Protagenic Therapeutics Inc (PTIX) 2010 Q4 法說會逐字稿

Welcome to Atrinsic conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions). I would now like to turn the conference over to Landon Barretto. Please go ahead.

Thank you, Jeremy, good morning. Thank you all for joining us today. Welcome to the Atrinsic 2010 fiscal year end earnings conference call. With me are Ray Musci, Atrinsic's Chief Operating Officer; and Thomas Plotts, the Chief Financial Officer.

In compliance with SEC requirements, I must read the following statement. Except for historical information, the matters discussed in the conference call are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. The factors that could cause results to differ materially are included in the Company's filings with the Securities and Exchange Commission. Forward-looking statements made during today's call are only made as of the date of this conference call, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Gentlemen, please proceed.

Thank you, Landon, and good morning. I would like to thank everybody for dialing in this morning and for your continued interest and support.

We filed our Form 10-K for 2010 this morning under an appropriate -- an extension. It did take us a bit longer than usual to complete our work. With the significance of the changes that occurred and the Company has undertaken within the past fiscal year, especially in the fourth quarter, we simply required some additional time to complete our audit and the appropriate filings. One may understand that we simply have fewer resources and people doing many tasks and we are attempting to exercise the due care and diligence required to ensure the completeness and correctness of our filings.

I would like to take this opportunity to thank our employees, specifically our finance team, Mr. Wagner and Mr. Plotts, specifically, as well as the team at KPMG, for their continued work and the efforts they put forth to assist the Company in meeting its objectives.

In recap of 2010, it was certainly a significant one for the Company. As we discussed on our last call, the Company had initiated and continues to engage in a meaningful, deliberate and comprehensive redefinition of its business, specifically how we operate and what it is that we actually do. Certainly, much has occurred in 2010 to that aim, especially in the fourth quarter, and much continues to occur in the first two quarters of this year.

In our fourth quarter, specifically October, we announced the amendment of our agreement with Brilliant Digital Entertainment to acquire those assets associated with the Kazaa music subscription business. We continue to narrow our focus in building two primary business units, Atrinsic Interactive, our agency business; and Kazaa, our digital entertainment subscription. We continue to make significant progress towards those objectives.

We told you last quarter that in moving toward that objective our aim was also to significantly reduce our operating costs by 30% to 50% and consolidate those activities here in New York. Much of that has been accomplished. As one key measure, we have reduced our internal headcount from 140 at the beginning of the year to just over 40 by the end of the year. We continue to make good progress but still have some items we desire to accomplish specifically related to those assets and resources devoted to Kazaa that we are attempting to acquire from BDE.

As we consolidate our lead generation and transactional-based revenue activities within and around the Atrinsic Interactive, and while smaller in revenue in terms of 2010 over 2009, we have developed a much more diversified and scalable business from a standpoint of personnel and technology resources. Sitting here in Q1 of 2011, we have successfully launched our new affiliate platform which features and affords our customers a robust tracking, distribution and brand protection features.

New advertisers are coming online at a very compelling rate and we continue to see some margin expansion and a little bit of revenue growth in this quarter over last. As we continue to develop and deploy our investments in our proprietary affiliate, [NSCO] distribution technologies, and here, too, we believe we are making good progress and expect we will be making some significant announcements here in the coming months.

As for Kazaa, we continue to work towards our integration and migration of these core assets. We're also continuing with development and marketing efforts. As we stated last quarter, we have been and continue to develop and to push into all things mobile. Last month, as we indicated we would last quarter, we implemented on our site optimization for mobile browsers that would allow our customers to access the Kazaa service from their iPhones and iPads simply by navigating to the Kazaa.com website without the requirement or downloading or installing a dedicated application.

Our development efforts and applications specifically for mobility devices continues and will possibly take it a bit longer then we might have initially hoped, we are making good progress. We continue to work hard to close our acquisition on the Kazaa assets from Brilliant Digital, and we expect to complete that transaction in the coming months. We expect to be in a position to begin releasing our mobile products over the course of the next few quarters, and here, too, we are making very good progress.

Many of the issues we are dealing with are admittedly somewhat fluid by nature. They are extremely challenging and not entirely within our sole control or of our own calendar. We may find that our originally targeted dates for certain objectives may slip, especially where we are fundamentally changing and redefining our business as well as attempting to drastically reduce costs in a very challenging environment, let alone in a very dynamic market.

Our working capital has and will continue to become very tight as we attempt to apply resources where we need to achieve our stated objectives. And as discussed further on our annual report, we need to raise additional capital in the near future. We have recently engaged advisors to attempt to assist us in determining just how we might best address our needs and are reviewing many alternatives in how we might best move forward.

While in certain aspects it may not be pretty, we remain committed to our original objectives, and we certainly endeavor to continue to update our shareholders as best we can.

And with that, we will turn it over to Tom.

Thanks, Ray, good morning, everyone. As Ray indicated, our 10-K is now on file with the SEC. There is no change in the numbers from the earnings release that we put out on March 31. And as the guy responsible for the Company's external financial reporting, I appreciate your patience as we make sure that our annual report was accurate and addressed the multitude of activity that occurred in 2010, which is what we are here to discuss this morning.

So for my prepared remarks, I will spend some time discussing our fourth quarter and fiscal year 2010 financial results, including providing some information regarding key metrics that we use to track our business. And after I finish, Ray and I will be able to respond to some questions that you may have.

I will begin with an important note about our current liquidity. At December 31 we had cash of $6.3 million and working capital of $2.1 million. We do need to raise additional capital, as Ray indicated, and to that end we are currently working with a financial adviser to assist us in the structuring of that financing and to engage an investment bank to raise debt or equity capital to fund immediate cash needs and to finance the longer-term growth of the Kazaa business. Additionally, we continue to evaluate the sale of certain of our assets and business in order to further focus management's attention and to reduce our cost structure.

I will now turn to our operating results for the fourth quarter and for the fiscal year ending December 31, 2010. Revenues decreased 42% to $40 million for 2010 compared to $69 million in 2009. Subscription revenue decreased 15% to $19 million for 2010 compared to $22.2 million for 2009. Kazaa revenue, which is part of our subscription revenue, now represents the majority of our subscription-based revenue during 2010.

Now, in terms of key metrics, at year end we had 205,000 subscribers across all of our subscription products. Now, ARPU, which is ARPU, our average monthly revenue per user, was approximately $6.11 for 2010, which is 22% higher than a year ago. This increase in ARPU was due to the higher retail price point of the Kazaa digital music service and was also the result of improvements in billing efficiency. At the end of year we had approximately 77,000 paying Kazaa subscribers.

Transactional revenue, which is primarily comprised of revenue generated by Atrinsic Interactive, which, as Ray indicated, is our search agency and affiliate network business, decreased 55% to $21 million in 2010 compared to $46.8 million for 2009. Now, this decrease was due to some loss of accounts, a reduction client advertising spends and was also the result of the restructuring of our lead generation business. Revenues for the fourth quarter of 2010 were $7.8 million compared to $13.7 million for 2009, which is a 43% decrease. Subscription revenue decreased 47% to $3.8 million for the fourth quarter in 2010 compared to $7.2 million in 2009. This was the result of just a total lower -- a lower number of subscribers across all of our products.

Now, transactional revenue also decreased in the fourth quarter to $4 million compared to $6.5 million a year ago. As discussed earlier, the decrease in the transactional revenue in the fourth quarter was attributable to a net lower number of agency accounts but also reflects this restructuring of our transactional services, which involves the elimination of unprofitable or marginally profitable lead generation and marketing programs, which we did during much of 2010.

Our third-party media costs decreased 48% to $22.5 million for 2010. Most of the decrease was due to the decline in transactional related revenue, and the rest of the decline was the result of significantly lower subscriber acquisition rates. During 2010 we moderated and eliminated the rate of subscriber acquisitions in response to the need to preserve cash and also in anticipation of improvements and enhancements to the Kazaa digital music service.

During 2010 we estimate that our subscriber acquisition cost, which is the cost to acquire a subscriber, was approximately $15.34. Now, we suspect that our subscriber acquisition cost will fluctuate from period to period, due to a number of different factors.

Now, product and distribution expense increased by $9.7 million to $20.2 million in 2010 compared to $10.5 million in 2009. Now, this increase was driven by important expenses, such as the cost of licensed content and product development costs. Both of these, the license content costs and the development costs, were a result of Kazaa.

Product development costs were approximately $3.8 million in 2010 and $1.5 million in the fourth quarter. This was reflecting the Company's product development activity during this period. Now, we expect this to moderate in the first half of 2011 as we conclude some of our development objectives -- the mobile web browser, which is already released, and our mobile apps, which we expect to release in the near-term.

Now, general and administrative expenses decreased by approximately $5.6 million in 2010 to $9.1 million. This decrease was due to our restructuring efforts to reduce our workforce, as Ray indicated, to 41 people at the end of the year, and a reduced need for consultants and other efforts by us to reduce the Company's level of general overhead.

Now, before we continue with some items further down on our P&L I would like to update you on the progress we're making in our restructuring. As you know, in connection with the announcement to purchase the Kazaa assets in November of 2010, we also undertook a restructuring of our existing operations to rapidly reduce certain expenditures. The restructuring involves the consolidation of all of our activities in one location in New York and includes the closure of our Canadian technology facility and the retrenchment of approximately 40 employees in the US and in Canada.

In addition to the restructuring of our Canadian operations, which is substantially complete at this time, we intend to transition the Kazaa functions and activities that are currently being carried out by personnel and contractors at Brilliant Digital, including development, back-end and marketing operations to US from Sydney, Australia. In the fourth quarter of 2010, the Company took a $4.9 million intangible impairment charge, further marking down the value of intangible assets the Company has previously acquired. We now have approximately $3 million in intangible assets on our balance sheet.

Now, adjusted EBITDA for 2010 for the full year was a $4.7 million loss compared to a $7.1 million loss for 2009. Adjusted EBITDA for the fourth quarter of 2010 was a loss of $5.2 million compared to a loss of $1.5 million for the fourth quarter of 2009. Now, adjusted EBITDA is a non-GAAP measure; please refer to the supplemental disclosure regarding non-GAAP measures in our press release. Excluding the effect of intangible impairments in 2010 and 2009, net loss was $14.8 million with $2.73 per share in 2010 compared to $12.2 million or $2.36 per share for 2009. Now, for the fourth quarter of 2010, our net loss was $3.3 million. This is excluding intangible impairments. Our net loss was $3.3 million or $0.54 of loss per share compared to a loss of $6.6 million or $1.23 per share a year ago.

Now, before we open up to questions I'd just like to add a couple points to provide a brief update on the status of the Kazaa acquisition. This transaction is expected to close once we have gained approval from our shareholders to do so, and also upon the transfer of the Kazaa assets to us. We expect to issue an annual meeting proxy statement shortly, which, in addition to customary annual meeting matters, will also include a stockholder proposal to approve the Kazaa transaction.

That's the end of my formal remarks. Now I think we can open it up to questions. Landon?

Jeremy, please poll for questions.

(Operator instructions) John Gilliam, Point Clear Strategic.

Can you give us some color on Q1, how things are going with each division? Do you feel like Q4 represents a trough for the revenue for each division?

Go ahead, Ray.

I think the -- I wouldn't call it a trough, John. We see our revenues actually pretty consistent in the first quarter over fourth, but we are seeing, again, some progress in certain areas. I think our subscription revenue and acquisition rate is actually beginning to pick up substantially, at least toward the tail end of this quarter.

The agency business is about the same as it was last quarter, quarter over quarter. But there, too, I think there's some significant implementation on the affiliate platform that they have taken or just gotten launched for March. So first quarter, I think, is going to be pretty much the same. Second quarter, again, I think we will start to see a lot of the stuff that we were working on begin to manifest itself into the revenue and expense line.

Okay. Can you give a breakdown of the non-Kazaa subscribers between -- I don't think I've seen that in the K -- the non-Kazaa subscribers? I'm assuming the remainder of those are split somewhat between casual gaming and ring tone subscribers. Would that be accurate?

Yes. I think we have a number of different products, including ring tone and as well as GatorArcade, which is casual gaming, as well as lifestyle products, which is what we call our voicemail and enhanced long-distance service. So it's really, actually, quite an even mix across a lot of those other products, and it's also a fairly even mix across our different billing platforms as well. We don't specifically disclose those numbers, though, John. But I can say that the bulk of our growth as it relates to our subscriber acquisition is obviously coming from the Kazaa subscription service.

All right, okay. I noticed in the K that you had, I believe it was, around $3 million or so reduction in cost of media; it was titled cost of media, third party. And I was curious if this -- am I correct, that's for the Kazaa service, that portion of the decrease? I backed into that from -- I think you had broken it out 85% to the transactional side, 15% to the subscription side; I believe that's correct. And to get that $3 million figure -- but I'm curious; is that primarily related to marketing spend for the Kazaa service that was a decrease from the prior quarter?

Well, I think the Kazaa spend this year has moderated, as we've indicated. But more importantly, the spends across our other subscription products, it's a very different -- we just don't have that same focus on those other products as we do on Kazaa. So we haven't -- a lot of that reduction is as a result of lower spends on those other products that we are not actively marketing.

Okay. How would you characterize the Kazaa spend in Q4 versus Q3?

I think, as you can see by the uptick in the number of Kazaa subscribers from the end of the third quarter to the end of the fourth quarter and certainly based on where we are tracking today, I think you could -- there was an increase, a moderate increase in Kazaa spends.

Okay, and that's really what I'm getting at, trying to determine if -- that's a fairly substantial increase, almost 20% Q over Q, which is impressive. And I was trying to determine was there a significant uptick in the marketing spend that we should attribute that to, or is it because we've found channels where we are able to get lower subscriber acquisition cost? Is there less attrition? Are we getting more organic, word-of-mouth type of subscribers or some combination of those three that led to that large increase?

Yes. Look, I think it's -- unfortunately, it's a combination of all those factors. There's increased utilization and activity on Kazaa.com with our existing subscribers; we see that. There has been a number of product enhancements and improvements that have occurred with Kazaa over the last six months or so. So we expect that we will see improvements in LTVs as a result of those -- that kind of increased activity.

Now, we are cognizant of that as we spend money on media. Now, it's also -- we are constantly looking at different media sources. And we are not necessarily looking for the cheapest media source; right, because that may not necessarily equate into the best subscriber. But we are looking for the right mix. So it's a constant analysis and evaluation for us. And we remain committed to purchasing subscribers at cost-effective rates to build the subscriber base. So it's a number of different factors, and I can't point to any one in particular, John, that would necessarily be the silver bullet.

It's a mix. And I think the -- it's the fourth quarter, so volume, traffic and the cost of the traffic generally on the Internet also starts to see a bit of uptick, just in the fourth quarter. So as Tom points out and as you point out, our media spend was slightly higher quarter over quarter. We are seeing improvements in our customer retention. We are seeing lower customer churn, higher usage, and that's a reflection of not only just the media we are spending but, as you point out, people coming to the website and actually staying longer.

I would say that we are seeing internally -- and these are things we look at every day -- we are seeing, I would say, modest increases in all those areas. So from that standpoint we are actually very excited about those things that we are accomplishing, which makes us all that more committed to our objectives.

Sure, absolutely. And that was my next question; I guess you answered it, that you are seeing an increase in LTVs. Is that correct? Did I understand you right; you are seeing the average --

I think we are seeing improvements in our LTVs, lower refunds. I also think it's like anything else; once we get our applications launched, that that will have a much more significant impact on retention.

Yes, and I would say that the launch of the mobile offering already -- I would expect to start to impact that. But I guess, what, you guys probably only have -- you don't even have a couple of months under your belt with that yet. So that's encouraging, that you are already seeing it at a measurable level from my standpoint.

Yes, I would agree with you.

(Operator instructions) John Gilliam, Point Clear Strategic Capital.

I had one more question. This quarter you guys -- obviously, this is not optimum, the approach -- I'm sure you did not plan to file late. But wanted to get an idea; going forward, would it be fair to say that we would have a more standard type approach in the dissemination of the quarterly results, that we would have some -- shareholders would be informed a few days to a week ahead of time that the results would be filed prior to the deadline? Would that be fair to say, going forward? Like with the quarter one results, should we expect that? Or do you anticipate there being delays of a similar fashion?

I would hope that we wouldn't have delays, John. Obviously, nobody likes to run their business that way. We're trying to be as transparent and open as possible and get our numbers out there. There's just a lot in flux, I think, as I said. 2010 and the annual report this year had a lot more challenges to it just because there was so much that occurred. Certainly, I don't think the Q this quarter is going to take quite the effort, because there wasn't as much. A lot of that heavier lifting is behind us. But I still wish -- I still have fewer people doing many tasks. So all I can say is, I know the team is working really hard. We're doing the best we can. I don't like running past deadlines, and we like to make sure that the information is out in the market as timely as possible so at least we can talk about it.

Again, all I can do is apologize. I know the team here is working really hard. There was just -- I think there was just a lot more than usual to get through for the annual report.

Sure, sure, I understand.

So I would say going forward, obviously it's our endeavor to hit deadlines, if not exceed them.

And I think I would just reiterate, John, again, I certainly take responsibility as the CFO of the Company for the extra week or so that we needed for filing the K. But we are on track with first-quarter results. We expect that we would have the K -- the Q filed within the time allowed and that we would have an earnings release probably concurrent with that filing of our first-quarter Q, which would the around the middle of May.

Okay. Do you anticipate releasing any metrics, just nonfinancial metrics, prior to that time along the lines of updates to subscriber numbers and such for the end of the Q1?

I think that we will, within our release, we will be able to provide March 31 first quarter of metrics, but we don't have any plans at this point to provide anything additional between now and then.

Okay, all right, thank you.

(Operator instructions). All right, gentlemen, I don't show any further questions in queue. Please continue.

Tom, Ray, do you have any further comments?

We are good. I want to thank everybody for their patience, their interest and their continued support.

Thank all of you for attending.

This concludes the Atrinsic conference call. Thank you for your participation. You may now disconnect.