UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549




FORM
10-K




(Mark
one)


x
              ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the fiscal year ended December 31, 2009




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from ____________ to _______________





Commission
file number 001-12555










ATRINSIC,
INC


(Exact
name of registrant as specified in its charter)




Delaware
            
            06-1390025(State or other jurisdiction of
              incorporation or organization)
            
            (I.R.S. Employer Identification No.)


469 7th
Avenue, 10th Floor, New York, NY 10018


(Address
of principal executive offices) (ZIP Code)




(212)
716-1977


(Registrant’s
telephone number, including area code)







Securities
registered pursuant to Section 12(b) of the Act:


Title of
each
class                                                          Name
of each exchange on which registered


Common
Stock, $0.01 par
value                                   The
NASDAQ Global Market





Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, $0.01 par value




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o No x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o No x





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 o




Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Website, 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    ̈  No x




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o





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.




Large
      accelerated filer   ̈
            Accelerated
      filer    ̈Non-accelerated
      filer    ̈ (Do not check if
      a smaller reporting company)
            Smaller reporting company   
      x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act)


Yes
o No x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed using the closing price of $1.34, as of June 30, 2009,
was $18,129,060.





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes x No
o





As of
March 24, 2010, the issuer had 20,878,933 shares of common stock issued and
outstanding (which number excludes 2,741,318 shares issued and held in
treasury).




DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III, Items 10, 11, 12
and 13 of this Form 10-K.














TABLE
OF CONTENTS




PART IItem
      1
                      
                      Business
                      
                      4Item
      1A
                      
                      Risk
      Factors
                      
                      11Item
      1B
                      
                      Unresolved
      Staff Comments
                      
                      18Item  2
                      
                      Properties
                      
                      18Item
      3
                      
                      Legal
      Proceedings
                      
                      18Item
      4
                      
                      Removed
      and Reserved
                      
                      18PART IIItem
      5
                      
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      19Item
      6
                      
                      Selected
      Financial Data
                      
                      19Item
      7
                      
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      20Item
      7A
                      
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      30Item
      8
                      
                      Financial
      Statements and Supplementary Data
                      
                      31Item
      9
                      
                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      
                      32Item
      9A(T)
                      
                      Controls
      and Procedures
                      
                      32Item
      9B
                      
                      Other
      Information
                      
                      32PART IIIItem
      10
                      
                      Directors,
      Executive Officers and Corporate Governance
                      
                      33Item
      11
                      
                      Executive
      Compensation
                      
                      33Item
      12
                      
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      33Item
      13
                      
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      
                      33Item
      14
                      
                      Principal
      Accounting Fees and Services
                      
                      33PART IVItem
      15
                      
                      Exhibits,
      Financial Statement Schedules
                      
                      34








Part
I





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
report, including the sections entitled “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Business,”
contains “forward-looking statements” that include information relating to
future events, future financial performance, strategies, expectations,
competitive environment, regulation and availability of resources of Atrinsic,
Inc. (“Atrinsic,” or the “Company”). These forward-looking statements include,
without limitation, statements regarding: proposed new services; the Company’s
expectations concerning litigation, regulatory developments or other matters;
statements concerning projections, predictions, expectations, estimates or
forecasts for the Company’s business, financial and operating results and future
economic performance; statements of management’s goals and objectives; and other
similar expressions concerning matters that are not historical facts. Words such
as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,”
“continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes”
and “estimates,” and similar expressions, as well as statements in future tense,
identify forward-looking statements.




Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of when, or how, that
performance or those results will be achieved. Forward-looking statements are
based on information available at the time they are made and/or management’s
good faith belief as of that time with respect to future events, and are subject
to risks and uncertainties that could cause actual performance or results to
differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause these differences include, but
are not limited to:




·
            our limited operating
      history


·
            the highly competitive market in
      which we operate;


·
            our ability to develop and market
      new applications and
services;


·
            protection of our intellectual
      property rights;


·
            costs and requirements as a
      public company;


·
            other factors, including those
      discussed under the headings “Risk Factors,” “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and
      “Business.”




Forward-looking
statements speak only as of the date they are made. You should not put undue
reliance on any forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information, except to the
extent required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking
statements.


3


ITEM 1. BUSINESS




With
respect to this discussion, the terms “we,” “us,” “our,” “Atrinsic”, and the
“Company” refer to Atrinsic, Inc., a Delaware corporation and its wholly-owned
subsidiaries, including New Motion Mobile, Inc. and Traffix, Inc. (“Traffix”),
also Delaware corporations.




A
Note Concerning Presentation




This
Annual Report on Form 10-K contains information concerning Atrinsic, Inc. as it
pertains to the period covered by this report – for the two years ended
December 31, 2009 and 2008. As a result of the acquisitions of Traffix, Inc., a
Delaware corporation (“Traffix”), and Ringtone.com LLC, a Minnesota limited
liability company (“Ringtone”), by Atrinsic, Inc. on February 4, 2008 and June
30, 2008 respectively, (explained herein), this Annual Report on Form 10-K also
contains information concerning the combination of Atrinsic, Traffix and
Ringtone, as of the date of this Annual Report.




Background
and History of Atrinsic




Atrinsic,
formerly known as New Motion, Inc., and prior to New Motion, Inc. as MPLC, Inc.,
was incorporated under the laws of the State of Delaware in 1994 under the
original name, The Millbrook Press, Inc. Until 2004, the Company was a publisher
of children’s nonfiction books for the school and library market and the
consumer market under various imprints. As a result of market factors, and after
an unsuccessful attempt to restructure its obligations out of court, on February
6, 2004, the Company filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code with the United States Bankruptcy Court for the District of
Connecticut (the “Bankruptcy Court”). After filing for bankruptcy, the Company
sold its imprints and remaining inventory and by July 31, 2004, had paid all
secured creditors 100% of amounts owed. At that point in time, the Company
was a “shell” company with nominal assets and no material operations. Beginning
in January 2005, after the Bankruptcy Court’s approval, all pre-petition
unsecured creditors had been paid 100% of the amounts owed (or agreed) and all
post petition administrative claims submitted had been paid. In December 2005,
$0.464 per eligible share was available for distribution and was distributed to
stockholders of record as of October 31, 2005. The bankruptcy proceedings were
concluded in January 2006 and no additional claims were permitted to be filed
after that date.




New
Motion Mobile, Inc. (our wholly-owned subsidiary) was formed in March 2005 and
subsequently acquired the business of Ringtone Channel, an Australian aggregator
of ringtones in June 2005. Ringtone Channel was originally incorporated on
February 23, 2004. In 2004, Ringtone Channel began to sell ringtones
internationally and then launched its first ringtone subscription service in the
U.S. in February 2005. In August 2005, New Motion Mobile launched its first
successful text message campaign incorporating music trivia. As of December 31,
2007, the Company’s Australian entity was dissolved.




On
October 24, 2006, the Company and certain stockholders entered into a Common
Stock Purchase Agreement with Trinad Capital Master Fund, Ltd. (“Trinad”),
pursuant to which we agreed to redeem 23,448,870 shares of our common stock
from existing stockholders and sell an aggregate of 69,750,000 shares
of our common stock, representing 93% of our issued and outstanding shares
of common stock, to Trinad in a private placement transaction for aggregate
gross proceeds of $750,000.




In
February 2007, we completed an exchange transaction (the
“Exchange”) pursuant to which New Motion Mobile became our wholly-owned
subsidiary. In connection with the Exchange, we raised gross proceeds of
approximately $20 million in equity financing through the sale of our Series A
Preferred Stock, Series B Preferred Stock and Series D Preferred
Stock.




After
receiving the requisite approval of our stockholders, on May 2, 2007, we filed a
certificate of amendment to our restated certificate of incorporation with the
Delaware Secretary of State to, among other things, change our corporate name to
New Motion, Inc. from MPLC, Inc., and effect a 1-for-300 reverse split. In
connection with these corporate actions, we also changed our ticker symbol to
“NWMO.”




On
February 4, 2008, we completed a merger with Traffix, Inc., a Delaware
corporation.  Pursuant to the merger, Traffix became our wholly owned
subsidiary.  Traffix was a leading online marketing company that
provided complete marketing solutions for its clients seeking to increase sales
and customer contact deploying the numerous facets of online marketing Traffix
offered.   Following the consummation of our merger with Traffix, Traffix
stockholders owned approximately 45% of our capital stock, on a fully-diluted
basis.  Also upon the closing of our transaction with Traffix, we
commenced trading on The NASDAQ Global Market under the symbol “NWMO.”




On June
30 2008, Atrinsic entered into an Asset Purchase Agreement (“Ringtone APA”)
with Ringtone.com, LLC (“Ringtone”) and W3i Holdings LLC (“W3i”) pursuant to
which we acquired certain assets from Ringtone, including, but not limited to,
short codes, a subscriber database, a covenant not to compete, working capital,
and certain domain names. In consideration for the assets and certain
liabilities assumed, we at the closing we paid to Ringtone approximately $7
million in cash. In addition, we delivered to Ringtone a convertible promissory
note (the “Note”) in the aggregate principal amount of $1.75 million, which
accrued interest at a rate of 10% per annum. In January 2009, we repaid the Note
and have no further indebtedness to Ringtone and W3i.


4





On July
30, 2008, we entered into an agreement to launch online and mobile marketing
services and offer our mobile products in the Indian market.  Under
the agreement, we own 19% of the Joint Venture and are required to pay up to
$325,000 in return for Compulsory Convertible Debentures which can be converted
to common stock at any time, at our sole discretion. We have paid
$225,000 of the $325,000 we were required to pay. We are in the
process of dissolving the venture and we will not be required to make the
remaining $100,000 payment.




On
October 30, 2008, we acquired a 36% minority interest in The Billing Resource,
LLC (“TBR”). TBR is an aggregator of fixed line telephone billing, providing
alternative billing services to us and unrelated third parties. We contributed
$2.2 million in cash to TBR upon its formation and another $1.0 million of
working capital advances subsequent to the close of the
transaction.  As of December 31 2009, we received a distribution of
$1.9 million.





On June
25, 2009, we amended our Restated Certificate of Incorporation to change our
corporate name from New Motion, Inc. to Atrinsic, Inc.  In connection
with the change in our corporate name, we also changed our ticker symbol on the
NASDAQ Global Market from “NWMO” to “ATRN.”




On July
31, 2009, we entered into an Asset Purchase Agreement with Central Internet
Corporation d/b/a/ ShopIt.com (“ShopIt”), pursuant to which we acquired certain
net assets from ShopIt, including but not limited to software, trademarks and
certain domain names. In consideration for the assets, at the closing we
cancelled $1.8 million in aggregate principal amount of indebtedness owed by
ShopIt to us, paid to ShopIt $450,000 and issued 380,000 shares of our common
stock, of which 180,000 shares were distributed to certain secured debt-holders
of ShopIt subject to put options, and 200,000 shares were placed in escrow to be
available until July 31, 2010 until finalization of the opening balance
sheet.





On March
26, 2010,we entered into a Marketing Services Agreement (the “Marketing
Agreement”) and a Master Services Agreement (the “Services Agreement”) with
Brilliant Digital Entertainment, Inc. (“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 either party, and may only be
terminated generally upon a bankruptcy or liquidation event or in the 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 responsible for
marketing, promotional, and advertising services in respect of the Kazaa
service.  Pursuant to the Services Agreement, we are to provide
services related to the operation of the Kazaa website and service, including
billing and collection.  BDE is obligated to provide certain other
services with respect to the service, including licensing the intellectual
property underlying the Kazaa service to us.





The Business of
Atrinsic





We are a
leading Internet focused marketing company.  We combine the power of
the Internet with traditional direct response marketing techniques to sell
entertainment and lifestyle subscription products directly to
consumers.  We also leverage our media network and marketing expertise
to provide lead generation and search related marketing services to our
corporate and advertising clients.  We have developed our marketing
media network, consisting of web sites, proprietary content and licensed media,
to attract consumers, corporate partners and advertisers.  We believe
our marketing media network and proprietary technology allows us to
cost-effectively acquire consumers and provide targeted leads and marketing data
to our corporate partners and advertisers.





Our
strategy is to 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 include those that are wholly owned and
administered by us and those that are executed in partnership with another
party.  They represent an important component of our value
maximization strategy.  By maintaining alternatives to third party
offers, we are able to make use of a larger proportion of acquired Internet
traffic and leads generated than would be the case with only third party
offerings.  Our owned products typically provide a higher effective
value for each media impression.  Consequently, we are continually
working to maximize the presentation and conversion of our own offers to
consumers who we touch in our media network.  We believe we have a
competitive advantage relative to other direct marketing companies, including
those that are marketing on the Internet.  The reason for this is
because we are able to offer multiple billing modalities as a result of
contracts and established relationships with billing aggregators and carriers,
further expanding the pool of eligible customers or leads.  In
addition to the standard credit card billing modality, we are sometimes able to
bill directly to a user’s mobile phone or land-line telephone
bill.


5





Our
services business is principally composed of services that we perform for third
parties in the areas of lead generation and search related
services.  Our lead generation business provides qualified inquiries
to third party advertisers through form submissions, validated telephone calls,
data delivery and other forms of targeting for advertisers.  We are
continually developing new performance marketing products that correspond to our
clients needs.  Our business model in this area is typically based on
a cost per designated action and not on an impression basis.  Our
search related services are comprised of search engine marketing services,
search engine optimization, banner display advertising and search engine
optimization to a range of clients.  This area of the business,
historically, has arisen from expertise and technology that has been developed
internally as a direct result of the development of our own performance
marketing media network.  This business is concentrated on providing
client representation and strategy assistance with paid search marketing for the
larger search portals in the United States.





Our
business principally serves two sets of customers:





·
            Corporate
      clients and advertisers – our transactional marketing services,
      and





·
            End
      user consumers – our subscription
services.





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. For subscription services, the end
user is able to access premium content and, in return, is billed a recurring
monthly fee through their credit card, mobile phone, or land-line.





Direct-to-Consumer
Subscription Services





We market
our recurring revenue services direct-to-consumer across the entertainment and
lifestyle categories.  We bill more than 300,000 subscribers each
month, at fees ranging from $5.00 to $20.00 per monthly
subscription.





Our
subscribers principally originate from our performance marketing media network,
which includes owned content sites, promotional and sweepstakes sites, email
campaigns, social media and, mobile media applications, and an affiliate
network.  Our direct model allows us to source large numbers of
subscribers and by using our own media network, also allows us to control the
quality of the subscribers.  We also incorporate advanced lead
validation strategies to enhance consumer targeting for our subscription
products and to ensure the highest data quality for our
advertisers.  In addition, as a result of our alternative billing
platforms, we are able to further expand the universe of eligible users for our
services.  Depending on the subscription service and user profile, we
can offer mobile phone, land-line, and credit card billing options to our
users.





In order
to be successful in the recurring revenue, direct-to-consumer subscription
services we offer, we are constantly monitoring a range of key metrics that have
a direct impact on our ability to retain existing subscribers and our efficiency
in acquiring new subscribers.  We regularly monitor the Life Time
Value (“LTV”) of those subscribers, taking into consideration cost per
acquisition, churn rates of subscribers, average revenue per user, ability to
bill new subscribers, ability to bill existing subscribers and refund rates,
among others.  To be competitive in our subscription business, we also
seek to leverage our considerable expertise in the alternative billing models we
offer which we believe provides us with a competitive advantage in the
marketplace.




Entertainment
Subscriptions:  In conjunction with Brilliant Digital
Entertainment, Inc. (“BDE”), a distributor of licensed digital content, we are
offering Kazaa, a subscription-based digital music service that gives users
unlimited access to hundreds of thousands of CD-quality tracks.  For a
monthly fee of $19.98 users can download unlimited music files and play those
files on up to three separate computers. The downloaded files remain playable as
long as the user’s subscription is active.  The subscription package
also allows users to download unlimited ringtones to a mobile
phone.  Unlike other music services that charge you every time a song
is downloaded, Kazaa allows users to listen to and explore as much music as they
want for one monthly fee, without having to pay for every track or
album.  We bill consumers for this service on a monthly recurring
basis through a credit card, land-line, or mobile device. Royalties are paid to
the music labels for licenses to the music utilized by this digital
service.





We also
offer consumers access to a premium ringtone service through Ringtone.com, which
is billed to a users mobile device. Through this service, consumers can download
premium ringtones to their mobile device.





Through
our interactive contests, we allow subscribers to win money, prizes and
discounts online and through mobile phones.  Our sweepstake services
encourage an engaged, repeat audience.  Bid4Prizes is a sweepstakes
and entertainment site that features a reverse-auction game where consumers can
play for name-brand prizes. Visitors can also buy discount products, and enjoy
the site's entertainment features. While ad-supported subscribers can access the
site online for free, paid subscribers enjoy VIP benefits, including mobile
access.


6





Our
casual gaming portfolio captures a wide-range of demographics and
interests.  Our primary casual game subscription service, GatorArcade,
has a broad selection of the most popular digital games, including top-rated
games ZumaTM, Diner Dash®, and World Series of Poker® Pro Challenge. The site
also offers arcade games, strategy games, puzzles, and mobile entertainment.
Subscribers can also play for free in an ad-supported environment and still
download certain games.




Lifestyles
Subscriptions: Through various partnerships, we have developed a range of
subscription-based services and clubs which appeal to various lifestyle interest
categories.  These services offer consumers access to shopping and
entertainment coupons and premium services that can be redeemed
online.  These memberships and clubs give consumers access to a broad
range of benefits, offered by national businesses, including Universal Studios,
Disney, and AMC Theatres.




Lead Generation and Online Marketing Services (Transactional
Services)





Our
online marketing services and lead generation offering gives corporate clients
and advertisers access to a full suite of direct marketing services from a
company with comprehensive Internet-based direct marketing
experience.





Online
and Search Marketing Services:  We develop and manage search
engine marketing campaigns for our third party advertising clients, as well as
for our own proprietary websites, promotions and
offers.  Historically, these services developed as a result of our
in-house expertise and technology which we used to support our own performance
marketing network.  Using proprietary technology, we build, manage and
analyze the effectiveness of hundreds of thousands of Pay Per Click (“PPC”)
keywords in real time across each of the major search engines, including Google,
Yahoo and Bing.  For our own products, we employ the same search marketing
and optimization strategies that we deploy on behalf of advertisers, providing
scalable search strategies, including organic and paid search
campaigns.  Our goal is to manage our advertisers' media mix properly
and minimize cannibalization between marketing channels. We also perform search
engine optimization services, for which advertising clients are billed
monthly.





We also
offer advertisers additional online marketing services, including a display
media platform, online and business intelligence, and brand
protection.  We provide advertisers with brand protection to mount an
optimal defense against online risks to an advertiser’s brand.  Our
brand protection provides advertisers with a high degree of visibility and
actionable intelligence to curb online abuse.  Our business
intelligence allows us to audit and analyze our advertisers' activities, their
competitors' activities, industry trends and the marketplace as a
whole.




A recent
addition to our range of service offerings includes the Atrinsic Affiliate
Network.  This network is a developing business and represents an
advance in the development of affiliate marketing platforms.  The
Atrinsic Affiliate Network offers a full-service solution for branded
advertisers.  Using the Network, advertisers create partnerships with
publishers to drive website traffic, customer acquisitions, and online sales.
The system’s software increases the transparency between publishers and
advertisers, giving both parties access to higher quality data and allowing
advertisers to connect to customers in the most cost efficient way
possible.  The system includes key differentiating features, including
business intelligence and brand protection.




Lead
Generation:  We leverage our performance marketing media
network for third party lead generation activities.  We invest heavily
in driving traffic to our network.  In an effort to maximize revenue
and profit per visit, and as a result of advanced consumer targeting, users will
frequently be directed by us to third party offers.  Our network of
sites and media encourage an engaged audience ideal for both advertising
programs and lead generation. These interactive sites and media programs provide
performance driven marketing opportunities that expose an advertiser’s products
or service offerings to our digital entertainment customer base.  Our
sites feature music content, games, sweepstakes, and loyalty
programs.  The Atrinsic performance marketing network also includes
multiple email programs, which allows us to use collected data for emailing
advertiser offers or for our own direct to consumer offers.





Our
content sites generate consumers who are attracted to our proprietary or
licensed content found on the sites.  Our websites feature specialized
content across the entertainment and lifestyle categories. This content includes
EZTracks.com, a library of 30,000 licensed songs by hundreds of artists across
all different genres, and GameFiesta.com, a casual gaming site for premium
online and downloadable games.  These sites allow third-party
advertisers to present their own offers and advertising.  In addition,
like our advertisers and corporate clients, we are able to capitalize on the
lead generation capabilities of these promotional and content-based web
properties to acquire customers for our own products.





Applying
technology is an important aspect of our lead generation business. We manage a
number of technology platforms which utilize dynamic targeting and advanced data
validation to automatically match consumers with the highest value offer or
series of offers, maximizing value per acquired customer.  This
technology allows us to get the maximum return on the marketing dollars spent to
drive traffic into our performance marketing network.


7





In order
to be successful in the lead generation business, we continually develop and
implement innovative strategies to provide our advertisers and clients with
access to targeted and qualified leads.  Such innovations include
proprietary data validation and enhancement services, and real-time lead
validation using call center and telephonic technologies.  Each layer
of validation and qualification enhances the value of a user to our advertisers,
which enables us to generate a higher value per acquired customer, or enables us
to determine lead suitability for our own products.





In
addition to our systems and technology that validate and enhance data and
improve user targeting, we are continually developing new ad units that
correspond to our clients needs for the delivery of their sales generation
inquiries.  These new ad units range from expressions of interest,
customized and targeted questions and data capture, to completed sales
transactions.  This range of ad unit offering, and the corresponding
flexibility of our technology and systems, allows us to work with a broad array
of advertisers, from direct marketers to established brands.  It also
allows us to go to market with products that have a corresponding range of price
points.





Competitive Landscape





We face
competition in all areas of our business and expect that this competition will
continue to intensify in the future as a result of industry consolidation, the
continuing maturation of the industry and low barriers to
entry.  These factors may result in price reductions and loss of
market share, which could reduce our future revenues and otherwise harm our
business. We compete with a diverse and large pool of advertising, media,
Internet companies and wireless and traditional telephone
carriers.  Larger, more established companies are increasingly focused
on developing and distributing products and services that directly compete with
us.  Our ability to compete depends upon several factors, including
our customer service and support levels, our sales and marketing efforts, the
ease of use, performance, price, and reliability of products and services
provided by us, and our ability to remain price competitive while maintaining
our operating margins.  The development, distribution and sale of
subscription services is a highly competitive business.  In this
market, we compete primarily on the basis of marketing acquisition costs, brand
strength, and carrier and billing breadth.  The subscription and
online marketing markets are characterized by frequent product introductions,
evolving platforms, new technologies, and a fluid and changing regulatory
environment.




Digital
Music:  Consumers are fundamentally changing the way that they
interact with and utilize music content, as the format used for digital music
distribution is evolving to become more user friendly and increasingly device
compatible.  With the increased availability of compatible music,
consumers are embracing technologies and services that allow them to
conveniently obtain, manage and move digital content in an easy and affordable
manner.  The growth of consumer Internet connectivity, particularly
broadband, WiFi, and the deployment of 3G mobile networks, has increased
consumer access to digital media.  Broadband PC Internet connections
enable consumers to transfer data more quickly than ever before.  We
believe these trends, along with other new technologies, will improve consumers’
access to digital media.





As
transfer speed for digital media to consumers’ PCs via the Internet, to other
non-PC Internet connected devices and to consumers’ mobile phones via WiFi and
3G networks continues to improve, we believe that consumers will continue to
seek products and services that help them quickly and easily find and access
content, manage their own collection of digital assets, and help them enjoy,
access and move their music collection from their PCs to other media such as
CDs, DVDs and digital entertainment devices, including portable MP3 players and
mobile phones.  Portable devices, including MP3 players and mobile
phones, have proliferated and their uses have increased.  Portable
digital music devices have revolutionized the way consumers listen to
music.  Many users are playing back digital music, spoken word and
video content via consumer electronics devices such as portable MP3
players.





Digital
music rights management has evolved, expanding hardware compatibility and
thereby reducing constraints on how consumers may use their digital
content.  Prior to 2007, record labels had licensed digital music for
distribution subject to specific requirements that all downloaded songs
contained Digital Rights Management (“DRM”).  As is common in new
technology industries, key market leaders each chose different, sometimes
proprietary, approaches to DRM, which caused compatibility issues. During 2007
the record labels agreed to allow DRM-free distribution of permanent downloads
in certain circumstances.  The new open DRM-free standard should
increase consumer interest in paid online music and may also drive increased
competition.  We also expect that DRM will allow companies like ours,
that provide content, rather than hardware, an opportunity to succeed in this
rapidly growing space.





Mobile
Content and Marketing Landscape:  The wireless market has
emerged as a result of the rapid growth and significant technological
advancement in the wireless communications industry.  Wireless
carriers are delivering new handsets to new and existing subscribers which have
the capability to download rich media content.  Due to the increase in
advanced mobile phones with the capabilities to handle rich media downloads, the
potential market for mobile services will increase significantly in the coming
years.  We expect that as a result of our mobile billing expertise,
Internet marketing experience and unique content offerings that we will be able
to capitalize on this rapidly growing market.


8





Lead
Generation Services Landscape: Attracting new customers is becoming
increasingly more difficult and expensive given rising postage fees, the
Do-Not-Call list, CAN-SPAM legislation and click-fraud via search engines.
Online lead generation, qualification and email campaign management is an
optimal solution to confront and mitigate some of these challenges.





Lead
Generation involves the use of technology to gather information about Internet
users.  Regulation requires users to grant permission or “opt-in” to
allow this information to be gathered. This “opt-in” is often acquired through
user registration forms. The information is then sold to advertisers for a price
per lead that can vary from $5 to $60, depending on factors such as the quality
of the lead, the lead exclusivity, the price level of product or service being
sold and the “freshness” of the lead. The financial services, education, and
automotive industries have been the most successful areas for lead
generation.





The U.S.
lead generation market has become increasingly competitive, as the largest U.S.
advertisers are shifting more of their budgets from traditional media to the
internet. We believe that we can successfully compete in the lead generation
business because of our technology and media network.





Search
Marketing Landscape:  The Internet is a global digital medium
for commerce, content, advertising and communications. As the online population
continues to grow, the Internet is increasingly becoming a tool for research and
commerce and for distributing and consuming media. Online users regularly use
the Internet to research offline purchases, making the Internet an important
channel for both online and offline merchants. Consumers are also using the
Internet to access an increasing amount of digital content across media formats
including video, music, text and games. As consumers increasingly use the
Internet to research and make purchases and to consume digital media,
advertisers are shifting more of their marketing budgets to digital channels.
Despite the size and growth of the digital marketing sector, the shift of
traditional advertising spending to the Internet has yet to match the rate of
consumption of online media. Marketers are expected to shift dollars away from
traditional media and toward search marketing, display advertising, email
marketing, social media, and mobile marketing. As advertisers spend more of
their marketing budgets to reach Internet users, we believe the market for
search marketing will continue to grow and we believe our business is structured
to capitalize on this opportunity.





Technology
Platform





Our
performance marketing network utilizes proprietary technologies to generate
real-time marketing results for our direct to consumer subscriptions business
and for our advertising clients.  Our proprietary technology
continually analyzes marketing results to gauge whether campaigns are generating
adequate results, and whether the media is being utilized cost-efficiently, and
to determine whether different marketing techniques will yield better overall
results.  We also employ other proprietary tools which allow us to
monitor and analyze, in real time, our marketing and media costs associated with
various campaigns. The technology measures effective buys on a per campaign
basis which allows us to adjust marketing efforts immediately towards the most
effective campaigns and mediums. These tools allow us to be more efficient and
effective in our media buys. We believe we have a low cost per acquisition rate,
due in large part to the application of these technologies.





We have
also developed, or are developing, technologies related to our use and treatment
of data, including the collection, processing and storage of data.  In
order to enhance the value of our leads and data, we continue to improve our
validation technology, including cross-checking and employing service bureau
database lookups for our core products and services.  Central to our
information strategy is a data warehouse that organizes and consolidates
enterprise data to facilitate data modeling, reporting and the monetization of
data.





Employees




As of
December 31, 2009, Atrinsic had 144 employees and full-time consultants in the
United States and Canada. We have never had a work stoppage and none of our
employees are represented by a labor organization or under any collective
bargaining arrangements. We consider our employee relations to be
good.




Government
Regulation




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.


9


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,  due to the increasing popularity and use of the Internet, a
number of laws and regulations have been adopted 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 are currently being considered by Federal, State, Local and
foreign legislatures with respect to these issues.




The application of existing laws or the
adoption or modification of laws or regulations in the future, together with
increased regulatory scrutiny might decrease the growth of the Internet, impose
taxes or other costly technical requirements, create uncertainty in the market
or in some other manner have an adverse effect on the Internet. These
developments could in turn have a material adverse effect on our business
prospects, financial condition and results of operations and could potentially
expose us and/or our clients to fines, litigation, cease and desist orders and
civil and criminal liability and/or other compliance costs.


10




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.





The following is a list of some of the risks and uncertainties
that exist in our operating, and competitive marketing environment. To be
successful, we believe that we must:





·
            Maintain existing and develop new
      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, 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 grow our
  business;


·
            Attract and retain qualified
      management and employees for the expansion of the operating
      platform;


·
            Continue to upgrade our
      technology and information processing systems to assess marketing results,
      measure customer satisfaction and remain
    competitive;


·
            Continue to develop and source
      high-quality, direct-to-consumer subscription-worthy content that achieves
      significant market
acceptance;


·
            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, 2009, we generated a significant portion of our
revenues from the sale of our products and services directly to consumers which
are billed through 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.


11





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 carriers decide to suspend the offering of 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 Internet 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.


12


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
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:




·
            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;·
            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·
            perceived
      lead quality.




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
content.




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.


13





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. 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.


14





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
do not intend to pay dividends on our equity securities.




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.





We face intense competition in the
marketing of our subscription services and the products of our transaction based
clients.




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 face 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 target markets longer than we
have.  In the future, likely competitors may include other major media
companies, traditional video game publishers, telephone carriers, content
aggregators, wireless software providers and other pure-play 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.




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.


15





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, 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.




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 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 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 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 we 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 to us in connection with transaction 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 us 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, we reached a settlement of the action in
principle with Mobile Messenger.  The terms of this 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 our results from operations, beyond what
we have already expensed and accrued for in 2009.





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 "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.


16





We
may be impacted by the affects of the current slowdown of the United States
economy.




Our
performance is subject to United States economic conditions and its 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, 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.




17




ITEM 1B UNRESOLVED STAFF
COMMENTS




Not
applicable




ITEM
2. PROPERTIES




Atrinsic’s
corporate headquarters are located at 469 7th Avenue,
New York, NY.




The
following table details the various properties leased and owned by us as of
March 24, 2010.




Location
                      
                      Leased/
                        Owned
                      
                      Square
                        Feet
                      
                      
                      ExpirationDieppe,
      New Brunswick, Canada
                      
                      Owned
                      
                      
                      17,000
                      
                      
                      
                      N/A469
      7th Avenue, New York, NY
                      
                      Leased
                      
                      
                      17,000
                      
                      
                      9/30/20181
      Blue Hill Plaza, Pearl River, NY
                      
                      Leased
                      
                      
                      14,220
                      
                      
                      11/15/2011




The
spaces listed above are 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.




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 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 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 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 transaction
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 the results of such disputes will not
have a significant adverse effect on the financial position or the results of
operations of the Company.





ITEM 4. Removed and Reserved


18




Part
II




ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND 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.” 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. 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.




AverageDailyHigh
                  
                  
                  Low
                  
                  
                  VolumeYear
      Ended December 31, 2009:First
      Quarter
                  
                  
                  1.46
                  
                  
                  
                  0.75
                  
                  
                  
                  44,077Second
      Quarter
                  
                  
                  1.50
                  
                  
                  
                  0.87
                  
                  
                  
                  33,344Third
      Quarter
                  
                  
                  1.42
                  
                  
                  
                  0.90
                  
                  
                  
                  14,863Fourth
      Quarter
                  
                  
                  1.17
                  
                  
                  
                  0.52
                  
                  
                  
                  43,920Year
      Ended December 31, 2008:First
      Quarter
                  
                  
                  14.00
                  
                  
                  
                  3.70
                  
                  
                  
                  44,166Second
      Quarter
                  
                  
                  5.25
                  
                  
                  
                  3.26
                  
                  
                  
                  82,617Third
      Quarter
                  
                  
                  4.35
                  
                  
                  
                  2.20
                  
                  
                  
                  39,769Fourth
      Quarter
                  
                  
                  3.41
                  
                  
                  
                  1.01
                  
                  
                  
                  42,630




As of
March 26, 2009, there were approximately 165 record holders of common stock. As
of March 26, 2009, the closing sales price of our common stock as reported on
the NASDAQ Global Market was $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 2009 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.





ITEM
6. SELECTED FINANCIAL DATA




Not
required.


19





ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




Cautionary
Statement





The
following discussion and analysis should be read together with the Consolidated
Financial Statements of 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 Atrinsic, Inc. for the
fiscal years ended December 31, 2009 and 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




As a
direct to consumer Internet marketing company, our strategy is to 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 maximization strategy.  By maintaining
alternatives to third party offers, we are able to make use of a larger
proportion of acquired Internet traffic and leads generated than would be the
case with only third party advertisers’ offerings, since our owned products
typically provide a higher effective value for each media
impression.





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, 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.





In managing our business, we internally develop programming or
partner with online content providers to match users with our service offerings
and those of our advertising clients. Our prospects for growth are dependent on
our ability to acquire content in a cost effective manner. Our results may also
be impacted by economic conditions and the relative strengths and weakness of
the U.S. economy, trends in the online marketing and telecommunications
industry, including client spending patterns and increases or decreases in our
portfolio of service offerings, including the overall demand for such offerings,
competitive and alternative programs and advertising 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 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 traffic disaggregation; (5)
matching leads to the highest relative value offer; and (6) the level of
customization required by our clients.


20





The
principal components of our operating expense are labor, media and media related
expenses (including media content costs, lead validation and affiliate
compensation), product or content development and royalties or licensing fees,
marketing and promotional expense (including sales commissions, customer service
and customer retention expense) and corporate general and administrative
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.





As a
growing part of our direct-to-consumer business, the 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 a 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 either party, and may only be terminated generally
upon a bankruptcy or liquidation event or in the 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 responsible for marketing, promotional,
and advertising services in respect of the 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




To 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.





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
promotional 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 increase our volume of visitors,
subscribers, and third-party leads by improving the reach and widening our
breadth of distribution. We expect to do this by increasing our portfolio of web
properties and sites, and improving existing, or employing innovative
techniques, to source traffic.  We expect that by expanding our online
distribution capability, we will lower our customer acquisition costs by
improving margins through greater scale.





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 content, like the Kazaa music service, is
important 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 and
services.  We will focus on subscription based products in the
entertainment and lifestyle categories as these products correspond to the
visitor base in our media network.


21





Lead
Generation Product Development:  In order to be competitive in
the performance 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 withAT&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 existing and 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.


22





Results
of Operations for the year ended December 31, 2009 compared to the year ended
December 31, 2008.




Revenues
presented by type of activity are as follows for the year ended December
31:





For
      the Year
                      
                      
                      Change
                      
                      
                      ChangeDecember
      31,
                      
                      
                      Inc.(Dec.)
                      
                      
                      Inc.(Dec.)2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      %Subscription
                      
                      $
                      22,254
                      
                      
                      $
                      44,196
                      
                      
                      $
                      (21,942
                      )
                      
                      
                      -50
                      %Transactional
                      
                      
                      46,835
                      
                      
                      
                      69,688
                      
                      
                      
                      (22,853
                      )
                      
                      
                      -33
                      %Total
      Revenues (1)
                      
                      $
                      69,089
                      
                      
                      $
                      113,884
                      
                      
                      $
                      (44,795
                      )
                      
                      
                      -39
                      %




(1)
            As described above, we currently
      aggregate revenues based on the type of user activity monetized. Our
      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
decreased approximately $44.8 million, or 39%, to $69.1 million for the year
ended December 31, 2009, compared to $113.9 million for the year ended December
31, 2008.





Subscription
revenue consists of content applications billed direct to consumers 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, 2009, compared to $44.2 million for the year ended December 31,
2008. The decrease in subscription service revenue was principally attributable
to a decrease in the 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 legal environment
associated with marketing mobile subscription services and due to the less
profitable economics – a result of higher 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 year 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 year-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.


23




Operating
Expenses




For the Year
                            
                            
                            Change
                            
                            
                            ChangeDecember 31,
                            
                            
                            Inc.(Dec.)
                            
                            
                            Inc.(Dec.)2009
                            
                            
                            2008
                            
                            
                            $
                            
                            
                            %Operating
      ExpensesCost
      of Media – 3rd
      party
                            
                            $
                            43,313
                            
                            
                            $
                            74,541
                            
                            
                            $
                            (31,228
                            )
                            
                            
                            -42
                            %Product
      and distribution
                            
                            
                            10,559
                            
                            
                            
                            9,749
                            
                            
                            
                            810
                            
                            
                            
                            8
                            %Selling
      and marketing
                            
                            
                            8,386
                            
                            
                            
                            9,974
                            
                            
                            
                            (1,588
                            )
                            
                            
                            -16
                            %General,
      administrative and other operating
                            
                            
                            14,706
                            
                            
                            
                            16,060
                            
                            
                            
                            (1,354
                            )
                            
                            
                            -8
                            %Depreciation
      and Amortization
                            
                            
                            3,698
                            
                            
                            
                            5,867
                            
                            
                            
                            (2,169
                            )
                            
                            
                            -37
                            %Impairment
      of Goodwill and Intangible Assets
                            
                            
                            17,289
                            
                            
                            
                            114,783
                            
                            
                            
                            (97,494
                            )
                            
                            
                            -85
                            %Total
      Operating Expenses
                            
                            $
                            97,951
                            
                            
                            $
                            230,974
                            
                            
                            $
                            (133,023
                            )
                            
                            
                            -58
                            %





Cost
of Media




Cost of
Media – 3rd party
decreased by $31.2 million to $43.3 million for the year ended December 31, 2009
from $74.5 million for the year ended December 31, 2008. Cost of Media – 3 rd party
includes media purchased for monetization of both transactional and subscription
revenues. Because of its strictly variable nature, this decrease was
proportionately correlated to the decline in the related revenue.  As
a percentage of revenue, Cost of Media -3rd party
improved to 63% for the year 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 Kazaa
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 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 $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. Product and distribution expenses are costs necessary to develop and
maintain proprietary content and support and maintain our websites and
technology platforms – which drive both our transactional and subscription based
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 $111,000 and $7,000 for the
year ended December 31, 2009 and 2008, respectively.





Selling
and marketing




Selling
and marketing expense decreased by $1.6 million to $8.4 million in the year
ended December 31, 2009 as compared to $10.0 million for the year ended December
31, 2008. The decrease is primarily due to a reduction in salaries and other
marketing costs, in accordance with the decrease 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 new service offerings
and call center activity.





General,
Administrative and Other Operating




General
and administrative expenses decreased by approximately $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. The decrease is due primarily due to a reduction
in labor and related costs, professional and consulting fees, facilities and
related costs, partially offset by an increase in Sarbanes Oxley consulting
fees, legal expense and severance payments and accruals to former executives.
While we consider it important to make appropriate and modest investments in
labor, facilities, and utilization of third party professional service providers
to support our continued growth, business development, and corporate governance
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 2008,
respectively.


24





Depreciation
and amortization




Depreciation
and amortization expense decreased $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 principally 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 2009. 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, 2009, 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 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.




Loss
from Operations




Operating
loss decreased to approximately $28.9 million for the year ended December 31,
2009 compared to $117.1 million for the year ended December 31, 2008. Excluding
the effect of goodwill and intangibles impairment in 2009 and 2008, operating
loss increased to approximately $11.6 million for the year ended December 31,
2009, compared to $2.3 million for the year ended December 31, 2008. The higher
operating loss is the result of the revenue 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 Media – 3rd party
margin.





Interest
income and dividends





Interest
and dividend income decreased approximately $676,000 to $72,000 for the year
ended December 31, 2009, compared to $748,000 for the year ended December 31,
2008. The reduction is mainly due to a decrease in the balances of cash and
marketable securities at December 31, 2009 compared to December 31, 2008, as
well as a reduction in the rate of return on invested capital.





Interest
expense




Interest
expense was $76,000 for the year ended December 31, 2009 compared to $147,000
for the year ended December 31, 2008. The interest paid is primarily related to
the note payable to Ringtone which was paid in January 2009.





Other
Income (Expense)




Other
income was $5,000 for the year ended December 31, 2009 compared to other expense
of ($153,000) for the year ended December 31, 2008. The 2008 expense was due to
a loss on sale of marketable securities.




Income
Taxes




Income
tax expense (benefit), before noncontrolling interest and equity in income of
investee, for the year ended December 31, 2009 and 2008 was $0.6 million and
($0.9) million, respectively and reflects an effective tax rate of 2.2% and 0.7%
respectively. The effective tax rates were computed taking into consideration
non-deductible impairment charges of $12.1 million and $114.8 million for 2009
and 2008, respectively, and the establishment of an income tax valuation
allowance of $11.0 million for 2009.





Equity
in Loss of Investee




Equity 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.


25





Net Loss (Income) Attributable to Noncontrolling
Interest





Net loss attributable to noncontrolling
interest was $28,000 for the year ended December 31, 2009 as compared to net
income of ($24,000) for the year ended December 31, 2008. This related to our
investment in MECC which was dissolved in June 2009.





Net
Loss Attributable to Atrinsic, Inc.





Net loss attributable to Atrinsic Inc., decreased by
$86.3 million to $29.5 million for the year ended December 31, 2009 as compared
$115.8 million for the year ended December 31, 2008. This decrease resulted from
the factors described above.





Liquidity
and Capital Resources




We
continually project anticipated cash requirements, which may include business
combinations, capital expenditures, and working capital requirements. As of
December 31, 2009, we had cash and cash equivalents of approximately $16.9
million and working capital of approximately $15.3 million. We used
approximately $3.0 million in cash for operations for the year ended December
31, 2009 and, contingent on prospective operating performance, may require
reductions in discretionary variable costs and other realignments to permanently
reduce fixed operating costs. 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 investment in ShopIt. Cash
used in financing activities was $2.8 million and was principally attributable
to repayment of the Ringtone note payable of $1.8 million and stock repurchases.
Our Board of Directors authorized a share repurchase program which expired in
May 2009. Under this share repurchase program we purchased 832,392 shares of our
common stock for an aggregate price of $939,000.





We
believe that our existing cash and cash equivalents and anticipated cash flows
from operating activities will be sufficient to fund minimum working capital and
capital expenditure needs for at least the next twelve months. The extent of our
future capital requirements will depend on many factors, including our results
of operations. If our cash flows from operations is 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.




Critical
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.




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, 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.


26





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 and provides for these probable
uncollectible amounts through a 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, 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 7 - “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 the Black Scholes option
pricing model and other binomial pricing models where appropriate. The key
assumptions for these models to derive fair value include 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.


27





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 its 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.




The
Company monetizes a portion of its user activities through transactional based
services generated primarily from (a) fees earned, primarily on a Cost Per Click
basis, from search syndication services; (b) fees earned for the Company's
search engine marketing ("SEM") services; and (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 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. ASC 740 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with ASC 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 federal,  state and Canadian examinations. The
statute of limitations for 2008 and 2009 in all jurisdictions remains open and
are subject to examination by tax authorities.




Contractual
Obligations and Off-Balance Sheet Arrangements




At
December 31, 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.


28




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 as of
December 31, 2009:





Operating
                  
                  
                  Employment
                  
                  
                  Total(in
      thousands)
                  
                  Leases
                  
                  
                  Agreements
                  
                  
                  Obligations2010
                  
                  $
                  1,165
                  
                  
                  $
                  717
                  
                  
                  $
                  1,8822011
                  
                  
                  1,127
                  
                  
                  
                  135
                  
                  
                  
                  1,2622012
                  
                  
                  886
                  
                  
                  
                  -
                  
                  
                  
                  8862013
                  
                  
                  936
                  
                  
                  
                  -
                  
                  
                  
                  9362014
                  
                  
                  987
                  
                  
                  
                  -
                  
                  
                  
                  9872015
      and thereafter
                  
                  
                  3,618
                  
                  
                  
                  -
                  
                  
                  
                  3,618$
                  8,719
                  
                  
                  $
                  852
                  
                  
                  $
                  9,571





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 Staff Position No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” 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. ASC 260-10 is effective for
fiscal years beginning after December 15, 2008. The adoption of ASC 260-10
did not have an impact on the Company’s financial statements.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” which 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. ASC 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.
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 ASC 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.


29





In
December 2007, the FASB issued SFAS No. 160, “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
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. ASC 810-10-65-1 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. 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 ASC 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 as of the
beginning of the annual reporting period commencing after November 15, 2009
and will be adopted by the Company in the first quarter of 2010. We do not
believe that the adoption of these revisions to ASC 810 will have a material
impact to our results of operations or financial position.




In
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 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 elements of 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.





ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




Not
required.


30





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




Report
      of Independent Registered Public Accounting Firm
              
              
              F-1Consolidated
      Balance Sheets
              
              
              F-2Consolidated
      Statements of Operations
              
              
              F-3Consolidated
      Statements of Comprehensive Loss
              
              
              F-4Consolidated
      Statement of Equity
              
              
              F-5Consolidated
      Statements of Cash Flows
              
              
              F-6Notes
      to the Consolidated Financial Statements
              
              
              F-7 –
      F-29


31




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


Atrinsic,
Inc.:




We have
audited the accompanying consolidated balance sheets of Atrinsic, Inc.
and subsidiaries, as of December 31, 2009 and 2008, and the related
consolidated statements of operations, equity, comprehensive loss, and cash
flows for each of the years in the two-year period ended December 31, 2009.
These consolidated financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Atrinsic, Inc.
and subsidiaries as of December 31, 2009 and 2008 and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2009 in conformity with U.S. generally accepted
accounting principles.





/s/ KPMG
LLP





New York,
New York


March 30,
2010


F-1





ATRINSIC,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


As
of December 31,


(Dollars
in thousands, except per share data)





2009
                            
                            
                            2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                            
                            $
                            16,913
                            
                            
                            $
                            20,410Marketable
      securities
                            
                            
                            -
                            
                            
                            
                            4,245Accounts
      receivable, net of allowance for doubtful accounts of $4,295 and
      $2,938
                            
                            
                            7,985
                            
                            
                            
                            16,790Income
      tax receivable
                            
                            
                            4,373
                            
                            
                            
                            2,666Prepaid
      expenses and other current assets
                            
                            
                            2,643
                            
                            
                            
                            3,686Total
      Currents Assets
                            
                            
                            31,914
                            
                            
                            
                            47,797PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $1,078 and
      $1,435
                            
                            
                            3,553
                            
                            
                            
                            3,525GOODWILL
                            
                            
                            -
                            
                            
                            
                            11,075INTANGIBLE
      ASSETS, net of accumulated amortization of $8,605 and
    $5,683
                            
                            
                            7,253
                            
                            
                            
                            12,508DEFERRED
      INCOME TAXES
                            
                            
                            -
                            
                            
                            
                            778INVESTMENTS,
      ADVANCES AND OTHER ASSETS
                            
                            
                            1,878
                            
                            
                            
                            3,080TOTAL
      ASSETS
                            
                            $
                            44,598
                            
                            
                            $
                            78,763LIABILITIES
      AND EQUITYCurrent
      LiabilitiesAccounts
      payable
                            
                            $
                            6,257
                            
                            
                            $
                            7,194Accrued
      expenses
                            
                            
                            9,584
                            
                            
                            
                            13,941Note
      payable
                            
                            
                            -
                            
                            
                            
                            1,858Deferred
      revenues and other current liabilities
                            
                            
                            725
                            
                            
                            
                            152Total
      Current Liabilities
                            
                            
                            16,566
                            
                            
                            
                            23,145DEFERRED
      TAX LIABILITY, NET
                            
                            
                            1,697
                            
                            
                            
                            -OTHER
      LONG TERM LIABILITIES
                            
                            
                            988
                            
                            
                            
                            969TOTAL
      LIABILITIES
                            
                            $
                            19,251
                            
                            
                            $
                            24,114COMMITMENTS
      AND CONTINGENCIES (see note 14)-
                            
                            
                            
                            -STOCKHOLDERS'
      EQUITYCommon
      stock - par value $.01, 100,000,000 authorized, 23,583,581 and 22,992,280
      shares issued at 2009 and 2008, respectively; and, 20,842,263 and
      21,083,354 shares outstanding at 2009 and 2008,
    respectively.
                            
                            $
                            236
                            
                            
                            $
                            230Additional
      paid-in capital
                            
                            
                            178,442
                            
                            
                            
                            177,347Accumulated
      other comprehensive loss
                            
                            
                            (20
                            )
                            
                            
                            (286
                            )Common
      stock, held in treasury, at cost, 2,741,318 and 1,908,926 shares at 2009
      and 2008, respectively.
                            
                            
                            (4,992
                            )
                            
                            
                            (4,053
                            )Accumulated
      deficit
                            
                            
                            (148,319
                            )
                            
                            
                            (118,849
                            )Total
      Stockholders' Equity
                            
                            
                            25,347
                            
                            
                            
                            54,389NONCONTROLLING
      INTEREST
                            
                            
                            -
                            
                            
                            
                            260TOTAL
      EQUITY
                            
                            
                            25,347
                            
                            
                            
                            54,649TOTAL
      LIABILITIES AND EQUITY
                            
                            $
                            44,598
                            
                            
                            $
                            78,763





The accompanying notes are an integral
part of these consolidated statements.


F-2


ATRINSIC,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


Years
ended December 31,


(Dollars
in thousands, except per share data)





2009
                
                
                2008Subscription
                
                $
                22,254
                
                
                $
                44,196Transactional
                
                
                46,835
                
                
                
                69,688REVENUE
                
                
                69,089
                
                
                
                113,884OPERATING
      EXPENSESCost
      of media-third party
                
                
                43,313
                
                
                
                74,541Product
      and distribution
                
                
                10,559
                
                
                
                9,749Selling
      and marketing
                
                
                8,386
                
                
                
                9,974General,
      administrative and other operating
                
                
                14,706
                
                
                
                16,060Depreciation
      and amortization
                
                
                3,698
                
                
                
                5,867Impairment
      of Goodwill and Intangible Assets
                
                
                17,289
                
                
                
                114,78397,951
                
                
                
                230,974LOSS
      FROM OPERATIONS
                
                
                (28,862
                )
                
                
                (117,090
                )OTHER
      (INCOME) EXPENSEInterest
      income and dividends
                
                
                (72
                )
                
                
                (748
                )Interest
      expense
                
                
                76
                
                
                
                147Other
      (income) expense
                
                
                (5
                )
                
                
                153(1
                )
                
                
                (448
                )LOSS
      BEFORE TAXES AND EQUITY IN LOSS OF INVESTEE
                
                
                (28,861
                )
                
                
                (116,642
                )INCOME
      TAXES
                
                
                640
                
                
                
                (852
                )EQUITY
      IN INCOME OF INVESTEE, AFTER TAX
                
                
                (59
                )
                
                
                -NET
      LOSS
                
                
                (29,442
                )
                
                
                (115,790
                )LESS:
      NET  LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING
      INTEREST,  AFTER TAX
                
                
                28
                
                
                
                (24
                )NET
      LOSS ATTRIBUTABLE TO ATRINSIC, INC
                
                $
                (29,470
                )
                
                $
                (115,766
                )NET
      LOSS PER SHARE ATTRIBUTABLE TO ATRINSIC COMMON
STOCKHOLDERSBasic
                
                $
                (1.43
                )
                
                $
                (5.43
                )Diluted
                
                $
                (1.43
                )
                
                $
                (5.43
                )WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                
                
                20,648,929
                
                
                
                21,320,638Diluted
                
                
                20,648,929
                
                
                
                21,320,638





The
accompanying notes are an integral part of these consolidated
statements.


F-3




ATRINSIC,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS


Years
Ended December 31,


(Dollars
in thousands, except per share data)





2009
                    
                    
                    2008NET
      LOSS
                    
                    $
                    (29,442
                    )
                    
                    $
                    (115,790
                    )OTHER
      COMPREHENSIVE LOSS, NET OF TAX:Unrealized
      gain on available-for-sale securities
                    
                    
                    -
                    
                    
                    
                    38Net
      Currency translation adjustment
                    
                    
                    267
                    
                    
                    
                    (287
                    )Total
      Other Comprehensive loss, Net of Tax
                    
                    $
                    (29,175
                    )
                    
                    $
                    (116,039
                    )Comprehensive
      loss attributable to noncontrolling interest
                    
                    
                    (28
                    )
                    
                    $
                    24Comprehensive
      loss attributable to Atrinsic, Inc
                    
                    $
                    (29,147
                    )
                    
                    $
                    (116,063
                    )





The
accompanying notes are an integral part of these consolidated
statements.


F-4




ATRINSIC, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF EQUITY
 Years
Ended December 31,
 (Dollars
in thousands, except per share data)
 
 AccumulatedAdditional
                                
                                
                                
                                
                                
                                OtherCommonStock
                                
                                
                                Paid-In
                                
                                
                                (Accumulated
                                
                                
                                Comprehensive
                                
                                
                                TreasuryStock
                                
                                
                                Noncontrolling
                                
                                
                                TotalShares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Deficit)
                                
                                
                                Loss
                                
                                
                                Shares
                                
                                
                                Amount
                                
                                
                                Interest
                                
                                
                                EquityBalance
      at January 1, 2008
                                
                                
                                12,021,184
                                
                                
                                $
                                120
                                
                                
                                $
                                19,583
                                
                                
                                $
                                (3,083
                                )
                                
                                $
                                (38
                                )
                                
                                
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                283
                                
                                
                                
                                16,865Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (115,766
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (23
                                )
                                
                                
                                (115,789
                                )Unrealized
      loss on investments
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                38
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                38Foreign
      currency translation adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (287
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (287
                                )Stock
      based compensation expense
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,282
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,282Exercise
      of stock options
                                
                                
                                561,738
                                
                                
                                
                                6
                                
                                
                                
                                337
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                343Excess
      tax benefit on share-based compensation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,017
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,017Purchase
      of common stock, at cost
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,908,926
                                
                                
                                
                                (4,053
                                )
                                
                                
                                -
                                
                                
                                
                                (4,053
                                )Common
      stock issued in connection with business combination
                                
                                
                                10,409,358
                                
                                
                                
                                104
                                
                                
                                
                                155,128
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                155,232Balance
      at December 31, 2008
                                
                                
                                22,992,280
                                
                                
                                $
                                230
                                
                                
                                $
                                177,347
                                
                                
                                $
                                (118,849
                                )
                                
                                $
                                (287
                                )
                                
                                
                                1,908,926
                                
                                
                                $
                                (4,053
                                )
                                
                                $
                                260
                                
                                
                                
                                54,648Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (29,470
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                28
                                
                                
                                
                                (29,442
                                )Foreign
      currency translation adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                267
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                267Liquidation
      of non controlling interest
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (288
                                )
                                
                                
                                (288
                                )Stock
      based compensation expense
                                
                                
                                91,301
                                
                                
                                
                                1
                                
                                
                                
                                856
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                857Issuance
      of common stock
                                
                                
                                40,000
                                
                                
                                
                                -
                                
                                
                                
                                47
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                47Tax
      shortfall on Stock based compensation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (430
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (430
                                )Purchase
      of common stock, at cost
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                832,392
                                
                                
                                
                                (939
                                )
                                
                                
                                -
                                
                                
                                
                                (939
                                )Return
      of Equity
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                138
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                138Common
      stock issued in connection with a business combination
                                
                                
                                460,000
                                
                                
                                
                                5
                                
                                
                                
                                484
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                489Balance
      at December 31, 2009
                                
                                
                                23,583,581
                                
                                
                                $
                                236
                                
                                
                                $
                                178,442
                                
                                
                                $
                                (148,319
                                )
                                
                                $
                                (20
                                )
                                
                                
                                2,741,318
                                
                                
                                $
                                (4,992
                                )
                                
                                
                                (0
                                )
                                
                                
                                25,347
 
 The
accompanying notes are an integral part of these consolidated
statements.
  F-5
  ATRINSIC,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
Ended December 31,
 (Dollars
in thousands, except per share data)
 
 2009
                  
                  
                  2008Cash
      Flows From Operating ActivitiesNet
      loss
                  
                  $
                  (29,442
                  )
                  
                  $
                  (115,790
                  )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Allowance
      for doubtful accounts
                  
                  
                  1,991
                  
                  
                  
                  2,152Depreciation
      and amortization
                  
                  
                  3,698
                  
                  
                  
                  5,867Impairment
      of goodwill and intangible assets
                  
                  
                  17,289
                  
                  
                  
                  114,783Stock-based
      compensation expense
                  
                  
                  857
                  
                  
                  
                  1,282Stock
      based consulting expense
                  
                  
                  40
                  
                  
                  
                  -Excess
      tax benefit from share-based compensation
                  
                  
                  -
                  
                  
                  
                  (1,017
                  )Impairment
      of investment in Mango Networks
                  
                  
                  225
                  
                  
                  
                  -Net
      loss on sale of marketable securities
                  
                  
                  -
                  
                  
                  
                  175Deferred
      income taxes
                  
                  
                  3,651
                  
                  
                  
                  (2,345
                  )Equity
      in loss (income) of investee
                  
                  
                  (108
                  )
                  
                  
                  -Changes
      in operating assets and liabilities of business, net of
      acquisitions:Accounts
      receivable
                  
                  
                  6,686
                  
                  
                  
                  4,532Prepaid
      income tax
                  
                  
                  (1,617
                  )
                  
                  
                  (2,464
                  )Prepaid
      expenses and other current assets
                  
                  
                  (359
                  )
                  
                  
                  1,152Accounts
      payable
                  
                  
                  (937
                  )
                  
                  
                  (3,205
                  )Other,
      principally accrued expenses
                  
                  
                  (4,989
                  )
                  
                  
                  (767
                  )Net
      cash (used in) provided by operating activities
                  
                  
                  (3,015
                  )
                  
                  
                  4,355Cash
      Flows From Investing ActivitiesCash
      received from investee
                  
                  
                  1,940
                  
                  
                  
                  11,212Cash
      paid to investees
                  
                  
                  (914
                  )
                  
                  
                  (2,519
                  )Purchases
      of marketable securities
                  
                  
                  -
                  
                  
                  
                  (6,577
                  )Proceeds
      from sales of marketable securities
                  
                  
                  4,242
                  
                  
                  
                  24,708Business
      combinations
                  
                  
                  (1,740
                  )
                  
                  
                  (7,030
                  )Acquisition
      of loan receivable
                  
                  
                  (480
                  )
                  
                  
                  -Capital
      expenditures
                  
                  
                  (682
                  )
                  
                  
                  (2,029
                  )Net
      cash provided by investing activities
                  
                  
                  2,366
                  
                  
                  
                  17,765Cash
      Flows From Financing ActivitiesRepayments
      of notes payable
                  
                  
                  (1,750
                  )
                  
                  
                  (111
                  )Liquidation
      of non-controlling interest
                  
                  
                  (288
                  )
                  
                  
                  -Return
      of investment - noncontrolling interest
                  
                  
                  138
                  
                  
                  
                  -Excess
      tax benefit on share-based compensation
                  
                  
                  -
                  
                  
                  
                  1,017Purchase
      of common stock held in treasury
                  
                  
                  (939
                  )
                  
                  
                  (4,053
                  )Proceeds
      from exercise of options
                  
                  
                  -
                  
                  
                  
                  343Net
      cash used in financing activities
                  
                  
                  (2,839
                  )
                  
                  
                  (2,804
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (9
                  )
                  
                  
                  (18
                  )Net
      (Decrease) Increase In Cash and Cash Equivalents
                  
                  
                  (3,497
                  )
                  
                  
                  19,298Cash
      and Cash Equivalents at Beginning of Year
                  
                  
                  20,410
                  
                  
                  
                  1,112Cash
      and Cash Equivalents at End of Period
                  
                  $
                  16,913
                  
                  
                  $
                  20,410SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for interest
                  
                  $
                  (76
                  )
                  
                  $
                  (35
                  )Cash
      refunded (paid) for taxes
                  
                  $
                  867
                  
                  
                  $
                  (2,620
                  )Acquisition
      of intangibles assets by issuance of note payable
                  
                  $
                  -
                  
                  
                  $
                  1,750Extinguishment
      of loan receivable in connection with business combination
                  
                  $
                  480
                  
                  
                  $
                  -Common
      stock issued for extinguishment of loan receivable in connection with
      business combination
                  
                  $
                  155
                  
                  
                  $
                  -Common
      stock issued in connection with business combination
                  
                  $
                  600
                  
                  
                  $
                  155,232
  The accompanying notes are an integral part of these
consolidated statements.
  F-6
  NOTE 1 – Nature of
Operations
  Atrinsic
is a direct marketing company based in the United States. Atrinsic has two main
service offerings. Transactional services and Subscription services.
Transactional services offers full service online marketing and distribution
services 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. Subscription services offer our portfolio of subscription based
content applications direct to users working with wireless carriers and other
distributors.
  NOTE
2 - Summary of Significant Accounting Policies
  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.
  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, 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.
  Segment
Reporting
  The
Company has determined it operates in one operating segment. Operating segments
are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The business model is centered around
the monetization of user activities either online, mobile, or other. The Company
monetizes that activity on either a subscription basis (i.e. Subscription
Services) or on a transactional basis (i.e. Network) largely at the discretion
of the Chief Operating Decision Maker and discrete financial information by
source of monetization is not available.
  Foreign
Currency Translation
  The
Company has a wholly owned subsidiary based in Canada which is included in the
Company’s consolidated financial statements. The subsidiary’s financials are
reported in Canadian dollars and translated in accordance with FASB Accounting
Standards Codification (“ASC”) 830. Assets and liabilities for these foreign
operations are translated at the exchange rate in effect at the balance sheet
date, and income and expenses are translated at average exchange rates
prevailing during the period. We include accumulated net translation adjustments
in stockholders’ equity as a component of accumulated other comprehensive
loss.
  Cash
and Cash Equivalents
  The
Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents. The carrying amount of cash
equivalents approximates fair value because of the short-term maturity of these
instruments.
  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.
  F-7
 
 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 as a result of completing its annual impairment analysis as of
December 31, 2009. The results of this review and impact of the impairment
are more fully described in Note 7 - “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.
 
 The
Company has determined that there was an impairment of finite-lived intangible
assets during the fourth quarter of 2009. The results of this assessment are
more fully described in Note 7.
 
 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 of stock option
awards and performance based restricted stock, we use the Black Scholes option
pricing model and other binomial pricing models where appropriate. The key
assumptions for these models to derive fair value include expected term, rate of
risk free returns and volatility. Information about our specific award plans can
be found in Note 13.
  Revenue
Recognition
  In
accordance with ASC 605 and SEC Staff Accounting Bulletin 104, 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,
charge-backs, or credits which are 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 its subscription service revenues through a carrier or
distributors who are paid a transaction fee for their services. In accordance
with ASC subtopic 605-45 “Principal Agent Considerations”,  the
Company recognizes as revenues the net amount received from the carrier or
distributor, net of their fee.
  F-8
  The
Company monetizes a portion of its user activities through transactional based
services generated primarily from (a) fees earned, primarily on a cost per click
(“CPC”) basis, from search syndication services; (b) fees earned for the
Company's search engine marketing ("SEM") services; and (c) other fees for
marketing services including data and list management services, which can be
either periodic or transactional. 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 transactional services revenues are recognized on a
gross basis in accordance with the provisions of ASC Subtopic 605-45, 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 party Media
Cost.
  Accumulated
Other Comprehensive Loss
  Comprehensive  loss
consists of two components, net loss and other comprehensive income (loss).
Other comprehensive income (loss) refers to revenue, expenses, gains and losses
that under generally accepted accounting principles in the United States, or
GAAP, are recorded as an element of shareholders’ equity but are excluded from
net income (loss).  The Company’s other comprehensive loss consists of
foreign currency translation adjustments from those subsidiaries not using the
US dollar as their functional currency and unrealized gains on marketable
securities categorized as available for sale.
  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 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. ASC 740 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with ASC 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 largest amount of benefit
that is more likely than not to be sustained.
 
 The
Company and its subsidiaries file income tax returns in the U.S and Canada. The
Company is subject to federal, states and Canadian examinations. The statute of
limitations for 2008 and 2009 in all jurisdictions remains open and are subject
to examination by tax authorities.
 
 Fair
Value Measurements
 
 We apply
the fair value measurement guidance of ASC 820 for our financial assets and
liabilities that are required to be measured at fair value and for our
nonfinancial assets and liabilities that are not required to be measured at fair
value on a recurring basis, including goodwill and intangible assets. The
measurement of fair value requires the use of techniques based on observable and
unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our market assumptions.
The inputs create the following fair value hierarchy:
 
 •      
Level 1 —       Quoted prices for identical assets
or liabilities in active markets.
 
 •      
Level 2 —       Quoted prices for similar assets
or liabilities in active markets; quoted prices for identical or similar assets
or liabilities in markets that are not active; and model-derived valuations
where inputs are observable or where significant value drivers are
observable.
 
 •      
Level 3 —       Assets or liabilities where inputs
are unobservable to third parties.
 
 When
available, we use quoted market prices for the same or similar instruments to
determine the fair value of our assets and liabilities and classify such items
in Level 1 or Level 2.  In some cases, and where observable inputs are not
available, we use unobservable inputs to measure fair value and classify such
items in Level 3.
  F-9


Reclassification




Certain
amounts reported in prior years have been reclassified to conform to the current
year presentation.




NOTE
3 – Purchase of the Assets of ShopIt





On
December 2, 2008 the Company entered into a Marketing Services and License
Agreement (the “Agreement”) with ShopIt.  Under the Agreement the
Company performed certain marketing and administrative services for ShopIt and
distributed proprietary and third party advertisements through Shopit.com and
its social media advertising network. The Agreement provided ShopIt with a
revenue share of all leads monetized by the Company. Under the Agreement, the
Company made periodic advance payments and made incremental advances to ShopIt
to support continued marketing and product development.





On July
31, 2009, the Company entered into an Asset Purchase Agreement (“APA”) with
ShopIt.com pursuant to which the Company acquired certain net assets from
ShopIt.com, including but not limited to software, trademarks and certain domain
names. The Company purchased ShopIt to be the foundation of its e-commerce
platform and a distribution point for its social media application. In
consideration for the assets, the Company at the closing cancelled $1.8 million
in aggregate principal amount of indebtedness owed by ShopIt to the Company,
paid to ShopIt $450,000 and issued 380,000 shares of the Company’s common stock,
of which 180,000 shares were distributed to certain secured debt-holders of
ShopIt and 200,000 shares were placed in escrow to be available in July 2010 or
upon finalization of the opening balance sheet. Of the $1.8 million of
indebtedness owed by ShopIt, $1.1 million related to a marketing agreement
between the Company and ShopIt and $640,000 of debt was purchased at a discount
from ShopIt’s debt-holders’ prior to entering into the APA. The Company
purchased the $640,000 debt for $480,000 in cash and 80,000 shares of the
Company’s stock. The debt-holder share consideration for both the 180,000 and
the 80,000 shares, issued to debt-holders, are subject to put options at $2 per
share which were valued at fair market value using an option pricing model,
recorded as a liability and marked to market through earnings each accounting
period. The put options are exercisable at any time during the 30 day period
commencing on the date which is twelve months following the closing date of the
APA and the debt Assignment Agreements as applicable. The put options are
recorded in other current liabilities on the Consolidated Balance Sheets and
classified as Level II in accordance with ASC 820.





The
purchase was accounted for as a business combination in accordance with ASC 805
(formerly SFAS No. 141R), “Business Combinations.” Goodwill of $1.1 million was
recorded as a result of the acquisition and all acquisition costs are recorded
in the Consolidated Statement of Operations in the period incurred. The Company
has up to one year after the acquisition date to finalize business combination
accounting. During the fourth quarter of 2009, the company revised its
provisional estimates of the fair market value of the intangible assets of
ShopIt it acquired by a $0.3 million reduction of software, a $0.8 million
reduction of domain names and a $0.1 million increase for trademarks
and trade names, with the offset of $1.1 million recorded as an increase to
Goodwill. Revisions were based on a formal evaluation conducted by management in
the fourth quarter of 2009.





The table
below shows the fair value of the consideration paid in connection with the
Asset Purchase Agreement:





Closing
      payment
                  
                  $
                  450Pre
      existing cash advances to ShopIt
                  
                  
                  1,175Extinguishment
      of loan receivable by ShopIt
                  
                  
                  480Equity
      instruments (380,000 shares at closing )
                  
                  
                  414Equity
      instruments (80,000 shares in connection with prior period
      consideration)
                  
                  
                  74Put
      options (180,000 shares at closing)
                  
                  
                  186Put
      options (80,000 shares in connection with prior period
      consideration)
                  
                  
                  81Total
      consideration
                  
                  $
                  2,860


F-10




The purchase price was allocated to the assets
acquired based on their estimated fair values as of the date of acquisition as
summarized below:





Goodwill
                  
                  $
                  1,052Software,
      estimated useful life - 5 yrs
                  
                  
                  705Domain
      names
                  
                  
                  196Trademarks
      and Trade names
                  
                  
                  907Estimated
      fair value of assets acquired
                  
                  $
                  2,860





At
December 31, 2009, all the Goodwill from the acquisition of ShopIt was impaired
as part of the year end impairment analysis (see footnote 7).





The
Company has not presented the pro forma effect of the ShopIt acquisition because
there is insufficient continuity of the acquired entity's operations prior to
and after the transaction and because of the limited activity and deminimus
operations of ShopIt. The Company believes that pro forma financial information
involving ShopIt is immaterial to an understanding of future operations of the
Company.





NOTE
4 – Investments and Advances





Joint
Venture with Visionaire and Mango Networks





On July
30, 2008, the Company entered into an agreement to launch online and mobile
marketing services and offer the Company’s mobile products in the Indian
market.  Under the agreement, the Company owns 19% of the Joint
Venture and is entitled to one of three seats on the Board of Directors. The
Company is required to pay up to $325,000 in return for Compulsory Convertible
Debentures which can be converted to common stock at any time, at the Company’s
sole discretion. The Company paid $225,000 of the $325,000 it was required to
pay and subsequently recorded, at December 31, 2009, an other-than-temporary
impairment for the $225,000 paid. The Company is in the process of dissolving
the Joint Venture called Mango Networks and will not be required to make the
remaining $100,000 payment.




Investment
in The Billing Resource, LLC





On
October 30, 2008, the Company acquired a 36% non-controlling interest in The
Billing Resource, LLC (“TBR”). TBR is an aggregator of fixed telephone line
billing, providing alternative billing services to the Company and unrelated
third parties. The Company contributed $2.2 million in cash on formation and
provided an additional $0.9 million of working capital advances in 2009 to
support near term growth. As of December 31, 2009, the Company received a
distribution $1.9 million from TBR. As of December 31, 2009 the Company’s net
investment in TBR totals $1.4 million and is included in Investments, Advances
and Other Assets on the accompanying  Consolidated Balance
Sheet.





In
addition, the Company has an operating agreement with TBR whereby TBR provides
billing services to the Company and its customers.  The agreement
reflects transactions in the normal course of business and was negotiated on an
arm’s length basis.





The
Company records its investment in TBR under the equity method of accounting and
as such presents its prorata share of the equity in earnings and losses of TBR
within its quarterly and year end reported results. The Company recorded $59,000
as equity in income for the year ended December 31, 2009.





NOTE
5- Kazaa





Kazaa is
a subscription-based music service providing unlimited online access to hundreds
of thousands of CD-quality tracks for a monthly fee of approximately
$19.98.  Subscribers of this service are signed up for this service on
the Internet and are billed monthly to their credit card, mobile phone or
landline phone.  Kazaa allows users to download unlimited music files
to up to three PCs that the user owns.




On March
26, 2010, the Company entered into a Marketing Services Agreement (the
“Marketing Agreement”) and a Master Services Agreement (the “Services
Agreement”) with Brilliant Digital, Inc. (“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 either party, and may only be
terminated generally upon a bankruptcy or liquidation event or in the event of
an uncured material breach by either party.




F-11





Under the
Marketing Agreement, the Company is responsible for marketing, promotional, and
advertising services in respect of the Kazaa service.  In exchange for
these marketing services, the Company will be reimbursed for 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, the Company is 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, the Company is 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 $2.5 million 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, the Company is not obligated to make additional
expenditures if more than $5.0 million remains unrecovered or unrecouped by
the Company from Kazaa revenues.





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.  As of, and for the period ending December
31, 2009, the Company has presented net revenue earned of $2.7 million, expenses
incurred for the Kazaa music service net of reimbursements of $4.9 million,
along with an other receivable due from BDE of $2.1 million.





NOTE 6 - Property and
Equipment




Property
and equipment consists of the following:





Useful
      Life
                  
                  
                  December 31,
                  
                  
                  December 31,in years
                  
                  
                  2009
                  
                  
                  2008Computers
      and software applications
                  
                  
                  3
                  
                  
                  $
                  1,874
                  
                  
                  $
                  2,335Leasehold
      improvements
                  
                  
                  10
                  
                  
                  
                  1,830
                  
                  
                  
                  1,626Building
                  
                  
                  40
                  
                  
                  
                  766
                  
                  
                  
                  655Furniture
      and fixtures
                  
                  
                  7
                  
                  
                  
                  161
                  
                  
                  
                  344Gross
      PP&E
                  
                  
                  
                  
                  
                  
                  4,631
                  
                  
                  
                  4,960Less:
      accumulated depreciation
                  
                  
                  
                  
                  
                  
                  (1,078
                  )
                  
                  
                  (1,435
                  )Net
      PP&E
                  
                  
                  
                  
                  
                  $
                  3,553
                  
                  
                  $
                  3,525





Depreciation
expense for the years ended December 31, 2009 and 2008 totaled $0.8 million and
$1.1 million respectively and is recorded on a straight line basis. In
connection with improvements made during 2008 to the Company’s facility located
at 469 7th Avenue,
New York, the landlord agreed to reimburse the Company $0.6 million for the cost
of such improvements. This reimbursement is being amortized over the 10-year
life of the lease.





NOTE 7– Goodwill and Intangible
Assets




Impairment
of Long-Lived Assets




ASC 360
requires that an entity test for the recoverability of long-lived assets if
events or changes in circumstances indicate that the carrying value may not be
recoverable.  We concluded that a triggering event occurred in late fourth
quarter 2009, meeting the significant adverse change in business climate
criterion, indicating that the carrying value of our amortizable intangible
assets may not be recoverable.




F-12





The
Company has assessed the recoverability of the long-lived asset groups
classified as held and used by comparing their undiscounted future cash flows to
their individual carrying value.  The future undiscounted cash flows
associated with certain acquired Traffix amortizable intangible assets were
determined to be significantly less than the carrying value of such
assets.





The
Company then determined the fair value of such amortizable intangible assets and
recognized an impairment charge of $2.0 million.




Impairment
of  Indefinite Lived Intangibles and Goodwill





As part
of our annual impairment analysis, it was determined that the carrying amount of
the Company’s indefinite lived intangible assets was impaired and a loss of $2.1
million was recognized.





In
connection with its annual goodwill impairment testing for the year ended
December 31, 2009, the Company determined there was an impairment of the
carrying value of goodwill and recorded a non-cash goodwill impairment charge of
$13.1 million.  The goodwill impairment is primarily due to reduced
valuation multiples, which is reflected in our stock price and market
capitalization.





The
impairment charge reflects the amount by which the carrying amount of goodwill
exceeded the residual value remaining after ascribing fair values to the
Company’s tangible and intangible assets. 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 to determine whether
goodwill was impaired.




The
implied fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. As a result, the Company
allocated the fair value of the single reporting unit to all of the assets and
liabilities of the Company as if the reporting unit had been acquired in the
business combination and fair value of the reporting unit was the price paid to
acquire the reporting unit. The excess of the fair value of the reporting unit
over the amounts assigned to its assets and liabilities is the implied fair
value of the goodwill.




The
changes in carrying amount of goodwill for the year ended December 31, 2009 and
2008 respectively are as follows:





Balance
      at December 31, 2007
                  
                  $
                  -Acquisition
      of Traffix Inc
                  
                  
                  125,858Impairment
      Charge
                  
                  
                  (114,783
                  )Balance
      at December 31, 2008
                  
                  
                  11,075Estimate
      revision in connection with acquisition of Traffix, Inc
                  
                  
                  906Estimate
      revision in connection with acquisition of Ringtone
                  
                  
                  115Acquisition
      of ShopIt
                  
                  
                  1,052Impairment
                  
                  
                  (13,148
                  )Balance
      at December 31, 2009
                  
                  $
                  -





During
the first quarter of 2009, the Company revised its estimate of the fair market
value of certain pre-acquisition contingencies and other merger related
liabilities for its acquisitions of Traffix, Inc., and Ringtone.com. This
resulted in an increase of the Company’s liabilities by approximately $906,000.
In the second quarter of 2009 the Company increased its liabilities by a further
$115,000 in relation to its acquisition of Ringtone.com. In the third quarter of
2009, as a result of the purchase of the assets of ShopIt.com, the Company
recorded $1.1 million of goodwill and $1.8 million of identifiable intangible
assets (see note 3).




F-13





The
carrying amount and accumulated amortization of intangible assets as of December
31 2009 and 2008, respectively, are as follows:





Useful Life
                  
                  
                  Gross Book
                  
                  
                  Accumulated
                  
                  
                  
                  
                  
                  Net Bookin Years
                  
                  
                  Value
                  
                  
                  Amortization
                  
                  
                  Impairment
                  
                  
                  ValueAs
      of December 31, 2009Indefinite
      Lived assetsTradenames
                  
                  
                  
                  
                  $
                  6,241
                  
                  
                  $
                  -
                  
                  
                  $
                  1,916
                  
                  
                  $
                  4,325Domain
      names
                  
                  
                  
                  
                  
                  1,370
                  
                  
                  
                  -
                  
                  
                  
                  72
                  
                  
                  
                  1,298Amortized
      Intangible AssetsAcquired
      software technology
                  
                  
                  3 -
      5
                  
                  
                  
                  3,136
                  
                  
                  
                  1,589
                  
                  
                  
                  620
                  
                  
                  
                  927Domain
      names
                  
                  
                  3
                  
                  
                  
                  550
                  
                  
                  
                  351
                  
                  
                  
                  124
                  
                  
                  
                  75Licensing
                  
                  
                  2
                  
                  
                  
                  580
                  
                  
                  
                  580
                  
                  
                  
                  -
                  
                  
                  
                  -Tradenames
                  
                  
                  9
                  
                  
                  
                  1,320
                  
                  
                  
                  281
                  
                  
                  
                  761
                  
                  
                  
                  278Customer
      lists
                  
                  
                  1.5
      - 3
                  
                  
                  
                  1,618
                  
                  
                  
                  1,377
                  
                  
                  
                  87
                  
                  
                  
                  154Subscriber
      database
                  
                  
                  1
                  
                  
                  
                  3,956
                  
                  
                  
                  3,956
                  
                  
                  
                  -
                  
                  
                  
                  -Restrictive
      covenants
                  
                  
                  5
                  
                  
                  
                  1,228
                  
                  
                  
                  471
                  
                  
                  
                  561
                  
                  
                  
                  196Total
                  
                  
                  
                  
                  
                  $
                  19,999
                  
                  
                  $
                  8,605
                  
                  
                  $
                  4,141
                  
                  
                  $
                  7,253As
      of December 31, 2008Indefinite
      Lived assetsTradenames
                  
                  
                  
                  
                  
                  $
                  5,334
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  5,334Domain
      names
                  
                  
                  
                  
                  
                  
                  1,174
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,174Amortized
      Intangible AssetsAcquired
      software technology
                  
                  
                  3 -
      5
                  
                  
                  
                  2,431
                  
                  
                  
                  743
                  
                  
                  
                  -
                  
                  
                  
                  1,688Domain
      names
                  
                  
                  3
                  
                  
                  
                  550
                  
                  
                  
                  168
                  
                  
                  
                  -
                  
                  
                  
                  382Licensing
                  
                  
                  2
                  
                  
                  
                  580
                  
                  
                  
                  580
                  
                  
                  
                  -
                  
                  
                  
                  -Tradenames
                  
                  
                  9
                  
                  
                  
                  1,320
                  
                  
                  
                  134
                  
                  
                  
                  -
                  
                  
                  
                  1,186Customer
      lists
                  
                  
                  1.5
      - 3
                  
                  
                  
                  1,618
                  
                  
                  
                  1,154
                  
                  
                  
                  -
                  
                  
                  
                  464Subscriber
      database
                  
                  
                  1
                  
                  
                  
                  3,956
                  
                  
                  
                  2,679
                  
                  
                  
                  -
                  
                  
                  
                  1,277Restrictive
      covenants
                  
                  
                  5
                  
                  
                  
                  1,228
                  
                  
                  
                  225
                  
                  
                  
                  -
                  
                  
                  
                  1,003Total
                  
                  
                  
                  
                  
                  $
                  18,191
                  
                  
                  $
                  5,683
                  
                  
                  $
                  -
                  
                  
                  $
                  12,508





Amortization
expense for the year ended December 31, 2009 and 2008 was $2.9 million and $4.7
million respectively. Expected annual amortization expense related to
amortizable intangibles for fiscal year 2010, 2011, 2012, 2013and 2014 are $0.8
million, $0.3 million, $0.2 million, $0.2 million and $0.1 million,
respectively.





NOTE
8 -   Fair Value
Measurement




The carrying amounts of cash
equivalents, accounts receivable, accounts payable and accrued expenses are
believed to approximate fair value due to the short-term maturity of these
financial instruments. The following tables present certain
information for our assets and liabilities that are measured at fair value on a
recurring basis at December 31, 2009 and 2008:




LevelI
                  
                  
                  Level2
                  
                  
                  Level3
                  
                  
                  Total2009:Liabilities:Put
      options
                  
                  $
                  -
                  
                  
                  $
                  267
                  
                  
                  $
                  -
                  
                  
                  $
                  2672008:Assets:Auction-rate
      securities
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  4,000
                  
                  
                  $
                  4,000Available-for
      sale securities
                  
                  $
                  245
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  245





F-14




At December 31, 2009, put option liabilities on our common stock issued
in connection with the Shop-It acquisition are included in other current liabilities in our consolidated balance
sheet.  At December
31, 2008, auction-rate
securities and available-for-sale securities
are included in marketable securities in our consolidated balance
sheet.  In January 2009, the auction-rate securities of $4.0 million
were redeemed and converted to cash at par plus
interest.




We also measure goodwill and intangible assets on a non-recurring basis, for which we
recognized impairment charges in 2009 that is summarized as follows (in
thousands):





Quoted PricesinActive Markets
                  
                  
                  Significant
                  
                  
                  SignificantDecember 31,
                  
                  
                  for Identical
                  
                  
                  Unobservable
                  
                  
                  Unobservable
                  
                  
                  Total2009
                  
                  
                  Assets (Level 1)
                  
                  
                  Inputs (Level 2)
                  
                  
                  Inputs (Level 3)
                  
                  
                  LossesGoodwill
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  13,148Intangible
      Assets
                  
                  $
                  7,253
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  7,253
                  
                  
                  $
                  4,141




Goodwill,
with a carrying amount of $13.1 million was written down to its fair value of
$0.0 million in 2009, resulting in an impairment charge of $13.1 million, which
was included in earnings for the period.




Intangible assets, with a carrying amount of $11.4 million
were written down to their fair value of $7.3 million, resulting in an
impairment charge of $4.1 million, which was included in earnings for the
period.




NOTE
9 - Concentration of Business
and Credit Risk





Financial
instrument which potentially subject the Company to credit risk consist
primarily of cash and cash equivalents and accounts receivable.





Atrinsic
is currently utilizing several billing aggregators in order to provide content
and billings to the end user. These billing aggregators act as a billing
interface between Atrinsic and the mobile phone carriers that ultimately bill
Atrinsic’s end user subscribers. These billing aggregators have not had long
operating histories in the U.S. or operations with traditional business models.
These companies face a greater business risk in the marketplace, due to a
constant evolving business environment that stems from the infancy of the U.S.
mobile content industry. In addition, the Company also has customers other than
aggregators that represent significant amounts of revenues and accounts
receivable.


F-15




The table
below represents the company’s concentration of business and credit risk by
customers and aggregators.





For The Years EndedDecember 31,2009
                        
                        
                        2008RevenuesCustomer
      A
                        
                        
                        28
                        %
                        
                        
                        13
                        %Billing
      Aggregator B
                        
                        
                        8
                        %
                        
                        
                        4
                        %Customer
      C
                        
                        
                        7
                        %
                        
                        
                        3
                        %Other
      Customers & Aggregators
                        
                        
                        57
                        %
                        
                        
                        80
                        %As
      of December 31,2009
                        
                        
                        2008Accounts
      ReceivableBilling
      Aggregator D
                        
                        
                        16
                        %
                        
                        
                        12
                        %Billing
      Aggregator B
                        
                        
                        12
                        %
                        
                        
                        1
                        %Customer
      E
                        
                        
                        12
                        %
                        
                        
                        7
                        %Other
      Customers & Aggregators
                        
                        
                        60
                        %
                        
                        
                        80
                        %




NOTE
10 - Stockholders' Equity




In April,
2008, the Company’s Board of Directors authorized a stock repurchase program
allowing it to purchase up to $10 million of its outstanding shares of common
stock through May 31, 2009, depending on market conditions, share prices, and
other factors. Repurchases could take place in the open market or in privately
negotiated transactions and could be made under a Rule 10b5-1 plan.




The
Company repurchased 832,392 and 1,908,926 shares of its common stock during the
years ended December 31, 2009 and 2008, respectively. The shares were
repurchased at an average price $1.13 and $2.12 per share for the years ended
December 31, 2009 and 2008 respectively. Total cash consideration for the
repurchased stock was $5.0 million which is presented as Common Stock, Held in
Treasury in the accompanying Consolidated Balance Sheet.





On
February 4, 2008, Atrinsic completed the transactions contemplated by that
certain Agreement and Plan of Merger executed on September 26, 2007 (the “Merger
Agreement”) by and among Atrinsic, NM Merger Sub, Inc., a Delaware corporation
and wholly owned subsidiary of Atrinsic (“Merger Sub”) and Traffix, Inc., a
Delaware corporation (“Traffix”) (the “Merger Agreement”) pursuant to which
Merger Sub merged with and into Traffix (the “Merger”). As a result of the
Merger, Traffix became a wholly-owned subsidiary of Atrinsic. In consideration
for the Merger, shareholders of Traffix received approximately 0.676 shares of
common stock of Atrinsic for each share of Traffix common stock. In the
aggregate, Atrinsic issued approximately 10,409,358 shares of Atrinsic stock to
Traffix shareholders.


F-16


NOTE 11 – Provision (Benefit) for Income
Taxes




The
provision (benefit) for income taxes consists of the following components for
the periods ended as follows:





For the Year EndedDecember 31,2009
                  
                  
                  2008Current:Federal
                  
                  $
                  (3,361
                  )
                  
                  $
                  504State
                  
                  
                  19
                  
                  
                  
                  591Foreign
                  
                  
                  331
                  
                  
                  
                  398Total
      Current
                  
                  $
                  (3,011
                  )
                  
                  $
                  1,493Deferred:Federal
                  
                  $
                  2,489
                  
                  
                  $
                  (1,644
                  )State
                  
                  
                  1,177
                  
                  
                  
                  (736
                  )Foreign
                  
                  
                  (15
                  )
                  
                  
                  35Total
      Deferred
                  
                  $
                  3,651
                  
                  
                  $
                  (2,345
                  )Total
      Income Tax Provision (Benefit)
                  
                  $
                  640
                  
                  
                  $
                  (852
                  )





Deferred
tax assets and liabilities reflect the effect of tax losses, credits, and the
future tax effect of temporary differences between consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and are measured using enacted tax rates that apply to
either future taxable income or deductible amounts in the years in which those
temporary differences are expected to be recovered or settled.





The
income tax effects of significant items comprising the Company's deferred income
tax assets and liabilities are as follows:





For the Year EndedDecember 31,2009
                  
                  
                  2008Deferred
      Tax Assets:Allowance
      for Doubtful Accounts
                  
                  $
                  1,759
                  
                  
                  $
                  1,194Compensation
      Expense – NSOs
                  
                  
                  687
                  
                  
                  
                  768Accrued
      Expenses
                  
                  
                  1,649
                  
                  
                  
                  315Intangible
      Assets
                  
                  
                  5,642
                  
                  
                  
                  4,641Net
      Operating Loss Carryforward
                  
                  
                  1,567
                  
                  
                  
                  186Foreign
      Tax Credit
                  
                  
                  1,068
                  
                  
                  
                  144AMT
      Credit
                  
                  
                  39
                  
                  
                  
                  39Total
      Deferred Tax Assets
                  
                  
                  12,411
                  
                  
                  
                  7,287Deferred
      tax asset valuation allowance
                  
                  
                  (11,091
                  )
                  
                  
                  -Deferred
      Tax Assets, Net of Valuation Allowance
                  
                  $
                  1,320
                  
                  
                  $
                  7,287Deferred
      Tax Liabilities:Prepaid
      Expenses
                  
                  $
                  (270
                  )
                  
                  $
                  (335
                  )Fixed
      Assets
                  
                  
                  (714
                  )
                  
                  
                  (397
                  )Intangible
      Assets
                  
                  
                  (1,946
                  )
                  
                  
                  (4,259
                  )Other
                  
                  
                  -
                  
                  
                  
                  (157
                  )Total
      Deferred Tax Liabilities
                  
                  
                  (2,930
                  )
                  
                  
                  (5,148
                  )Net
      Deferred Tax (Liabilities) Assets
                  
                  $
                  (1,610
                  )
                  
                  $
                  2,139




F-17




Under the
provisions of Financial Accounting for Income Taxes, ASC 740, formerly Statement
of Financial Accounting Standards 109 (“SFAS 109”), “Accounting for Income
Taxes”, management is required to evaluate whether a valuation allowance should
be established against its deferred tax assets based on the consideration of all
available evidence using a "more likely than not" standard. Realization of
deferred tax assets is dependent upon taxable income in prior carryback years,
estimates of future taxable income, tax planning strategies, and reversals of
existing taxable temporary differences. Based on negative evidence such as
cumulative losses in recent years and losses expected in future years,
management concluded that a full valuation allowance of $11.1 million should be
recorded as of December 31, 2009. However, the Company recorded a deferred tax
liability relating to intangibles which are not expected to reverse in the
future and therefore cannot be offset against deferred tax assets.





As of
December 31, 2009 the Company had $1.3 million of federal net operating loss
carryforwards, $10.4 million state loss carryforwards and $1.0 million in
foreign tax credits. The federal net operating loss  and state net
operating loss will expire in 2029 if not utilized by then. The foreign tax
credit will expire from 2015 to 2019.




The
Company has $4.4 million and $ 2.7 million recorded as an income tax receivable
on its consolidated balance sheet as of December 31, 2009 and 2008,
respectively. In November 2009 Congress passed the Worker Homeownership &
Business Assistance Act of 2009 which allows businesses to carryback operating
losses for up to 5 years. As a result of this Act the company is able to
carryback some of its 2009 taxable loss, resulting in an
estimated  refund of  approximately $2.7 million, which is
included in income tax receivable on the Balance Sheet at December 31, 2009.
Also included in income taxes receivable is a carryback of $0.7 million which
was submitted to the IRS subsequent to the 2009 Act. The remaining $1.0 million
was for overpayment of federal taxes.




The total
income tax provision (benefit) relating to continuing operations differed from
income taxes at the statutory federal income tax rates of 35% and 34% for 2009
and 2008, respectively, as a result of the following items:





For the Year Ended December 31,2009
                  
                  
                  2008Computed
      expected income tax benefit at statutory rate
                  
                  $
                  (10,101
                  )
                  
                  
                  -35.00
                  %
                  
                  $
                  (39,658
                  )
                  
                  
                  -34.00
                  %Permanent
      differences including goodwill impairment
                  
                  
                  2,511
                  
                  
                  
                  8.70
                  %
                  
                  
                  39,284
                  
                  
                  
                  33.68
                  %State
      taxes, net of federal benefit
                  
                  
                  (1,612
                  )
                  
                  
                  -5.59
                  %
                  
                  
                  (198
                  )
                  
                  
                  -0.17
                  %Foreign
      taxes
                  
                  
                  (677
                  )
                  
                  
                  -2.35
                  %
                  
                  
                  -
                  
                  
                  
                  -Valuation
      allowance
                  
                  
                  11,090
                  
                  
                  
                  38.43
                  %
                  
                  
                  -
                  
                  
                  
                  -Other,
      net
                  
                  
                  (571
                  )
                  
                  
                  -1.99
                  %
                  
                  
                  (280
                  )
                  
                  
                  -0.24
                  %$
                  640
                  
                  
                  
                  2.22
                  %
                  
                  $
                  (852
                  )
                  
                  
                  -0.73
                  %





Uncertain
Tax Positions




The
Company recognizes interest and penalties related to uncertain tax positions as
income tax expense.




The
Company or its subsidiaries filed income tax returns in U.S. and Canada. In the
normal course of business the Company’s open tax years of 2006 and forward are
subject to examinations by the taxing authorities. If any issues addressed in
the Company’s tax audits are resolved in a manner not consistent with
management’s expectations, the Company could be required to adjust its provision
for income taxes. Although the timing or the resolution and/or closure of the
audits is highly uncertain and may change within the next twelve months the
changes are not anticipated to be significant.




A
year-over-year reconciliation of our liability for uncertain tax positions is as
follows:





2009
                  
                  
                  2008Balance
      at beginning of the year
                  
                  $
                  531
                  
                  
                  $
                  -Additions
      based on tax positions in prior years
                  
                  
                  220
                  
                  
                  
                  531Reductions
      due to settlements and other
                  
                  
                  (676
                  )
                  
                  
                  -Balance
      at end of the year
                  
                  $
                  75
                  
                  
                  $
                  531


F-18


NOTE
12– 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 for
the Company include outstanding stock options and warrants.




The
computational components of basic and diluted earnings per share are as
follows:





For The Year EndedDecember 31,2009
                    
                    
                    2008EPS
      Denominator:Basic
      weighted average shares
                    
                    
                    20,648,929
                    
                    
                    
                    21,320,638Effect
      of dilutive securities
                    
                    
                    -
                    
                    
                    
                    -Diluted
      weighted average shares
                    
                    
                    20,648,929
                    
                    
                    
                    21,320,638EPS Numerator (effect on net
      income):Net
      loss attributable to Atrinsic, Inc.
                    
                    $
                    (29,470
                    )
                    
                    $
                    (115,766
                    )Effect
      of dilutive securities
                    
                    
                    -
                    
                    
                    
                    -Diluted
      loss attributable to Atrinsic, Inc.
                    
                    $
                    (29,470
                    )
                    
                    $
                    (115,766
                    )Net
      loss per common share:Basic
      weighted average loss attributable to Atrinsic, Inc.
                    
                    $
                    (1.43
                    )
                    
                    $
                    (5.43
                    )Effect
      of dilutive securities
                    
                    
                    -
                    
                    
                    
                    -Diluted
      weighted average loss attributable to Atrinsic, Inc.
                    
                    $
                    (1.43
                    )
                    
                    $
                    (5.43
                    )




Common
stock underlying outstanding options and convertible securities were not
included in the computation of diluted earnings per share for the years ended
December 31, 2009 and 2008, because their inclusion would be anti dilutive when
applied to the Company’s net loss per share.




Financial
instruments, which may be exchanged for equity securities are excluded in
periods in which they are anti-dilutive. The following shares were excluded from
the calculation of diluted earnings per share:




Anti
      Dilutive EPS DisclosureDecember
      31,2009
                  
                  
                  2008Convertible
      note payable
                  
                  
                  -
                  
                  
                  
                  322,878Options
                  
                  
                  1,877,244
                  
                  
                  
                  2,883,372Warrants
                  
                  
                  314,443
                  
                  
                  
                  314,443Restricted
      Shares
                  
                  
                  11,670
                  
                  
                  
                  110,000Restricted
      Stock Units
                  
                  
                  275,000
                  
                  
                  
                  -





The per
share exercise prices of the options excluded were $0.48-$14.00 at December 31,
2009 and 2008. The per share exercise prices of the warrants excluded were $3.44
- $5.50 at December 31, 2009 and 2008.




See note
13 for further information about the options and warrants.




F-19




NOTE
13– Stock Based Compensation




2005
Plan




In 2005,
New Motion Mobile, Inc., the Company’s wholly-owned subsidiary, established its
2005 Stock Incentive Plan, (the “2005 Plan”), for eligible employees and other
directors and consultants. Under the 2005 Plan, officers, employees and
non-employees may be granted options to purchase common stock at no less than
100% of the market price at the date the option is granted. Since New Motion
Mobile’s stock was not publicly traded, the market price at the date of grant
was historically determined by third party valuation or the Company’s Board of
Directors. Incentive stock options granted to date typically vest at the rate of
33% on the anniversary of the vesting commencement date, and 1/24th of the
remaining shares on the last day of each month thereafter until fully vested.
The options expire ten years from the date of grant subject to cancellation upon
termination of employment or in the event of certain transactions In February
2007, the Company completed an exchange transaction (the “Exchange”) pursuant to
which New Motion Mobile became Atrinsic’s wholly-owned subsidiary. In connection
with the Exchange the options granted under the 2005 Plan by New Motion Mobile
were assumed by Atrinsic and, at that time of the Exchange, Atrinsic’s board of
directors adopted a resolution to not grant any further equity awards under the
2005 Plan.




2007
Plan




On
February 16, 2007, Atrinsic’s board of directors approved the 2007 Stock
Incentive Plan (the “2007 Plan”) which made available for grant up to 1,400,000
shares of common stock. On March 15, 2007, Atrinsic received, by written consent
of holders of a majority of all classes of its common and preferred stock and
the consent of the holders of a majority of Atrinsic’s common stock and
preferred stock voting together and as a single class, approval of the 2007
Plan. Under the 2007 Plan, officers, employees and non-employees may be granted
options to purchase Atrinsic’s common stock at no less than 100% of the market
price at the date the option is granted. Stock options and restricted stock
granted under the 2007 Plan typically vest at the rate of 33% on the anniversary
of the vesting commencement date, and 1/24th of the remaining shares on the last
day of each month thereafter until fully vested. The options expire ten years
from the date of grant subject to cancellation upon termination of employment or
in the event of certain transactions, such as a merger of Atrinsic.





2009
Plan





On June
25, 2009, the Company adopted the Atrinsic, Inc. 2009 Stock Incentive
Plan.  Under the plan, the Company is authorized to grant equity-based
awards in the form of stock options, restricted common stock, restricted stock
units, stock appreciation rights, and other stock based awards to employees
(including executive officers), directors and consultants of the Company and its
subsidiaries. The maximum number of shares available for grant under the plan is
2,750,000 shares of common stock.  The number of shares available for
award under the plan is subject to adjustment for certain corporate changes and
based on the types of awards provided, all in accordance with the provisions of
the plan.





Following
adoption of the 2009 Stock Incentive Plan, executives were granted 750,000
restricted stock units under the plan which will vest after the closing of
trading on the date that the average per share trading price of the Company’s
common stock during any period of 10 consecutive trading days equals or exceeds
$7.50 or upon a change in control of the Company, as defined in the plan. In
addition, the Company adopted a one-time option exchange program pursuant to
which 283,334 restricted stock units were granted in exchange for 850,000
options held by certain executives of the Company. On each of December 31, 2009,
December 31, 2010, and December 31, 2011, one-third of the restricted stock
units held by each individual will be eligible for vesting in accordance with
quantitative and qualitative measures to be determined by the Compensation
Committee of the Board. From an accounting perspective the 283,334 grants from
the exchange program have not been granted since the Board has not determined
the quantitative or qualitative measures under which these restricted share
units will vest. On October 6, 2009, Burton Katz resigned from his position as
Chief Executive Officer of the Company and also resigned from the Company’s
Board of Directors. On October 20, 2009, the Company and Burton Katz entered
into a Separation and Mutual Release Agreement which provided that the 375,000
restricted stock units held by Mr. Katz (of which 100,000 were from the exchange
program and were not granted from an accounting perspective) are cancelled along
with all rights of Mr. Katz to receive shares of common stock of
the Company pursuant to such restricted stock units. On December 16, 2009,
Andrew Zaref resigned as Chief Financial Officer of the Company and Mr. Zaref
entered into a Separation and Mutual Release agreement which led to the
cancellation of the 266,667 (of which 66,667 were from the exchange program and
were not granted from an accounting perspective) restricted stock units held by
Mr. Zaref. As a result of the resignation of these executives, the forfeiture
rate on stock based compensation expense increased to 51% in 2009 compared to
20% in 2008.




Stock
based compensation is expensed using the straight line attribution method and
reflects the application of an annual forfeiture rate.




Option
Valuation




To value
awards granted, the Company uses the Black-Scholes option pricing model. The
Company determines the assumptions in this pricing model at the grant date. For
options granted prior to January 1, 2006, Atrinsic used the minimum value method
for volatility, as permitted by SFAS No. 123, resulting in 0% volatility. For
options granted or modified after January 1, 2006, Atrinsic bases expected
volatility on the historical volatility of a peer group of publicly traded
entities. Atrinsic has limited history with its stock option grants, during
which time there has been limited stock option exercise and forfeiture activity
on which to base expected maturity. Management estimates that on average,
options will be outstanding for approximately 7 years. Atrinsic bases the
risk-free rate for the expected term of the option on the U.S. Treasury Constant
Maturity rate as of the grant date. There were no options granted in 2009.




F-20





The fair
value of each option award during the year ended December 31, 2008 was estimated
on the date of grant using a Black-Scholes valuation model that used the
assumptions noted in the following table:




2008Strike
      Price
                        
                        $
                        4.16
      - $10.92Expected
      life
                        
                        5.6
      yearsRisk
      free interest rate
                        
                        3.0%
      to 3.5
                        %Volatility
                        
                        
                        58.0
                        %Fair
      market value per share
                        
                        $
                        2.23
      - $4.57




Stock Options





Stock
option activity under the 2005 Plan and 2007 Plan was as follows:





Weighted-
                  
                  
                  EstimatedAverage
                  
                  
                  AggregateNumber of
                  
                  
                  Exercise
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  ValueOutstanding
      at January 1, 2008
                  
                  
                  1,145,677
                  
                  
                  $
                  2.94
                  
                  
                  $
                  12,671Traffix
      options converted to NWMO
                  
                  
                  1,508,069
                  
                  
                  $
                  8.37Granted
                  
                  
                  325,000
                  
                  
                  $
                  10.72Exercised
                  
                  
                  (561,737
                  )
                  
                  $
                  0.61Forfeited
      or cancelled
                  
                  
                  (506,821
                  )
                  
                  $
                  8.25Outstanding
      at December 31, 2008
                  
                  
                  1,910,188
                  
                  
                  $
                  7.82
                  
                  
                  $
                  81,527Vested
      or expected to vest at December 31. 2008
                  
                  
                  1,491,075
                  
                  
                  $
                  7.35
                  
                  
                  $
                  81,527Exercisable
      at December 31, 2008
                  
                  
                  121,682
                  
                  
                  $
                  0.48
                  
                  
                  $
                  81,527Outstanding
      at January 1, 2009
                  
                  
                  1,910,188
                  
                  
                  $
                  7.82
                  
                  
                  $
                  81,527Granted
                  
                  
                  -Exercised
                  
                  
                  -Forfeited
      or cancelled
                  
                  
                  (396,128
                  )
                  
                  $
                  9.93Outstanding
      at December 31, 2009
                  
                  
                  1,514,060
                  
                  
                  $
                  7.28
                  
                  
                  $
                  20,671Vested
      or expected to vest at December 31, 2009
                  
                  
                  1,499,768
                  
                  
                  $
                  7.29
                  
                  
                  $
                  20,671Exercisable
      at December 31, 2009
                  
                  
                  121,592
                  
                  
                  $
                  0.48
                  
                  
                  $
                  20,671





For the
year ended December 31, 2008 the company received $344,000 in proceeds from
option exercises.




Grants
Outside of Plans




In 2008,
the Company issued options to purchase 500,000 shares of the Company’s common
stock to executives of the Company. These options were issued outside of the
Plan due to a limitation in the number of shares available under the Plan. As a
result of the adoption of the Company’s one-time option exchange program on June
25, 2009, these shares were cancelled. The remaining options to purchase 363,184
shares of common stock are exercisable until October 5, 2010 as per the
Company’s Separation and Mutual Release Agreement with Burton Katz.





Awards
granted outside the Plan are valued in the same manner as options granted under
the Plan, including the methods of deciding upon the assumptions used in the
Black-Scholes valuation. The fair value of the option award outside the Plan was
estimated on the date of grant using a Black Scholes valuation model that used
the assumptions noted in the following table:


F-21




Stock
option activity outside the Plan was as follows:





Weighted-
                  
                  
                  EstimatedAverage
                  
                  
                  AggregateNumber of
                  
                  
                  Exercise
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  ValueOutstanding
      at January 1, 2008
                  
                  
                  363,184
                  
                  
                  $
                  2.34
                  
                  
                  $
                  -Granted
                  
                  
                  500,000
                  
                  
                  $
                  8.22Exercised
                  
                  
                  -Forfeited
      or cancelled
                  
                  
                  -Outstanding
      at December 31, 2008
                  
                  
                  -Vested
      or expected to vest at December 31, 2008
                  
                  
                  863,184
                  
                  
                  $
                  5.74
                  
                  
                  $
                  -Exercisable
      at December 31, 2008
                  
                  
                  363,184
                  
                  
                  $
                  2.34
                  
                  
                  $
                  -Outstanding
      at January 1, 2009
                  
                  
                  863,184
                  
                  
                  $
                  5.74
                  
                  
                  $
                  -Granted
                  
                  
                  -Exercised
                  
                  
                  -Forfeited
      or cancelled
                  
                  
                  (500,000
                  )
                  
                  $
                  8.22Outstanding
      at December 31, 2009
                  
                  
                  363,184
                  
                  
                  $
                  2.34
                  
                  
                  $
                  -Vested
      or expected to vest at December 31, 2009
                  
                  
                  363,184
                  
                  
                  $
                  2.34
                  
                  
                  $
                  -Exercisable
      at December 31, 2009
                  
                  
                  -





Summary
Option Information




The
following table summarizes information concerning currently outstanding and
exercisable stock options as of December 31, 2009:




Weighted
                                
                                
                                Weighted
                                
                                
                                
                                
                                
                                WeightedRange of
                                
                                
                                
                                
                                Average
                                
                                
                                Average
                                
                                
                                
                                
                                
                                AverageExercise
                                
                                Options
                                
                                
                                Remaining
                                
                                
                                Exercise
                                
                                
                                Options
                                
                                
                                ExercisePrices
                                
                                Outstanding
                                
                                
                                Life (years)
                                
                                
                                Price
                                
                                
                                Exercisable
                                
                                
                                Price2005 Plan :$0.48
                                
                                
                                121,592
                                
                                
                                
                                6.2
                                
                                
                                $
                                0.48
                                
                                
                                
                                121,592
                                
                                
                                $
                                0.482007 Plan :$6.00
                                
                                
                                356,200
                                
                                
                                
                                7.1
                                
                                
                                $
                                6.00
                                
                                
                                
                                341,908
                                
                                
                                $
                                6.00$14.00
                                
                                
                                25,000
                                
                                
                                
                                7.7
                                
                                
                                $
                                14.00
                                
                                
                                
                                25,000
                                
                                
                                $
                                14.00Traffix
      Options converted to Atrinsic$0
      - $4.99
                                
                                
                                205,353
                                
                                
                                
                                1.4
                                
                                
                                $
                                3.90
                                
                                
                                
                                205,353
                                
                                
                                $
                                3.90$5.00
      - $9.99
                                
                                
                                519,431
                                
                                
                                
                                3.4
                                
                                
                                $
                                8.77
                                
                                
                                
                                519,431
                                
                                
                                $
                                8.77$10.00
      - $14.99
                                
                                
                                286,484
                                
                                
                                
                                4.3
                                
                                
                                $
                                10.89
                                
                                
                                
                                286,484
                                
                                
                                $
                                10.89Outside
      of Plans :$2.34
                                
                                
                                363,184
                                
                                
                                
                                6.7
                                
                                
                                $
                                2.34
                                
                                
                                
                                363,184
                                
                                
                                $
                                2.34


F-22




Restricted
Stock




The
following table summarizes restricted stock activity for the years ended
December 31, 2009 and 2008.




Weighted Avg.Grant DateNumber of
                  
                  
                  Fair ValueShares
                  
                  
                  PerShareOutstanding
      at January 1, 2008
                  
                  
                  75,000
                  
                  
                  $
                  16.40Granted
                  
                  
                  132,005
                  
                  
                  $
                  8.33Exercised
                  
                  
                  -
                  
                  
                  $
                  -Forfeited
      or cancelled
                  
                  
                  (97,005
                  )
                  
                  $
                  14.57Outstanding
      at December 31, 2008
                  
                  
                  110,000
                  
                  
                  $
                  8.33Vested
      or expected to vest at December 31. 2008
                  
                  
                  -
                  
                  
                  $
                  -Exercisable
      at December 31, 2008
                  
                  
                  -
                  
                  
                  $
                  -Outstanding
      at January 1, 2009
                  
                  
                  110,000
                  
                  
                  $
                  8.33Granted
                  
                  
                  38,352
                  
                  
                  $
                  1.13Exercised
                  
                  
                  (91,396
                  )
                  
                  $
                  5.31Forfeited
      or cancelled
                  
                  
                  (45,286
                  )
                  
                  $
                  8.33Outstanding
      at December 31, 2009
                  
                  
                  11,670
                  
                  
                  $
                  8.33Vested
      or expected to vest at December 31, 2009
                  
                  
                  -
                  
                  
                  $
                  -Exercisable
      at December 31, 2009
                  
                  
                  -
                  
                  
                  $
                  -





Restricted
Stock Units





In 2009,
the Company adopted the Atrinsic, Inc. 2009 Stock Incentive Plan. Under this
plan, 750,000 restricted stock units were granted to certain executives of the
Company. With the resignation of Burton Katz, the Chief Executive Officer, and
Andrew Zaref, the Chief Financial Officer, 475,000 of these restricted stock
units were cancelled. The following table summarizes the activity for
2009.





Number of
                  
                  
                  Fair ValueShares
                  
                  
                  PershareOutstanding
      at January 1, 2009
                  
                  
                  -
                  
                  
                  $
                  -Granted
                  
                  
                  750,000
                  
                  
                  $
                  0.28Exercised
                  
                  
                  -
                  
                  
                  $
                  -Forfeited
      or cancelled
                  
                  
                  (475,000
                  )
                  
                  $
                  0.28Outstanding
      at December 31, 2009
                  
                  
                  275,000
                  
                  
                  $
                  0.28Vested
      or expected to vest at December 31 2009
                  
                  
                  -
                  
                  
                  $
                  -Exercisable
      at December 31, 2009
                  
                  
                  -
                  
                  
                  $
                  -


F-23








Total
non-cash equity based compensation expense included in the consolidated
Statement of Operations for the years ended December 31, 2009 and 2008 was $0.9
million and $1.3 million, respectively, as follows:




For the Year EndedDecember 31,2009
                  
                  
                  2008Product
      and distribution
                  
                  $
                  111
                  
                  
                  $
                  7Selling
      and marketing
                  
                  
                  -
                  
                  
                  
                  3General
      and administrative and other operating
                  
                  
                  746
                  
                  
                  
                  1,272$
                  857
                  
                  
                  $
                  1,282





For the
year ended December 31, 2009 and 2008 compensation expense relating to options
was recorded net of a forfeiture rate of approximately 51% and 20% respectively.
No stock-based compensation costs were capitalized as part of the cost of an
asset for any of the periods presented. Additionally, SFAS No. 123(R) (ASC
Subtopic 718) requires that the tax benefit from the tax deduction related to
share-based compensation that is in excess of recognized compensation costs be
reported as a financing cash flow rather than an operating cash
flow.





Warrants




In 2006,
the Company issued Secured Convertible Notes to Scott Walker and SGE, a
corporation owned by Allan Legator, the Company’s then Chief Financial Officer.
These Secured Convertible Notes were repaid in full with interest in September
2006. Pursuant to the terms of the Secured Convertible Notes, on January 26,
2007, Scott Walker was granted a right to receive a warrant to purchase, on a
post-Reverse Split basis, 14,382 shares of common stock at an exercise price of
$3.44 per share and SGE was granted a right to receive a warrant to purchase, on
a post-Reverse Split basis, 9,152 shares of common stock at an exercise price of
$3.44 per share.





In
February 2007, the Company completed an exchange transaction pursuant to which
New Motion Mobile became our wholly-owned subsidiary. In connection with the
exchange transaction, we raised gross proceeds of approximately $20 million in
equity financing through the sale of our Series A Preferred Stock, Series B
Preferred Stock and Series D Preferred Stock.  In connection with the
Series A, B and D Preferred Stock financings, a placement agent was paid a cash
fee equal to 7.5% of the gross proceeds from the financing and five year
warrants to purchase 290,909 shares of common stock at an average exercise price
of $5.50 per share on a post reverse-split basis, which was equivalent to the
average per share valuation of the Company for the Series A, B and D Preferred
Stock financings.




The fair
values of the warrants were between $2.42 and $4.31 and were estimated on the
date of grant using a Black-Scholes valuation model. To calculate the fair
value, volatility of 86%, interest rate of 5% and expected life of 5 years was
used. The warrants issued during the year ended December 31, 2008 are fully
vested and exercisable on the date of grant. The Company did not have any
warrant activity prior to January 1, 2007.


F-24







The
following table summarizes information concerning currently outstanding and
exercisable common stock warrants as of December 31, 2009:





Weighted
                            
                            
                            WeightedRange of
                            
                            
                            
                            
                            Average
                            
                            
                            AverageExercise
                            
                            Warrants
                            
                            
                            Remaining
                            
                            
                            Exercise
                            
                            
                            Warrants
                            
                            
                            FairPrices
                            
                            Outstanding
                            
                            
                            Life (years)
                            
                            
                            Price
                            
                            
                            Exercisable
                            
                            
                            Value$
                            3.44
                            
                            
                            23,534
                            
                            
                            
                            2.1
                            
                            
                            $
                            3.44
                            
                            
                            
                            23,534
                            
                            
                            $
                            2.42$
                            5.50
                            
                            
                            290,909
                            
                            
                            
                            2.2
                            
                            
                            $
                            5.50
                            
                            
                            
                            290,909
                            
                            
                            $
                            4.31





NOTE
14 - Commitments and Contingencies





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 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 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 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 we 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 to us in connection with transaction 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 us 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, we reached a settlement of the action in
principle with Mobile Messenger.  The terms of this 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 our results from operations, beyond what
we have 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 the results of such disputes will not
have a significant adverse effect on the financial position or the results of
operations of the Company. Of approximately $9.6 million in total accrued
expenses as of December 31, 2009, $2.1 million is associated with legal
contingencies disclosed above.


F-25




Lease
and Employment Commitments





The
following table shows the Company’s future commitments for future minimum lease
payments required under operating leases for office space and equipment that
have remaining non cancellable lease terms in excess of one year and future
commitments under employment agreements, as of December 31, 2009:





Operating
                    
                    
                    Employment
                    
                    
                    Total(in
      thousands)
                    
                    Leases
                    
                    
                    Agreements
                    
                    
                    Obligations2010
                    
                    $
                    1,165
                    
                    
                    $
                    717
                    
                    
                    $
                    1,8822011
                    
                    
                    1,127
                    
                    
                    
                    135
                    
                    
                    
                    1,2622012
                    
                    
                    886
                    
                    
                    
                    -
                    
                    
                    
                    8862013
                    
                    
                    936
                    
                    
                    
                    -
                    
                    
                    
                    9362014
                    
                    
                    987
                    
                    
                    
                    -
                    
                    
                    
                    9872015
      and thereafter
                    
                    
                    3,618
                    
                    
                    
                    -
                    
                    
                    
                    3,618$
                    8,719
                    
                    
                    $
                    852
                    
                    
                    $
                    9,571





Rent
expense for all operating leases in 2009 and 2008 was $1.3million and $1.4
million, respectively.





NOTE
15 - Employee Benefit Plan




The
Company’s employee benefit plan covers all eligible employees and includes a
savings plan under Section 401(k) of the Internal Revenue Code. The savings plan
allows participants to make pretax contributions up to 90% of their earnings,
with the Company contributing an additional 35% of up to six percent of an
employee’s compensation. During the years ended December 31, 2009 and 2008, the
Company contributed approximately $78,000 and $27,000 to the plan.




NOTE
16 – Geographic Data




Geographic
information about the Company’s long-lived assets is presented below. Revenues
were exclusively generated in the United States.





YearsEndedDecember31,(In thousands)
                  
                  2009
                  
                  
                  2008Canada
                  
                  $
                  1,238
                  
                  
                  $
                  1,245United
      States
                  
                  
                  9,569
                  
                  
                  
                  14,789$
                  10,807
                  
                  
                  $
                  16,034





NOTE
17 – 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.




F-26





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 Staff Position No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” 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. ASC 260-10 is effective for
fiscal years beginning after December 15, 2008. The adoption of ASC 260-10
did not have an impact on the Company’s financial statements.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” which 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. ASC 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.
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 ASC 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
December 2007, the FASB issued SFAS No. 160, “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
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. ASC 810-10-65-1 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. 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 ASC 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 as of the
beginning of the annual reporting period commencing after November 15, 2009
and will be adopted by the Company in the first quarter of 2010.  We do not
believe that the adoption of these revisions to ASC 810 will have a material
impact to our results of operations or financial position.




In
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 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 elements of 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.


F-27




NOTE
18 – Subsequent Events





We have
evaluated events subsequent to the balance sheet date for the year ended
December 31, 2009. Except for the matters separately disclosed in Note 4
(pertaining to Mango), Note 5 (pertaining to Kazaa) and Note 14 (pertaining to
the settlement of class action proceeding in the State of California), there
have not been any material events that have occurred  that would
require adjustments to or disclosure in our Consolidated Financial
Statements.





NOTE
19 – Valuation and Qualifying Accounts




The
following table provides information regarding the Company’s allowance for
doubtful accounts and deferred tax valuation allowance.




Write-offs/Description
              
              Balance
              
              
              Charged to
              
              
              Payments/
              
              
              Balance(In thousands)
              
              January 1,
              
              
              Expenses
              
              
              Other
              
              
              December 31,2008Allowance
      for doubtful accounts
              
              $
              565
              
              
              
              2,141
              
              
              
              232
              
              
              $
              2,938Deferred
      tax assets — valuation allowance
              
              $
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              -2009Allowance
      for doubtful accounts
              
              $
              2,938
              
              
              
              1,991
              
              
              
              (634
              )
              
              $
              4,295Deferred
      tax assets — valuation allowance
              
              $
              -
              
              
              
              11,090
              
              
              
              -
              
              
              $
              11,090





Supplemental
Financial Information




The
following table presents unaudited quarterly results of operations for 2009 and
2008. These quarterly results reflect all normal recurring adjustments that are,
in the opinion of management, necessary for a fair presentation of the
results.




Quarter EndedMarch 31,
                      
                      
                      June 30,
                      
                      
                      September 30,
                      
                      
                      December 31,2009
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2009Total
      revenues
                      
                      $
                      23,548
                      
                      
                      $
                      17,008
                      
                      
                      $
                      14,873
                      
                      
                      $
                      13,660Net
      loss before income taxes
                      
                      
                      (1,790
                      )
                      
                      
                      (2,865
                      )
                      
                      
                      (5,061
                      )
                      
                      
                      (19,146
                      )Provision
      (benefit) for taxes
                      
                      
                      (670
                      )
                      
                      
                      (930
                      )
                      
                      
                      (2,736
                      )
                      
                      
                      4,976Net
      loss
                      
                      
                      (1,120
                      )
                      
                      
                      (1,935
                      )
                      
                      
                      (2,325
                      )
                      
                      
                      (24,122
                      )Equity
      in loss (income) of Investee
                      
                      
                      85
                      
                      
                      
                      (33
                      )
                      
                      
                      61
                      
                      
                      
                      (173
                      )Net
      (loss)  Income attibutable to non-controlling
      interest
                      
                      
                      (18
                      )
                      
                      
                      46
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      (loss) income attributable to Atrinsic,Inc.
                      
                      $
                      (1,187
                      )
                      
                      $
                      (1,948
                      )
                      
                      $
                      (2,386
                      )
                      
                      $
                      (23,949
                      )Net
      loss per share:Basic
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.10
                      )
                      
                      $
                      (0.12
                      )
                      
                      $
                      (1.15
                      )Diluted
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.10
                      )
                      
                      $
                      (0.12
                      )
                      
                      $
                      (1.15
                      )Weighted
      average number of common shares:Basic
                      
                      
                      20,790,942
                      
                      
                      
                      20,294,869
                      
                      
                      
                      20,634,558
                      
                      
                      
                      20,841,331Diluted
                      
                      
                      20,790,942
                      
                      
                      
                      20,294,869
                      
                      
                      
                      20,634,558
                      
                      
                      
                      20,841,331




F-28




Quarter EndedMarch 31,
                  
                  
                  June 30,
                  
                  
                  September 30,
                  
                  
                  December 31,2008
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008Total
      revenues
                  
                  $
                  28,738
                  
                  
                  $
                  31,451
                  
                  
                  $
                  30,819
                  
                  
                  $
                  22,876Net
      (loss) Income before income taxes
                  
                  
                  (470
                  )
                  
                  
                  1,786
                  
                  
                  
                  (98
                  )
                  
                  
                  (117,860
                  )Provision
      (benefit) for taxes
                  
                  
                  (174
                  )
                  
                  
                  768
                  
                  
                  
                  (77
                  )
                  
                  
                  (1,369
                  )Net
      (loss) income
                  
                  
                  (296
                  )
                  
                  
                  1,018
                  
                  
                  
                  (21
                  )
                  
                  
                  (116,491
                  )Equity
      in loss of Investee
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      (loss) income attibutable to non-controlling interest
                  
                  
                  (29
                  )
                  
                  
                  (48
                  )
                  
                  
                  (15
                  )
                  
                  
                  68Net
      (loss) income attributable to Atrinsic,Inc.
                  
                  $
                  (267
                  )
                  
                  $
                  1,066
                  
                  
                  $
                  (6
                  )
                  
                  $
                  (116,559
                  )Earnings
      (loss) income per share:Basic
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.05
                  
                  
                  $
                  (0.00
                  )
                  
                  $
                  (5.37
                  )Diluted
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.05
                  
                  
                  $
                  (0.00
                  )
                  
                  $
                  (5.37
                  )Weighted
      average number of common shares:Basic
                  
                  
                  18,932,871
                  
                  
                  
                  22,664,860
                  
                  
                  
                  22,545,451
                  
                  
                  
                  21,689,795Diluted
                  
                  
                  18,932,871
                  
                  
                  
                  23,176,573
                  
                  
                  
                  22,545,451
                  
                  
                  
                  21,689,795


F-29


ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.




None




ITEM
9A(T) CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Members
of the our management, including our Chief Executive Officer, Jeffrey Schwartz,
and Chief Financial Officer, Thomas Plotts, have evaluated the effectiveness of
our disclosure controls and procedures, as defined by paragraph (e) of Exchange
Act Rules 13a-15 or 15d-15, as of December 31, 2009, the end of the period
covered by this report.  Based upon that evaluation, Messrs. Schwartz
and Plotts concluded that our disclosure controls and procedures were effective
as of December 31, 2009.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended.  Our internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.  Our internal control over financial reporting
includes those policies and procedures that:




(i)           pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;




(ii)           provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of management and directors;
and




(iii)          provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition our assets that could have a material effect on
our financial statements.




Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009.  In making this assessment, we used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.  Based on our assessment and those criteria, we have
concluded that our internal control over financial reporting was effective as of
December 31, 2009.




This
annual report does not include an attestation report by our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only our management report in
this annual report.




Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during the fourth quarter
ended December 31, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.




ITEM
9B. OTHER INFORMATION




The
description of the Marketing Services Agreement and the Master Services
Agreement, contained under Item 7 under the heading “Executive Overview”
beginning on page 21 is incorporated under this Item 9B by
reference.
  The
description of the company’s settlement of its Class Action proceeding in the
State of California on Allen V. Atrinsic f/k/a New Motion, Inc. pending in the
Los Angeles County Superior Court and the description of the company’s
settlement with Mobile Messenger, each as described under Item 3, Legal
Proceedings, are incorporated under this Item 9B by
reference.




32





Part III




ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND
CORPORATE GOVERNANCE




The
information required by this item will be included in an amendment to this
report on form 10-K or a proxy statement which shall be filed with the
Securities and Exchange Commission no later than April 30, 2010.




ITEM
11. EXECUTIVE COMPENSATION




The
information required by this item will be included in an amendment to this
report on form 10-K or a proxy statement which shall be filed with the
Securities and Exchange Commission no later than April 30, 2010.




ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





The
information required by this item will be included in an amendment to this
report on form 10-K or a proxy statement which shall be filed with the
Securities and Exchange Commission no later than April 30, 2010.




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




The
information required by this item will be included in an amendment to this
report on form 10-K or a proxy statement which shall be filed with the
Securities and Exchange Commission no later than April 30, 2010.




ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




On
January 30, 2009, we appointed KPMG, LLP as our new independent registered
public accounting firm following the resignation of McGladrey and Pullen LLP,
our former auditors, on January 21, 2009.  We originally engaged
McGladrey & Pullen LLP as our independent registered public accountant on
May 7, 2008.  Prior to their resignation, McGladrey and Pullen LLP had
not commenced any procedures with regard to the December 31, 2008 audit nor did
they report on our consolidated financial statements during their
engagement.




Prior to
May 7, 2008, Windes & McClaughry was engaged as our principal independent
accounting firm and reported on our December 31, 2007 consolidation financial
statements.  Prior to February 12, 2007, our principal auditors were
Carlin, Charron & Rosen, LLP.




The
following table sets forth fees billed to us by our auditors, KPMG LLP during
fiscal year ending December 31, 2009 and  during fiscal year ending
December 31, 2008 for: services rendered for the audit of our annual financial
statements and the review of our quarterly financial statements, services by our
auditors that are reasonably related to the performance of the audit or review
of our financial statements and that are not reported as Audit Fees, services
rendered in connection with tax compliance, tax advice and tax planning, and all
other fees for services rendered.





(In
      thousands)
                    
                    December 31, 2009
                    
                    
                    December 31, 2008Audit
      Fees
                    
                    $
                    375
                    
                    
                    $
                    285Audit
      Related Fees
                    
                    
                    5
                    
                    
                    
                    -Tax
      Fees
                    
                    
                    -
                    
                    
                    
                    -All
      Other Fees
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    380
                    
                    
                    $
                    285





Our audit
committee was directly responsible for interviewing and retaining our
independent accountants, considering the accounting firms’ independence and
effectiveness, and pre-approving the engagement fees and other compensation to
be paid to, and the services to be conducted by, the independent accountants
mentioned above. The audit committee pre-approved 100% of the services described
above.


33




Part IV




ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




(a)          Documents filed as part of this
report




1.          Financial
Statements.




See Index
to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is
incorporated herein by reference.




2.          Financial Statement
Schedules.




All
financial statement schedules are omitted because the information is
inapplicable or presented in the Notes to Financial Statements.




3.           Exhibits.  See Item 15(b)
below.




(b)         Exhibits.  We
have filed, or incorporated into this Form 10-K by reference, the exhibits
listed on the accompanying Index to Exhibits immediately following the signature
page of this Form 10-K.




(c)        Financial Statement
Schedule.  See Item 15(a) above.


34


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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.





Atrinsic,
      Inc./s/
      Thomas PlottsBy: Thomas
      Plotts
                    Its: Chief Financial Officer (Interim)Date: March 30, 2010




POWER
OF ATTORNEY




The
undersigned directors and officers of Atrinsic, Inc. do hereby constitute and
appoint Jeffrey Schwartz and Thomas Plotts, and each of them, with full power of
substitution and resubstitution, as their true and lawful attorneys and agents,
to do any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney and agent, may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, as amended and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments hereto, and we do hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.




In
accordance with the Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.




Name
              
              Title
              
              Date/s/ Jeffrey Schwartz
              
              Chief
      Executive Officer
              
              March
      30, 2010Jeffrey
      Schwartz
              
              (Principal
      Executive Officer)/s/ Thomas Plotts
              
              Chief
      Financial Officer (Interim)
              
              March
      30,  2010Thomas
      Plotts
              
              (Principal
      Financial and AccountingOfficer)/s/ Ray Musci
              
              Director
              
              March
      30, 2010Raymond
      Musci/s/ Lawrence Burstein
              
              Director
              
              March
      30, 2010Lawrence
      Burstein/s/ Robert  Ellin
              
              Director
              
              March
      30, 2010Robert
      S. Ellin/s/ Mark Dyne
              
              Director
              
              March
      30, 2010Mark
      Dyne/s/ Jerome Chazen
              
              Director
              
              March
      30, 2010Jerome
      Chazen/s/ Stuart Goldfarb
              
              Director
              
              March
      30, 2010Stuart
      Goldfarb


S-1


EXHIBIT
INDEX




ExhibitNo.
                          
                          Title2.1
                          
                          Exchange
      Agreement dated January 31, 2007, among MPLC, Inc., Atrinsic, Inc., the
      Stockholders of Atrinsic, Inc. and Trinad Capital Master Fund, Ltd.
      Incorporated by reference to the Registrant’s Current Report on Form 8-K
      (File No. 000-51353) filed with the Commission on February 1,
      2007.**2.2
                          
                          Plan
      of Reorganization dated January 25, 2005. Incorporated by reference to
      Exhibit 2.1 to the Registrant’s Form 10-SB (File No. 000-51353) filed with
      the Commission on June 10, 2005.2.3
                          
                          Order
      Confirming Plan of Reorganization dated January 25, 2005. Incorporated by
      reference to Exhibit 2.2 to the Registrant’s Form 10-SB (File No.
      000-51353) filed with the Commission on June 10, 2005.2.4
                          
                          Agreement
      and Plan of Merger dated September 26, 2007 by and between the Registrant,
      Traffix, Inc., and NM Merger Sub. Incorporated by reference to Exhibit 2.1
      of the Registrant’s Current Report on Form 8-K (File No. 000-51353) filed
      with the Commission on September 27, 2007.2.5
                          
                          Amendment
      to Agreement and Plan of Merger dated October 12, 2007. Incorporated by
      reference to the Registrant’s Current Report on Form 8-K (File No.
      000-51353) filed with the Commission on October 19,
  2007.2.6
                          
                          Asset
      Purchase Agreement entered into on June 30, 2008, by and among Atrinsic,
      Inc. Ringtone.com, LLC and W3i Holdings, LLC.  Incorporated by
      reference to the Registrant’s Current Report on Form 8-K (File No.
      001-12555) filed with the Commission on July 7, 2008.**3.1
                          
                          Restated
      Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to
      the Registrant’s Form 10-SB (File No. 000-51353) filed with the Commission
      on June 10, 2005.3.2
                          
                          Certificate
      of Amendment to the Restated Certificate of Incorporation, dated October
      12, 2004. Incorporated by reference to Exhibit 3.2 to the Registrant’s
      Form 10-SB (File No. 000-51353) filed with the Commission on June 10,
      2005.3.3
                          
                          Certificate
      of Amendment to the Restated Certificate of Incorporation, dated April 8,
      2005. Incorporated by reference to Exhibit 3.3 to the Registrant’s Form
      10-SB (File No. 000-51353) filed with the Commission on June 10,
      2005.3.4
                          
                          Certificate
      of Amendment to the Restated Certificate of Incorporation, dated May 2,
      2007. Incorporated by reference to Exhibit 3.1 to the Registrant’s Current
      Report on Form 8-K (File No. 000-51353) filed with the Commission on May
      7, 2007.3.5
                          
                          Certificate
      of Amendment to the Restated Certificate of Incorporation dated June 25,
      2009. Incorporated by reference to Exhibit 3(i).1 to the Registrant’s
      Current Report on Forms 8-K (File No. 000-12555) filed with the Commission
      on July 1, 2010.3.6
                          
                          Bylaws.
      Incorporated by reference to Exhibit 3.4 to the Registrant’s Form 10-SB
      (File No. 000-51353) filed with the Commission on June 10,
      2005.3.7
                          
                          Form
      of certificate for shares of common stock of Atrinsic, Inc. Incorporated
      by reference to Exhibit 99.1 of the Registrant’s Registration Statement
      of  Form SB-2/A (File No. 333-143025) filed with the Commission
      on July 23, 2007.4.1
                          
                          Series
      A Convertible Preferred Stock Registration Rights Agreement. Incorporated
      by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
      8-K (File No. 000-51353) filed with the Commission on January 26,
      2007.4.2
                          
                          Series
      D Convertible Preferred Stock Registration Rights Agreement. Incorporated
      by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
      8-K (File No. 000-51353) filed with the Commission on March 6,
      2007.4.3
                          
                          2005
      Stock Incentive Plan. Incorporated by reference to the Registrant’s
      Current Report on Form 8-K (File No. 000-51353) filed with the Commission
      on February 13,
2007.


EX-1





4.4
                            
                            2007
      Stock Incentive Plan. Incorporated by reference to Exhibit 4.9 to the
      Registrant’s Current Report on Form 10-QSB (File No. 000-51353) filed with
      the Commission on May 15, 2007.4.5
                            
                            Form
      of Stock Option Agreement. Incorporated by reference to Exhibit 4.4 to the
      Registrant’s Current Report on Form 8-K (File No. 000-51353) filed with
      the Commission on February 13, 2007.10.1
                            
                            Series
      A Convertible Preferred Stock Purchase Agreement dated January 24, 2007,
      between the Registrant and Trinad Capital Master Fund, Ltd. Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K (File No. 000-51353) filed with the Commission on January 26,
      2007.10.2
                            
                            Series
      D Convertible Preferred Stock Purchase Agreement dated February 28, 2007,
      between the Registrant and various purchasers. Incorporated by reference
      to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
      000-51353) filed with the Commission on March 6, 2007.10.3
                            
                            Voting
      Agreement dated February 21, 2007 among Trinad
      Capital Master Fund, Raymond Musci, MPLC Holdings, LLC, Europlay Capital
      Advisors, LLC and Scott Walker. Incorporated byreference to
      Exhibit 10.34 to the Registrant’s Current Report on Form 8-K (File No.
      000-51353) filed with the Commission on March 6, 2007.10.4
                            
                            Standard
      Multi-Tenant Office Lease dated July 6, 2005, between Atrinsic, Inc. and
      Dolphinshire, L.P. Incorporated by reference to Exhibit 10.4 to the
      Registrant’s Current Report on Form 8-K (File No. 000-51353) filed with
      the Commission on February 13, 2007.10.5
                            
                            Asset
      Purchase Agreement dated January 19, 2007, between Atrinsic, Inc. and
      Index Visual & Games Ltd. Incorporated by reference to Exhibit 10.28
      to the Registrants Current Report on Form 8-K (File No. 3400-51353) filed
      with the Commission on February 13, 2007.10.6
                            
                            Secured
      Convertible Promissory Note issued on January 19, 2007 by Atrinsic in
      favor of Index Visual & Games Ltd. Incorporated by reference to
      Exhibit 10.29 to the Registrants Current Report on Form 8-K (File No.
      000-51353) filed with the Commission on February 13,
  2007.10.7
                            
                            Messaging
      Agreement dated November 17, 2003, between Mobliss, Inc. and Cingular
      Wireless LLC, assigned to Atrinsic, Inc. on January 19, 2007. Incorporated
      by reference to Exhibit 10.30 to the Registrants Current Report on Form
      8-K (File No. 000-51353) filed with the Commission on February 13,
      2007.10.8
                            
                            SMS
      Connectivity Agreement dated January 8, 2004, between Mobliss, Inc. and
      Cingular Wireless LLC, assigned to Atrinsic, Inc. on January 19, 2007.
      Incorporated by reference to Exhibit 10.31 to the Registrants Current
      Report on Form 8-K (File No. 000-51353) filed with the Commission on
      February 13, 2007.10.9
                            
                            Heads
      of Agreement dated January 19, 2007, between Atrinsic, Inc. and Index
      Visual & Games Ltd. Incorporated by reference to Exhibit 10.32 to the
      Registrants Current Report on Form 8-K (File No. 000-51353) filed with the
      Commission on February 13, 2007.10.10
                            
                            Lease
      Agreement dated April 14, 2008, between MED 469 LLC, Rector 469, LLC and
      TPP 469 LLC and Traffix, Inc.10.11
                            
                            First
      Lease Modification Agreement dated as of May 14, 2008 between MED 469 LLC,
      Rector 469, LLC and TPP 469 LLC and Traffix, Inc.10.12
                            
                            Employment
      Agreement dated as of February 1, 2008, by and between Atrinsic, Inc. and
      Andrew Stollman.  Incorporated by reference to the Registrant’s
      Current Report on Form 10-Q (File No. 001-12555) filed with the Commission
      on May 20, 2008. *10.13
                            
                            Employment
      Agreement dated as of February 1, 2008, by and between Atrinsic, Inc. and
      Burton Katz.  Incorporated by reference to the Registrant’s
      Current Report on Form 10-Q (File No. 001-12555) filed with the Commission
      on May 20, 2008. *10.14
                            
                            Consulting
      Agreement dated as of January 31, 2008 by and between Atrinsic, Inc. and
      Jeffrey Schwartz. Incorporated by reference to the Registrant’s
      Current Report on Form 10-Q (File No. 001-12555) filed with the Commission
      on May 20, 2008.10.15
                            
                            Master
      Services Agreement effective as of January 1, 2008 by and between
      Atrinsic, Inc. and Motricity, Inc.  Incorporated by reference to
      the Registrant’s Current Report on Form 10-Q (File No. 001-12555) filed
      with the Commission on May 20, 2008.  Certain portions of this
      agreement have been omitted and filed separately with the Securities and
      Exchange Commission pursuant to a request for an order granting
      confidential treatment pursuant to Rule 24b-2 of the Rules and Regulations
      of the Commission under the Securities Exchange Act of
    1934.10.16
                            
                            Form
      of Convertible Promissory Note Issued to Ringtone.com. Incorporated by
      reference to the Registrant’s Current Report on Form 8-K (File No.
      001-12555) filed with the Commission on July 7,
  2008.


EX-2





10.17
                
                Employment
      Agreement by and between Andrew Zaref and Atrinsic, Inc. dated July 14,
      2008.  Incorporated by reference to the Registrant’s Current
      Report on Form 8-K (File No. 001-12555) filed with the Commission on July
      17, 2008. *10.18
                
                Atrinsic,
      Inc. 2009 Stock Incentive Plan, Incorporated by reference to Exhibit 10.1
      to the Registrant’s Current Report on Form 8-K (File No. 001-12555) filed
      with the Commission on July 1, 2009.10.19
                
                Atrinsic,
      Inc. 2010 Annual Incentive Compensation Plan. Incoporated by reference to
      Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No.
      001-12555) filed with the Commission on July 1, 2009.10.20
                
                Employment
      Agreement by and between Jeffery Schwartz and Atrinisc, Inc. dated January
      27, 2010. *10.21
                
                Employment
      offer by and between Thomas Plotts and Atrinsic, Inc. dated January 29,
      2010. *10.22
                
                Separation
      Agreement and Mutual release by and between Burton Katz and Atrinsic, Inc.
      dated October 20, 2009.10.23
                
                Separation
      and Release Agreement by and between Andrew Zaref and Atrinsic, Inc. dated
      December 16, 2009.14.1
                
                Code
      of Ethics. Incorporated by reference to Exhibit 14.1 to the Registrants
      Current Report on Form 8-K (file No. 000-51353) filed with the Commission
      on August 24, 2007.21.1
                
                Subsidiaries
      of the registrant.23.1
                
                Consent
      of Independent Registered Public Accounting Firm.24.1
                
                Power
      of Attorney (included on signature page)31.1
                
                Certification
      of Principal Executive Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of Principal Financial Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                
                Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002.99.1
                
                Asset
      Purchase Agreement entered into on July 31, 2009 by and among the
      registrant and ShopIt, Inc., a Delaware corporation. Incorporated by
      reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K
      (File 001-12555) filed with the Commission on August 6,
    2009.





* Each a
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this annual report on Form 10-K.


**
Pursuant to Item 601(b) (2) of Regulation S-K, the schedules to these agreements
have been omitted. The Registrant undertakes to supplementally furnish a copy of
the omitted schedules to the Securities and Exchange Commission upon
request.


EX-3