NEW YORK--(BUSINESS WIRE)--Atrinsic, Inc., (OTCQB: ATRN), marketer of the Kazaa digital music service, and Atrinsic Interactive, an internet search marketing agency, today announced financial results for the third quarter ended September 30, 2011.
Third Quarter Financial and Operational Highlights:
- Atrinsic appointed Mr. Nathan Fong Chief Financial Officer with over 15 years of media, entertainment, and subscription based experience.
- Revenues for the third quarter of 2011 increased 34% to $12.3 million compared to $9.2 million in the third quarter of 2010.
- Executive team efforts to streamline the business results in a 27% decrease in G&A expenses from $2.6 million in third quarter of 2010 to $1.9 million in the third quarter of 2011 due to restructuring,
- Transactional Services revenue increased $4.9 million to $9.8 million from $4.9 million for the third quarter of 2010.
- Atrinsic launched its Kazaa streaming music application which is now available for download through Apple’s App Store, with key features including search and listen on demand, unlimited downloads, create and sync playlist, Kazaa Radio, and higher audio quality options.
- Kazaa music service is now priced at $9.99 per month, a highly competitive value proposition for prospective subscribers.
Management Comments
“Atrinsic’s digital music subscription service, Kazaa, is one of only a handful of companies that has licensing agreements with the major record labels,” stated Stuart Goldfarb, CEO of Atrinsic. “Despite the explosive growth of digital music over the last decade, the value of Kazaa’s broad library of digital content and the potential of its unique subscription model has yet to be realized. The mission of our management team is to unleash this value and drive growth for shareholders. We have been striving to improve Kazaa’s web and mobile services in every way.”
“We intend for Kazaa to be available on more and more mobile devices in the future. The Kazaa music library, which already contains millions of songs from all four of the major labels, will continue to grow; we expect to add millions of more tracks from thousands of independent record labels. Our customer experience and our value proposition will continue to improve and be refined,” continued Goldfarb.
“I am very pleased to have the opportunity to join the Atrinsic executive team,” commented Nathan Fong, Atrinsic’s CFO. “Going forward, we remain intently focused on raising debt or equity capital to fund our immediate cash needs and to finance our long-term growth to further develop the Kazaa business as we grow its subscriber base.”
Third Quarter 2011 Financial Results
Revenues for the third quarter of 2011 increased 34% to $12.3 million compared to $9.2 million in the same period last year. Subscription revenue decreased from $4.3 million to $2.5 million compared to the third quarter of 2010. Subscription revenue is primarily generated from the Company’s core Kazaa digital music subscription service. The decrease in subscription revenue was due to a reduction in total subscribers compared to the year-ago period, with most of the decrease coming from our non-Kazaa subscription products, reflecting our primary focus on Kazaa and the reduction or the de-emphasis of our non-core legacy subscription products.
Transactional Services revenue increased $4.9 million to $9.8 million from $4.9 million for the third quarter of 2011 compared to the third quarter of 2010. The increase in transactional revenue was primarily related to a sales volume improvement from existing clients in SEM (Search Engine Marketing) as well the acquisition of new clients. In addition, SEO (Search Engine Optimization) revenue increased 80% from third quarter of 2010. Transactional services also benefited from the addition of both large retail and lead generation advertisers to the Atrinsic Affiliate Network. The Company does not anticipate similar growth it its Transactional Services business in the fourth quarter of 2011.
As of September 30, 2011, the Company had approximately 55,000 Kazaa subscribers compared to approximately 65,000 as of September 30, 2010 and 77,000 at December 31, 2010. The Company expects to experience a modest decline in this subscriber base over the next several months as we reposition and introduce new marketing activities.
Operating expenses for the third quarter of 2011 increased 35% to $17.3 million compared to $12.8 million for the same period last year. The increase is primarily attributable to an increase in the cost of third party media which resulted from increased Transactional Services activity. The Company is also reporting a non-cash impairment of intangibles assets charge of $1.4 million which is due to the significant decline in the non-Kazaa subscription business. General, administrative, and other operating expenses decreased 27%. The decrease in G&A is a result of the Company’s efforts to streamline and eliminate certain activities and to better position the business for long-term growth.
Third quarter Adjusted EBITDA was a loss of ($3.3) million compared to a loss of ($3.1) million for the third quarter of 2010. The Company reported a net loss for the third quarter of ($4.5) million, or a net loss of ($0.72) per diluted share compared to a net loss of ($3.6) million, or ($0.70) loss per diluted share for the third quarter of 2010. Excluding the previously mentioned non-cash impairment charge in the third quarter of 2011, the Company would have reported a net loss of ($3.1) million, or a net loss of ($0.49) per diluted share.
Balance Sheet/Cash Flow Highlights
As of September 30, 2011, the Company had $2.0 million of cash and cash equivalents compared to $6.3 million as of December 31, 2010. The Company spent $0.9 million on capitalized application and software development for Kazaa and Atrinsic Interactive year-to-date. In May 2011 the Company issued $5.8 million of 12-month original issue discount convertible notes with warrants, at conversion or strike prices between $2.90 and $2.97, subject to adjustment under certain conditions. The offering generated proceeds before financing costs and adjustments of $5.3 million. As of September 30, 2011, the Company had a $9.8 million working capital deficit.
In order to fund operations, the Company intends to make an offering of securities not registered under the Securities Act of 1933, as amended (the “Securities Act”). The securities to be offered will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. At this time, the title, amount and basic terms of the securities to be offered and the amount and timing of the offering are not known, but the Company anticipates that the terms of the offering may be substantially similar to the financing transaction the Company completed in May 2011, as reported in the Company’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on June 1, 2011 and October 27, 2011. The proceeds of the offering will be used for general working capital purposes, including to fund Atrinsic’s Kazaa digital music subscription business. The Company intends for this notice to comply with Rule 135(c) of the general rules and regulations promulgated under the Securities Act, and accordingly, this notice is not intended to and does not constitute an offer to sell nor a solicitation for an offer to purchase any securities of the Company.
Company Updates
Atrinsic appointed Nathan Fong as Chief Financial Officer in September 2011. Most recently, Mr. Fong served as Executive Vice President and Chief Financial Officer of The Orchard Enterprise, Inc., a privately owned company, which was formerly public and listed on NASDAQ. The Orchard is an industry pioneer and innovator in digital media services, partnering with entertainment companies, music labels, recording artists and others. Prior to The Orchard, Mr. Fong has over 15 years of experience with media and entertainment companies including Rodale, Discovery Communications, and Twentieth Century Fox.
Atrinsic launched its Kazaa streaming music application which is now available for download through Apple’s App Store. The Kazaa app is available for free download and provides users a free seven day trial. All current subscribers have access to Kazaa’s constantly updated catalogue of millions of songs. The key features of the app are search and listen on demand, unlimited downloads, create and sync playlist, Kazaa Radio, and higher audio quality options.
Conference Call Information
The Company will not be hosting an earnings conference call for the third quarter ended September 30, 2011.
About Atrinsic and Kazaa
Our business is focused on two segments: (1) the Kazaa digital music subscription business, and (2) Search and affiliate marketing, built around the Atrinsic Interactive brand.
Built around a recurring-revenue business model, our subscription service is focused on digital music in the rapidly growing mobile space, and our lead offering, the Kazaa digital music service, is a recognizable brand in such a space. Our core strategic focus for Kazaa is to build and sustain a large and profitable subscriber base, to provide a clear, simple and competitive user experience to an engaged audience and to deliver entertainment content to our customers anywhere, anytime and on any device.
The Kazaa music service gives users unlimited access to millions of high-quality digital tracks. For a monthly fee users can stream unlimited music files and play those files on multiple devices. Subscribers can also save songs, albums and playlists and access them even when they are offline or don’t have a phone signal. Customers can discover new music through custom radio and recommendations based upon our exclusive technology. Unlike other music services that charge you every time a song is downloaded, the Kazaa music service allows users to listen to and explore as much music as they want for one low monthly fee, without having to pay for every track or album. Consumers are billed for this service via credit card, or billed directly to their AT&T mobile phone. Royalties are paid to the rights’ holders’ for licenses to the music utilized by this digital service. Atrinsic and Brilliant Digital, Inc. jointly offer the Kazaa digital music service pursuant to a Marketing Services Agreement and a Master Services Agreement between the two companies.
Atrinsic Interactive, our affiliate network and search marketing agency, is a leading search agency and a top-tier affiliate network. We offer advertisers an integrated service offering across paid search, or search engine marketing, search engine optimization, display advertising, affiliate marketing, as well as offering business intelligence and brand protection services to our clients. Our core strategic focus for Atrinsic Interactive is to build a leading independent search marketing agency and a top-five affiliate network.
Forward-Looking Statements
This press release contains “forward-looking” statements based on management’s current expectations as of the date of this release. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements include the Company’s discussion relating to management’s current strategic priorities and its planned financing. Because such statements inherently involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Such risks include, among others, the Company’s ability to maintain customer and strategic business relationships, the impact of competitive products and pricing, growth in targeted markets, the adequacy of the Company’s liquidity and financial strength to support growth, and other information that may be detailed from time to time in the Company’s filings with the United States Securities and Exchange Commission. All information in this release is as of the date of this release. The Company does not undertake any obligation to update or revise these forward-looking statements to conform to actual results or changes in the Company’s expectations.
Supplemental Disclosure regarding Non-GAAP Measures
EBITDA and Adjusted EBITDA
The following tables set forth the Company’s EBITDA and Adjusted EBITDA for the three month periods ending on September 30, 2011 and 2010, respectively. The Company defines “EBITDA” and “Adjusted EBITDA” as net income adjusted to exclude the following line items presented in its Statement of Operations: Income taxes, interest expense, interest and dividend income, net, depreciation and amortization, and in the case of Adjusted EBITDA, non-cash equity based compensation, equity in (loss) income of investee, and other (income) expense. While this non-Generally Accepted Accounting Principles (“GAAP”) measure has been relabeled to more accurately describe in the title the method of calculation of the measure, the actual method of calculating the measure is presented below.
The Company uses Adjusted EBITDA, among other things, and possibly with additional adjustments, to evaluate the Company’s operating performance, to value prospective acquisitions, and as one of several components of incentive compensation targets for certain management personnel, and this measure is among the primary measures used by management for planning and forecasting of future periods. This measure is an important indicator of the Company’s operational strength and performance of its business because it provides one of several links between profitability and operating cash flow. The Company believes the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by the Company’s management, helps improve their ability to understand the Company’s operating performance and makes it easier to compare the Company’s results with other companies that have different financing and capital structures or tax rates. In addition, it is our understanding that this measure is also among the primary measures used externally by the Company’s investors, analysts and peers in its industry for purposes of valuation and comparing the operating performance of the Company to other companies in its industry. The Company has elected to not adjust EBITDA for the impact of the adoption of ASC 718 (formerly FAS No.123R) and the Company has provided what it believes to be relevant supplemental information in this communication for analysis by others to fit their particular needs.
Since EBITDA and Adjusted EBITDA are not measures of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net income as an indicator of operating performance. EBITDA and Adjusted EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs. As EBITDA and Adjusted EBITDA exclude certain financial information compared with net income, the most directly comparable GAAP financial measure, users of this financial information should consider what information is excluded. As required by the SEC, the Company provides below a reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable amount reported under GAAP.
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Reconciliation of Reported Net Income (Loss) To EBITDA and Adjusted EBITDA (Dollars in thousands, except per share data) (Unaudited) |
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| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||
| Net loss attributable to Atrinsic | $ | (4,522) | $ | (3,636) | $ | (14,188) | $ | (11,562) | ||||
| Reconciliation Items: | ||||||||||||
| Income taxes | 45 | 35 | 107 | 208 | ||||||||
| Interest (income) expense and dividends, net | (550) | (3) | 617 | (7) | ||||||||
| Depreciation and amortization | 233 | 325 | 640 | 972 | ||||||||
| EBITDA | (4,794) | (3,279) | (12,824) | (10,389) | ||||||||
| Non-cash equity based compensation | 33 | 225 | 285 | 860 | ||||||||
| Equity in (loss) income of Investee | 9 | 13 | (47) | 74 | ||||||||
| Other (income) expense | 0 | (77) | (384) | (87) | ||||||||
| Impairment of intangible assets | 1,421 | - | 1,421 | - | ||||||||
| Adjusted EBITDA | $ | (3,331) | $ | (3,118) | $ | (11,549) | $ | (9,542) | ||||
| Diluted Adjusted EBITDA | ||||||||||||
| per Common Share | $ | (0.53) | $ | (0.60) | $ | (1.83) | $ | (1.83) | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||
| Basic | 6,298,662 | 5,216,274 | 6,314,795 | 5,214,889 | ||||||||
| Diluted | 6,298,662 | 5,216,274 | 6,314,795 | 5,214,889 | ||||||||
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ATRINSIC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share data) |
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| Three Months Ended | Nine Months Ended | |||||||||||||
| September 30, | September 30, | |||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||
| Subscriptions | $ | 2,496 | $ | 4,261 | $ | 9,495 | $ | 15,234 | ||||||
| Transactional services | 9,830 | 4,916 | 16,157 | 16,956 | ||||||||||
| NET REVENUE | 12,326 | 9,177 | 25,652 | 32,190 | ||||||||||
| OPERATING EXPENSES | ||||||||||||||
| Cost of media – 3rd party | 9,208 | 4,589 | 16,119 | 17,943 | ||||||||||
| Content costs | 1,997 | 1,831 | 6,210 | 5,689 | ||||||||||
| Product and distribution | 1,799 | 2,565 | 6,529 | 8,197 | ||||||||||
| Selling and marketing | 793 | 938 | 2,908 | 3,225 | ||||||||||
| General, administrative and other operating | 1,893 | 2,597 | 5,720 | 7,538 | ||||||||||
| Depreciation and amortization | 233 | 325 | 640 | 972 | ||||||||||
| Impairment of intangible assets | 1,421 | - | 1,421 | - | ||||||||||
| 17,344 | 12,845 | 39,547 | 43,564 | |||||||||||
| LOSS FROM OPERATIONS | (5,018) | (3,668) | (13,895) | (11,374) | ||||||||||
| OTHER (INCOME) EXPENSE | ||||||||||||||
| Interest income and dividends | (0) | (4) | (2) | (9) | ||||||||||
| Interest expense | (550) | 1 | 619 | 2 | ||||||||||
| Other expense (income) | 0 | (77) | (384) | (87) | ||||||||||
| (550) | (80) | 233 | (94) | |||||||||||
| LOSS BEFORE TAXES AND EQUITY IN (EARNINGS) LOSS OF INVESTEE | (4,468) | (3,588) | (14,128) | (11,280) | ||||||||||
| INCOME TAXES | 45 | 35 | 107 | 208 | ||||||||||
| EQUITY IN (EARNINGS) LOSS OF INVESTEE, AFTER TAX | 9 | 13 | (47) | 74 | ||||||||||
| NET LOSS ATTRIBUTABLE TO ATRINSIC, INC. | $ | (4,522) | $ | (3,636) | $ | (14,188) | $ | (11,562) | ||||||
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NET LOSS PER SHARE ATTRIBUTABLE TO ATRINSIC COMMON STOCKHOLDERS: |
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| Basic | $ | (0.72) | $ | (0.70) | $ | (2.25) | $ | (2.22) | ||||||
| Diluted | $ | (0.72) | $ | (0.70) | $ | (2.25) | $ | (2.22) | ||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||||
| Basic | 6,298,662 | 5,216,274 | 6,314,795 | 5,214,889 | ||||||||||
| Diluted | 6,298,662 | 5,216,274 | 6,314,795 | 5,214,889 | ||||||||||
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ATRINSIC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) |
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| As of | As of | ||||||
| September 30, | December 31, | ||||||
| 2011 | 2010 | ||||||
| (Unaudited) | |||||||
| ASSETS | |||||||
| Current Assets | |||||||
| Cash and cash equivalents | 1,998 | $ | 6,319 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $849 and $1,168 | 5,297 | 4,994 | |||||
| Income tax receivable | 81 | 437 | |||||
| Asset held for sale | 787 | - | |||||
| Prepaid expenses and other current assets | 900 | 565 | |||||
| Total Current Assets | 9,063 | 12,315 | |||||
| PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,107 and $1,813 | 2,484 | 2,692 | |||||
| INTANGIBLE ASSETS, net of accumulated amortization of $3,028 and $3,813 | 1,380 | 3,083 | |||||
| DEFERRED TAX ASSET | 278 | 276 | |||||
| INVESTMENTS, ADVANCES AND OTHER ASSETS | 869 | 976 | |||||
| TOTAL ASSETS | $ | 14,074 | $ | 19,342 | |||
| LIABILITIES AND EQUITY | |||||||
| Current Liabilities | |||||||
| Accounts payable | $ | 5,231 | $ | 4,470 | |||
| Accrued expenses | 6,799 | 5,172 | |||||
| Convertible notes | 4,020 | - | |||||
| Derivative liability | 1,883 | - | |||||
| Deferred tax liability | 347 | 347 | |||||
| Deferred revenues and other current liabilities | 542 | 274 | |||||
| Total Current Liabilities | 18,822 | 10,263 | |||||
| OTHER LONG TERM LIABILITIES | 903 | 907 | |||||
| TOTAL LIABILITIES | 19,725 | 11,170 | |||||
| COMMITMENTS AND CONTINGENCIES (See Note 15) | - | - | |||||
| STOCKHOLDERS' EQUITY | |||||||
|
Common stock - par value $0.01, 100,000,000 shares authorized, 7,022,289 and 6,964,125 shares issued at September 30, 2011 and December 31, 2010, respectively; and, 6,340,780 and 6,282,616 shares outstanding at September 30, 2011 and December 31, 2010, respectively. |
70 | 70 | |||||
| Additional paid-in capital | 181,462 | 181,087 | |||||
| Accumulated other comprehensive income | 32 | 42 | |||||
|
Common stock, held in treasury, at cost, 681,509 shares at September 30, 2011 and December 31, 2010. |
(4,981) | (4,981) | |||||
| Accumulated deficit | (182,234) | (168,046) | |||||
| Total Stockholders' Equity | (5,651) | 8,172 | |||||
| TOTAL LIABILITIES AND EQUITY | $ | 14,074 | $ | 19,342 | |||
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ATRINSIC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands, except per share data) |
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| Nine Months Ended | ||||||
|
September 30, |
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| 2011 | 2010 | |||||
| Cash Flows From Operating Activities | ||||||
| Net loss | $ | (14,188) | $ | (11,562) | ||
| Adjustments to reconcile net loss to net cash | ||||||
| used in operating activities: | ||||||
| Allowance for doubtful accounts | (319) | (20) | ||||
| Depreciation and amortization | 640 | 972 | ||||
| Impairment of intangible assets | 1,421 |
|
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| Stock-based compensation expense | 285 | 860 | ||||
| Deferred income taxes | - | 37 | ||||
| Equity in loss (earnings) of investee | (47) | 74 | ||||
| Interest expense relating to debt discount and derivative liability losses | 648 |
- |
||||
| Changes in operating assets and liabilities : | ||||||
| Accounts receivable | 15 | 1,310 | ||||
| Prepaid income tax | 334 | 896 | ||||
| Prepaid expenses and other assets | 234 | 1,765 | ||||
| Accounts payable | 766 | (1,993) | ||||
| Deferred revenue | 148 | - | ||||
| Other, principally accrued expenses | 2,313 | (5,306) | ||||
| Net cash used in operating activities | (7,750) | (12,967) | ||||
| Cash Flows From Investing Activities | ||||||
| Cash received from investee | - | 360 | ||||
| Capital expenditures | (911) | (41) | ||||
| Net cash provided by (used in) investing activities | (911) | 319 | ||||
| Cash Flows From Financing Activities | ||||||
| Proceeds from issuance of convertible notes and warrants | 4,715 | - | ||||
| Financing costs for the convertible notes and warrants | (446) | - | ||||
| Proceeds from exercise of stock options and issuance of common stock | 90 | - | ||||
| Purchase of common stock held in treasury | - | (9) | ||||
| Net cash provided by (used in) financing activities | 4,359 | (9) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (19) | (7) | ||||
| Net Decrease In Cash and Cash Equivalents | (4,321) | (12,664) | ||||
| Cash and Cash Equivalents at Beginning of Year | 6,319 | 16,913 | ||||
| Cash and Cash Equivalents at End of Period | $ | 1,998 | $ | 4,249 | ||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||
| Cash (refunded) paid for taxes | $ | (241) | $ | (696) | ||
| Cash paid for interest | $ | - | $ | 2 | ||
| Reduction of proceeds from issuance of convertible notes (see Note 17) | $ | 535 | $ | - | ||
| Non-cash financing costs | $ | 51 | $ | - | ||