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 our marketing and information collection practices. Also, since our products and services are accessible on mobile phones and the Internet, we are exposed to legal and regulatory developments affecting the Internet and telecommunications services in general.
There is substantial uncertainty as to the applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, defamation, obscenity and privacy. The vast majority of these laws were adopted prior to the advent of the Internet and, as a result, did not contemplate the unique issues of the Internet. In addition, theredue to the increasing popularity and use of the Internet, a number of laws and regulations have been variousadopted at the international, federal, state and local levels with respect to the Internet. Many of these laws cover issues such as freedom of expression, pricing, online products and services including sweepstakes, taxation, advertising, intellectual property, and the convergence of traditional telecommunications services with Internet communications. Recently, growing public concern regarding privacy and the collection, distribution and use of Internet user information has led to increased federal and state scrutiny, as well as regulatory activity concerning data collection, record keeping, storage, security, notification of data theft, and associated use practices. Moreover, a number of laws and regulations have been proposed and court cases relatingare currently being considered by Federal, State, Local and foreign legislatures with respect to companies’ online business activities, includingthese issues.
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.
We have a limited operating history in an emerging market, which may make it difficult to evaluate our business.
Our wholly-owned subsidiary, New Motion Mobile, commenced offering subscription products and services directly to consumers in 2005. In addition, our merger with Traffix, which is responsible for generating the majority of our Transactional revenues, was completed at the beginning of 2008. Accordingly, we have a limited history of generating revenues, and our future revenue and income generating potential is uncertain and unproven based on our limited operating history. As a result of our short operating history, we have limited financial data that can be used to develop trends and other historical based evaluation methods to project and forecast our business. Any evaluation of our business and the potential prospects derived from such evaluation must be considered in light of our limited operating history and discounted accordingly. Evaluations of our current business model and our future prospects must address the risks and uncertainties encountered by companies in early stages of development, that possess limited operating history, and that are conducting business in new and emerging markets.
| · | Maintain existing and develop new wireless carrier and billing aggregator relationships upon which our direct-to-consumer subscription business currently depends; |
| · | Maintain a compliance based control system to render our products and services compliant with carrier and aggregator demands, as well as marketing practices imposed by private marketing rule makers, such as the Mobile Marketing Association, (MMA), and to conform with the stringent marketing demands as imposed by various States’ Attorney Generals; |
| · | Respond effectively to competitive pressures in order to maintain our market position; |
| · | Increase brand awareness and consumer recognition to secure continued growth;grow our business; |
| · | Attract and retain qualified management and employees for the expansion of the operating platform; |
| · | Continue to upgrade our technology to process increased usage and remain competitive with message delivery; |
| · | Continue to upgrade our information processing systems to assess marketing results, andmeasure customer satisfaction ;and remain competitive; |
| · | Continue to develop and source high-quality, mobiledirect-to-consumer subscription-worthy content that achieves significant market acceptance; |
| · | Maintain and grow our off-deck distribution (“off-deck” refers primarily to services delivered through the Internet, which are independent of the carriers own product and service offers), including such distribution through our web sites and third-party direct-to-consumer distributors; |
| · | Execute our business and marketing strategies successfully. |
If we are unable to address these risks, and respond accordingly, our operating results may not meet our publicly forecasted expectations, and/or the expectations as derived by our investors, which could cause the price of our common stock to decline.
Our business relies on wireless and landline carriers and aggregators to facilitate billing and collections in connection with our subscription products sold and services rendered. The loss of, or a material change in, any of these relationships could materially and adversely affect our business, operating results and financial condition.
During the year ended December 31, 2008,2009, we generated a significant portion of our revenues from the sale of our products and services directly to consumers which are billed through wireless 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 invested 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; |
| · | a carrier’s decision to offer its own competing subscription applications, products and services; |
| · | 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; |
| · | a network encountering technical problems that disrupt the delivery of, or billing for, our applications; |
| | 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 currently affecting the United States; or |
| · | 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 of these wireless carriers decidesdecide to suspend the offering of off-deck applications,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 internetInternet and telecommunications providers, over whom we have no control, for the conduct of our subscription business and transactional 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 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 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. This process would be both expensive and time-consuming. 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-parties to provide us with licensed content including the Kazaa music service. We are reliant on such companies to maintain licenses with 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. Failure of our partners to continue to provide these services, may result in disruption to our customers and a loss in our business. 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 have 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.
Our working capital requirements are significant and we may need to raise cash in the future to fund our working capital requirements.
Our working capital requirements are significant. If our cash flows from operations are less than anticipated or our working capital requirements or capital expenditures are greater than expectations, or if we expand our business by acquiring or investing in additional products or technologies, we may need to secure additional debt or equity financing. We are continually evaluating various financing strategies to be used to expand our business and fund future growth. There can be no assurance that additional debt or equity financing will be available on acceptable terms, if at all. The potential inability to obtain additional debt or equity financing, if required, could have a material adverse effect on our operations.
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 business, as well as our subscription business, with both having a materially negative impact on our results of operations and financial condition.
During 2008,2009, all of our revenue was 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 reasons: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; |
| · | 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;click-throughs; |
| · | companies may be reluctant or slow to adopt online advertising that replaces, limits or competes with their existing direct marketing efforts; |
| · | companies may prefer other forms of Internet advertising we do not offer, including certain forms of search engine placements; |
| · | companies may reject or discontinue the use of certain forms of online promotions that may conflict with their brand objectives; |
| · | companies may not utilize online advertising due to concerns of "click-fraud", particularly related to search engine placements; |
| · | regulatory actions may negatively impact certain business practices that we currently rely on to generate a portion of our revenue and profitability; and |
If the number of companies who purchase online advertising from us does not continue to grow, we may experience difficulty in attracting publishers, and our revenue could decline.
We no longer meet the minimum bid price requirement for continued listing on the NASDAQ Global Market and have until June 22, 2010 to correct it.
We received a notice from NASDAQ that we no longer meet the minimum bid price requirement for continued listing on the NASDAQ Global Market as set forth in NASDAQ’s Marketplace Rule 5450(a)(1), as a result of the bid price of our common stock closing below the required minimum $1.00 per share for 30 consecutive business days. We have been provided with a customary grace period of 180 calendar days in which to regain compliance with the minimum bid price rule. If at any time before June 22, 2010, the bid price of our stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will provide written confirmation to us that we have regained compliance. If we do not regain compliance with the bid price rule by June 22, 2010, NASDAQ will notify us that our common stock is subject to delisting from The NASDAQ Global Market. However, we may appeal the delisting determination to a NASDAQ hearing panel and the delisting will be stayed pending the panel's determination. Alternatively, we may apply to transfer the listing of its common stock to the NASDAQ Capital Market if we satisfy all criteria for initial listing on the NASDAQ Capital Market, other than compliance with the minimum bid price requirement. If such application to the NASDAQ Capital Market is approved, then we may be eligible for an additional grace period.
We intend to actively monitor the bid price for our common stock between now and June 22, 2010, and will consider available options to regain compliance with the NASDAQ minimum bid price requirements. If we are unable to regain compliance with the minimum bid rule and is delisted, or unable to qualify for listing on the NASDAQ Capital Market, market liquidity for our common stock could be severely affected, and our stockholders’ ability to sell securities in the secondary market could be limited. Delisting from NASDAQ would negatively affect the value of our common stock. Delisting could also have other negative results, including, but not limited to, the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.
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 contentcontent.
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 same. 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.
If we fail to compete effectively against other internet advertising companies, we could lose customers or advertising inventory and our revenue and results of operations could decline.
The Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products and services obsolete and unmarketable or require unanticipated technology or other investments. Our failure to adapt successfully to these changes could harm our business, results of operations and financial condition.
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 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..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 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, 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 have no intentiondo not intend to pay dividends on our equity securities.
Our recently acquired subsidiary, Traffix, had paid dividend of $0.08 per share on its common stock for its last 18 fiscal quarters prior to the acquisition. 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. We may also use our cash to repurchase shares pursuant to our share repurchase program discussed elsewhere in this report. 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.
In both our subscription services, including our Kazaa music service, and transaction services, we compete primarily on the basis of marketing acquisition cost, brand awareness, consumer penetration and carrier and distribution depth and breadth. We considerface 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 primary subscription business competitors to be Buongiorno, Playphone, Dada Mobile, Acotel, Glu Mobile, Cellfish (Lagadere), Jamster (Fox), Hands on Mobile and Thumbplay. In our transactional business,target markets longer than we consider Azoogle, Value Click, Miva, Kowabunga! (Think Partnership), Right Media, iCrossing, 360i, iProspect, Publicis (Formerly Digitas), Omnicom, Aptimus and Blue Lithium to be our primary competitors.have. In the future, likely competitors may include other major media companies, traditional video game publishers, wirelesstelephone carriers, content aggregators, wireless software providers and other pure-play wireless subscription publishers,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, increasing customer penetration in existing markets, executing on marquee brand alignment, and/or effectively executing on business level accretive acquisition identification and successful closing and post acquisition integration, 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.
If we do not successfully execute our international strategy, our revenue, results of operations and the growth of our business could be harmed.
Our planned international expansion and the integration of international operations present unique challenges and risks to our company, and require management attention. Our foreign operations subject us to foreign currency exchange rate risks and we currently do not utilize hedging instruments to mitigate foreign currency exchange rate risks.
Our continued international expansion will subject us to additional foreign currency exchange rate risks and will require additional management attention and resources. We cannot assure you that we will be successful in our international expansion and operations efforts. Our international operations and expansion subject us to other inherent risks, including, but not limited to: the impact of recessions in economies outside of the United States; changes in and differences between regulatory requirements between countries; U.S. and foreign export restrictions, including export controls relating to encryption technologies; reduced protection for and enforcement of intellectual property rights in some countries; potentially adverse tax consequences; difficulties and costs of staffing and managing foreign operations; political and economic instability; tariffs and other trade barriers; and seasonal reductions in business activity.
Our failure to address these risks adequately could materially and adversely affect our business, revenue, results of operations and financial condition.
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. We are dependent on our key personnel for managing our business affairs. The loss of their services could materially and adversely affect the conduct and the continuation of our business.
We are and will be highly dependent upon the efforts of the members of our management team, particularly those of our Chief Executive Officer, Burton Katz, our President, Andrew Stollman, our Executive Vice President, Corporate Development, Raymond Musci and our Chief Financial Officer, Andrew Zaref. The loss of the services of Messrs. Katz, Stollman, Musci or Zaref may impede the execution of our business strategy and the achievement of our business objectives. We can give you no assurance that we will be able to attract and retain the qualified personnel necessary for the development of our business. Our failure to recruit key personnel or our failure to adequately train, motivate and supervise our existing or future personnel will adversely affect our operations.
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 December 31, 2008,2009, a majority 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. Moreover, applicable NASDAQ listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant stock options or other stock-based awards to employees in the future. As a result, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, any of which could materially, adversely affect our business.
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 below and as described under the heading "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.
In 2007,On March 10, 2010, and subsequent to our fiscal year-end, Atrinsic received final approval of its settlement to its Class Action proceeding in the OfficeState of California on Allen v. Atrinsic, Inc. f/k/a New Motion, Inc., pending in Los Angeles County Superior Court. The settlement covers all of the Attorney Generalcompany’s mobile products, web sites and advertizing practices through December 2009. All costs of the settlement and defense were accrued for in 2008, therefore this settlement did not have an impact on the Company’s results of operations in 2009 and will not impact the Company’s results of operations in 2010.
As a result of the State of Florida commenced an investigationCalifornia Settlement and final approval of the advertisingjudgment, Atrinsic has filed stays, and business practiceswill file dispositive motions, in the following actions, which it is either directly named in or has assumed the defense of the third party wireless content industry including the Companyfollowing cases: Baker v. Sprint Nextel Corp., Motricity, Inc., and its acquired entities, namely Traffix,New Motion, Inc. On February 12, 2009, the Company approached thepending in Dade County Superior Court in Florida, Attorney General to volunteer its complianceStewart v New Motion, Inc. and cooperate with the ongoing investigation, and contribute to the remediation and educational initiatives of the Florida Attorney General. In connection with this matter, at December 31, 2008 the Company estimatesMotricity, Inc., pending in Hennepin County District Court in Minnesota, Rynearson v. Motricty, Inc, pending in King County Superior Court in Washington Walker v. Motricity, Inc., pending in Alameda County Superior Court in California. Management believes that total costs approximate $1.125 million which is included Accrued Expenses in the Consolidated Balance Sheet.
The Company is also named in two Class Action Lawsuits (in Florida and California) involving allegations concerning the Company's marketing practices associated with some of its services billed and delivered via wireless carriers. The Company is disputing the allegations and is vigorously defending itself in these matters. In one of these matters the Company has received a Summary Judgment on its Motion to Dismiss related to a number of the allegations made in the original complaint. The Companyit has accrued for theall probable and estimable related costs in the amount of $275,000 in connection with these matters which are included in Accrued Expenses in the Consolidated Balance Sheet.
On February 2, 2009 the Companywe filed a complaint, in the Superior Court of the State of California for the County of Los Angeles, against Mobile Messenger Americas, Inc. and Mobile Messenger PTY LTD, and its subsidiarylater amended to name Mobile Messenger Americas Inc. (“MobilePty, Ltd in place of the latter (collectively, “Mobile Messenger”), to recover monies owed the Companyto us in connection with transaction activity incurred in the ordinary and normal course andof business. The complaint also included declaritorysought declaratory relief concerning demands made by Mobile Messenger'sMessenger for indemnification infor amounts paid by Mobile Messenger's settlement in it’s Florida Class Action Matter which it settledMessenger in late 2008 (“in settlement of a class action lawsuit in Florida, Grey vs.v. Mobile Messenger”Messenger, et al. (the “Florida Class Action”). Mobile Messenger a party also involved in the Florida Attorney General investigation described herein, brought upon the Companyus a cross complaint, filed in April 2009, seeking injunctive relief, indemnification for the settlement of the Florida Class Action and other matters, damages allegedly exceeding $17 million, declaratory relief and recoupment of attorneys fees. The Settlement in Gray vs. Mobile Messenger was represented by KamberEdelson, LLC, which now represents Mobile Messenger inIn November 2009, we reached a settlement of the action against the Company on a contingency basis.in principle with Mobile Messenger. The same firm represents the Plaintiffsterms of this settlement are to be confidential but in the Florida Class Action filed against the Company, as well as another plaintiff, an internet marketing company based in NY,general will result in a commercial dispute over payments for marketing services and potential damages concerning that company's marketing practices. The Company disputes the allegations and intends to vigorously defend itself in these matters considering, among other things, the specific facts surrounding the underlying claims against the Company are without merit. The Company will also seek to limit any participation in any settlement to recoup legal fees citing an apparent conflict of interest in that the attorney representing Mobile Messenger (Kamber Edelson, LLC,) whom is also representing numerous other parties taking action in the aforementioned and other related matters.
We recorded a significant amount of goodwill and other intangible assets in connection with our merger with Traffix and the acquisitioncomplete dismissal of the assets of Ringtone.com, which may resultentire action, including the cross-complaint, with prejudice. The settlement is not expected to have a material impact on our results from operations, beyond what we have already expensed and accrued for in significant future charges against earnings if the goodwill and other intangible assets become impaired.2009.
In accounting for the merger with Traffix and the acquisition of the assets of Ringtone.com, we allocated and recorded a large portion of the purchase price paid in the merger to goodwill and other intangible assets. Under SFAS No.142, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangible assets, such as the charge that was taken in the fourth quarter of 2008, could materially adversely affect New Motion’s results of operations in future periods.
We may incur liabilities to tax authorities in excess of amounts that have been accrued which may adversely impact our results of operations and financial condition.
As more fully described in note 11 "Income"Provision (Benefit) for Income Taxes" to our consolidated financial statements contained in this annual report on Form 10-K, we have recorded significant income tax liabilities. The preparation of our consolidated financial statements requires estimates of the amount of income tax that will become payable in each of the jurisdictions in which we operate. We may be challenged by the taxing authorities in these jurisdictions and, in the event that we are not able to successfully defend our position, we may incur significant additional income tax liabilities and related interest and penalties which may have an adverse impact on our results of operations and financial condition.
We may be impacted by the affects of the current slowdown of the United States economy.
Our performance is subject to worldwideUnited States economic conditions and theirits 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 services tend to decline 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, energy costs, 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, make sales to new customers or maintain or increase our international operations 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 recession in the United States.
The requirements of the Sarbanes-Oxley act, including section 404, are burdensome, and our failure to comply with them could have a material adverse affect on the company’s business and stock price.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. Our independent registered public accounting firm will need to annually attest to the Company’s evaluation, and issue their own opinion on the Company’s internal control over financial reporting beginning with the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2009.2010. The process of complying with Section 404 is expensive and time consuming, and requires significant management attention. We cannot be certain that the measures we will undertake will ensure that we will maintain adequate controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls over financial reporting that we will need, will become more complex, and significantly more resources will be required to ensure that our internal controls over financial reporting remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our auditors discover a material weakness in our internal control over financial reporting, the disclosure of that fact, even if the weakness is quickly remedied, could diminish investors’ confidence in our financial statements and harm our stock price. In addition, non-compliance with Section 404 could subject us to a variety of administrative sanctions, including the suspension of trading, ineligibility for listing on one of the Nasdaq Stock Markets or national securities exchanges, and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price.
Revenue from our new businesses may be difficult to predict
We are devoting resources to service offerings where we have limited operation history. This makes it difficult to predict revenue and could result in longer than expected sales and implementation cycles.
Not applicable
ITEM 2. PROPERTIES
New Motion’sAtrinsic’s corporate headquarters at December 31, 2008 wereare located at 469 7th Avenue, New York, NY.
The following table details the various properties leased and owned by us after our merger with Traffix.as of March 24, 2010.
Location | | Leased/ Owned | | Square Feet | | | Expiration | |
Dieppe, New Brunswick, Canada | | Owned | | | 17,000 | | | | N/A | |
469 7th Avenue, New York, NY | | Leased | | | 12,40017,000 | | | 9/30/2018 | |
1 Blue Hill Plaza, Pearl River, NY | | Leased | | | 14,220 | | | 11/15/2011 | |
42 Corporate Park, Irvine, CA | | Leased | | | 12,466 | | | 1/31/2010 | |
The spacespaces listed above isare adequate for our current needs and we believe suitable additional or substitute space will be available to accommodate the foreseeable expansion of our operations. Our owned property in Dieppe, Canada is not subject to a mortgage or any liens. Atrinsic’s telephone number is (212) 716-1977.
ITEM 3. LEGAL PROCEEDINGS.
We are subjectOn March 10, 2010, and subsequent to certain legal proceedingsour fiscal year-end, Atrinsic received final approval of its settlement to its Class Action proceeding in the State of California on Allen v. Atrinsic, Inc. f/k/a New Motion, Inc., pending in Los Angeles County Superior Court. The settlement covers all of the company’s mobile products, web sites and claims arisingadvertizing practices through December 2009. All costs of the settlement and defense were accrued for in 2008. Therefore this settlement did not have an impact on the Company’s results of operations in 2009 and will not impact its results of operations in 2010.
As a result of the State of California Settlement and final approval of the judgment, Atrinsic has filed stays, and will file dispositive motions, in the following actions, which it is either directly named in or has assumed the defense of the following cases: Baker v. Sprint Nextel Corp., Motricity, Inc., and New Motion, Inc. pending in Dade County Superior Court in Florida, Stewart v New Motion, Inc. and Motricity, Inc., pending in Hennepin County District Court in Minnesota, Rynearson v. Motricty, Inc, pending in King County Superior Court in Washington Walker v. Motricity, Inc., pending in Alameda County Superior Court in California. Management believes that it has accrued for all probable and estimable related costs of these actions.
On February 2, 2009 the Company filed a complaint, in the Superior Court of the State of California for the County of Los Angeles, against Mobile Messenger Americas, Inc. and Mobile Messenger PTY LTD, later amended to name Mobile Messenger Americas Pty, Ltd in place of the latter (collectively, “Mobile Messenger”), to recover monies owed the Company in connection with ourtransaction activity incurred in the ordinary and normal course of business. The complaint also sought declaratory relief concerning demands made by Mobile Messenger for indemnification for amounts paid by Mobile Messenger in late 2008 in settlement of a class action lawsuit in Florida, Grey v. Mobile Messenger, et al. (the “Florida Class Action”). Mobile Messenger brought upon the Company a cross complaint, filed in April 2009, seeking injunctive relief, indemnification for the settlement of the Florida Class Action and other matters, damages allegedly exceeding $17 million, declaratory relief and recoupment of attorneys fees. In November 2009, the Company reached a settlement of the action in principle with Mobile Messenger. The terms of the settlement are to be confidential but in general will result in a complete dismissal of the entire action, including the cross complaint, with prejudice. The settlement is not expected to have a material impact on the Company’s results from operations, beyond what the Company has already expensed and accrued for in 2009.
In the ordinary course of business, the Company is involved in various disputes, which are routine and incidental to the business and the industry in which it operates. In the opinion of management there are currently no claims thatthe results of such disputes will not have a materialsignificant adverse effect on our consolidatedthe financial position or the results of operations or cash flows.of the Company.
We are not involved in any legal proceedings that require disclosure in this report.
None
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES
On June 25, 2009, the Company changed its corporate name and ticker symbol from New Motion, Inc., (NWMO) to Atrinsic, Inc., (ATRN). Our common stock is quoted on The NASDAQ Global Market under the symbol “NWMO.Market.” Prior to our acquisition of Traffix which occurred on February 4, 2008, our common stock was quoted on the Over-The-Counter Bulletin Board under the symbol NWMO, and prior to May, 2007, our common stock was quoted on the Over-The-Counter Bulletin Board under the symbol “MPNC.”NWMO. The following table sets forth, for the periods indicated, the high and low sales prices (or high and low bid quotations with respect to the periods during which our common stock was traded on the Over-The-Counter Bulletin Board as determined from quotations on the Over-The-Counter Bulletin Board) for our common stock, as well as the total number of shares of common stock traded during the periods indicated. With respect to the Over-The-Counter market quotations referenced above, such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The quotations have been adjusted to reflect a 1-for-300 reverse stock split of our common stock which took effect on May 2, 2007.
| | | | | | | | Average | |
| | | | | | | | Daily | |
| | High | | | Low | | | Volume | |
Year Ended December 31, 2008: | | | | | | | | | |
First Quarter | | $ | 14.00 | | | $ | 4.10 | | | | 44,166 | |
Second Quarter | | $ | 5.08 | | | $ | 3.92 | | | | 82,617 | |
Third Quarter | | $ | 4.30 | | | $ | 3.09 | | | | 39,769 | |
Fourth Quarter | | $ | 3.00 | | | $ | 1.06 | | | | 42,630 | |
| | | | | | | | | | | | |
Year Ended December 31, 2007: | | | | | | | | | | | | |
First Quarter(1) | | $ | 114.00 | | | $ | 15.00 | | | | 60 | |
Second Quarter | | $ | 39.00 | | | $ | 4.00 | | | | 3,720 | |
Third Quarter | | $ | 18.00 | | | $ | 13.00 | | | | 1,060 | |
Fourth Quarter | | $ | 19.90 | | | $ | 10.00 | | | | 740 | |
(1) On February 12, 2007, pursuant to the closing of an Exchange Transaction, New Motion (then called MPLC, Inc) acquired all of the outstanding voting securities of New Motion Mobile, Inc. (then called New Motion), which became MPLC’s wholly owned subsidiary. | | | | | | | | Average | |
| | | | | | | | Daily | |
| | High | | | Low | | | Volume | |
Year Ended December 31, 2009: | | | | | | | | | |
First Quarter | | | 1.46 | | | | 0.75 | | | | 44,077 | |
Second Quarter | | | 1.50 | | | | 0.87 | | | | 33,344 | |
Third Quarter | | | 1.42 | | | | 0.90 | | | | 14,863 | |
Fourth Quarter | | | 1.17 | | | | 0.52 | | | | 43,920 | |
| | | | | | | | | | | | |
Year Ended December 31, 2008: | | | | | | | | | | | | |
First Quarter | | | 14.00 | | | | 3.70 | | | | 44,166 | |
Second Quarter | | | 5.25 | | | | 3.26 | | | | 82,617 | |
Third Quarter | | | 4.35 | | | | 2.20 | | | | 39,769 | |
Fourth Quarter | | | 3.41 | | | | 1.01 | | | | 42,630 | |
As of March 12,26, 2009, there were approximately 146165 record holders of common stock. As of March 12,26, 2009, the closing sales price of our common stock as reported on the NASDAQ Global Market was $1.19$0.88 per share. Our transfer agent is American Stock Transfer & Trust Company and their phone number is (718) 921-8275.
Dividend Policy
We do not anticipate paying any dividends on our common stock for the foreseeable future. We intend to retain our future earnings to re-invest in our ongoing business. The declaration of cash dividends in the future will be determined by our board of directors based upon our earnings, financial condition, capital requirements and other relevant factors.
Recent Sales of Unregistered Securities
During the 20082009 fiscal year, other than as disclosed in our Quarterly Reports on Form 10-Q or on Form 8-K, as filed with the Securities and Exchange Commission, we did not sell unregistered securities.
Common Stock Repurchases
On April 8, 2008, the Company’s Board of Directors authorized management to repurchase up to $10 million of common stock through May 31, 2009. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements, and other factors, including management’s discretion. Repurchases may be made through privately negotiated transactions or in the open market. The Board of Directors of the Company may modify, extend, or terminate the share repurchase program at any time, and there is no guarantee of the exact number of shares that will be repurchased under the program. Repurchases will be funded from available working capital, and subject to other limitations.
During the year ended December 31, 2008, we repurchased an aggregate of 1,908,926 shares of our common stock at a cost of $4.05 million, at an average of $2.12 per share.
Issuer Purchases of Equity Securities | |
| | (a) Total Number Of Shares Purchased | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part Of Publicly announced Plans or Programs | | | (d) Approximate Dollar Value of Shares That May Yet Be Purchased Under Plans Or Programs | |
Beginning balance April 8 , 2008 | | | | | | | | | | | $ | 10,000,000 | |
| | | | | | | | | | | | | |
(April 8, 2008 to June 30, 2008) | | | 232,300 | | | $ | 4.51 | | | | 232,300 | | | $ | 8,953,282 | |
| | | | | | | | | | | | | | | | |
(July 1, 2008 to September 30, 2008) | | | 387,072 | | | $ | 3.96 | | | | 387,072 | | | $ | 7,419,060 | |
| | | | | | | | | | | | | | | | |
(October 1, 2008 to October 31, 2008) | | | 248,100 | | | $ | 2.34 | | | | 248,100 | | | $ | 6,838,506 | |
| | | | | | | | | | | | | | | | |
(November 1, 2008 to November 30, 2008) | | | 791,954 | | | $ | 0.63 | | | | 791,954 | | | $ | 6,338,506 | |
| | | | | | | | | | | | | | | | |
(December 1, 2008 to December 31, 2008) | | | 249,500 | | | $ | 1.57 | | | | 249,500 | | | $ | 5,946,791 | |
Total | | | 1,908,926 | | | | | | | | 1,908,926 | | | | | |
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain information regarding our results of operations and financial position and is qualified in its entirety by the Consolidated Financial Statements and notes thereto, which appear elsewhere herein.Not required.
(In thousands except per share data) | | 2008 | | | 2007 | |
OPERATING RESULTS FOR YEAR ENDED DECEMBER 31: | | | | | | |
Net Revenue | | $ | 113,884 | | | $ | 36,982 | |
Operating and Corporate Costs, Excluding Depreciation and Amortization, Goodwill Impairment, Stock based compensation | | | 109,042 | | | | 40,015 | |
Goodwill Impairment | | | 114,783 | | | | - | |
Depreciation and Amortization | | | 5,867 | | | | 1,349 | |
Stock based Compensation | | | 1,282 | | | | 1,117 | |
Operating (Loss) Income | | | (117,090 | ) | | | (5,499 | ) |
Net (Loss) Income | | $ | (115,766 | ) | | $ | (4,149 | ) |
| | | | | | | | |
(Loss) Income Per Basic Share | | | | | | | | |
Common stock | | $ | (5.43 | ) | | $ | (0.37 | ) |
(Loss) Income Per Diluted Share | | | | | | | | |
Common stock | | $ | (5.43 | ) | | $ | (0.37 | ) |
BALANCE SHEET DATA AT DECEMBER 31: | | | | | | |
(In thousands except per share data) | | 2008 | | | 2007 | |
Cash and cash equivalents | | | 20,410 | | | | 1,112 | |
Working Capital | | | 23,683 | | | | 14,041 | |
Property and Equipment | | | 3,525 | | | | 860 | |
Goodwill and Intangibles | | | 23,583 | | | | 599 | |
Total Shareholders’ Equity (Deficit) | | | 54,389 | | | | 16,582 | |
Cautionary Statement
The following discussion and analysis should be read together with the Consolidated Financial Statements of New Motion,Atrinsic, Inc. and the “Notes to Consolidated Financial Statements” included elsewhere in this report. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of New Motion,Atrinsic, Inc. for the fiscal years ended December 31, 20082009 and 2007.2008. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control.
Executive Overview
New Motion, Inc., doing business as Atrinsic,As a direct to consumer Internet marketing company, our strategy is oneto maximize the value of each media impression by maximizing the revenue and profit from each visitor to our media network. We do this by using proprietary technology to match each consumer touch point (visit, registration or lead submission) with the highest value offer or series of offers. These offers are sourced from a large pool of advertisers or from our own portfolio of consumer subscription products. We also engage in targeted performance marketing activities where we focus on acquiring customers for an advertiser on an exclusive basis.
Our premium subscription products, which are marketed directly to consumers, are an important component of the leading digital advertisingmaximization strategy. By maintaining alternatives to third party offers, we are able to make use of a larger proportion of acquired Internet traffic and marketing services company inleads generated than would be the United States. Atrinsic is organized ascase with only third party advertisers’ offerings, since our owned products typically provide a single segment with two principal offerings: (1) Transactional services - offering full service online marketing and distribution services which are targeted and measurable online campaigns and programshigher effective value for marketing partners, corporate advertisers, or their agencies, generating qualified customer leads, online responses and activities, or increased brand recognition, and (2) Subscription services - offering our portfolio of subscription based content applications direct to users working with wireless carriers and other distributors.each media impression.
Atrinsic brings together the power of the Internet, the latest in mobile technology, and traditional marketing/advertising methodologies, creating a fully integrated multi platform vehicle for the advanced generation of qualified leads monetized by the sale and distribution of subscription content, brand-based distribution and pay-for-performance advertising. Atrinsic’s service’s content is organized into four strategic content groups - digital music, casual games, interactive contests, and communities/lifestyles. The Atrinsic brands include GatorArcade, a premium online and mobile gaming site, Ringtone.com, a mobile music download service, and iMatchUp, one of the first integrated web-mobile dating services. Feature-rich Transactional advertising services include a mobile ad network, extensive search capabilities, email marketing, one of the largest and growing publisher networks, and proprietary subscription content. Services are provided on a variety of pricing models including cost per action, fixed fee, or commission based arrangements.
New Motion, Inc. is operating under the trade name of Atrinsic and is in the process of formally changing its name. Our goal is to optimize revenues from each of our qualified leads, regardless of the nature of the services we provide to such parties. Over an extended period of time, our ability to generate incremental revenues relies on our ability to increase the size and scope of our media network, our ability to target campaigns, and our ability to convert qualified leads into appropriate revenue generating opportunities.opportunities, including into subscribers of our own products. Revenue growth also depends on our ability to market and sell our services, including search services and lead generation activities, to third parties.
We combine our direct response capability with an Internet-based customer acquisition model, which allows us to use proprietary lead generation, search and email marketing strategies, to generate a greater volume of Internet traffic at a lower effective cost of acquisition. Our success at acquiring qualified customers at a low effective cost is due, in part to our portfolio of attractive web properties, content and licensed media. This performance marketing media network ensures a continual base of subscribers to our subscription products, and also generates qualified traffic that is complementary to our third-party advertisers.
Our direct response marketing business principally serves two sets of customers. Corporate clients and third party advertisers (transactional services) use our products and services to enhance their online marketing programs. Consumers (subscriptions) subscribe to our services to receive premium content on the Internet and on their mobile device. Each of these business activities – transactional and subscription – may utilize the same originating media or derive a customer from the same source; the difference is reflected in the type of customer billing. In the case of transactional marketing services, the billing is generally carried out on a service fee, percentage, or on a performance basis. For subscription services, the end user (the consumer) is able to access premium content and in return is charged a recurring monthly fee to a credit card, mobile phone, or land-line phone.
There are a variety of factors that influence our revenues on a periodic basis including but not limited to: (1) economic conditions and the relative strengths and weakness of the U.S. economy; (2)economy, trends in the online marketing and telecommunications industry, including client spending patterns and their overall demand for our service offerings; (3) increases or decreases in our portfolio of service offerings; and (4)offerings, including the overall demand for such offerings, competitive and alternative programs and advertising mediums.mediums, and risks inherent in our customer database, including customer attrition.
Similar to other media based companies, our ability to specifically isolate the relative historical aggregate impact of price and volume regarding our revenue is not practical as the majority of our services are sold and managed on an order by order basis and our revenues are greatly impacted by our decisions regarding qualified lead monetization.ability to qualify, validate and enhance leads that we acquire. Factors impacting the pricing of our services include, but are not limited to: (1) the dollar value, length and breadth of the order; (2) the quality of the desired action; (3) the quantity of actions or services requested by our clients; (4) our ability to enhance the value of leads through validation and (4)traffic disaggregation; (5) matching leads to the highest relative value offer; and (6) the level of customization required by our clients.
The principal components of our operating expensesexpense are labor, media and media related expenses (including media content costs, lead validation and affiliate compensation,compensation), product or content development and royalties or licensing fees),fees, marketing and promotional expensesexpense (including sales commissions, customer service and customer acquisition and retention expenses)expense) and corporate general and administrative expenses.expense. We consider our operating cost structure to be predominantly variable in nature over a short time horizon, and as a result, we are immediately able to make modifications to our cost structure to what we believe to be increases or decreases in revenue and market trends. This factor is important in monitoring our performance in periods when revenues are increasing or decreasing. In periods where revenues are increasing as a result of improved market conditions, we will make every effort to best utilize existing resources, but there can be no guarantee that we will be able to increase revenues without incurring additional marketing or operating costs and expenses. Conversely, in a period of declining market conditions we are immediately able to reduce certain operating expenses and preserve operating income. Furthermore, if we perceive a decline in market conditions to be temporary, we may choose to maintain or increase operating expenses for the future maximization of operating results.
STRATEGIC INITIATIVES
OurAs a growing part of our direct-to-consumer business, strategy involves increasing our overall scalethe Kazaa music service is an important focus for management. The Kazaa digital music service is offered in conjunction with BDE, an online distributor of licensed digital content. On March 26, 2010, we entered into a Marketing Services Agreement (the “Marketing Agreement”) and profitabilitya Master Services Agreement (the “Services Agreement”) with BDE effective as of July 1, 2009 (collectively, the “Agreements”), relating to the operation and marketing of the Kazaa digital music service. The Agreements have a term of three years from the effective date, contain provisions for automatic one year renewals, subject to notice of non-renewal by offeringeither party, and may only be terminated generally upon a large number of diversified products through a unique distribution networkbankruptcy or liquidation event or in the most cost effective manner possible. To achieve this goal,event of an uncured material breach by either party. In accordance with the Agreements, Atrinsic and BDE will share equally in the “Net Profit” generated by the Kazaa music subscription service after all of our costs and expenses are recovered.
Under the Marketing Agreement, we are pursuingresponsible for marketing, promotional, and advertising services in respect of the following objectives.Kazaa service. In exchange for these marketing services, we will be reimbursed for the pre-approved costs and expenses incurred in connection with the provision of the services plus all other agreed budgeted amounts. Pursuant to the Services Agreement, we are to provide services related to the operation of the Kazaa website and service, including billing and collection services and the operation of the Kazaa online storefront. BDE is obligated to provide certain other services with respect to the service, including licensing the intellectual property underlying the Kazaa service to us, obtaining all licenses to the content offered as part of the service and delivering that content to the subscribers via the service interface.
As part of the Agreements, we are required to make advance payments and expenditures in respect of certain expenses incurred in order to provide the required services and operate the Kazaa music service. These advances and expenditures are recoverable on a dollar for dollar basis against future revenues. BDE has agreed to repay up to $2,500,000 of these advances and expenditures which are not otherwise recovered from Kazaa generated revenues and this repayment obligation will be secured under separate agreement. Similarly, we are not obligated to make additional expenditures if more than $5,000,000 remains unrecovered or unrecouped by us from Kazaa revenues.
Business Strategy
Achieve Cross Media BenefitsTo become a leading direct to consumer Internet marketing company, our strategy is to continue to develop a broad marketing and media network that allows us to cost-efficiently acquire consumers for our subscription-based services and for our third-party lead generation activities. We also must continually develop best in class service offerings for our clients in the area of search related services. One
Expand Online Distribution Capabilities: we consider our distribution capabilities as encompassing the various ways we generate Internet traffic by attracting users to various web properties and converting visitors into subscribers and third-party leads. We employ a multifaceted approach to generating traffic: (i) users may navigate directly to our web properties, (ii) users respond to our email marketing, (iii) we garner users of our strategic objectivespromotional and sweepstakes sites, (iv) we attract users to our content sites by offering valuable media and other content, (v) we utilize call center technology in the acquisition process, and (vi) we use search engine optimization and search marketing efforts which attract users to our sites and services on a PPC-basis. Our strategy is to leverageincrease our volume of visitors, subscribers, and third-party leads by improving the cross media benefit derived primarily from the combinationreach and widening our breadth of New Motion and Traffix which was consummated on February 4, 2008. Our premium-billed subscriptions allow us to integrate and to leverage online and mobile distribution channels to deliver compelling media and entertainment. The advantage of the fixed Internet is that from a marketing expense standpoint, the cost of customer acquisitions is generally determinable. In addition, the Internet is full of free content that is advertisement supported. The Internet also allows for the delivery of rich media over broadband. The advantage of mobile media is that it already has a well established customer activation and customer retention capability and is accessible and portable for those using it to access content. Our cross media strategy seamlessly enables our subscriber to realize true convergence. Atrinsic enables subscribers to interact with our content at work, at home or on a remote basis.
Vertically Integrate and Expand Distribution Channels.distribution. We own a large library of wholly owned content, proprietary premium billed services, and our own media and distribution. By allocating a large proportion of the qualified leads acquired by our subscription properties to our owned marketing and distribution networks, we expect to generate cost savings through the eliminationdo this by increasing our portfolio of third-party margins. These cost savings are expectedweb properties and sites, and improving existing, or employing innovative techniques, to result insource traffic. We expect that by expanding our online distribution capability, we will lower our customer acquisition costs throughout our business. We also expect to continue to enhance our distribution channels by expanding existing channels to market and sell our products and services online and explore alternative marketing mediums. We also expect, with limited modification, to market and sell our existing online-only content directly to wireless customers. Finally, we expect to continue to drive a portion of our consumer traffic directly to our proprietary products and services without the use of third-party media outlets and media publishers.improving margins through greater scale.
Multiple Revenue Streams and Advertiser Network. Our merger with Traffix has allowed for a reduction in customer concentration and more diversification of the combined company’s revenue streams. We will continue to generate recurring revenue streams from a subscription -based model, which is targeted at end user mobile subscribers. We will also have the traditional revenue streams inherent in our online performance-based model, which is targeted to publishers and advertisers. Further revenue diversification is expected to result from our larger distribution reach, and our ability to generate ad revenue across the combined company’s portfolio of web properties.
Publish High-Quality, Branded Subscription Content.: As a direct to consumer Internet marketing company, we are focused on partnering with companies, and developing proprietary sources of content, for our direct to consumer subscription products. We believe that publishing a diversified portfolio of the highest quality most innovative applicationscontent, like the Kazaa music service, is criticalimportant to our business. We intend to continue to develop innovative and sought-after content and intend to continue to devote significant resources to the development of high-quality and innovative products services and Internet storefronts. The U.S. consumer’s propensityservices. We will focus on subscription based products in the entertainment and lifestyle categories as these products correspond to use the fixed Internet to acquire, redeem and use mobile subscription products is unique. In this regard, we aim to provide complementary services between these two high-growthvisitor base in our media channels. We also expect to continue to create Atrinsic-branded applications, products and services, which typically generate higher margins.network.
Lead Generation Product Development: In order to enhancebe competitive in the Atrinsicperformance marketing areas, companies must de-commoditize the leads they generate. We are pursuing a number of value enhancing strategies to increase the marketability of our leads to third parties and to increase the conversion of leads into subscribers of our direct-to-consumer subscription services. These innovations include ad units designed to drive direct telephone calls, where a call center operator will respond instantly to a user’s request for information and, in some instances, transfer the consumer directly to an advertiser. We also actively increase the value of a consumer inquiry by validating the submission of online information through automated data lookups and validation, or through call center confirmation. All of these lead value enhancement techniques assist us in increasing the average sales price of leads sold to our advertisers, or improves the conversion of users into subscribers to our direct-to-consumer subscription services and the corresponding increases in LTV that result from more highly qualified subscribers.
Multiple Billing Platforms: As a direct result of being proficient in multiple billing platforms, we are able to create customer acquisition efficiencies because we can acquire direct subscribers and generate third-party leads. This provides us with a competitive advantage over traditional direct response marketers, who may only offer a single billing modality – credit cards. We have agreements through multiple aggregators who have access to U.S. carriers – both wireless and landline – for billing. These relationships include our 36% interest in TBR, which is an aggregator of fixed-line billing. In addition to agreements with aggregators, we also have an agreement in place with AT&T Wireless to distribute and bill for our services directly to subscribers on their network. As a result of our multiple billing protocols, we are able to expand our potential customer base, attracting consumers who may prefer a different billing mechanism than is traditionally offered. Many of our new product initiatives leverage and expand upon our alternative billing capabilities.
Online Marketing Services: In order to be competitive in the area of online marketing services, particularly in search related marketing services, we must continue to expand our staff and technology capabilities. Our product offering will not remain competitive if we don’t offer our clients leading edge technology and strategies designed to drive their online sales efforts. Adding more services revenue will involve prospecting a targeted set of clients who are natural consumers of our services. Our initiatives include delivering an integrated suite of services, which include search engine marketing services, search engine optimization, display advertising, and affiliate marketing. Our ability to integrate brand protection and competitive intelligence is a source of differentiation and growth for our product brands, we plan to continue building brands through productexisting and service quality, subscriber, customer and carrier support, advertising campaigns, public relations and other marketing efforts.new client base.
Technology: Through our use of technology, we attempt to display the highest value offer to the consumer. On a real-time basis, our technology dynamically analyzes user data, media source, and estimated offer values and progressions to gauge which offer maximizes the value of the media impression. If the user is “qualified,” we will expose one of our targeted consumer subscription offers. In the event that the user does not correspond to our internal targeting criteria, the most profitable third-party offers will be displayed. In every case, we are continually working on technology to improve targeting capability so as to maximize the value of each media impression. We also employ proprietary technology which measures, in real time, the effectiveness of our media buying by media source. This allows us to adjust marketing efforts immediately towards the most effective partners. These tools allow us to be more effective in our media buying, reducing our acquisition costs and improving convertibility and profitability.
Results of Operations for the year ended December 31, 20082009 compared to the year ended December 31, 2007.2008.
Revenues presented by type of activity are as follows for the year ended December 31:
| | | For the Year | | | Change | | | Change | |
| | For the Year December 31 | | | Change Inc.(Dec.) | | | Change Inc.(Dec.) | | | December 31, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | 2008 | | | 2007 | | | $ | | | | % | | | 2009 | | | 2008 | | | $ | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subscription | | $ | 44,196 | | | $ | 36,982 | | | $ | 7,214 | | | 20 | % | | $ | 22,254 | | | $ | 44,196 | | | $ | (21,942 | ) | | | -50 | % |
Transactional | | $ | 69,688 | | | $ | - | | | $ | 69,688 | | | | 100 | % | | | 46,835 | | | | 69,688 | | | | (22,853 | ) | | | -33 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Revenues (1) | | $ | 113,884 | | | $ | 36,982 | | | $ | 76,902 | | | | 208 | % | | $ | 69,089 | | | $ | 113,884 | | | $ | (44,795 | ) | | | -39 | % |
(1) | As described above, the Companywe currently aggregatesaggregate revenues based on the type of user activity monetized. The company’sOur objective is to optimize total revenues from the user experiences. Accordingly, this factor should be considered in evaluating the relative revenues generated from our Subscription and Transactional Services. |
Revenues increaseddecreased approximately by $76.9$44.8 million, or 208%39%, to $69.1 million for the year ended December 31, 2009, compared to $113.9 million for the year ended December 31, 2008, compared2008.
Subscription revenue consists of content applications billed direct to $37.0consumers via mobile or land based telephone lines or credit card. These services are delivered through the Internet to PCs, or mobile phones, or through other Internet-connected devices. Subscription revenue decreased by approximately $22.0 million, or 50%, to $22.2 million for the year ended December 31, 2007. Subscription based revenue increased by approximately $7.2 million, or 20%,2009, compared to $44.2 million for the year ended December 31, 2008, compared to $37.0 million for the year ended December 31, 2007.2008. The increasedecrease in subscription service revenue was principally attributable to an increasea decrease in the average number of billable subscribers during the period. At December 31, 2009 the number of subscribers was 338,000 compared to 501,000 at December 31, 2008. This also compares to 346,000 subscribers at September 30, 2009. The decrease in billable subscribers from a year ago was due primarily to a significant reduction in mobile customer acquisition rates, offset by approximately 70,000 net billable additions from the introduction of the Kazaa music subscription service. Net billable additions refers to the number of subscribers added during the period, less attrition. During 2009, we reduced our mobile marketing spends, which directly impacted customer acquisition rates. We elected to cut our mobile marketing spends because of the uncertain regulatory and our purchase of Ringtone.com, coupledlegal environment associated with our efforts to improve subscriber retention. Although we ended 2008 with approximately 501,000 subscribers as compared to approximately 840,000 subscribers at the end of 2007, during 2008 the average number of monthly billable subscribers was higher than in 2007marketing mobile subscription services and the number of subscribers increased disproportionally at the end of 2007. The number of subscribers is largely, but not precisely, correlateddue to the periodic reported revenues asless profitable economics – a result of inter-period volatilityhigher customer acquisition costs – of our mobile subscription service offerings.
Transactional revenue is derived from our online marketing and lead generation activities, which are targeted and measurable online campaigns and programs for marketing partners, corporate advertisers, or their agencies, generating qualified customer leads, online responses and activities, or increased brand recognition. Transactional revenue decreased by approximately $22.9 million or 33% to $46.8 million for the circumstance that subscribers are billedyear ended December 31, 2009 compared to $69.7 million for the year ended December 31, 2008. The decrease is principally attributed to the reduction in discretionary advertising spending by our search customers.
We also experienced weakness in our marketing services and lead generation business, including a reduction in page views, site visits, and registrations, which manifested itself in lower revenue for these service lines on a monthlyyear-over-year basis. As a result of the slow-down in economic activity in the United States during 2009, spending on advertising decreased markedly, leading to increased competition in the Internet marketing and lead generation markets which, in turn, created significant downward pricing pressure on our offerings and resulted in a lower volume of registrations and leads that could be sourced at an attractive price.
Transactional revenues increased by $69.7 million or 100% in 2008. The increase is attributable to the service offerings acquired in connection with our acquisition of Traffix, Inc which took place in February 4, 2008.
Operating Expenses
| | For the Year December 31, | | | Change Inc.(Dec.) | | | Change Inc.(Dec.) | | | For the Year | | | Change | | | Change | |
| | 2008 | | | 2007 | | | $ | | | % | | | December 31, | | | Inc.(Dec.) | | | Inc.(Dec.) | |
| | | | | | | | | | | | | | 2009 | | | 2008 | | | $ | | | % | |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of Media – 3rd party | | $ | 74,541 | | | $ | 29,054 | | | 45,487 | | | 157 | % | | $ | 43,313 | | | $ | 74,541 | | | $ | (31,228 | ) | | | -42 | % |
Product and distribution | | 9,749 | | | 3,149 | | | 6,600 | | | 210 | % | | | 10,559 | | | | 9,749 | | | | 810 | | | | 8 | % |
Selling and marketing | | 9,974 | | | 1,521 | | | 8,453 | | | 556 | % | | | 8,386 | | | | 9,974 | | | | (1,588 | ) | | | -16 | % |
General and administrative and other operating | | 16,060 | | | 7,408 | | | 8,652 | | | 117 | % | |
General, administrative and other operating | | | | 14,706 | | | | 16,060 | | | | (1,354 | ) | | | -8 | % |
Depreciation and Amortization | | 5,867 | | | 1,349 | | | 4,518 | | | 335 | % | | | 3,698 | | | | 5,867 | | | | (2,169 | ) | | | -37 | % |
Impairment of goodwill | | | 114,783 | | | | - | | | | 114,783 | | | | 100 | % | |
Impairment of Goodwill and Intangible Assets | | | | 17,289 | | | | 114,783 | | | | (97,494 | ) | | | -85 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Operating Expenses | | $ | 230,974 | | | $ | 42,481 | | | $ | 188,493 | | | | 444 | % | | $ | 97,951 | | | $ | 230,974 | | | $ | (133,023 | ) | | | -58 | % |
Cost of Media
Cost of Media increased– 3rd party decreased by $45.5$31.2 million to $43.3 million for the year ended December 31, 2009 from $74.5 million in 2008 from $29 million in 2007. For 2008,for the year ended December 31, 2008. Cost of Media – 3rd party includes media purchased for monetization of both transactional and subscription revenues. The increaseBecause of its strictly variable nature, this decrease was principally attributedproportionately correlated to the media necessarydecline in the related revenue. As a percentage of revenue, Cost of Media -3rd party improved to source63% for the revenue acquiredyear ended December 31, 2009 from 65% for the year ended December 31, 2008. This improvement in Cost of Media -3rd party margin is attributable to reductions in the pace of mobile customer acquisition, partially offset by increased search marketing spend associated with the acquisitionKazaa music subscription service. It is to be expected that for businesses with a significant recurring revenue component, if direct marketing expense is significantly curtailed, the business, as a result of Traffix, Inc. which took place February 4, 2008.the recurring nature of revenue generated by the subscription service, will exhibit a short term period of improved Cost of Media – 3 rd party margins.
Product and Distribution
Product and distribution expense increased by $6.6$0.8 million to $10.5 million in the year ended December 31, 2009 as compared to $9.7 million for the year ended December 31, 2008 compared to $3.1 million for the year ended December 31, 2007. The increase was principally attributed to the acquisition of Traffix, Inc. which took place February 4, 2008. Product and distribution expenses are costs necessary to develop and maintain proprietary content and support and maintain our websites and user data, technology platforms – which drivesdrive both our transactional and subscription based revenue.revenues. In 2009, we experienced higher product and distribution expense as a result of costs incurred to further develop the Kazaa music service, greater royalty and license expense, also associated with Kazaa, and other general marketing and distribution technology-related expense. These higher technology and royalty costs were offset by a reduction in product and distribution salary expense. Included in product and distribution cost is stock compensation expense of $6,593$111,000 and $288,443$7,000 for 2008the year ended December 31, 2009 and 20072008, respectively.
Selling and marketing
Selling and marketing expense increaseddecreased by $1.6 million to $8.4 million to $9.9 million in 2008the year ended December 31, 2009 as compared to $1.5$10.0 million for the year ended December 31, 2007.2008. The increasedecrease is primarily due to an increasea reduction in fixedsalaries and variable labor, principally attributed toother marketing costs, in accordance with the acquisitiondecrease in our revenue over the same period. This decrease in selling and marketing expense was partially offset by higher customer service expense as a result of Traffix, Inc. which took place February 4, 2008. In addition, the company incurred approximately $2.2 million of bad debt expense in 2008new service offerings and none in 2007.call center activity.
General, Administrative and Other Operating
General and administrative expenses increaseddecreased by approximately $8.7$1.4 million to $14.7 million for the year ended December 31, 2009 compared to $16.1 million for the year ended December 31, 2008 compared to $7.4 million for the year ended December, 31, 2007.2008. The increasedecrease is due primarily due to an increasea reduction in labor and related costs, necessary to support core operations, professional and consulting fees, facilities and related costs, principally attributablepartially offset by an increase in Sarbanes Oxley consulting fees, legal expense and severance payments and accruals to the growth the company experienced as of result of the acquisition of Traffix, Inc. Management has taken action to achieve approximately $4.0 million of efficiencies resulting from the acquisition of Traffix, however the Company continuesformer executives. While we consider it important to make appropriate and modest investments in labor, facilities, technology infrastructure, and utilization of third party professional service providers to support itsour continued growth, business development, and corporate governance initiatives.initiatives, management has also made steps to reduce our overall cost structure as a result of the challenging and competitive business environment, and the associated decrease in revenue and unfavorable operating results we have experienced over the last year. We continue to look for opportunities to leverage our existing infrastructure or to generate appropriate cost savings without affecting employee morale or jeopardizing business development opportunities. Included in general and administrative expense is severance of $1.1 million for the year ended December 31, 2009 and stock compensation expense of $0.7 million and $1.3 million for the year ended December 31, 2009 and $828,045 for 2008, and 2007 respectively.
Depreciation and amortization
Depreciation and amortization expense increased $4.5decreased $2.2 million to $3.7 million for the year ended December 31, 2009 compared to $5.9 million for the year ended December 31, 2008 comparedprincipally as a result of a reduction in capital expenditure and a decrease of $1.4 million of Ringtone subscriber database amortization expense from 2008 to $1.3 million2009. The database was fully amortized by the second quarter of 2009.
Impairment of Goodwill and Intangible Assets
The Company conducts its annual impairment test in the fourth quarter of the year, unless an event occurs prior to the fourth quarter that would more likely than not reduce the fair value of the Company below its carrying amount. In connection with our annual goodwill impairment testing conducted in the fourth quarter, and for the year ended December 31, 2007 principally as the result of the amortization of intangible assets and depreciation of fixed assets acquired in connection with the acquisition of the Traffix, Inc. and Ringtone.com.
Impairment of Goodwill
In connection with its annual goodwill impairment testing for the year ended December 31, 2008, the Company2009, we determined there was impairment of the carrying value of goodwill and intangible assets and recorded a non-cash charge of $17.3 million compared to an impairment charge of $114.8 million.million in 2008. The goodwill and intangibles impairment, the majority of which is not deductible for income tax purposes, is primarily due to our declining market price, reduced expectations for future operating results and reduced valuation multiples. Such negative factors are reflected in our stock price and market capitalization.
Income (Loss)Loss from Operations
Operating loss increaseddecreased to approximately $117.0$28.9 million for the year ended December 31, 2008,2009 compared to an operating loss of $5.5$117.1 million for the year ended December 31, 2007. This increase was principally attributable to the $114.8 million charge for the impairment of goodwill taken during the fourth quarter of 2008. Excluding the charge foreffect of goodwill and intangibles impairment thein 2009 and 2008, operating loss for the year ended December 31, 2008 decreased $3.2 millionincreased to ($2.3) million compared to an operating loss of ($5.5)approximately $11.6 million for the year ended December 31, 2007. Management has taken action2009, compared to gain approximately $4.0$2.3 million for the year ended December 31, 2008. The higher operating loss is the result of efficiencies resulting from the acquisitionrevenue decrease, together with proportionately higher product and distribution expense, selling and marketing expense and general and administrative expense, offset by an improvement in the Cost of Traffix, however the Company continues to make appropriate and modest investments in labor, facilities, technology infrastructure, and utilization ofMedia – 3rd party professional service providers to support its continued growth, business development and corporate governance initiatives.margin.
Interest income and dividends
Interest and dividend income increased $284,000decreased approximately $676,000 to $72,000 for the year ended December 31, 2009, compared to $748,000 for the year ended December 31, 2008,2008. The reduction is mainly due to a decrease in the balances of cash and marketable securities at December 31, 2009 compared to $464,000 for the year ended December 31, 2007. The increase is primarily due to interest income earned2008, as well as a reduction in the rate of return on higher cash balances maintained throughout 2008, offset by lower rates, and interest and dividends earned on marketable securities.invested capital.
Interest expense
Interest expense increased $125,000was $76,000 for the year ended December 31, 2009 compared to $147,000 for the year ended December 31, 2008, compared to $22,000 for the year ended December 31, 2007.2008. The increaseinterest paid is primarily attributablerelated to interest expense of $90,000 on the note payable associated with the purchase of the assets ofto Ringtone .com.which was paid in January 2009.
Other Income (Expense)
Other expense increased $141,000 to $153,000income was $5,000 for the year ended December 31, 2008,2009 compared to $12,000other expense of ($153,000) for the year ended December 31, 2007.2008. The increase is primarily attributable2008 expense was due to a loss on the sale of marketable securities of $174,000.securities.
Income Taxes
Income tax benefitexpense (benefit), before noncontrolling interest and equity in income of investee, for the year ended December 31, 2009 and 2008 was $852,000$0.6 million and ($0.9) million, respectively and reflects an effective tax rate of 0.73%, which was2.2% and 0.7% respectively. The effective tax rates were computed taking into consideration the non-deductible impairment charge noted above,charges of $12.1 million and $114.8 million for 2009 and 2008, respectively, and the effectsestablishment of the merger with Traffix, Inc. which occurred on February 4, 2008, and includes the resultan income tax valuation allowance of changes$11.0 million for 2009.
Equity in the weighted average statutory rate attributable to the additionLoss of certain local jurisdictions resulting from the merger, and certain adjustments realized in connection with the finalization of tax returns.Investee
MinorityEquity in income of investee was $59,000, net of taxes at December 31, 2009 and represents our 36% interest in The Billing Resource, LLC (TBR). We acquired the interest in TBR in the 4th Quarter 2008 and the operating results were de minimis.
Minority interest represents the income allocable25
Net loss attributable to the shareholders of the Company for itsnoncontrolling interest in MECC. Minority interestwas $28,000 for the year ended December 31, 2008 was $24,0002009 as compared to net income of ($283,000)24,000) for the year ended December 31, 2007.2008. This related to our investment in MECC which was dissolved in June 2009.
Net Loss Attributable to Atrinsic, Inc.
Liquidity and Capital Resources
The CompanyWe continually projectsproject anticipated cash requirements, which may include share repurchases, business combinations, capital expenditures, principal and interest payments on its outstanding and future indebtedness, and working capital requirements. Funding requirements have been financed through business combinations, cash flow from operations, issuance of preferred stock, option exercises and issuance of long-term debt. As of December 31, 2008, the Company2009, we had cash and cash equivalents of approximately $20.4$16.9 million marketable securitiesand working capital of approximately $4.2$15.3 million. We used approximately $3.0 million (including Auction Rated Securities of $4.0 million that was redeemed and converted toin cash at par plus interest in January 2009) and a working capital balance of approximately $23.7 million. The Company generated approximately $4.4 million fromfor operations for the year ended December 31, 20082009 and, expects to generate cash flows from operating activities prospectively, which, contingent on prospective operating performance, may require reductions in discretionary variable costs and other realignments to permanently reduce fixed operating costs.
In conjunction with We generated $2.4 million in cash from investing activities, principally from proceeds from sale of marketable securities and a distribution from The Billing Resource, offset by the Company’s objectiveinvestment in ShopIt. Cash used in financing activities was $2.8 million and was principally attributable to repayment of enhancing shareholder value, the Company’sRingtone note payable of $1.8 million and stock repurchases. Our Board of Directors authorized a share repurchase program.program which expired in May 2009. Under this share repurchase program the Companywe purchased 1,908,926832,392 shares of the Company’sour common stock for an aggregate price of approximately $4.05 million during the Fiscal 2008.$939,000.
The Company believesWe believe that itsour existing cash and cash equivalents and anticipated cash flows from our operating activities will be sufficient to fund minimum working capital and capital expenditure needs for at least the next twelve months. The extent of the Company’sour future capital requirements will depend on many factors, including itsour results of operations. If the Company’sour cash flows from operations is less than anticipated or itsour working capital requirements or capital expenditures are greater than expectations, or if the Company expands itswe expand our business by acquiring or investing in additional products or technologies, itwe may need to secure additional debt or equity financing. The Company isWe are continually evaluating various financing strategies to be used to expand itsour business and fund future growth. There can be no assurance that additional debt or equity financing will be available on acceptable terms, itif at all. The potential inability to obtain additional debt or equity financing, if required, could have a material adverse effect on the Company’sour operations.
In connection with its investments as further described in footnote 14, the Company is obligated to fund investments totaling approximately $1.6 million in 2009. Furthermore, management anticipates the risk adjusted return is sufficiently in excess of the contributed capital obligations, as of this date. There is however, no guarantee of the anticipated returns. In addition, management has taken considerable actions to secure its interest in achieving such a return.
Significant Estimates andCritical Accounting Policies and Estimates
Principles of Consolidation
The consolidated financial statements include the accounts of all majority and wholly-owned subsidiaries and significant intercompany balances and transactions have been eliminated.
The equity method is used to account for investments in entities in which we have an ownership of less than 50% and have significant influence over the operating and financial policies of the affiliate. For investments in entities for which the company has a less than 50 percent ownership interest, but has certain participatory rights, the investee is consolidated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management continually evaluates its estimates and judgments including those related to allowances for doubtful accounts, and the associated allowances for returns and chargebacks, useful lives of property, plant and equipment and intangible assets, fair value of stock options granted, forfeiture rate of equity based compensation grants, probable losses associated with pre-acquisition contingencies, income taxes and other contingencies. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable in the circumstances. Actual results may differ from those estimates. Macroeconomic conditions may directly, or indirectly through our business partners and vendors, impact our financial performance and available resources. Such conditions may, in turn, impact the aforementioned estimates and assumptions. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.
Accounts Receivable and Related Allowances
The Company maintains allowances for doubtful accounts for estimated losses which may result from the inability of its customers to make required payments. The Company bases its allowances on the likelihood of recoverability of accounts receivable by customer, based on past experience, the age of the accounts receivable balance, the credit quality of the Company’s customers, and, taking into account current collection trends. If specific customer circumstances change or industry trends worsen beyond the Company’s estimates, the Company would be required to increase its allowances for doubtful accounts. Alternatively, if trends improve beyond the Company’s estimates, the Company would be required to decrease its allowance for doubtful accounts. The Company’s estimates are reviewed periodically, and adjustments are reflected through bad debt expense in the period they become known. Changes in the Company’s bad debt experience can materially affect its results of operations.
The Company also makes estimates for refunds chargebacks or credits, and provides for these probable uncollectible amounts through a deferral and reduction of recorded revenues in the period for which the sale occurs, based on analyses of previous rates and trends.
Due to the payment terms of the carriers requiring in excess of 60 days from the date of billing or sale, at its sole discretion, the Company can elect to use trade discounts in order to facilitate quicker payment. This discount or fee allows for payments of approximately 80% of the prior month’s billings 15 to 20 days after the end of the month. The Company records revenue net of that fee, if incurred, which is 3.5% to 5% of the associated revenue.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with ASC 350 formerly Statement of Financial Accounting Standards No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets”, the value assigned to goodwill and indefinite lived intangible assets is not amortized to expense, but rather it is evaluated at least on an annual basis to determine if there is a potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the reporting unit goodwill is less than the carrying value. If the fair value of an indefinite lived intangible is less than its carrying amount, an impairment loss is recorded. Fair value is determined based on discounted cash flows, market multiples or appraised values as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.
The Company has determined that there was an impairment of the carrying value of goodwill and non-amortizable intangible assets as a result of completing its annual impairment analysis as of December 31, 2008.2009. In performing the related valuation analysis the company used various valuation methodologies including probability weighted discounted cash flows, comparable transaction analysis, and market capitalization and comparable company multiple comparison. The results of this review and impact of the impairment are more fully described in Note 67 - “Goodwill and Intangible Assets”.
Intangible assets subject to amortization primarily consist of customer lists, trade names and trademarks, and restrictive covenants that were acquired. The intangible asset values assigned to the identified assets for each acquisition were generally determined based upon the expected discounted aggregate cash flows to be derived over the estimated useful life. The method of amortizing the intangible asset values reflects, based upon the Company’s historical experience, an accelerated rate of attrition in the subscriber database based over the expected life of the underlying subscriber database after considering turnover. Accordingly, the Company amortizes the value assigned to subscriber database based on the actual depletion of the acquired subscriber database. The Company reviews the recoverability of its finite-lived intangible assets for recoverability whenever events or circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability is assessed by comparison to associated undiscounted cash flows. In the fourth quarter of 2009, and prior to ASC 350 evaluation, the Company recognized an impairment of $2.1 million under ASC 360.
Stock-Based Compensation
The Company records stock based compensation in accordance with ASC 718 formerly Financial Accounting Standard Board Statement of Financial Accounting Standards No. 123 (revised 2004). In estimating the grant date fair value at stock option awards and performance based restricted stock, we use certainthe Black Scholes option pricing model and other binomial pricing models where appropriate. The key assumptions and estimatesfor these models to derive fair value such asinclude expected term, rate of risk free returns and volatility. If different assumptions and estimates were used, the amounts charged to compensation expense would be different.
Revenue Recognition
The Company monetizes a portion of its user activities through subscription based sources by providing on-going monthly access to and usage of premium products and services. In general, customers are billed at standard rates, at the beginning of the month, and revenues are recognized upon receipt of information confirming an arrangement. The Company estimates a provision for refunds and credits which is recorded as a reduction to revenues. In determining the estimate for refunds and credits, the Company relies upon historical data, contract information and other factors. The estimated provision for refunds can vary from actual results.
The Company effectuates this type ofits subscription revenues through a carrier or distributors who are paid a transaction fee for their services. In accordance with ASC 605 formerly Emerging Issues Task Force (“EITF” No 99-19) “Reporting Revenues Gross as Principal Versus Net as an Agent”, the Company recognizes as revenues the net amount received from the carrier or distributor, net of their fee. Revenues are deferred if the probability of collection is not reasonably assured.
The Company monetizes a portion of its user activities through transactional based services generated primarily from (a) fees earned, primarily on a CPCCost Per Click basis, from search syndication services; (b) commission fees earned for the Company's search engine marketing ("SEM") services; (c) commission fees earned from marketing service arrangements associated with our affiliate marketing partners; and (d)(c) other fees for marketing services including data and list management services, which can be either periodic or transactional. Commission fee revenue is recognized in the period that the Company's advertiser customer generates a sale or other agreed-upon action on the Company's affiliate marketing networks or as a result of the Company's SEM services, provided that no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. All transaction services revenues are recognized on a gross basis in accordance with the provisions of EITF 99-19, due to the fact that the Company is the primary obligor and bears all credit risk to its customer, and publisher expenses that are directly related to a revenue-generating event are recorded as a component of 3rd part Media Cost.
Income Taxes
The Company uses the asset and liability method of financial accounting and reporting for income taxes required by ASC 740 formerly Statement of Financial Accounting Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes”. Under SFAS 109,ASC 740, deferred income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes.
We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Effective January 1, 2007, the Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes” subsequently codified under ASC 740-10-25 which resulted in no material adjustment in the liability for unrecognized tax benefits. The Company classifies interest expense and penalties related to unrecognized tax benefits as income tax expense. FIN 48ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109ASC 740 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with this Interpretation is a two-step process. The first step is recognition, in which the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.
The Company and its subsidiaries file income tax returns in the U.S and Canada. The Company is subject to U.S., Australian (prior years filing)federal, state and Canadian federal and state examinations. The statute of limitations for 20072008 and 20082009 in all jurisdictions remains open and are subject to examination by tax authorities.
Contractual Obligations and Off-Balance Sheet Arrangements
At December 31, 2008,2009, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.
The following table shows the Company’s future commitments for future minimum lease payments required under operating leases that have remaining non cancellable lease terms in excess of one year, future commitments under investment and marketing agreements and future commitments under employment agreements and note and interest payable as of December 31, 2008:2009:
| | Operating Leases | | | Employment Agreements | | | Investments & Marketing Advances | | | Note and Interest payable | | | Total Obligations | | | Operating | | | Employment | | | Total | |
2009 | | $ | 1,502 | | | $ | 1,333 | | | $ | 1,570 | | | $ | 1,925 | | | $ | 6,330 | | |
(in thousands) | | | Leases | | | Agreements | | | Obligations | |
2010 | | 1,246 | | | 1,250 | | | - | | | - | | | $ | 2,496 | | | $ | 1,165 | | | $ | 717 | | | $ | 1,882 | |
2011 | | 1,184 | | | 271 | | | - | | | - | | | $ | 1,455 | | | | 1,127 | | | | 135 | | | | 1,262 | |
2012 and thereafter | | | 5,912 | | | | - | | | | - | | | | - | | | $ | 5,912 | | |
2012 | | | | 886 | | | | - | | | | 886 | |
2013 | | | | 936 | | | | - | | | | 936 | |
2014 | | | | 987 | | | | - | | | | 987 | |
2015 and thereafter | | | | 3,618 | | | | - | | | | 3,618 | |
| | $ | 9,844 | | | $ | 2,854 | | | $ | 1,570 | | | $ | 1,925 | | | $ | 16,193 | | | | | | | | | | | | | |
| | | $ | 8,719 | | | $ | 852 | | | $ | 9,571 | |
In certain situations, the Company does have minimum fee obligations assuming the counterparty performs the required level of services. We feel that the level of business activity under normal and ordinary circumstances exceeds the minimum thresholds. Therefore, the amounts are not included in the table above.
Recent Accounting Pronouncements
Adopted in 2009
In August 2009, the FASB issued ASU 2009-05 “Measuring Liabilities at Fair Value” (“ASC 820-10”). ASC 820-10 is effective for interim and annual reporting periods beginning after August 27, 2009. It clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. We adopted ASC 820-10 for the year ended December 31, 2009 and it did not have a material impact on our consolidated financial statements.
In the third quarter of 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The ASC is the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC). The adoption of the ASC did not have an impact on the Company’s results of operations or financial position.
In June 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which has been superseded by the FASB codification and included in ASC 855-10. ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The effective date of ASC 855-10 is interim or annual financial periods ending after June 15, 2009. The adoption of ASC 855-10 did not have a material effect on the Company’s consolidated financial statements.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” EITF 03-6-1Securities” which has been superseded by the FASB codification ASC 260-10 gives guidance as to the circumstances when unvested share-based payment awards should be included in the computation of EPS. EITF 03-6-1ASC 260-10 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impactThe adoption of EITF 03-6-1 on our consolidated financial statements.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 ("SFAS 162"), The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles used in preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. This statement is effective November 15, 2008. The Company will adopt SFAS 162 as required, and its adoption isASC 260-10 did not expected to have an impact on the consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. FSP 142-3, “Determining the Useful Life of Intangible Assets” FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of FSP 142-3 on our consolidatedCompany’s financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities,” an amendment of FASB Statement No. 133. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact SFAS No. 161 may have its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which we refer to as SFAS No. 160. SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than us (minority interests) be clearly identified and disclosed in the consolidated statement of financial position within equity, but separate from the parent's equity. Any changes in the parent's ownership interests are required to be accounted for in a consistent manner as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008; however, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company will adopt SFAS No. 160 in our fiscal year ending December 31, 2009. However, the Company is currently evaluating the impact of SFAS No. 160 may have its consolidated financial statements.
On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of SFAS No. 157,” which defers the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This FSP delayed the implementation of SFAS 157 for the Company’s accounting of goodwill, acquired intangibles, and other nonfinancial assets and liabilities that are measured at the lower of cost or market until January 1, 2009.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141Rwhich has been superseded the FASB codification and included in ASC 805. ASC 805 establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141RASC 805 is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact SFAS 141R will have on adoption on our accounting for future acquisitions. Previously, any release of valuation allowances for certain deferred tax assets would serve to reduce goodwill, whereas under the new standard any release of the valuation allowance related to acquisitions currently or in prior periods will serve to reduce our income tax provision in the period in which the reserve is released. Additionally, under SFAS 141RASC 805 transaction-related expenses, which were previously capitalized, will be expensed as incurred. The adoption of ASC 805 did not have a material effect on our results of operations or financial position.
In FebruaryDecember 2007, the FASB issued SFAS No. 159, The Fair Value Option160, “Noncontrolling Interests in Consolidated Financial Statements,” which has been superseded by the FASB codification and included in ASC 810-10-65-1 and establishes requirements for Financial Assetsownership interests in subsidiaries held by parties other than us (minority interests) be clearly identified and Financial Liabilities (“SFAS 159”), which gives companiesdisclosed in the option to measure eligibleconsolidated statement of financial assets, financial liabilities and firm commitments at fair value (i.e.,position within equity, but separate from the fair value option), on an instrument-by-instrument basis, thatparent's equity. Any changes in the parent's ownership interests are otherwise not permittedrequired to be accounted for in a consistent manner as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value under other accounting standards. The election to use the fair value optionvalue. ASC 810-10-65-1 is available when an entity first recognizeseffective, on a financial asset or liability or upon entering into a firm commitment. Subsequent changes in fair valueprospective basis, for fiscal years beginning after December 15, 2008; however, presentation and disclosure requirements must be recordedretrospectively applied to comparative financial statements. Except for presentation and disclosure requirements, the adoption of ASC 810-10-65-1 had no material impact on the Company’s financial statements.
Not Yet Adopted
In June 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 earnings. SFAS 159 isASC 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 will be effective for financial statements issued for fiscal yearas of the beginning of the annual reporting period commencing after November 15, 2007. The Company elected not to adopt the provisions of SFAS 159 for its financial instruments that are not required to2009 and will be measured at fair value.
Acquisitions
On February 4, 2008, New Motion completed its merger with Traffix, Inc. (“Traffix”); a performance based online marketing company, pursuant to a merger agreement entered intoadopted by the companies on September 26, 2007. As a result of the closing of the transaction, Traffix became a wholly owned subsidiary of New Motion. Immediately following the consummation of the merger, Traffix stockholders owned approximately 45% of the capital stock of New Motion, on a fully-diluted basis. Each issued and outstanding share of Traffix common stock was converted into the right to receive approximately 0.676 shares of New Motion common stock based on the capitalization of both companies on the closing date of the merger. Effective the date of the close of the merger, New Motion commenced trading on The NASDAQ Global Market under the symbol “NWMO.”
On June 30, 2008, New Motion entered into an Asset Purchase Agreement with Ringtone.com, LLC, a Minnesota limited liability company and W3i Holdings LLC, a Minnesota limited liability company and the sole member of Ringtone.com. In consideration for the assets, the Company at the closing paid to Ringtone.com $7 million in cash. In addition, the Company delivered to Ringtone.com a convertible promissory note (the “Note”) in the aggregate principal amountfirst quarter of $1.75 million, which accrues interest at2010. We do not believe that the adoption of these revisions to ASC 810 will have a rate of 10% per annum (provided that from and after an event of default, the Note will bear interest at a rate of 15% per annum).
See Note 4material impact to the consolidated financial statements for a more detailed description of the Traffix and Ringtone.com acquisitions.
Pro Forma Financial Data
As more fully described in Note 4 to the consolidated financial statements, New Motion acquired all of the outstanding common shares of Traffix in accordance with the merger agreement as well as certain assets and liabilities of Ringtone.com, LLC in accordance with the asset purchase agreement. The following unaudited pro formaour results of operations are based on the historical statements of operations of New Motion, Traffix and Ringtone.com, LLC, after giving effect to the acquisition of Traffix by New Motion, using the purchase method of accounting and applying the assumptions and adjustments described in the related discussion below.
The pro forma combined statement of operations for the year ended December 31, 2008 is presented as if the acquisitions of Traffix and Ringtone.com had occurred on January 1, 2008. You should read this information in conjunction with the accompanying notes to the consolidated financial statements included herewith.
The pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisitions had been completed on the dates indicated, nor is it indicative of future operating results or financial position.
Financial statements of New Motion issued after the acquisitions reflects only the operations of TraffixIn October 2009, FASB approved for issuance Emerging Issues Task Force (EITF) issue 08-01, Revenue Arrangements with Multiple Deliverables which has been superseded by FASB codification and Ringtone.com after the acquisitions and have not been restated retroactively to reflect the historical financial position or results of operations of Traffix and Ringtone.com.
Traffix and Ringtone results of operations are derived from the unaudited management accounts of Traffix and Ringtone for the period from January 1, 2008 to February 3, 2008 and the period from January 1, 2008 to June 30, 2008, respectively.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
For The Year Ended December 31, 2008
(Dollars in thousands, except per share data)
| | New Motion | | | Traffix | | | Acquisition Adjustments | | | Total Traffix | | | Ringtone | | | Acquisition Adjustments | | | Total Ringtone | | | Combined Pro Forma | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenue-Subscription | | $ | 44,196 | | | | | | | | | | | | $ | 7,278 | | | $ | (310 | )(g) | | $ | 6,968 | | | $ | 51,164 | |
Net revenue-Transactional | | | 69,688 | | | | 10,637 | | | | (3,068 | )(a) | | | 7,569 | | | | | | | | - | | | | - | | | | 77,257 | |
TOTAL REVENUE | | | 113,884 | | | | 10,637 | | | | (3,068 | ) | | | 7,569 | | | | 7,278 | | | | (310 | ) | | | 6,968 | | | | 128,421 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues-third party | | | 74,541 | | | | 7,441 | | | | (310 | )(b) | | | 7,131 | | | | 5,675 | | | | (1,107 | )(h) | | | 4,568 | | | | 86,240 | |
Product and distribution | | | 9,749 | | | | | | | | - | | | | - | | | | | | | | - | | | | - | | | | 9,749 | |
Selling and marketing | | | 9,974 | | | | 266 | | | | (1,961 | )(c) | | | (1,695 | ) | | | | | | | - | | | | - | | | | 8,279 | |
General and administrative | | | 16,060 | | | | 1,596 | | | | (560 | )(d) | | | 1,036 | | | | 669 | | | | - | | | | 669 | | | | 17,765 | |
Depreciation and amortization | | | 5,867 | | | | 96 | | | | 275 | (e) | | | 371 | | | | 54 | | | | 14 | (e) | | | 68 | | | | 6,306 | |
Impairment of goodwill | | | 114,783 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 114,783 | |
| | | 230,974 | | | | 9,399 | | | | (2,556 | ) | | | 6,843 | | | | 6,398 | | | | (1,093 | ) | | | 5,305 | | | | 243,122 | |
(LOSS) FROM OPERATIONS | | | (117,090 | ) | | | 1,238 | | | | (512 | ) | | | 726 | | | | 880 | | | | 783 | | | | 1,663 | | | | (114,701 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER EXPENSE (INCOME) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income and dividends | | | (748 | ) | | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (748 | ) |
Interest expense | | | 147 | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 147 | |
Other income/expenses | | | 153 | | | | | | | | 28 | | | | 28 | | | | - | | | | - | | | | - | | | | 181 | |
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES | | $ | (116,642 | ) | | $ | 1,238 | | | $ | (540 | ) | | $ | 698 | | | $ | 880 | | | $ | 783 | | | $ | 1,663 | | | $ | (114,281 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME TAXES | | | (852 | ) | | | 551 | | | | (551 | )(f) | | | - | | | | - | | | | - | | | | - | | | | (852 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | |
(LOSS) INCOME BEFORE MINORITY INTEREST | | | (115,790 | ) | | | 687 | | | | 11 | | | | 698 | | | | 880 | | | | 783 | | | | 1,663 | | | | (113,429 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
MINORITY INTEREST, NET OF PROVISION FOR INCOME | | | (24 | ) | | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (24 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | |
NET INCOME | | $ | (115,766 | ) | | $ | 687 | | | $ | 11 | | | $ | 698 | | | $ | 880 | | | $ | 783 | | | $ | 1,663 | | | $ | (113,405 | ) |
Pro Forma Adjustments
The following pro forma adjustments are 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 unaudited pro forma consolidated statementelements of operations: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 June 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.
(a) Adjustments to sales: | | | |
| | | |
To eliminate Traffix sales made to New Motion | | $ | (1,961 | ) |
| | | | |
To eliminate Traffix sales made to Ringtone | | $ | (1,107 | ) |
| | | | |
(b) Adjustments to cost of revenue-third party: | | | | |
| | | | |
To eliminate Traffix expense paid to Ringtone | | $ | (310 | ) |
| | | | |
(c) Adjustments to sales and marketing: | | | | |
| | | | |
To eliminate New Motion expense paid to Traffix | | $ | (1,961 | ) |
| | | | |
(d) Adjustments to general and administrative: | | | | |
| | | | |
To adjust for various acquisition cost related to the merger of Traffix | | $ | (560 | ) |
| | | | |
(e) Adjustments to depreciation and amortization: | | | | |
| | | | |
To record additional amortization related to intangibles recorded in | | $ | 14 | |
purchase accounting to reflect such amounts from January 1, 2008 to the respective date of acquisition. | | $ | 275 | |
| | | | |
(f) Adjustments to income taxes: | | | | |
| | | | |
To eliminate Traffix tax expense which is now reflected in New Motion | | $ | (551 | ) |
| | | | |
(g) Adjustments to sales: | | | | |
| | | | |
To eliminate Ringtone sales made to Traffix | | $ | (310 | ) |
| | | | |
| | | | |
| | | | |
To eliminate Ringtone expense paid to Traffix | | $ | (1,107 | ) |
Not applicable.required.