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ATRINSIC, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Plan of Operation(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Plan of Operation section analyzes the major elements of our consolidated balance sheets, statement of operations and statement of cash flows. This section should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information appearing elsewhere in this Annual Report. Historical Background We were originally incorporated under the name Millbrook Acquisition Corp., on or about February 3, 1994. In May, 2007, Millbrook Acquisition Corp. changed its name to New Motion, Inc. In February, 2008, New Motion, Inc. merged with Traffix, Inc., pursuant to which Traffix, Inc. became a wholly-owned subsidiary of New Motion, Inc. In June, 2009, New Motion, Inc. changed its name to Atrinsic, Inc. Prior to our bankruptcy filing in 2012, we were a marketer of direct-to-consumer subscription products and an Internet search-marketing agency. We sold entertainment and lifestyle subscription products directly to consumers, which we marketed through the Internet. We also sold Internet marketing services to our corporate and advertising clients. However, by early 2012, we had suspended all operation of these businesses. In addition, until March 30, 2012, we were a reporting company under the Exchange Act and filed periodic reports with the SEC. On March 30, 2012, we filed a Form 15 with the SEC, terminating our obligation to file periodic reports under Sections 13 and 15(d) of the Exchange Act. On June 15, 2012, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code and terminated all remaining employees. Since then we have been managed by several outside legal and financial professionals. In June 2013, the United States Bankruptcy Court, Southern District of New York confirmed our Plan of Reorganization subject to our acquisition of a 51% controlling equity interest in Momspot, which was completed on July 12, 2013. Pursuant to the terms of a Membership Interest Purchase Agreement, we acquired a 51% equity interest in Momspot in exchange for our commitment to contribute up to $165,000 of working capital to Momspot over a two-year period to fund its business development and operations. Simultaneous with the acquisition, we became a party to the Momspot Operating Agreement and the manager thereunder. Momspot is a development stage company whose goal is to be the premier specialty retail affiliate marketing company targeting women between the ages of 24 and 45 who are either mothers or expecting their first child. Momspot current constitutes our only business operation. Pursuant to the Plan of Reorganization, all outstanding debt was converted to equity with the secured creditors receiving 4,600,000,000 shares, $0.000001 par value per share, of our Series A Convertible Preferred Stock, general unsecured creditors receiving an aggregate of 300,000,000 shares of our Common Stock, par value $0.000001 per share, and pre-bankruptcy petition common stockholders having their pre-bankruptcy shares exchanged for an aggregate of 100,000,000 shares of Common Stock. As of July 12, 2013, we adopted fresh start accounting in accordance with ASC 852. As a result, we are deemed a new entity for financial reporting purposes. Accordingly, the financial statements on or prior to July 12, 2013 are not comparable with the financial statements for periods after July 12, 2013. Operating activities between July 1, 2013 and July 11, 2013 were insignificant. Results of Operations We have had no operations since May 2012. We have no revenue. For the period from July 12, 2013 to June 30, 2014, we incurred a loss from operations of approximately $975,000. It can be primarily attributed to stock-based compensation expense ($274,909) as a result of the options issued in February 2014; insurance expenses of approximately $83,000; and professional expenses of approximately $517,000 related to legal services, consulting services and accounting services. During the period, we recorded $204,000 of professional fees related to a post confirmation liquidation plan and approximately $49,000 of net loss attributable to non-controlling interest. Liquidity and Capital Resources We continually project anticipated cash requirements, which may include business combinations, capital expenditures, and working capital requirements. In accordance with the Plan of Reorganization, all of our pre-bankruptcy filing accounts payable were converted into equity, which has a favorable impact on liquidity. As of June 30, 2013, we had cash of approximately $717,000 and negative working capital of approximately $17,226,000. As of June 30, 2014, we had cash of approximately $101,000 and working capital deficit of approximately $71,000. During the period from July12 to June 30, 2014, we used approximately $790,000 of cash for operations, which included payments to legal and accounting professionals, payments to consultants to develop our website, insurance, business licensing fees, stock-based compensation expenses and other administrative expenses. This accounted for the total decrease in cash for the period. 29 We anticipate only a modest amount of affiliate and advertising revenue over the next 12 to 24 months, which will only have a negligible impact on our future capital requirements. As such, we need to raise additional capital to cover our budgeted operating and capital expenditures. Our operating budget for each of the current (i.e., year ending June 30, 2015) and ensuing (i.e., year ending June 30, 2016) fiscal years is $375,000, or $750,000 in the aggregate. The largest single line items in our budget are marketing ($115,000 to $150,000 per year) and development ($80,000 to $130,000 per year), which is essentially the cost of one to two full-time equivalent software engineers and/or programmers. In order to enable us to continue to sustain our operations until we consummate a financing, on August 15, 2014 each of our two principal stockholders loaned us $45,000, or $90,000 in the aggregate, which should provide us with sufficient working capital for an additional 90 days. We have recently begun to explore new financing opportunities. Going Concern We intend to finance operating activities through: • managing current cash on hand; and • seeking additional funds raised in the future. Our financial statements for the year ended June 30, 2014 indicate there is substantial doubt about our ability to continue as a going concern as we are dependent on our ability to obtain short term financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis in order to attain profitability, as well as successfully obtain financing on favorable terms to fund our long term plans. We need to raise additional capital to cover our budgeted operating and capital expenditures. If our capital raising efforts are not successful, we might not be able to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we not able to continue as a going concern. Plan of Operations Business Overview Since emerging from bankruptcy, we are a development stage company in the process of developing an online affiliate marketing and comparison shopping site targeting the Mommy Market. Our website, www.momspot.com, will aggregate thousands of consumer retail products from dozens of retailers and market these products to the Mommy Market. Our website will offer basic e-commerce functionality, including product search and browsing, product search filtering, and detailed product specifications. Users will also have the ability to share their thoughts and impressions about the products they choose either via email or social networks of which they are a member, and will also be able to save specified products to their customizable "My Momspot", which they can view or share at a later time. Users will also have the ability to cultivate a network of other Momspot users, or invite new individuals to become members of Momspot, which provides a forum for users to interact with each other and to provide personal product recommendations and reviews. We are presently using CJ Affiliate by Conversant, formerly known as Commission Junction, to build our network and to source product data from various merchants and to manage our relationships and affiliate commissions generated from these merchants. We have already secured affiliate relationships with approximately 29 merchants. We are also a member of a second affiliate network, although we have not yet activated this data feed. Finally, we also plan to enhance and supplement our product database by working with an existing comparison shopping website. We released the first live version of Momspot (v1.0) to www.momspot.com on March 1, 2014. We are not promoting the current live site, nor implementing any marketing effort as this release was used primarily for testing purposes, allowing us to gauge Momspot's organic user acquisition capabilities in addition to allowing us to analyze the efficacy of our site design and layout by measuring user interaction with various website elements and pages. 30 Despite the absence of any promotional activity, since its release more than 1,800 users visited our website, accruing more than 4,000 page views, clicking on 639 merchant products and conducting 12 sales transactions. In May 2014, we released version 2.0 of the Momspot website, which contains a newly redesigned homepage and other site functionality. Based on site testing and user feedback, we devised a number of homepage design changes that we anticipate will improve user engagement and bring more value to our user base. These changes include reducing the height and size of the primary homepage image and to add tabbed navigation underneath the primary homepage image that allows for immediate product browsing and filtering. We also added new tabs that will allow users to immediately view products that we have curated based on child age and product importance, products that are most popular among our users, products that are on sale or have been discounted, as well as provide immediate access to the users' My Momspot area and to our editorial and blog content. Simultaneously with the release of Version 2.0, we activated our marketing strategy to maximize the site publicity and public awareness of this new release. These strategies include: 1. Activating Momspot's four main social networks on Facebook, Twitter, Pinterest and Google+ through frequent posts of products and content that all link to the Momspot website; 2. Paid Search, also referred to as Search Engine Marketing (SEM), via the major search engines Google and Bing; 3. Activating paid advertising via social media channels; 4. Hiring a public relations firm to help us get placed in popularmagazines and other publications; 5. Sponsoring local and national events and trade shows, such as the Biggest Baby Shower in NYC, MommyCon, Brooklyn Baby Expo, etc.; 6. Sponsoring contests that are marketed to Momspot users for which prizes may include a paid baby shower or baby reveal party; and 7. Encouraging the Momspot user network to share products and make posts on their social networks, as well as to host Momspot-sponsored events. We anticipate significant growth in users and increased revenues as a result of the release of Version 2.0. However, with this increase in site usage, we will require the support of additional resources to ensure consistent operational readiness of the website. Development Milestones Upcoming development milestones include: · Devise development strategy for release 3.0. We are also in the process of devising a development strategy for building out the components to be included in the next version of the website (release 3.0), which include the following four initiatives: 1. Partnering with an existing comparison shopping company in order to leverage their merchant product database, product attribution and taxonomy. We are in advanced discussions with a number of comparison shopping engines, including PriceGrabber, Shopping.com, and Pronto.com, to use their existing product database to enhance and supplement our existing product database that is currently procured through our integration with CJ Affiliate by Conversant. This will require the development of a new back-end data solution that will integrate with the comparison shopping site we select, as well as a tool to administer an additional layer of intelligence that allows us to assign additional product attributes and display logic to products procured from this new source. This new data back-end would allow us to provide our users highly curated buying guides that recommend products users may need given their life circumstances, motherhood stage, and age of children. 31 2. Seamlessly integrating a blog and editorial area into the website. We plan to add a new blog section onto our website that will seamlessly integrate a Wordpress blog via a link from the Momspot website. The design of the blog will mimic the Momspot style guidelines, and will include email integration such that users who have opted in receive email notifications of new blog posts. This initiative includes the identification of potential content partners and bloggers with whom Momspot will work in order to procure content. This may take the form of either a syndication partnership, where we will wither pay specific bloggers or content sites in order to syndicate specific posts on the Momspot website or a freelance agreement with specific bloggers to write exclusive content for Momspot. · Version 3.0 Development and Testing. Development of release 3.0 initiatives will be done by a different web development resource than the one that worked on version 1.0. As with version 1.0 and 2.0, there will be extensive development testing to ensure functionality has been built properly and data is being presented properly. Moreover, there will be user acceptance testing (UAT) performed by real users in order to determine the efficacy and usability of site features. Possible feature and functionality changes may occur as a result of this testing. Human Resources Momspot has only one employee - Barry Eisenberg - who serves as its chief executive officer. Mr. Eisenberg is responsible for the day-to-day management of all aspects of Momspot, which includes identifying and hiring contractors, managing our financial matters, devising and implementing the marketing strategy, procuring and managing affiliate relationships, conducting market research and focus group testing, website testing, communicating with investors, and overseeing contractors work including design and development of the website. Third-party contractors are utilized to assume the following critical roles: 1. Defining user experience and functional requirements 2. User interface and brand design 3. Front and back-end web development 4. Legal 5. Accounting Eventually, we hope to hire full-time individuals to assume these critical roles. · Human Resources. Our most urgent need at the moment is to hire a full-time technical resource that has full-stack website development experience and can both develop website code as well as manage other development resources. It is preferable that this person be located in New York City where we are currently located. Until this individual is hired, development and deployment of new website releases is at risk of being significantly delayed. At this time, we do not have the financial resources to hire this type of individual. · Ongoing Site Support and Maintenance. In addition to performing and managing larger development projects, we require a technical resource who can provide on-going technical support and site maintenance to ensure operational readiness at all times. As is common with websites, minor issues may arise that require someone with technical expertise to resolve. Having an individual with technical skills available to the company 24x7, with an expectation of quick turnaround, will be essential to ensure the uninterrupted operation of our website. In the near-term, if we cannot hire a full-time resource, this role will be outsourced to a third party service provider. Financing - Capital Needs Momspot was initially capitalized with $165,000 of which approximately $105,000 has been used by Momspot through June 30, 2014 for website design and development, website infrastructure and hosting services, management compensation and legal and accounting fees. Although www.momspot.comwent live in March 2014, to date we have had no meaningful revenues. Moreover, we anticipate only a modest amount of affiliate and advertising revenue over the next 12 to 24 months, which will only have a negligible impact on our future capital requirements. 32 Our operating budget for each of the current (i.e., year ending June 30, 2015) and ensuing (i.e., year ending June 30, 2016) fiscal years is $375,000, or $750,000 in the aggregate. The largest single line items in our budget are marketing ($115,000 to $150,000 per year) and development ($80,000 to $130,000 per year), which is essentially the cost of one to two full-time equivalent software engineers and/or programmers. In order to enable us to continue to sustain our operations until we consummate a financing, on August 15, 2014, each of our two principal stockholders loaned us $45,000, or $90,000 in the aggregate, which should provide us with sufficient working capital for an additional 90 days. Each loan evidenced by a secured promissory note bearing interest at the rate of 5.0% per annum. The entire original principal amount of the note and all accrued and unpaid interest thereon is due and payable on July 31, 2015. We have recently begun to explore additional financing options. We need to raise additional capital to cover our budgeted operating and capital expenditures. If the capital raising efforts are not successful, we might not be able to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we not be able to continue as a going concern. Data Analytics As with all commercial websites, understanding users' behaviors and interaction with the site is important to know in order to optimize the site layout and design to ensure maximum user engagement and conversion rates. Conversions include any 'high-value' actions made by users on the site - e.g. clicking the "Shop Now" button, sharing products via social networks, etc. We have created a detailed measurement plan to regularly track and collect site data and user interactions in order to make recommendations for site enhancements in order to optimize user interaction. We plan to leverage Google Analytics as the platform and tool by which we will collect and analyze this data. This plan focuses on the analyzing the number of unique visitors per month, page views per visit, visit duration, bounce rate, and defined user conversions. Presently, we have defined the following as user conversions: · User registration · "Shop Now" button click · Product share via social button · Product share via email · User profile completion · Product save · Product review · Price alert setup We will implement a regular process by which we analyze the data collected through this data measurement plan, and then make recommendations for site tweaks/enhancements based on this analysis. We may conduct A/B testing as a result of these recommendations, or simply make the changes directly to a single instance of the production environment and then analyze the data of the modified site against the previous results. Contractual Arrangements We do not have any material contractual relationships. Off Balance Sheet Arrangements We have no material off-balance sheet arrangements that are likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. 33 Significant Accounting Policies We have identified significant accounting principles that affect our consolidated financial statements by considering accounting policies that involve the most complex or subjective decisions or assessments as well as considering newly adopted principals. They are: Fresh Start Accounting. Effective July 12, 2013 (the "Effective Date"), we adopted fresh start accounting and reporting in accordance with FASB ASC 852. We are required to apply the provisions of fresh start reporting to our financial statements, as the holders of our voting shares pre-bankruptcy received less than 50% of our voting shares post-bankruptcy and the reorganization value of our assets immediately before the date of confirmation was less than the post-petition liabilities and allowed claims. We determined that our fair value on the Effective Date was zero. Fresh start reporting generally requires resetting the historical net book value of assets and liabilities to fair value as of the effective date by allocating the entity's enterprise value as set forth in the Reorganization Plan to its assets and liabilities pursuant to accounting guidance related to business combinations. The financial statements as of the Effective Date report our results with no beginning retained earnings or accumulated deficit. Thus, any presentation after the Effective Date represents the financial position and results of operations of a new reporting entity and is not comparable to prior periods. The unaudited condensed consolidated financial statements for periods ended prior to the Effective Date do not include the effect of any changes in capital structure or changes in the fair value of assets and liabilities as a result of fresh start accounting. In accordance with FASB ASC 852, our pre-emergence charges to earnings of $778,000, recorded as reorganization items result from certain costs and expenses relating to the Reorganization Plan becoming effective, including the cancellation of certain debt upon issuance of new equity. 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 ownership of more than 50% of the voting stock of an entity creates a subsidiary. The financial statements of the parent and subsidiary are consolidated for reporting purposes. Use of Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Audit Principles ("GAAP") 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, 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. Cash and Cash Equivalents. We consider all highly liquid instruments with a maturity of less than three months when purchased to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short-term maturity of these instruments. Fair Value Measurement. The fair value of Momspot was determined based on valuation performed by management, which took into consideration, where applicable, cash received , market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. Earnings (Loss) Per Share. Basic earnings per share ("EPS") is computed by dividing reported earnings by the weighted average number of shares of common stock outstanding for the period. Diluted EPS includes the effect, if any, of the potential issuance of additional shares of common stock as a result of the exercise or conversion of dilutive securities, using the treasury stock method. Potential dilutive securities include outstanding stock options and warrants. Recently Issued Accounting Pronouncements In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. We elected to adopt this ASU effective with its Registration Statement on Form 10 filed with SEC on July 2, 2014. The adoption resulted in the removal of previously required developmental stage disclosures. 34 In August 2014, the FASB issued ASU 2014-15 on "Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern". Currently, there is no guidance in U.S. GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management's plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for public and nonpublic entities for annual periods ending after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of ASU 2014-15 on our consolidated financial statements. |