Qtrax faces more financial, legal problems

Update: 8:30 a.m.: To include iLike news.

The financial troubles dogging Qtrax, a peer-to-peer music service that has spent years trying to get off the ground, appear to be deepening.

Last month, CNET News reported that enterprise software giant Oracle had filed a lawsuit against New York-based Qtrax, alleging that the service owed it $1.9 million and had violated its copyright. Now, records show that at least two other companies have filed suit in New York against the music service in efforts to collect allegedly unpaid bills from the music start-up.

In addition, Qtrax is behind in payments to at least one of the four major recording companies, according to music industry sources.

Qtrax CEO Allan Klepfisz said Friday that the start-up has secured some funding and is close to putting its money problems behind it, but acknowledged that management has had trouble at times paying bills. He also argued that a start-up with financial problems isn't news. Perhaps, but it's hard to name another digital music service of any size that was sued by vendors or creditors before it launched. Klepfisz said that Qtrax has been seven years in the making.

The New York-based company generated some media attention with its ambitious plan of offering ad-supported music downloads free of charge to the public via peer-to-peer technology. In 2008, Qtrax trumpeted the signing of licensing agreements with all four major labels, only to have to acknowledge later that those "deals" weren't actually signed. The company's credibility was called into question after that.

Qtrax is by no means the only company that has experienced financial setbacks.

Money troubles are common in the struggling ad-supported music sector. Ruckus closed in January, and SpiralFrog shut down in March. Imeem staved off a financial crisis when it obtained new funding and negotiated better licensing rates from the major record labels. Not one of the players in the sector has yet to report a profit but Imeem said it is moving towards profitability. Another company in the space that claims to have been profitable for the past eight months is iLike, which was said to be an acquisition target by MySpace according to a Monday report in TechCrunch.

The additional lawsuits against Qtrax were both filed this spring. Millennium Information Technologies said in documents filed in April with the Supreme Court of the State of New York that Qtrax paid it $85,000 but still owes $147,634.72 for helping to implement Oracle's software to Qtrax's site. Last week, Millennium filed for a default judgment against Qtrax

In June, a company called Las Vegas Wall Street Group filed papers with the same court accusing Qtrax and Klepfisz of owing it $1.5 million. Representatives from Millennium and Las Vegas Wall Street Group did not respond to interview requests.

Klepfisz said Friday that Las Vegas Wall Street Group is not a vendor but did not dispute that Qtrax owes the company money. "The facts will emerge in due course," he said. As for Millennium, Klepfisz said there was more to the story than what was in the court documents.

"By and large, all our vendors have done an exceptional job," Klepfisz said. "There are occasional exceptions. We feel we have a basis for this action (with Millennium)."

Klepfisz's statement suggests that Qtrax was unhappy with the quality of service it received from Millennium. There were, however, no complaints from Klepfisz when he responded to Millennium's demands for payment, documents show.

"Next wire I believe is Wed. I will confirm," Klepfisz wrote Millennium representatives, who filed copies of the e-mails with the New York court. "I think by early July we can clear whatever is deemed to be outstanding."

Klepfisz also wrote: "Sorry for the lateness. Will be in your account first thing in the morning. Another installment Tuesday. Thanks."

One February 2008 payment that Qtrax sent Millennium for $26,250 "was returned, and not honored by the Defendant's financial institution, citing 'insufficient funds.'"

In Oracle's suit, the software maker produced a copy of what it charged was a $1.8 million bounced check.

In a note posted to the Qtrax blog two weeks ago, Klepfisz addressed the site's long-awaited launch date.

"I cannot sign off without a discussion of our launch date," he wrote. "So, are we going to set a launch date? Well, I said in the last blog that we will do so when (the company's funding) is deposited. And I thought it would happen by now. I was wrong. It is not yet deposited. But it is scintillatingly close. So stand by. We will be announcing that final immutable launch date very soon."