3 million for the sixnine months ended JuneSeptember 30, 2009. The decrease in revenue was primarily attributable to the loss of accounts and a reduction in discretionary advertising expenditures by our clients. Duringclients, as well as a result of a restructuring of our Transactional and Marketing Services activities. Beginning in the second quarter, and substantially completed by the end of the third quarter, the Company also took proactive steps to eliminate any unprofitable or marginally profitable lead generation activitiescampaigns and marketing programs from its productTransactional and servicesMarketing Services offerings. These steps had the effect of reducing lead generation sales volume, further contributing to the decrease in revenue compared to the year ago period. As a result of this restructuring, the bulk of our Transactional and Marketing Services revenue now consists of revenue generated from our search agency business, together with higher yielding marketing campaigns.
Operating Expenses
| | For the Six Months Ended | | | Change | | | Change | |
| | June 30, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | 2010 | | | 2009 | | | $ | | | % | |
Operating Expenses | | | | | | | | | | | | | |
Cost of Media – 3rd party | | $ | 13,353 | | | $ | 25,948 | | | | (12,595 | ) | | | -49 | % |
Product and distribution | | | 9,489 | | | | 4,851 | | | | 4,638 | | | | 96 | % |
Selling and marketing | | | 2,287 | | | | 4,927 | | | | (2,640 | ) | | | -54 | % |
General, administrative and other operating | | | 4,943 | | | | 6,905 | | | | (1,962 | ) | | | -28 | % |
Depreciation and Amortization | | | 647 | | | | 2,562 | | | | (1,915 | ) | | | -75 | % |
| | | | | | | | | | | | | | | | |
Total Operating Expenses | | $ | 30,719 | | | $ | 45,193 | | | $ | (14,474 | ) | | | -32 | % |
| | For the Nine Months Ended | | | Change | | | Change | |
| | September 30, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | 2010 | | | 2009 | | | $ | | | % | |
Operating Expenses | | | | | | | | | | | | |
Cost of Media – 3 rd party | | $ | 17,943 | | | $ | 35,859 | | | | (17,916 | ) | | | -50 | % |
Product and distribution | | | 13,886 | | | | 8,502 | | | | 5,384 | | | | 63 | % |
Selling and marketing | | | 3,225 | | | | 7,095 | | | | (3,870 | ) | | | -55 | % |
General, administrative and other operating | | | 7,538 | | | | 10,563 | | | | (3,025 | ) | | | -29 | % |
Depreciation and Amortization | | | 972 | | | | 3,111 | | | | (2,139 | ) | | | -69 | % |
| | | | | | | | | | | | | | | | |
Total Operating Expenses | | $ | 43,564 | | | $ | 65,130 | | | $ | (21,566 | ) | | | -33 | % |
Cost of Media
Cost of Media – 3rdparty decreased by $12.6$17.9 million or 49%50% to $13.4$17.9 million for the sixnine months ended JuneSeptember 30, 2010 from $25.9$35.9 million for the sixnine months ended JuneSeptember 30, 2009. Cost of Media – 3rdparty includes media purchased for monetization of both transactionalTransactional and marketing servicesMarketing Services and subscriptionSubscription revenues. AlthoughThe decrease in Cost of Media – 3 rd party was due to two primary factors. First, approximately 75% of the decrease in Cost of Media – 3rdparty on a year-over-year basis was primarily due to the decline in Transactional and Marketing Services related revenue from period to period,which resulted in a corresponding reduction in purchased media. Second, the levelremaining 25% of the decrease in Cost of Media – 3rdparty is also dependent uponon a year-over-year basis was due to lower subscriber acquisition rates, and in turn, a lower number of subscribers acquired – although not as pronounced as during the Company’sthird quarter of 2010 only.
The rate of newsubscriber acquisitions is based on a number of factors, not least of which is subscriber acquisition which may move independentlycost, or “SAC.” Midway through the second quarter, 2010 and for all of revenues. the third quarter, 2010, management moderated and limited the rate of subscriber acquisitions in response to (i) the need to preserve cash, (ii) changes in its alternative billing processes, and (iii) anticipation of improvements and enhancements to the Kazaa digital music service.
During the sixnine months ended JuneSeptember 30, 2010, the Company added approximately 271,000324,000 new subscribers, over half of which were Kazaa subscribers. This overall level of subscription-related Cost of Media – 3rd party spend and rate of customer acquisition was not sufficient to replace the Company’s existing subscriber base during this period.the nine months ended September 30, 2010. “Net Adds,” which represents the number of subscribers acquired, net of subscriber attrition, was a negative 121,000 for the nine months ended September 30, 2010. Cost of media for the sixnine months ended JuneSeptember 30, 2010, includes an increase in Kazaa-related Cost of Media – 3rdparty of $2.7 million.$1.8 million relative to third quarter 2009. We expect to recoup these Kazaa cost of media expenses from the future cash flows of the Kazaa music service, although there can be no assurance in this regard.
During the first half ofnine months ended September 30, 2010, the Company estimates that its subscriber acquisition cost, or “SAC,”SAC was approximately $13.32,$14.02 per subscriber, which reflects an approximate 5% improvementa 6% decrease in SAC from the year ago period. SAC is dependent on a number of factors, including prevailing market conditions, the type of media, and the ability of the Company to convert leads into subscribers. The Company expects that SAC will fluctuate from period to period based on all of these factors. Management will continue to monitor SAC closely to ensure that the Company acquires customers in a cost effective manner.
Product and Distribution
Product and distribution expense increased by $4.6$5.4 million or 96%63% to $9.5$13.9 million for the sixnine months ended JuneSeptember 30, 2010 as compared to $4.9$8.5 million for the sixnine months ended JuneSeptember 30, 2009. Product and distribution expenses are costs necessary to provide licensed content and development and support for our products, websites and technology platforms – which drive both our Transactional and Marketing Services and Subscription based revenues. Compared to the year ago period, in the first half of 2010, we experienced higher product and distribution expense of $5.5$7.7 million as a result of costs incurred to further develop the Kazaa music service and greater royalty and license expense payable to music labels, also associated with Kazaa. We expect to recoup these Kazaa product and distribution expenses from the future cash flows of the Kazaa music service, although there can be no assurance in this regard. The Kazaa costs are offset by a decrease in non Kazaa related labor and professional fees. Included in product and distribution cost is stock compensation expense of $21,000$44,000 and $0.1 million$138,000 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.
Selling and Marketing
Selling and marketing expense decreased $2.6$3.9 million or 54%55% to $2.3$3.2 million in the sixnine months ended JuneSeptember 30, 2010 as compared to $4.9$7.1 million for the sixnine months ended JuneSeptember 30, 2009. This decrease in selling and marketing expense was primarily attributable to the Company’s efforts to eliminate unprofitable or marginally profitable lead generation activities and marketing programs from its product and services offerings.offerings in 2010. The Company’s bad debt expense, a component of selling and marketing, decreased by approximately $1.5$1.8 million for the sixnine months ended JuneSeptember 30, 2010 compared to the sixnine months ended JuneSeptember 30, 2009. The decrease in selling and marketing was also due to a decrease in salaries and employee related costs. Included in selling and marketing cost is stock compensation expense of $17,000$28,000 and $0 for the sixnine months ended JuneSeptember 30, 2010 and 2009 respectively.
General, Administrative and Other Operating
General and administrative expenses decreased by $2.0$3.0 million to $4.9$7.5 million for the sixnine months ended JuneSeptember 30, 2010 compared to $6.9$10.6 million for the sixnine months ended JuneSeptember 30, 2009. The decrease is primarily due to a reduction in workforce, and associated savings, a decrease in professional fees and other efforts to reduce the Company’s overall levels of overhead. The rate of decrease in general, administrative and other operating expense, on a year-over-year basis, is slower than for some other components of operating expenses because of fixed nature of general and administrative costs, relative to the more variable based costs inherent in other categories of operating expense. Included in general and administrative expense is stock compensation expense of $0.6$0.8 million and $0.7$0.9 million for the sixnine months ended JuneSeptember 30, 2010 and 2009 respectively.
Depreciation and Amortization
Depreciation and amortization expense decreased $1.9$2.1 million to $0.6$1.0 million for the sixnine months ended JuneSeptember 30, 2010 compared to $2.6$3.1 million for the sixnine months ended JuneSeptember 30, 2009 principally as a result of the decrease in amortization expense due to the full amortization of a major intangible in 2009.
Loss from Operations
Operating loss increased by $3.1$1.7 million or 67%17% to $7.7$11.4 million for the sixnine months ended JuneSeptember 30, 2010, compared to an operating loss of $4.6$9.7 million for the sixnine months ended JuneSeptember 30, 2009. The Company’s revenue decreased by 43%42% with a corresponding decrease in operating expenses of 32%33%. While Cost of Media – 3 rd party, is typically variable with respect to revenue, other operating expenses, in particular, General and administrative expenses tend to consist of a higher proportion of fixed costs.
Interest Income and Dividends
Interest and dividend income decreased $58,000 to $4,000$9,000 for the sixnine months ended JuneSeptember 30, 2010, compared to $62,000$67,000 for the sixnine months ended JuneSeptember 30, 2009. The reduction is mainly due to a decrease in the balances of cash and marketable securities at June 30, 2010 compared to June 30, 2009, as well as a reduction in market rate of return on cash and cash equivalents.
Interest Expense
Interest expense was $1,000$2,000 for the sixnine months ended JuneSeptember 30, 2010 compared to $76,000 for the sixnine months ended JuneSeptember 30, 2009.
Other (Income) Expense
Other income increased to $87,000 for the nine months ended September 30, 2010. There were $5,000 in other expenses in the nine months ended September 30, 2009.
Income Taxes
Income tax expense (benefit), before noncontrolling interest and equity in loss of investee, for the sixnine months ended JuneSeptember 30, 2010 and 2009 was $0.2 million and ($1.6)4.3) million respectively and reflects an effective tax rate of (2%) and 34%45% respectively. The Company had a loss before taxes of $7.7$11.3 million for the sixnine months ended JuneSeptember 30, 2010 compared to loss before taxes of $4.7$9.7 million for the sixnine months ended JuneSeptember 30, 2009. The Company has provided for a full valuation allowance against its tax benefits because it is more likely than not that such benefits will not be utilized by the Company.
Subsequent to the quarter ending September 30, 2010, the Company received $2.7 million of cash refunds from the IRS relating to its $3.5 million in taxes receivable on its balance sheet as of September 30, 2010. The Company is currently undergoing an examination of its 2007 Federal Income Tax Return with the Internal Revenue Service regarding the utilization of Net Operating Loss carrybacks from prior periods. As of the date of this filing, the Company can not reasonably ascertain the expected completion date of this examination or the expected results of this examination and how much of these carrybacks will be allowed to be utilized.
Equity in Loss of Investee
Equity in loss of investee was $60,000$74,000 for the sixnine months ended JuneSeptember 30, 2010 compared to $52,000$113,000 for the sixnine months ended JuneSeptember 30, 2009. The Equity represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The company acquired its interest in TBR in the 4th Quarter 2008.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest for the six months ended June 30, 2009 was $28,000. This related to our investment in MECC which was dissolved in June 2009.
Net Loss Attributable to Atrinsic, IncInc.
Net loss increased by $4.8$6.1 million to $7.9$11.6 million for the sixnine months ended JuneSeptember 30, 2010 as compared to a net loss of $3.1$5.5 million for the sixnine months ended JuneSeptember 30, 2009. This increase in loss resulted from the factors described above.
Liquidity and Capital Resources
As of JuneSeptember 30, 2010, we had cash and cash equivalents of approximately $7.3$4.2 million and working capital of approximately $8.7$6.0 million. We used approximately $9.6$13.0 million in cash for operations for the sixnine months ended JuneSeptember 30, 2010. This was the result2010 which consisted of cash used to pay third party media suppliers, employees and consultants, represented bya net loss of $11.6 million, a decrease in accounts payable and accrued expenses, net of prepaid expenses, of approximately $2.9 million and cash used as a result of the increase in accounts receivable of approximately $0.9$5.5 million, which was offset by approximately $0.9 million decrease in prepaid taxes (of which $0.7 million was net of cash refunded for taxes). As a result, our cash and cash equivalents at JuneSeptember 30, 2010, after adding back non cash items, decreased $9.6$12.7 million to approximately $7.3$4.2 million from approximately $16.9 million at December 31, 2009. Subsequent to the quarter ending September 30, 2010, the Company received $2.7 million of cash refunds from the IRS relating to its $3.5 million in taxes receivable on its balance sheet as of September 30, 2010. The cash used in operating activities during the nine months ended September 30, 2010 included expenditures to realign, focus on and serve the Company’s direct-to-consumer entertainment and subscription products, including the Kazaa digital music service. We expect that the actions we have taken in the first nine months of the year will allow us to reduce expenditures in the fourth quarter and beyond.
We believe thatOur working capital requirements are significant. In order to grow our existing cash, cash equivalents, together with cash flows from expected salesbusiness and meet our objective of ourbecoming a leading direct-to-consumer music and entertainment subscription and transactional marketing services, and other potential sources of cash flows, including income tax refunds $3.5 millionbusiness built around the Kazaa brand, we will be sufficientneed to enable us to continue our marketing, production, and distribution activities for at least 12raise additional capital in the next twelve months. However, our projections of future cash needs and cash flows may differ from actual results. If current cash and cash equivalents, and cash that may be generated from operations, are insufficient to satisfy our liquidity requirements, we may seek to sell debt or equity securities or to obtain a line of credit. The sale of additional equity securities or convertible debt could result in dilution to our stockholders. We currently have no arrangements with respect to additional financing. We can givefinancing and there is no assurance that weguaranty funding will generate sufficient revenues in the future (through sales, license fees, or otherwise) to satisfy our liquidity requirements or sustain future operations, or that other sources of funding would be available if needed, on favorable terms or at all. If we cannot obtain such funds, if needed, we wouldwill likely need to curtail or cease some or alldecrease the rate of growth of our operations.business, including our efforts to become a leading direct-to-customer music and entertainment business built around the Kazaa brand.
New Accounting Pronouncements
Adopted in 2010
In JuneSeptember 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”) which has been superseded by the FASB Codification and included in ASC 810 to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. These revisions to ASC 810 are effective as of January 1, 2010 and the adoption of these revisions to ASC 810 had no impact on our interim results of operations or financial position.
Not Yet Adopted
In October 2009, FASB approved for issuance Emerging Issues Task Force (EITF) issue 08-01, Revenue Arrangements with Multiple Deliverables which has been superseded by the FASB codification and included in ASC 605-25. This statement provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The EITF introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after JuneSeptember 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company is currently evaluating the impact of adopting this pronouncement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4T. Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Members of the our management, including our President, Andrew Stollman and Chief Financial Officer, Thomas Plotts, have evaluated the effectiveness of our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of JuneSeptember 30, 2010, the end of the period covered by this report. Based upon that evaluation, Messrs. Stollman and Plotts concluded that our disclosure controls and procedures were effective for the period ended Juneas of September 30, 2010.
Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the secondthird quarter ended JuneSeptember 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this report before purchasing our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is unaware of, or that it currently deems immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition, cash flows and/or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and stockholders are at risk of losing some or all of the money invested in purchasing our common stock.
If the purchase of the Kazaa assets does not close, the price of our common stock could decline and our future business and operations could be harmed.
The Company's and Brilliant Digital’s obligations to complete the purchase and sale of assets is subject to conditions, many of which are beyond the control of the parties. If the transaction is not completed for any reason, we may be subject to a number of material risks, including:
| · | The decline in the price of our common stock; |
| · | Costs related to the transaction, such as financial advisory, legal, accounting, proxy solicitation and printing fees, must be paid even if the transaction is not completed; |
| · | Matters relating to the transaction (including the negotiation of terms and integration planning) required a substantial commitment of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us; |
| · | We may not be able to realize the expected benefits of the acquisition; |
| · | If the transaction is not completed, we may not be able to operate as effectively under the existing Marketing Services Agreement and Master Services Agreement. |
We have experienced a significant reduction in revenue and have been using cash to fund operations. If we cannot halt this revenue decline and reduce expenditures we may have to cease operations.
The Company has experienced a significant revenue decline and degradation in business prospects over the past two years, and as a result the Company has used a significant amount of cash to fund its operations. The Company’s cash and cash equivalents was $7.3were $4.2 million as of JuneSeptember 30, 2010, which is a $9.6MM$12.7 million decline from the $16.9 million as of December 31, 2009. If we are unsuccessful at stabilizing or slowing the decline in our revenue, and our associated use of cash to fund operations, or if we cannot raise cash through financing alternatives, then we may need to significantly curtail or cease operations.
Our working capital requirements are significant and if we maywant to grow our business we will need to raise cash in the future to fund our working capital requirements.future.
Our working capital requirements are significant. In the sixnine months ended JuneSeptember 30, 2010, we used approximately $9.6$12.7 million in cash. If our cash flows from operations continueIn order to be less than anticipated or our working capital requirements or capital expenditures are greater than expectations, or if we expandgrow our business by acquiring or investing in additional products or technologies,and meet our objective of becoming a leading direct-to-consumer music and entertainment subscription business, built around the Kazaa brand, we will need to secureraise additional capital in the next twelve months. The sale of additional equity securities or convertible debt could result in dilution to our stockholders. We currently have no arrangements with respect to additional financing and there is no guaranty funding will be available on favorable terms or equity financing. In additionat all. If we cannot obtain such funds, we will likely need to stabilizingdecrease the rate of growth of our business, including our efforts to become a leading direct-to-consumer music and growing our cash flow from operations,entertainment subscription business built around the Kazaa brand.
A key focus of management is to develop, grow and expand the Kazaa digital music business. The digital music industry is highly competitive and as a result of the industry’s characteristics, subjects market participants to significant working capital requirements, as is evidenced by the numerous companies in the industry that have experienced significant losses. If we are continually evaluating various financing strategiesto attract and retain talented employees, acquire subscribers and enhance and improve the Kazaa digital music service, which we will need to do if we are to be usedsuccessful, we will have significant capital requirements.
We face risks in implementing our restructuring plan.
In connection with our announcement to expandpurchase the assets of the Kazaa digital music service, we are undertaking a restructuring of our businessexisting operations. Although the reorganization and fund future growth. Thereconsolidation of activities are expected to yield cost savings as a result of the reduction in headcount, the elimination of duplicative activities and combining or eliminating networking and other overhead costs, there can be no assurance that we will achieve the forecasted savings. Our remaining business may also suffer as a result of the restructuring due to the loss of employees, who have been involuntarily terminated, or employees who leave voluntarily. We may also face defections from customers who are unsure of our viability and may also receive less favorable terms than we currently receive from our vendors, as a result of their perception of the restructuring. We expect to take a charge of approximately $1.1 million in the fourth quarter to account for costs associated with the restructuring’s exit and disposal activities that we have identified and can reasonably estimate. The restructuring costs include termination benefits for involuntarily terminated employees. The restructuring charge also includes costs to consolidate and close facilities and to relocate certain employees. There can be no assurance that the actual costs associated with the restructuring will not differ from estimated charge, or that the restructuring will be completed effectively, with limited negative impact on our business.
As part of our restructuring plan and in connection with the integration of activities with the Kazaa business, we will be migrating many of our technological assets. We face risks with such migrations, including disruptions in service. Also, the costs and time associated with any migration could be substantial, requiring the reengineering of computer systems and telecommunications infrastructure. We may also face interruptions in the services we provide across all of our business activities. In addition to service interruptions arising from third-party service providers, unanticipated problems affecting our proprietary internal computer and telecommunications systems have the potential to occur in future fiscal periods, and could cause interruptions in the delivery of services, causing a loss of revenue and related gross margins, and the potential loss of customers, all of which could materially and adversely affect our business, results of operations and financial condition.
The anticipated benefits of the acquisition of the Kazaa business may not be realized fully or at all or may take longer to realize than expected.
The integration of Atrinsic and the business of Kazaa faces challenges as a result of the differing geographical locations of the two business. In the event the transactions contemplated by the asset purchase agreement close, the combined company will be required to devote significant management attention and resources to integrating the Kazaa business and the assets into our operations. Delays in this process could adversely affect our business, financial results, financial condition and stock price. Even if we are able to improve our cash flowintegrate the business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from operationsthis integration or that additional debt or equity financingthese benefits will be available on acceptable terms, if at all. The potential inability to obtain additional debt or equity financing, if required, could haveachieved within a material adverse effect on our operations.reasonable period of time.
We face intense competition in the sale of our subscription services and transactional and marketing services.
In our subscription service business, which includes the Kazaa music service, and our transactional and marketing services business, we compete primarily on the basis of marketing acquisition cost, brand awareness, consumer penetration and carrier and distribution depth and breadth. We face numerous competitors, many of whom are much larger than us, who have greater financial and operating resources than we do and who have been operating in our target markets longer than we have. In the future, likely competitors may include other major media companies, traditional video game publishers, telephone carriers, content aggregators, wireless software providers and other pure-play direct response marketers publishing content and media, and Internet affiliate and network companies.
If we are not as successful as our competitors in executing on our strategy in targeting new markets and increasing customer penetration in existing markets our sales could decline, our margins could be negatively impacted and we could lose market share, any and all of which could materially harm our business prospects, and potentially have a negative impact on our share price.
We may continue to be impacted by the affects of the current weakness of the United States economy.
Our performance is subject to United States economic conditions and its impact on levels of consumer spending. Consumer spending recently has deteriorated significantly as a result of the current economic situation in the United States and may remain depressed, or be subject to further deterioration for the foreseeable future. Purchases of our subscription based services as well as our transactional and marketing services have declined in periods of recession or uncertainty regarding future economic prospects, as disposable income declines. Many factors affect the level of spending for our products and services, including, among others: prevailing economic conditions, levels of employment, salaries and wage rates, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to existing customers or make sales to new customers on a profitable basis. As a result, our operating results may be adversely and materially affected by downward trends in the United States or global economy, including the current downturn in the United States which has impacted our business, and which may continue to affect our results of operations.
We generate a significant portion of our revenues from the sale of our products and services directly to consumers which are billed through aggregators and telephone carriers. We expect that we will continue to bill a significant portion of our revenues through a limited number of aggregators for the foreseeable future, although these aggregators may vary from period to period. In a risk diversification and cost saving effort, we have established a direct billing relationship with a carrier that mitigates a portion of our revenue generation risk as it relates to aggregator dependence; conversely this risk is replaced with internal performance risk regarding our ability to successfully process billable messages directly with the carrier. Moreover, in an effort to further mitigate such operational risk, we investedobtained a 36% equity stake in a landline telephone aggregator, TBR, to give us more visibility in the billing and collection process associated with subscription services billed to customers of local exchange carriers.
Our aggregator agreements are not exclusive and generally have a limited term of less than three years with automatic renewal provisions upon expiration in the majority of the agreements. These agreements set out the terms of our relationships with the aggregator and carriers, and provide that either party to the contract can terminate such agreement prior to its expiration, and in some instances, terminate without cause.
Many other factors exist that are outside of our control and could impair our carrier relationships, including:
| · | a carrier’s decision to suspend delivery of our products and services to its customer base; | |
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| · | a carrier’s decision to offer its own competing subscription applications, products and services; |
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| · | a carrier’s decision to offer similar subscription applications, products and services to its subscribers for price points less than our offered price points, or for free; |
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| · | a network encountering technical problems that disrupt the delivery of, or billing for, our applications; |
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| | the potential for concentrations of credit risk embedded in the amounts receivable from the aggregator should any one, or group if aggregators encounter financial difficulties, directly or indirectly, as a result of the current period of slower economic growth affecting the United States; or |
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| · | a carrier’s decision to increase the fees it charges to market and distribute our applications, thereby increasing its own revenue and decreasing our share of revenue. |
If one or more carriers decide to suspend the offering of our subscription services, we may be unable to replace such revenue source with an acceptable alternative, within an acceptable time frame. This could cause us to lose the capability to derive revenue from those subscribers, which could materially harm our business, operating results and financial condition.
We depend on third-party Internet and telecommunications providers, over whom we have no control, for the conduct of our subscription business and transactional and marketing business. Interruptions in or the discontinuance of the services provided by one of the providers could have an adverse effect on revenue; and securing alternate sources of these services could significantly increase expenses and cause significant interruption to both our transactional and marketing and subscription businesses.
We depend heavily on several third-party providers of Internet and related telecommunication services, including hosting and co-location facilities, in conducting our business. These companies may not continue to provide services to us without disruptions in service, at the current cost or at all. The costs and time associated with any transition to a new service provider would be substantial, requiring the reengineering of computer systems and telecommunications infrastructure to accommodate a new service provider to allow for a rapid replacement and return to normal network operations. In addition, failure of the Internet and related telecommunications providers to provide the data communications capacity in the time frame required by us could cause interruptions in the services we provide across all of our business activities. In addition to service interruptions arising from third-party service providers, unanticipated problems affecting our proprietary internal computer and telecommunications systems have the potential to occur in future fiscal periods, and could cause interruptions in the delivery of services, causing a loss of revenue and related gross margins, and the potential loss of customers, all of which could materially and adversely affect our business, results of operations and financial condition.
We depend on partners and third-parties for our content and for the delivery of services underlying our subscriptions.
We depend heavily on partners and third-partiesthird parties to provide us with licensed content including for the Kazaa music service. We are reliant on such companies to maintain licenses with content providers, including music labels, so that we can deliver services that we are contractually obligated to deliver to our customers. These companies may not continue to provide services to us without disruption, or maintain licenses with the owners of the delivered content. In addition to licensed content, we are also reliant on partners and third parties to provide services and to perform other activities which allow us to bill our subscribers. The costs associated with any transition to a new service or content provider would be substantial, even if a similar partner is available. Failure of our partners or other third parties to provide content or deliver services havehas the potential to cause interruptions in the delivery of services, causing a loss of revenue and related gross margins, and the potential loss of customers, all of which could materially and adversely affect our business, results of operations and financial condition.
We may not fully recoup the expenses and other costs we have expended with respect to the Kazaa music serviceservice.
Under theOn March 26, 2010, we entered into three-year Marketing Services Agreement and Master Services Agreement we entered into with Brilliant Digital, Inc. (“BDE”),effective July 1, 2009, relating to the operation and marketing of the Kazaa digital music service,service. Under the agreements, we are responsible for marketing, promotional, and advertising services. In exchange for these marketing services, the Company is entitled to full recoupment for all pre-approved costs and expenses incurred in connection with the provision of the services plus all other agreed budgeted amounts. On October 13, 2010, Atrinsic entered into amendments to its existing Marketing Services Agreement and Master Services Agreement with Brilliant Digital. The firstamendments extend the term of each of the Marketing Services Agreement and Master Services Agreement from three years to thirty years, provide Atrinsic with an exclusive license to the Kazaa trademark in connection with Atrinsic’s services under the agreements, and modify the Kazaa digital music service profit share payable to Atrinsic under the agreements from 50% to 80%. In addition, the amendments remove Brilliant Digital’s obligation to repay up to $2.5 million of these expensesadvances and expenditures which are not otherwise recovered from Kazaa generated revenues and remove the cap on expenditures that Atrinsic is required to be directly reimbursed by BDE and all other expenses beyond this amount are fully recoupable byadvance in relation to the Company from the cash flow generated byoperation of the Kazaa music service. business.
As of JuneSeptember 30, 2010, the Company has received the $2.5 million in repayments from BDEBrilliant digital and we are are dependent on the future net cash flow of the Kazaa music service to fully recoup the approximately $6.2$7.5 million of advances and expenditures we have made, net of cash received or reimbursed, as of JuneSeptember 30, 2010. There can be no assurance that the future net cash flows from the Kazaa music service will be sufficient to allow us to fully recoup our expenditures, which could materially and adversely affect our financial condition.
If advertising on the internet loses its appeal, our revenue could decline.
Companies doing business on the Internet must compete with traditional advertising media, including television, radio, cable and print, for a share of advertisers' total marketing budgets. Potential customers may be reluctant to devote a significant portion of their marketing budget to Internet advertising or digital marketing if they perceive the Internet to be trending towards a limited or ineffective marketing medium. Any shift in marketing budgets away from Internet advertising spending or digital marketing solutions, could directly, materially and adversely affect our transactional and marketing business, as well as our subscription business, with both having a materially negative impact on our results of operations and financial condition.
All of our revenue is generated, directly or indirectly, through the Internet in part by delivering advertisements that generate leads, impressions, click-throughs, and other actions to our advertiser customers' websites as well as confirmation and management of mobile services. This business model may not continue to be effective in the future for various reasons, including the following:
| · | click and conversion rates may decline as the number of advertisements and ad formats on the Web increases, making it less likely that a user will click on our advertisement; |
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| · | the installation of "filter" software programs by web users which prevent advertisements from appearing on their computer screens or in their email boxes may reduce click-throughs; |
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| · | companies may be reluctant or slow to adopt online advertising that replaces, limits or competes with their existing direct marketing efforts; |
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| · | companies may prefer other forms of Internet advertising we do not offer, including certain forms of search engine placements; |
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| · | companies may reject or discontinue the use of certain forms of online promotions that may conflict with their brand objectives; |
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| · | companies may not utilize online advertising due to concerns of "click-fraud", particularly related to search engine placements; |
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| · | regulatory actions may negatively impact certain business practices that we currently rely on to generate a portion of our revenue and profitability; and |
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If the number of companies who purchase online advertising from us does not grow, we will experience difficulty in attracting publishers, and our revenue will decline.
Our revenue could decline if we fail to effectively monetize our content and our growth could be impeded if we fail to acquire or develop new content.
Our success depends in part on our ability to effectively manage our existing content. The Web publishers and email list owners that list their unsold leads, data or offers with us are not bound by long-term contracts that ensure us a consistent supply of such information. In addition, Web publishers or email list owners can change the amount of content they make available to us at any time. If a Web publisher or email list owner decides not to make content from its websites, newsletters or email lists available to us, we may not be able to replace this content with content from other Web publishers or email list owners that have comparable traffic patterns and user demographics quickly enough to fulfill our advertisers' requests. This would result in lost revenue.
We recorded intangible assets in connection with our acquisition of ShopIt.com which may result in significant future charges against earnings if the intangible assets become impaired.
In accounting for the acquisition of the assets of Shopit.com, we allocated and recorded a large portion of the purchase price paid in exchange for the assets to intangible assets. Under ASC 350 Intangibles – Goodwill and Other, formerly SFAS No.142, and related authoritative guidance, we must assess, at least annually and potentially more frequently, whether the value of such intangible assets has been impaired. Any reduction or impairment of the value of intangible assets, such as the charge that was taken in the fourth quarter of 2009, could materially adversely affect Atrinsic’s results of operations in future periods.
If we are unable to successfully keep pace with the rapid technological changes that may occur in the wireless communication, internet and e-commerce arenas, we could lose customers or advertising inventory and our revenue and results of operations could decline.
To remain competitive, we must continually monitor, enhance and improve the responsiveness, functionality and features of our services, offered both in our subscription and transactional and marketing activities. Wireless network and mobile phone technologies, the Internet and the online commerce industry in general are characterized by rapid innovation and technological change, changes in user and customer requirements and preferences, frequent new product and service introductions requiring new technologies to facilitate commercial delivery, as well as the emergence of new industry standards and practices that could render existing technologies, systems, business methods and/or our products and services obsolete or unmarketable in future fiscal periods. Our success in our business activities will depend, in part, on our ability to license or internally develop leading technologies that address the increasingly sophisticated and varied needs of prospective consumers, and respond to technological advances and emerging industry standards and practices on a timely-cost-effective basis. Website and other proprietary technology development entails significant technical and business risks, including the significant cost and time to complete development, the successful implementation of the application once developed, and time period for which the application will be useful prior to obsolescence. There can be no assurance that we will use internally developed or acquired new technologies effectively or adapt existing websites and operational systems to customer requirements or emerging industry standards. If we are unable, for technical, legal, financial or other reasons, to adopt and implement new technologies on a timely basis in response to changing market conditions or customer requirements, our business, prospects, financial condition and results of operations could be materially adversely affected.
We could be subject to legal claims, government enforcement actions, and be held accountable for our or our customers' failure to comply with federal, state and foreign laws, regulations or policies, all of which could materially harm our business.
As a direct-to-consumer marketing company, we are subject to a variety of federal, state and local laws and regulations designed to protect consumers that govern certain of aspects of our business. For instance, recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices. Any failure by us to comply with applicable federal, state and foreign laws and the requirements of regulatory authorities may result in, among other things, indemnification liability to our customers and the advertising agencies we work with, administrative enforcement actions and fines, class action lawsuits, cease and desist orders, and civil and criminal liability.
Our customers are also subject to various federal and state laws concerning the collection and use of information regarding individuals. These laws include the Children's Online Privacy Protection Act, the Federal CAN-SPAM Act of 2003, as well as other laws that govern the collection and use of consumer credit information. We cannot assure you that our customers are currently in compliance, or will remain in compliance, with these laws and their own privacy policies. We may be held liable if our customers use our technologies in a manner that is not in compliance with these laws or their own stated privacy policies, which would have an adverse impact on our operations.
Our success depends on our ability to continue forming relationships with other Internet and interactive media content, service and product providers.
The Internet includes an ever-increasing number of businesses that offer and market consumer products and services. These entities offer advertising space on their websites, as well as profit sharing arrangements for joint effort marketing programs. We expect that with the increasing number of entrants into the Internet commerce arena, advertising costs and joint effort marketing programs will become extremely competitive. This competitive environment might limit, or possibly prevent us from obtaining profit generating advertising or reduce our margins on such advertising, and reduce our ability to enter into joint marketing programs in the future. If we fail to continue establishing new, and maintain and expand existing, profitable advertising and joint marketing arrangements, we may suffer substantial adverse consequences to our financial condition and results of operations. Additionally, we, as a result of our acquisition of Traffix, now have a significant economic dependence on the major search engine companies that conduct business on the Internet; such search engine companies maintain ever changing rules regarding scoring and indexing their customers marketing search terms. If we cannot effectively monitor the ever changing scoring and indexing criteria, and affectively adjust our search term applications to conform to such scoring and indexing, we could suffer a material decline in our search term generated acquisitions, correspondingly reducing our ability to fulfill our clients marketing needs. This would have an adverse impact on our company’s revenues and profitability.
The demand for a portion of our transactional and marketing services may decline due to the proliferation of “spam” and the expanded commercial adoption of software designed to prevent its delivery.
Our business may be adversely affected by the proliferation of "spam" or unwanted internet solicitations. In response to the proliferation of spam, Internet Service Providers ("ISP's") have been adopting technologies, and individual computer users are installing software on their computers that are designed to prevent the delivery of certain Internet advertising, including legitimate solicitations such as those delivered by us. We cannot assure you that the number of ISP's and individual computer users who employ these or other similar technologies and software will not increase, thereby diminishing the efficacy of our transactional and marketing, as well as our subscription service activities. In the case that one or more of these technologies, or software applications, realize continued and/or widely increased adoption, demand for our services could decline in response.
We no longer meet the minimum bid price requirement for continued listing on the NASDAQ Global Market and face delisting pending the outcome of an appeal with the NASDAQ Listing Qualification Panel.delisting.
On JuneSeptember 23, 2010, we were notified by the NASDAQ Staff that we do not comply with the minimum $1.00 bid price requirement set forth in Listing Rule 5450(a)(1). As a result, our common stock iswas subject to delisting from The NASDAQ Stock Market unless we requested a hearing before a NASDAQ Listing Qualifications Panel (the “Panel”). We requested a hearing and presented our plan to regain compliance at such hearing before the Panel on August 5, 2010. The delisting continues to be stayed until the Panel issues its decision following the hearing.
Under NASDAQ’s Listing Rules, the Panel may, in its discretion, decidedecided to continue the Company’s listing pursuant to an exception to the Rule for a maximum of 180 calendar days from the date of the Staff’s notification or through December 20, 2010. However,
In order to maintain our Nasdaq listing, at our annual meeting, scheduled for December 1, 2010, our Stockholders will vote to approve a reverse stock split at a ratio of up to one for four. If the reverse split proposal is approved, and our Board of Directors intends to effect a reverse stock split in a ratio to be determined by December 6, 2010, in order that that our stock will trade above $1.00 for at least 10-days, prior to December 20, 2010. There can be no assurance that our stockholders will approve the proposal to effect a reverse stock split, and further there can be no assurancesassurance that if the Panelreverse stock split is deemed effective by December 6, 2010, that our stock price will do so.trade above the minimum bid price of $1.00 per share for 10-days prior to December 20, 2010.
We do not intend to pay dividends on our equity securities.
It is our current and long-term intention that we will use all cash flows to fund operations and maintain excess cash requirements for the possibility of potential future acquisitions. Future dividend declarations, if any, will result from our reversal of our current intentions, and would depend on our performance, the level of our then current and retained earnings and other pertinent factors relating to our financial position. Prior dividend declarations should not be considered as an indication for the potential for any future dividend declarations.
System failures could significantly disrupt our operations, which could cause us to lose customers or content.
Our success depends on the continuing and uninterrupted performance of our systems. Sustained or repeated system failures that interrupt our ability to provide services to customers, including failures affecting our ability to deliver advertisements quickly and accurately and to process visitors' responses to advertisements, and, validate mobile subscriptions, would reduce significantly the attractiveness of our solutions to advertisers and Web publishers. Our business, results of operations and financial condition could also be materially and adversely affected by any systems damage or failure that impacts data integrity or interrupts or delays our operations. Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious or accidental human acts, and natural disasters. We operate a data center in Canada and have a co-location agreement with a service provider to support our operations. Therefore, any of the above factors affecting any of these areas could substantially harm our business. Moreover, despite network security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems in part because we cannot control the maintenance and operation of our third-party data centers. Despite the precautions taken, unanticipated problems affecting our systems could cause interruptions in the delivery of our solutions in the future and our ability to provide a record of past transactions. Our data centers and systems incorporate varying degrees of redundancy. All data centers and systems may not automatically switch over to their redundant counterpart. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.
Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees and harm our business.
We have historically used stock options as a key component of our employee compensation program in order to align employees' interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom have been granted stock options, or to attract additional highly-qualified personnel. As of JuneSeptember 30, 2010, many of our outstanding employee stock options have exercise prices in excess of the stock price on that date. To the extent this continues to occur, our ability to retain employees may be adversely affected.
We have been named as a defendant in litigation, either directly, or indirectly, with the outcome of such litigation being unpredictable; a materially adverse decision in any such matter could have a material adverse affect on our financial position and results of operations.
As described under the heading “Commitments and Contingencies,” or "Legal Proceedings" in our periodic reports filed pursuant to the Securities Exchange Act of 1934, from time to time we are named as a defendant in litigation matters. The defense of these claims may divert financial and management resources that would otherwise be used to benefit our operations. Although we believe that we have meritorious defenses to the claims made in each and all of the litigation matters to which we have been a named party, whether directly or indirectly, and intend to contest each lawsuit vigorously, no assurances can be given that the results of these matters will be favorable to us. A materially adverse resolution of any of these lawsuits could have a material adverse affect on our financial position and results of operations.
As more fully described in Note 10," Income Taxes" to our condensed consolidated financial statements contained in this Quarterly report on Form 10-Q, we have recorded significant income tax receivables. In November 2009 Congress passed the Worker Homeownership & Business Assistance Act of 2009 which allows businesses to carryback operating losses for up to 5 years. As a result of this Act the company is able to carryback some of its 2009 taxable loss, resulting in an estimated refund of approximately $2.7 million. Also included in income taxes receivable is a carryback of $0.7 million and our 2007 tax year is currently under examination bywhich was submitted to the Internal Revenue Service in connection with this receivable.IRS subsequent to the 2009 Act. We may be challenged. Our remaining tax receivable may be subject to audit by the IRS.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 28, 2010, the Company issued to Barretto Pacific Corporation (“Barretto”) 30,000 shares of common stock. The shares were issued in partial consideration for consulting services rendered by Barretto to us. In issuing the shares of our common stock without registration under the Securities Act, we relied upon one or more of the exemptions from registration contained in Sections 4(2) of the Securities Act, as the shares were issued to an accredited investor, without a view to distribution, and were not issued through any general solicitation or advertisement.
Exhibit Number | | Description of Exhibit |
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10.1 | | EmploymentAsset Purchase Agreement by and Between Atrinsic, Inc. and Brilliant Digital Entertainment, Inc. and Altnet, Inc., dated June 30, 2010October 13, 2010. |
10.2 | | Amendment No. 1 to Marketing Services Agreement entered into by and between Atrinsic, Inc. and Thomas Plotts.Brilliant Digital Entertainment, Inc., dated October 13, 2010. |
10.3 | | Amendment No. 1 to Master Services Agreement entered into by and between Atrinsic, Inc. and Brilliant Digital Entertainment, Inc., dated October 13, 2010. |
31.1 | | Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | | Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
* | Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this quarterly report on Form 10-Q. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Dated: August 16,November 15, 2010
BY: | /s/ Andrew Stollman | | BY: | /s/ Thomas Plotts |
| Andrew Stollman | | | Thomas Plotts |
| President | | | Chief Financial Officer |
| (Principal Executive Officer) | | | (Principal Financial and Accounting Officer) |