Protagenic Therapeutics, Inc.\new - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the fiscal quarter ended September 30, 2015

or

For the transition period from _______________ to _______________

Commission File Number: 000-51353

ATRINSIC, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       x   No        ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes       x   No        ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       ¨   No        x

As of November 11, 2015, there were 400,000,000 outstanding shares of the registrant’s common stock.

ATRINSIC INC.

Form 10-Q Report

For the Fiscal Quarter Ended September 30, 2015

TABLE OF CONTENTS

Part I. Financial Information

Item 1. Financial Statements

ATRINSIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

ATRINSIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share and per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

ATRINSIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

ATRINSIC, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data) 

NOTE 1 - NATURE OF OPERATIONS

On June 15, 2012, the Company filed Chapter 11 in the United States Bankruptcy Court in Southern District of New York (Case No. 12-12553). As of that date, the Company terminated all remaining employees and ceased its normal business operations.

The Company emerged from Chapter 11 on June 26, 2013, at which time the Plan of Reorganization was conditionally confirmed by the United States Bankruptcy Court, Southern District of New York. The confirmation was subject to the consummation of the Company’s acquisition of a 51% controlling interest in Momspot LLC (“Momspot”), which was subsequently completed on July 12, 2013 (“Emergence Date”). Momspot’s 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. The Emergence Date was the date the Company adopted fresh start accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852. The adoption of fresh-start accounting resulted in the Company becoming a new entity for financial reporting purposes. Momspot is currently the Company’s business operations. The Company’s principle activities are conducted through Momspot.

Since the fourth quarter of the 2015 fiscal year Momspot’s development plans has been suspended pending receipt of incremental funding.

NOTE 2 - LIQUIDITY AND GOING CONCERN

The Company intends to finance its activities through:

The Company has experienced recurring losses and negative cash flow from operations since emerging from bankruptcy. There is substantial doubt about the Company’s ability to continue as a going concern as it is dependent on its ability to obtain short term financing and ultimately to generate sufficient cash flow to meet its obligations on a timely basis in order to attain profitability, as well as successfully obtain financing on favorable terms to fund the Company’s long term plans. The Company continually projects anticipated cash requirements, which may include business combinations, capital expenditures, and working capital requirements. As of September 30, 2015, the Company had cash of approximately $10, a working capital deficit of approximately $708 including notes payable to stockholders due August 2016, and a total shareholders’ deficit of $707. During the three months ended September 30, 2015, the Company used approximately $102 of cash for operations. The Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital and other financing requirements for the foreseeable future.

The Company needs to raise additional capital to cover its budgeted operating and capital expenditures. If the capital raising efforts are not successful, the Company 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 the Company not be able to continue as a going concern. These factors among others create substantial doubt about the Company’s ability to continue as a going concern.

On September 3, 2015, the Company issued secured convertible promissory notes (the “Secured Convertible Notes”) in the principal amount of $25 to each of its two principal stockholders, for an aggregate of $50, each an existing secured lender to the Company. The Secured Convertible Notes have a maturity date of August 31, 2016 and bear interest at the rate of 5.0% per annum, payable at maturity. The outstanding principal and accrued interest of each Secured Convertible Note is convertible, subject to a 4.99% Beneficial Ownership Cap (as defined in the Secured Convertible Notes), into shares of the Company’s common stock at an initial conversion price of $5.00 per share (subject to standard anti-dilution adjustments), at the option of the respective holders.

The obligations of the Company under the Secured Convertible Notes are secured by a first priority security interest in all of the property of the Company pursuant to letter agreements, dated September 3, 2015, with its two principal stockholders. The proceeds of the Secured Convertible Notes will be utilized by the Company to fund its working capital needs (See Note 5).

ATRINSIC, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements of the Company are unaudited and do not include all of the information and disclosures generally required for annual financial statements. In the opinion of management, the statements contain all material adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s condensed consolidated financial position as of September 30, 2015, and the condensed consolidated results of its operations and cash flows for the three month period ended September 30, 2015 and 2014. This report should be read in conjunction with the Company’s Annual Report on Form 10-K, filed with Securities and Exchange Commission on September 25, 2015, which contains the complete information and disclosure for the year ended June 30, 2015. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

Principles of Consolidation

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.

The condensed consolidated financial statements include the accounts of all majority and wholly-owned (“Momspot”) subsidiaries and significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. 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 fair value of stock options granted and income taxes. 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 the Company’s business partners and vendors, impact the Company’s financial performance and available resources. Such conditions may, in turn, impact the aforementioned estimates and assumptions.

Earnings 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 for the Company include outstanding convertible preferred shares, stock options and convertible debts.

Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at September 30, 2015 and September 30, 2014, because such securities are anti-dilutive, are as follows: 

Recent Accounting Pronouncements

The FASB, the Emerging Issues Task Force and the SEC have issued certain accounting standards updates and regulations as of September 30, 2015 that will become effective in subsequent periods. However, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2015 and 2014 and it does not believe that any of these pronouncements will have a significant impact on the condensed consolidated financial statements at the time they become effective.

ATRINSIC, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data

NOTE 4 - STOCKHOLDERS’ EQUITY

Stock Options

On February 11, 2014, the Company issued options with a term of five (5) years and an exercise price of $0.002 to the individuals below for the number of shares of common stock:

The Company granted to Sebastian Giordano, for services as Chief Restructuring Officer and Acting Chief Executive Officer, an option to purchase 125,000,000 shares of the Company’s Common Stock.

The Company granted to each of Edward Gildea and Jonathan Schechter, for services as directors of the Company, an option to purchase 50,000,000 shares of the Company’s Common Stock.

On February 28, 2014, the Company granted to Edward Gildea, for services to be rendered as Acting Chief Executive Officer, an option to purchase 50,000,000 shares of the Company’s Common Stock with a term of five (5) years and an exercise price of $0.002.

All of the shares covered by these options immediately vested on the grant date.

The grant date fair value of stock options granted was approximately $275. The fair value of the Company’s common stock was based upon the publicly quoted price on the date of grant. The expected term for stock options granted with service conditions represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for “plain vanilla” options. The Company obtained the risk free interest rate from publicly available data published by the Federal Reserve. The volatility rate was computed based on a comparison of average volatility rates of similar companies. The fair value of the options was determined using the Black-Scholes model with the following assumptions: risk free interest rate - 0.69% to 0.71%, volatility - 84.40%, expected term - 2.5 years, expected dividends- N/A.

As of September 30, 2015, the weighted average exercise price of all stock options outstanding was $0.002, the remaining contractual life was 3.4 years and there was no intrinsic value.

NOTE 5 – CONVERTIBLE NOTES PAYABLE DUE TO STOCKHOLDERS

On August 15, 2014, the Company raised gross proceeds, in a debt financing transaction, of $90 from its two principal stockholders, and issued secured promissory notes in the principal amount of $45 to each of them (the “August 2014 Notes”). On December 18, 2014, the Company raised gross proceeds, in a debt financing transaction, of $150 from its two principal stockholders, and issued secured promissory notes in the principal amount of $75 to each of them (the “December 2014 Notes”). On May 15, 2015, the Company raised gross proceeds, in a debt financing transaction, of $100 from its two principal stockholders, and issued secured promissory notes in the principal amount of $50 to each of them (the “May 2015 Notes”). The notes had a Maturity Date of July 31, 2015 and bear interest at the rate of 5.0% per annum, payable at maturity. Any amounts that remain unpaid after July 31, 2015, shall thereafter bear interest at the rate of twelve percent (12%) per annum. Interest is calculated on the basis of actual number of days elapsed over a year of 360 days. The notes are secured by all the assets of the Company.

On September 3, 2015, effective as of July 31, 2015, the maturity dates of the February 2014 Notes, the August 2014 Notes, the December 2014 Notes and the May 2015 Notes (collectively, the “Prior Notes”), in the aggregate principal amount of $515, were extended to August 31, 2016 and the Prior Notes were amended to permit conversion of the principal and accrued interest due and payable under the Prior Notes into shares of the Company’s common stock.

On September 3, 2015, the Company issued secured convertible promissory notes (the “Secured Convertible Notes”) in the principal amount of $25 to each of its two principal stockholders, for an aggregate of $50, each an existing secured lender to the Company. The Secured Convertible Notes have a maturity date of August 31, 2016 and bear interest at the rate of 5.0% per annum, payable at maturity. The outstanding principal and accrued interest of each Secured Convertible Note is convertible, subject to a 4.99% Beneficial Ownership Cap (as defined in the Secured Convertible Notes), into shares of the Company’s common stock at an initial conversion price of $5.00 per share (subject to adjustment), at the option of the respective holders.

The obligations of the Company under the Secured Convertible Notes are secured by a first priority security interest in all of the property of the Company pursuant to letter agreements, dated September 3, 2015, with its two principal stockholders. The proceeds of the Secured Convertible Notes will be utilized by the Company to fund its working capital needs.

ATRINSIC, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data

During the three months ended September 30, 2015 and 2014, interest expense amounted to approximately $7 and $3, respectively. Accrued interest as of September 30, 2015 and June 30, 2015 was approximately $28 and $21, respectively.

NOTE 6 - SUBSEQUENT EVENTS

On October 30, 2015, the Company issued secured convertible promissory notes (the “New Secured Convertible Notes”) in the principal amount of $25 to each of its two principal stockholders, for an aggregate of $50, each an existing secured lender to the Company. The New Secured Convertible Notes have a maturity date of August 31, 2016 and bear interest at the rate of 5.0% per annum, payable at maturity. The outstanding principal and accrued interest of each New Secured Convertible Note is convertible, subject to a 4.99% Beneficial Ownership Cap (as defined in the New Secured Convertible Notes), into shares of the Company’s common stock at an initial conversion price of $5.00 per share (subject to adjustment), at the option of the respective holders.

The obligations of the Company under the New Secured Convertible Notes are secured by a first priority security interest in all of the property of the Company pursuant to letter agreements, dated October 30, 2015, with each of its two principal stockholders. The proceeds of the New Secured Convertible Notes will be utilized by the Company to fund its working capital needs.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Historical Background

We were originally incorporated under the name Millbrook Acquisition Corp., on or about February 3, 1994. In May 2007, we changed our name to New Motion, Inc. In February 2008, we merged with Traffix, Inc., pursuant to which Traffix, Inc. became a wholly-owned subsidiary of ours. In June 2009, we changed our 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”) and filed periodic reports with the Securities and Exchange Commission (“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 (the “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 currently 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 (“Common Stock”), and pre-bankruptcy petition common stockholders having their pre-bankruptcy shares exchanged for an aggregate of 100,000,000 shares of Common Stock.

Results of Operations

Three months ended September 30, 2015 compared to the three months ended September 30, 2014 (dollars in thousands)

During the three months ended September 30, 2015, we incurred a loss from operations of approximately $130 as compared to $118 for three months ended September 30, 2014. The increase in loss from operations can be primarily attributed to an increase of $12 in professional expenses related to accounting, legal and other consulting expenses. During the three months ended September 30, 2015, we recorded approximately $5 of net loss attributable to non-controlling interest as compared to $7 for three months ended September 30, 2014.

Liquidity and Going Concern (dollars in thousands)

We continually project anticipated cash requirements, which may include business combinations, capital expenditures, and working capital requirements. As of September 30, 2015, we had cash of approximately $10 and working capital deficiency of approximately $708.

Our existing liquidity is not sufficient to fund our operations, anticipated capital expenditures and working capital for the foreseeable future.  Absent generation of sufficient revenue from the execution of our business plan, we will need to obtain additional debt or equity financing.

Operating activities used $102 and $80 in cash for the three months ended September 30, 2015 and 2014, respectively. The sources of cash from operating activities during the three months ended September 30, 2015, primarily comprised of $131 net loss, a $6 increase of accounts payable, which included payments to legal and accounting professionals, payments to consultants, and other administrative expenses, and a $21 decrease of prepaid insurance expenses.

We do not have investing activities for the three months ended September 30, 2015 and 2014.

Our financing activities provided cash of $50 for the three months ended September 30, 2015. On September 3, 2015, we raised gross proceeds, in a debt financing transaction, of $50 from our two principal stockholders, and issued secured convertible promissory notes in the principal amount of $25 to each of them. The notes are secured by all of our assets.

Our financial statements for the three months ended September 30, 2015 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 operating and capital expenditures. If the capital raising efforts are not successful, we might not be able to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a “smaller reporting company” as defined by Regulation S-K and as such, is not required to provide the information contained in this item pursuant to Regulation S-K.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of September 30, 2015. Based on this evaluation, our principal executive officer and principal financial officers have concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, including this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that our disclosure and controls are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. The design of any system of controls also is based in part on certain assumptions regarding the likelihood of certain events, and there can no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Given these and other inherent limitations of control systems, these are only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II.  Other Information

Item 6 . Exhibits

(*€) - Filed herewith.

(*) - Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.

(1) - Filed on September 9, 2015 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference.

 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.