UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





FORM
10-Q


(Mark
One)


x
            Quarterly
      Report Pursuant to Section13 or 15(d) of the Securities Exchange Act of
      1934





For the
quarterly period ended June 30, 2010 or





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)








(Former
name, former address and former fiscal year, if changed since last
report)





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 and 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 xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date 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 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 Exchange Act).


Yes  ̈No x





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 and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.


Yes xNo  ̈





As of
August 16, 2010, the Company had 20,869,215 shares of Common Stock, $0.01 par
value, outstanding, which excludes 2,726,036 shares held in treasury.










Table
of Contents




PagePART
      I
            FINANCIAL
      INFORMATIONItem
      1
            Financial
      Statements
            
            
            3Item
      2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            14Item
      3
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            
            23Item
      4T
            Controls
      and Procedures
            
            
            23PART
      II
            OTHER
      INFORMATION
            
            
            24Item
      1A
            Risk
      Factors
            
            
            24Item
      6
            Exhibits
            
            
            30





2




Item 1
Financial Statements




ATRINSIC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCESHEETS
 (Dollars
in thousands, except per share data)
 
 As
      of
              
              
              As
      ofJune
      30,
              
              
              December
      31,2010
              
              
              2009(Unaudited)ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              7,268
              
              
              $
              16,913Accounts
      receivable, net of allowance for doubtful accounts of $3,940 and
      $4,295
              
              
              8,980
              
              
              
              7,985Income
      tax receivable
              
              
              3,524
              
              
              
              4,373Prepaid
      expenses and other current assets
              
              
              958
              
              
              
              2,643Total
      Current Assets
              
              
              20,730
              
              
              
              31,914PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $1,141 and
      $1,078
              
              
              3,309
              
              
              
              3,553INTANGIBLE
      ASSETS, net of accumulated amortization of $3,466 and
    $8,605
              
              
              6,907
              
              
              
              7,253INVESTMENTS,
      ADVANCES AND OTHER ASSETS
              
              
              1,819
              
              
              
              1,878TOTAL
      ASSETS
              
              $
              32,765
              
              
              $
              44,598LIABILITIES
      AND EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              4,522
              
              
              $
              6,257Accrued
      expenses
              
              
              6,850
              
              
              
              9,584Other
      current liabilities
              
              
              698
              
              
              
              725Total
      Current Liabilities
              
              
              12,070
              
              
              
              16,566DEFERRED
      TAX LIABILITY, NET
              
              
              1,719
              
              
              
              1,697OTHER
      LONG TERM LIABILITIES
              
              
              908
              
              
              
              988TOTAL
      LIABILITIES
              
              
              14,697
              
              
              
              19,251COMMITMENTS
      AND CONTINGENCIES (see note 12)
              
              
              -
              
              
              
              -STOCKHOLDERS'
      EQUITYCommon
      stock - par value $0.01, 100,000,000 authorized, 23,588,579 and 23,583,581
      shares issued at June 30, 2010 and 2009, respectively; and, 20,862,543 and
      20,842,263 shares outstanding at June 30, 2010 and 2009,
      respectively.
              
              
              236
              
              
              
              236Additional
      paid-in capital
              
              
              179,057
              
              
              
              178,442Accumulated
      other comprehensive income (loss)
              
              
              1
              
              
              
              (20
              )Common
      stock, held in treasury, at cost, 2,726,036 and 2,741,318 shares at 2010
      and 2009, respectively.
              
              
              (4,981
              )
              
              
              (4,992
              )Accumulated
      deficit
              
              
              (156,245
              )
              
              
              (148,319
              )Total
      Stockholders' Equity
              
              
              18,068
              
              
              
              25,347TOTAL
      LIABILITIES AND EQUITY
              
              $
              32,765
              
              
              $
              44,598
  The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements




3




ATRINSIC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (Dollars
in thousands, except per share data)
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Subscription
              
              $
              4,991
              
              
              $
              4,833
              
              
              $
              10,973
              
              
              $
              10,210Transactional
      and Marketing Services
              
              
              5,822
              
              
              
              12,175
              
              
              
              12,040
              
              
              
              30,346NET
      REVENUE
              
              
              10,813
              
              
              
              17,008
              
              
              
              23,013
              
              
              
              40,556OPERATING
      EXPENSESCost
      of media-third party
              
              
              6,009
              
              
              
              10,472
              
              
              
              13,353
              
              
              
              25,948Product
      and distribution
              
              
              5,128
              
              
              
              2,597
              
              
              
              9,489
              
              
              
              4,851Selling
      and marketing
              
              
              1,337
              
              
              
              2,142
              
              
              
              2,287
              
              
              
              4,927General,
      administrative and other operating
              
              
              2,503
              
              
              
              3,639
              
              
              
              4,943
              
              
              
              6,905Depreciation
      and amortization
              
              
              324
              
              
              
              1,007
              
              
              
              647
              
              
              
              2,56215,301
              
              
              
              19,857
              
              
              
              30,719
              
              
              
              45,193LOSS
      FROM OPERATIONS
              
              
              (4,488
              )
              
              
              (2,849
              )
              
              
              (7,706
              )
              
              
              (4,637
              )OTHER
      (INCOME) EXPENSEInterest
      income and dividends
              
              
              (2
              )
              
              
              (16
              )
              
              
              (4
              )
              
              
              (62
              )Interest
      expense
              
              
              -
              
              
              
              26
              
              
              
              1
              
              
              
              76Other
      (income) expense
              
              
              (53
              )
              
              
              6
              
              
              
              (10
              )
              
              
              5(55
              )
              
              
              16
              
              
              
              (13
              )
              
              
              19LOSS
      BEFORE TAXES AND EQUITY IN LOSS OF INVESTEE
              
              
              (4,433
              )
              
              
              (2,865
              )
              
              
              (7,693
              )
              
              
              (4,656
              )INCOME
      TAXES
              
              
              109
              
              
              
              (930
              )
              
              
              173
              
              
              
              (1,600
              )EQUITY
      IN (EARNINGS) LOSS OF INVESTEE, AFTER TAX
              
              
              (50
              )
              
              
              (33
              )
              
              
              60
              
              
              
              52NET
      LOSS
              
              
              (4,492
              )
              
              
              (1,902
              )
              
              
              (7,926
              )
              
              
              (3,108
              )LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST, AFTER
      TAX
              
              
              -
              
              
              
              46
              
              
              
              -
              
              
              
              28NET
      LOSS ATTRIBUTABLE TO ATRINSIC, INC
              
              $
              (4,492
              )
              
              $
              (1,948
              )
              
              $
              (7,926
              )
              
              $
              (3,136
              )NET
      LOSS PER SHARE ATTRIBUTABLE TO ATRINSIC COMMON
      STOCKHOLDERSBasic
              
              $
              (0.22
              )
              
              $
              (0.10
              )
              
              $
              (0.38
              )
              
              $
              (0.15
              )Diluted
              
              $
              (0.22
              )
              
              $
              (0.10
              )
              
              $
              (0.38
              )
              
              $
              (0.15
              )WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
              
              
              20,869,210
              
              
              
              20,294,869
              
              
              
              20,856,736
              
              
              
              20,537,557Diluted
              
              
              20,869,210
              
              
              
              20,294,869
              
              
              
              20,856,736
              
              
              
              20,537,557


The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements




4




ATRINSIC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (Dollars
in thousands, except per share data)
  Six
      Months EndedJune
      30,2010
              
              
              2009Cash
      Flows From Operating ActivitiesNet
      loss
              
              $
              (7,926
              )
              
              $
              (3,108
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Allowance
      for doubtful accounts
              
              
              (25
              )
              
              
              1,474Depreciation
      and amortization
              
              
              647
              
              
              
              2,562Stock-based
      compensation expense
              
              
              635
              
              
              
              822Deferred
      income taxes
              
              
              21
              
              
              
              (1,661
              )Equity
      in loss of investee
              
              
              60
              
              
              
              81Changes
      in operating assets and liabilities of business, net of
      acquisitions:Accounts
      receivable
              
              
              (924
              )
              
              
              4,995Prepaid
      income tax
              
              
              856
              
              
              
              (326
              )Prepaid
      expenses and other current assets
              
              
              1,684
              
              
              
              (206
              )Accounts
      payable
              
              
              (1,734
              )
              
              
              (185
              )Other,
      principally accrued expenses
              
              
              (2,887
              )
              
              
              (5,120
              )Net
      cash used in operating activities
              
              
              (9,593
              )
              
              
              (672
              )Cash
      Flows From Investing ActivitiesCash
      received from investee
              
              
              -
              
              
              
              1,080Cash
      paid to investees
              
              
              -
              
              
              
              (781
              )Proceeds
      from sales of marketable securities
              
              
              -
              
              
              
              4,242Business
      combinations
              
              
              -
              
              
              
              (115
              )Acquisition
      of loan receivable
              
              
              -
              
              
              
              (480
              )Capital
      expenditures
              
              
              (38
              )
              
              
              (264
              )Net
      cash (used in) provided by investing activities
              
              
              (38
              )
              
              
              3,682Cash
      Flows From Financing ActivitiesRepayments
      of notes payable
              
              
              -
              
              
              
              (1,750
              )Liquidation
      of non-controlling interest
              
              
              -
              
              
              
              (288
              )Purchase
      of common stock held in treasury
              
              
              (9
              )
              
              
              (939
              )Net
      cash used in financing activities
              
              
              (9
              )
              
              
              (2,977
              )Effect
      of exchange rate changes on cash and cash equivalents
              
              
              (5
              )
              
              
              (8
              )Net
      (Decrease) Increase In Cash and Cash Equivalents
              
              
              (9,645
              )
              
              
              25Cash
      and Cash Equivalents at Beginning of Year
              
              
              16,913
              
              
              
              20,410Cash
      and Cash Equivalents at End of Period
              
              $
              7,268
              
              
              $
              20,435SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for interest
              
              $
              -
              
              
              $
              68Cash
      refunded (paid) for taxes
              
              $
              705
              
              
              $
              264


The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.




5





ATRINSIC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF EQUITY
 (UNAUDITED)
 For
the Six Months Ended June 30,
 (Dollars
in thousands, except per share data)
 
 
 Comprehensive
              
              
              Common
      Stock
              
              
              Additional
                Paid-In
              
              
              (Accumulated
              
              
              Accumulated
                Other
                Comprehensive
              
              
              Treasury
      Stock
              
              
              TotalLoss
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit)
              
              
              Loss
              
              
              Shares
              
              
              Amount
              
              
              EquityBalance
      at January 1, 2010
              
              
              -
              
              
              
              23,583,581
              
              
              $
              236
              
              
              $
              178,442
              
              
              $
              (148,319
              )
              
              $
              (20
              )
              
              
              2,741,318
              
              
              $
              (4,992
              )
              
              $
              25,347Net
      loss
              
              $
              (7,926
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,926
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,926
              )Foreign
      currency translation adjustment
              
              
              21
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              21
              
              
              
              -
              
              
              
              -
              
              
              
              21Comprehensive
      loss
              
              $
              (7,905
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock
      based compensation expense
              
              
              -
              
              
              
              4,998
              
              
              
              -
              
              
              
              635
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              635Treasury
      stock issued in connection with employee compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (20
              )
              
              
              
              
              
              
              
              
              
              
              (25,000
              )
              
              
              20
              
              
              
              -Purchase
      of common stock, at cost
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              9,718
              
              
              
              (9
              )
              
              
              (9
              )Balance
      at June 30, 2010
              
              
              -
              
              
              
              23,588,579
              
              
              $
              236
              
              
              $
              179,057
              
              
              $
              (156,245
              )
              
              $
              1
              
              
              
              2,726,036
              
              
              $
              (4,981
              )
              
              $
              18,068


The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements





6




ATRINSIC,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Note
1 - Basis of Presentation





The
accompanying Condensed Consolidated Balance Sheet as of June 30, 2010 and
December 31, 2009, the Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2010 and 2009, and the Condensed
Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and
2009 are unaudited, but in the opinion of management include all adjustments
necessary for the fair presentation of financial position, the results of
operations and cash flows for the periods presented and have been prepared in a
manner consistent with the audited financial statements for the year ended
December 31, 2009. Results of operations for interim periods are not
necessarily indicative of annual results. These financial statements should be
read in conjunction with the audited financial statements for the year ended
December 31, 2009, on Form 10-K filed on March 31, 2010.





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 and the associated allowances for refunds and credits, 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.





Funding
and Management’s Plans





Since the
Company’s inception, it has met its liquidity and capital expenditure needs
primarily through the proceeds from sales of common stock through equity
financing and private placement transactions. During the six months ended June
30, 2010, the Company’s cash used in operating activities was approximately $9.6
million. This was the result of cash used to pay third party media suppliers,
employees and consultants, and is represented by a decrease in accounts payable
and accrued expenses, net of prepaid expenses, of approximately $2.9 million and
cash used as a result of the increase in accounts receivable of approximately
$0.9 million, which was offset by approximately $0.9 million decrease in prepaid
taxes (of which $0.7 million was net cash refunded for taxes). As a result, the
Company’s cash and cash equivalents at June 30, 2010 decreased $9.6 million to
approximately $7.3 million from approximately $16.9 million at December 31,
2009.





The
Company believes that its existing cash, cash equivalents, together with cash
flows from expected sales of its subscription and transactional marketing
services, and other potential sources of cash flows, such as a $3.5 million tax
receivable, will be sufficient to enable it to continue marketing, production,
and distribution activities for at least 12 months.  However, the
Company’s projections of future cash needs and cash flows may differ from actual
results. If current cash and cash equivalents, and cash that may be generated
from operations, are insufficient to satisfy the Company’s liquidity
requirements, the Company may seek to sell debt or equity securities or to
obtain a line of credit. The sale of additional equity securities or convertible
debt could result in dilution to the Company’s stockholders. The Company
currently has no arrangements with respect to additional financing. The Company
can give no assurance that it will generate sufficient revenues in the future
(through sales, license fees, or otherwise) to satisfy its liquidity
requirements or sustain future operations, that the Company’s production and
distribution capabilities will be adequate, that other subscription and
marketing services will not be provided by other companies that will render the
Company’s services obsolete, or that other sources of funding would be
available, if needed, on favorable terms or at all. If the Company cannot obtain
such funds if needed, it would need to curtail or cease some or all of its
operations.





Note 2 – Investments and
Advances





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, of
which, $1.9 million was later distributed by TBR to the Company. The Company
also provided an additional $0.9 million of working capital advances in 2009 to
support near term growth. As of June 30, 2010, the Company’s net investment in
TBR totals $1.3 million and is included in Investments, Advances and Other
Assets on the accompanying Condensed 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.




7





The
Company records its investment in TBR under the equity method of accounting and
as such presents its pro-rata share of the equity in earnings and losses of TBR
within its quarterly and year end reported results. The Company recorded $60,000
and $52,000 as equity in loss for the six months ended June 30, 2010 and 2009,
respectively.





Note 3 – 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.





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 is entitled to full recoupment for all
pre-approved costs and expenses incurred in connection with the provision of the
services plus all other agreed budgeted amounts. The first $2.5 million of these
expenses are to be directly reimbursed by BDE and all other expenses beyond this
amount are fully recoupable by the Company from the cash flow generated by the
Kazaa music service.





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 current and
future revenues. In addition, BDE has agreed to directly repay the first
$2.5 million of these advances and expenditures which are not otherwise
recovered from Kazaa generated revenues and this repayment obligation has been
secured under separate agreement. As of June 30, 2010, the Company has
received the $2.5 million in repayments from BDE.  All advances and
expenditures that the Company makes beyond the amount reimbursed by BDE are
fully recoupable from the cash flow generated by the Kazaa music service.
Although the Company is not obligated to make expenditures in excess of $5.0
million, net of revenue and recouped funds since inception, July 1, 2009, and
through June 30, 2010, the Company has contributed $6.2 million net of
revenue and recouped funds.





In
accordance with the Agreements, Atrinsic and BDE will share equally in the “Net
Profit” generated by the Kazaa music subscription service only after all of our
costs and expenses that we have incurred are fully recouped by us. For the six
months ending June 30, 2010, the Company has presented in its statement of
operations, Kazaa revenue of $5.8 million and expenses incurred for the Kazaa
music service of $8.9 million, offset by $0.6 million of reimbursements from
BDE.




Note 4 – Fair Value
Measurements





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 June 30, 2010 and December 31, 2009:




Level
      I
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalJune
      30, 2010:Assets:Cash
      and cash equivalents
                
                $
                7,268
                
                
                $
                -
                
                
                $
                -
                
                
                $
                7,268Liabilities:Put
      options
                
                $
                -
                
                
                $
                254
                
                
                $
                -
                
                
                $
                254December
      31, 2009:Assets:Cash
      and cash equivalents
                
                $
                16,913
                
                
                $
                -
                
                
                $
                -
                
                
                $
                16,913Liabilities:Put
      options
                
                $
                -
                
                
                $
                267
                
                
                $
                -
                
                
                $
                267
  8




At June
30, 2010, put option liabilities on our common stock issued in connection with
the Shop-It acquisition are included in other current liabilities in our
condensed consolidated balance sheets. These were valued using a Black Scholes
model using a share price of $0.91, strike price of $2.00, interest rate of
0.31% and maturity of 30 days.




Note 5 - Concentration of Business and Credit
Risk





Financial
instruments 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 users of its subscription products. These billing
aggregators act as a billing interface between Atrinsic and the carriers that
ultimately bill Atrinsic’s end user subscribers. Some of these billing
aggregators have not had long operating histories in the U.S. or operations with
traditional business models. In particular mobile billing aggregators 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.





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





For
      The Six Months EndedJune
      30,2010
              
              
              2009RevenuesAggregator
      A
              
              
              19
              %
              
              
              1
              %Customer
      B
              
              
              11
              %
              
              
              0
              %Aggregator
      C
              
              
              6
              %
              
              
              1
              %Other
      Customers & Aggregators
              
              
              64
              %
              
              
              98
              %




As
      ofJune
      30,
              
              
              December
      31,2010
              
              
              2009Accounts
      ReceivableAggregator
      A
              
              
              34
              %
              
              
              12
              %Aggregator
      D
              
              
              14
              %
              
              
              16
              %Customer
      E
              
              
              8
              %
              
              
              0
              %Other
      Customers & Aggregators
              
              
              44
              %
              
              
              72
              %




NOTE 6 - Property and
Equipment




Property
and equipment consists of the following:





Useful
      Life
              
              
              June
      30,
              
              
              December
      31,in
      years
              
              
              2010
              
              
              2009Computers
      and software applications
              
              
              3
              
              
              $
              1,678
              
              
              $
              1,874Leasehold
      improvements
              
              
              10
              
              
              
              1,832
              
              
              
              1,830Building
              
              
              40
              
              
              
              778
              
              
              
              766Furniture
      and fixtures
              
              
              7
              
              
              
              162
              
              
              
              161Gross
      PP&E
              
              
              
              
              
              
              4,450
              
              
              
              4,631Less:
      accumulated depreciation
              
              
              
              
              
              
              (1,141
              )
              
              
              (1,078
              )Net
      PP&E
              
              
              
              
              
              $
              3,309
              
              
              $
              3,553


Depreciation expense for the six months
ended June 30, 2010 and 2009 totaled $0.3 million and $0.5 million,
respectively, and is recorded on a straight line basis.




9





Note
7 –Intangibles





The
carrying amount and accumulated amortization of intangible assets as of June 30,
2010 and December 31, 2009, respectively, are as follows:





Useful
      Life
              
              
              Gross
      Book
              
              
              Accumulated
              
              
              
              
              
              Net
      Bookin
      Years
              
              
              Value
              
              
              Amortization
              
              
              Impairment
              
              
              ValueAs
      of June 30, 2010Indefinite
      Lived assetsTradenames
              
              
              
              
              $
              4,325
              
              
              $
              -
              
              
              $
              -
              
              
              $
              4,325Domain
      names
              
              
              
              
              
              1,298
              
              
              
              -
              
              
              
              -
              
              
              
              1,298Amortized
      Intangible AssetsAcquired
      software technology
              
              
              3 -
      5
              
              
              
              2,516
              
              
              
              1,778
              
              
              
              -
              
              
              
              738Domain
      names
              
              
              3
              
              
              
              426
              
              
              
              386
              
              
              
              -
              
              
              
              40Tradenames
              
              
              9
              
              
              
              559
              
              
              
              301
              
              
              
              -
              
              
              
              258Customer
      lists
              
              
              3
              
              
              
              582
              
              
              
              499
              
              
              
              -
              
              
              
              83Restrictive
      covenants
              
              
              5
              
              
              
              667
              
              
              
              502
              
              
              
              -
              
              
              
              165Total
              
              
              
              
              
              $
              10,373
              
              
              $
              3,466
              
              
              $
              -
              
              
              $
              6,907As
      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
              
              
              $
              7,253


Except in
the case of a triggering event prior to the fourth quarter of 2010, the Company
will perform its annual impairment test on other long lived identifiable
intangible assets at the end of the fourth quarter.





Note
8 - Stock-based compensation





The fair
value of share-based awards granted is estimated on the date of grant using the
Black-Scholes option pricing model or binominal option model, when appropriate.
The key assumptions for these models are expected term, expected volatility,
risk-free interest rate, dividend yield and strike price. Many of these
assumptions are judgmental and the value of share-based awards is highly
sensitive to changes in these assumptions.





2010Strike
      Price
              $0.75
      - $0.91Expected
      life
              5.6
      yearsRisk
      free interest rate
              2.18%
      - 2.36%Volatility
              58%
      - 59%Fair
      market value per share
              $0.41
      - $0.49
  10


During
the six months ended June 30, 2010, the Company granted 1,685,000 stock options
and 41,666 restricted stock units to employees. During six months ended June 30,
2010, 25,000 restricted stock units vested and shares of common stock were
issued from treasury stock, net of 9,718 shares that were held back by the
Company to cover employee taxes on the shares issued. During the six months
ended June 30, 2010, 246,560 options were forfeited.





Stock
based compensation expense for the three and six months ended June 30, 2010 and
2009, respectively, are as follows:





For
      the
                Three
      Months Ended
              
              
              For
      the
                Six
      Months EndedJune
      30,
              
              
              June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Product
      and distribution
              
              $
              5
              
              
              $
              61
              
              
              $
              21
              
              
              $
              106Selling
      and marketing
              
              
              13
              
              
              
              -
              
              
              
              17
              
              
              
              -General
      and administrative and other operating
              
              
              287
              
              
              
              421
              
              
              
              597
              
              
              
              716Total
              
              $
              305
              
              
              $
              482
              
              
              $
              635
              
              
              $
              822
  Note
9 – Loss per Share Attributable to Atrinsic,
Inc.





Basic
loss per share attributable to Atrinsic, Inc. is computed by dividing reported
loss by the weighted average number of shares of common stock outstanding for
the period. Diluted loss per share 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 loss per share are as
follows:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009EPS
      Denominator:Basic
      weighted average shares
              
              
              20,869,210
              
              
              
              20,294,869
              
              
              
              20,856,736
              
              
              
              20,537,557Effect
      of dilutive securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
      weighted average shares
              
              
              20,869,210
              
              
              
              20,294,869
              
              
              
              20,856,736
              
              
              
              20,537,557EPS
      Numerator (effect on net income):Net
      loss attributable to Atrinsic, Inc.
              
              $
              (4,492
              )
              
              $
              (1,948
              )
              
              $
              (7,926
              )
              
              $
              (3,136
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
      loss attributable to Atrinsic, Inc.
              
              $
              (4,492
              )
              
              $
              (1,948
              )
              
              $
              (7,926
              )
              
              $
              (3,136
              )Net
      loss per common share:Basic
      weighted average loss attributable to Atrinsic, Inc.
              
              $
              (0.22
              )
              
              $
              (0.10
              )
              
              $
              (0.38
              )
              
              $
              (0.15
              )Effect
      of dilutive securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
      weighted average loss attributable to Atrinsic, Inc.
              
              $
              (0.22
              )
              
              $
              (0.10
              )
              
              $
              (0.38
              )
              
              $
              (0.15
              )


Common
stock underlying outstanding options and convertible securities were not
included in the computation of diluted earnings per share for the three and six
months ended June 30, 2010 and 2009, because their inclusion would be anti
dilutive when applied to the Company’s net loss per share.




11




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 DisclosureThree
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Options
              
              
              3,315,684
              
              
              
              1,919,902
              
              
              
              3,315,684
              
              
              
              1,919,902Warrants
              
              
              314,443
              
              
              
              314,443
              
              
              
              314,443
              
              
              
              314,443Restricted
      Shares
              
              
              6,672
              
              
              
              27,781
              
              
              
              6,672
              
              
              
              27,781Restricted
      Stock Units
              
              
              291,666
              
              
              
              750,000
              
              
              
              291,666
              
              
              
              750,000


The per
share exercise prices of the options were $0.48 - $14.00 for the three and six
months ended June 30, 2010 and 2009. The per share exercise prices of the
warrants were $3.44 - $5.50 for the three and six months ended June 30, 2010 and
2009.





Note 10 -Income Taxes





Income
tax expense (benefit) before noncontrolling interest and equity in loss of for
the six months ended June 30, 2010 and 2009, was $0.2 million and ($1.6)
million, respectively and reflects an effective tax rate of (2%) and 34%,
respectively. The Company has provided a valuation allowance against its
deferred tax assets because it is more likely than not that such benefits will
not be realized by the Company.




Uncertain
Tax Positions




The
Company is subject to taxation in the United States for Federal and State, and
certain foreign jurisdictions. The Company’s tax years for 2007, 2008 and 2009
are subject to examination by the tax authorities.  In addition, the
tax returns for certain acquired entities are also subject to examination. As of
June 30, 2010, an estimated liability of $42,000 for uncertain tax positions in
Canada is recorded in our Condensed Consolidated Balance Sheets. Management
believes that an adequate provision has been made for any adjustments that may
result from tax examinations. The outcome of tax examinations however, cannot be
predicted with certainty. 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
tax.    Although the timing or the resolution and/or closure
of the audits is highly uncertain, the Company does not believe that its
unrecognized tax benefit will materially change in the next twelve
months.





Note
11- New Accounting Pronouncements





Adopted
in 2010





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 are effective as of January
1, 2010 and the adoption of these revisions to ASC 810 had no impact on our
interim results of operations or financial position.





Not
Yet Adopted




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 the 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.


12


Note
12 - Commitments and Contingencies





On March
10, 2010, Atrinsic received final approval of its settlement of the Class Action
in the case known as Allen v. Atrinsic, Inc. f/k/a New Motion, Inc., formerly
pending in Los Angeles County Superior Court.  This national settlement
covers all of the Company’s mobile products, web sites and advertising practices
through the date the Final Judgment was entered.  All costs of the
settlement and defense were accrued for in 2008; therefore this settlement did
not impact the Company’s results of operations in 2009 and is not expected to
impact the Company’s results of operations in 2010.  In addition to
administrative costs and refunds, during the second quarter of 2010, the Company
paid the $1.0 million settlement for the Class Action.




Because
the terms of the settlement applied nationally, all other consumer class action
cases pending against the Company were dismissed without payment of any
monies.




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 $6.9 million in total accrued
expenses as of June 30, 2010, $0.7 million is associated with the legal
contingencies disclosed above.





Note
13 – Subsequent Events





On August
13, 2010, Jeffrey Schwartz resigned from his position as Chief Executive Officer
of the Company and also resigned from the Company’s Board of Directors.  On
an interim basis, Andrew Stollman, the Company's President, and Raymond Musci,
the Company's Executive Vice President of Corporate Development, will assume the
responsibilities formerly associated with Mr. Schwartz's position. No severance
was paid to Mr. Schwartz in connection with his resignation, pursuant to his
employment agreement with the Company.





We have evaluated events subsequent to
the balance sheet date through the date of our Form10-Q filing for the quarter
ended June 30, 2010 and determined there have not been any material events that
have occurred that would require adjustment to our unaudited condensed
consolidated financial statements.




13




Item 2 Management’s Discussion and Analysis





CAUTIONARY
STATEMENT





This
discussion summarizes the significant factors affecting our condensed
consolidated operating results, financial condition and liquidity and cash flows
for the six months ended June 30, 2010 and 2009. Except for historical
information, the matters discussed in this “Management’s Discussion and
Analysis” are forward-looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our
control. Actual results could differ materially from those projected in
the “forward-looking statements” as a result of, among other things, the
factors described under the “Cautionary Statements and Risk Factors” included
elsewhere in this report. The information contained in this Form 10-Q, as at and
for the six months ended June 30, 2010 and 2009, is intended to update the
information contained in our Annual Report on Form 10-K for the year ended
December 31, 2009 of Atrinsic, Inc. (“we,” “our,” “us”, the “Company,” or
“Atrinsic”) and presumes that readers have access to, and will have read, the
“Management’s Discussion and Analysis” and other information contained in our
Annual Report on Form 10-K.




A
NOTE CONCERNING PRESENTATION





This
Quarterly Report on Form 10-Q contains information concerning Atrinsic, Inc. as
it pertains to the periods covered by this report - for the six months
ended June 30, 2010 and 2009.





Executive
Overview





We are an
Internet focused marketing company. We sell entertainment and lifestyle
subscription products direct to consumers which we market through the Internet.
We also sell Internet 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 for our products and for our
corporate partners and advertisers.





Our
premium subscription products, which are marketed directly to consumers, are an
important component of our business strategy.  In addition to
utilizing our media network to acquire customers for our own products, we may
also sell leads to our corporate partners.  By doing so, we can derive
more revenue from our  acquired Internet traffic than would be the
case with only our internal offerings.  Even if a consumer does not
wish to purchase one of our products, we can still monetize that consumer
through our corporate partners.





Over an
extended period of time, our ability to generate incremental subscription
revenues relies on our ability to increase the number of subscribers to our
products as well as to improve the Life Time Value (“LTV”) of those
subscribers.  In order to increase LTVs, we must improve billing
efficiencies and, importantly, enhance the benefits our subscription products
provide our customers.  In order to generate incremental revenues
through the delivery of our Internet marketing services, we must increase the
size of our client base, as well as expand our current relationships. Since we
are a performance based search marketing agency, our success is dependent upon
our ability to deliver measurable results to our clients.





We
combine our direct response capability with an Internet-based customer
acquisition model, which allows us to use search engine optimization, paid
search and email marketing strategies, to generate 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 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 –
advertisers and consumers. Advertisers use our products and services to enhance
their online marketing programs (our transactional and marketing
services).  Consumers subscribe to our services to receive premium
content on the Internet and on their mobile device (our subscription services).
Each of these business activities – transactional and marketing services and
subscriptions – 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 and marketing services, the
billing is generally carried out on a service fee, percentage, or on a
performance basis. For subscriptions, 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 marketing programs to match users
with our service offerings or with 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.




14




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 third party media cost and a portion of 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 able
to reduce certain operating expenses to reduce operating losses. 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 Brilliant Digital Entertainment, Inc. (“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 have first been 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 are entitled to full recoupment for all
pre-approved costs and expenses incurred in connection with the provision of the
services plus all other agreed budgeted amounts. The first $2.5 million of these
expenses are to be directly reimbursed by BDE and all other expenses beyond this
amount are fully recoupable by us from the cash flow generated by the Kazaa
music service.  As of June 30, 2010, the Company has received the $2.5
million in repayments from BDE.  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. In addition,
BDE has agreed to directly repay the first $2.5 million of these advances
and expenditures which are not otherwise recovered from Kazaa generated revenues
and this repayment obligation has been secured under separate agreement. 
All advances and expenditures that we make beyond the amount reimbursed by BDE
are fully recoupable from the cash flow generated by the Kazaa music service.
Although we are not obligated to make expenditures in excess of $5.0 million,
net of revenue and recouped funds, since inception and through June 30, 2010, we
have contributed $6.2 million, net of revenue and recouped funds.





In accordance with the Agreements, for
the six months ended June 30, 2010, we have recorded Kazaa revenue of $5.8
million and expenses incurred for the Kazaa music service of $8.9 million,
offset by $0.6 million of reimbursements from BDE.





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 to deliver marketing services to our
advertising clients.  To generate long term value for our stockholders
and profitably grow our revenue over time, we are spending on media, product and
distribution and marketing expense to acquire customers today so that we can
build a substantial subscriber base to generate subscription revenue in the
future.  We also must continually develop best in class service
offerings for our clients in the area of search related
services.





Expand Online
Capabilities:  We employ a multifaceted approach to generating
Internet traffic for ourselves and for our advertisers: (i) we use search engine
optimization and search marketing efforts which attract users to our sites and
our advertisers’ sites on a Pay Per Click basis, (ii) users may navigate
directly to our web properties, and  (iii) users respond to our email
marketing.  Our strategy is to increase our volume of visitors, users
and subscribers by improving the cost effectiveness of our customer acquisition.
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.





15





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





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.





Lead
Validation:   We are pursuing a number of value enhancing
strategies to increase the conversion of leads into subscribers of our
direct-to-consumer subscription services.  By validating the
submission of online information through automated data lookups and validation,
we are able to increase the value of a lead or visitor to our web
sites.  Such lead value enhancement techniques assist us in improving
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 with AT&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.




Technology:Through our use of
technology, we attempt to maximize the value we receive from each consumer and
deliver to our advertising clients.  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 next 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.




16




Results
of Operations for the three months ended June 30, 2010 compared to the three
months ended June 30, 2009.





Revenues
presented by type of activity are as follows for the three month periods ending
June 30, 2010 and 2009:





For
      the
                Three
      Months Ended
              
              
              Change
              
              
              ChangeJune
      30,
              
              
              Inc.(Dec.)
              
              
              Inc.(Dec.)2010
              
              
              2009
              
              
              $
              
              
              %Subscription
              
              $
              4,991
              
              
              $
              4,833
              
              
              $
              158
              
              
              
              3
              %Transactional
      and Marketing Services
              
              $
              5,822
              
              
              $
              12,175
              
              
              $
              (6,353
              )
              
              
              -52
              %Total
      Revenues (1)
              
              $
              10,813
              
              
              $
              17,008
              
              
              $
              (6,195
              )
              
              
              -36
              %


(1)
            As
      described above, the Company currently aggregates revenues based on the
      type of user activity monetized. The Company’s objective is to optimize
      total revenues from the user experience. Accordingly, this factor should
      be considered in evaluating the relative revenues generated from our
      Subscriptions and from our Transactional and Marketing
      Services.





Revenues
decreased approximately $6.2 million or 36%, to $10.8 million for the three
months ended June 30, 2010, compared to $17.0 million for the three months ended
June 30, 2009.





Subscription
revenue increased slightly, increasing to $5.0 million for the three months
ended June 30, 2010, compared to $4.8 million for the three months ended June
30, 2009. Subscription revenue for the three months ended June 30, 2010 includes
Kazaa revenue of $2.9 million, without which, our subscription revenue would
have decreased by $2.7 million. The increase in subscription revenue was
principally attributable to a significant increase in average revenue per user,
or “ARPU,” which increased to approximately $5.41 for the three months ended
June 30, 2010, representing a 49% improvement in ARPU compared to the year ago
period.  This increase in ARPU is due to the combination of a higher
retail price point of the Kazaa music subscription service, relative to our
other subscription products, and the greater number of Kazaa subscribers, as a
proportion of our total subscriber base.  As of June 30, 2010, the
Company had approximately 284,000 subscribers across all of its entertainment
and lifestyle subscription products, compared to approximately 340,000
subscribers as of December 31, 2009. During the second quarter of 2010, the
Company added approximately 113,000 new subscribers.  More than 50% of
these new subscribers were new users of the Kazaa music subscription service. As
of June 30, 2010, the Company estimates that it has approximately 86,000 Kazaa
subscribers.





Transactional
and Marketing services revenue is derived from our online marketing activities,
which consist of targeted and measurable online campaigns and programs for
marketing partners, and corporate advertisers or their agencies, to generate
qualified customer leads, online responses and sales transactions , or
increased brand recognition. Transactional and Marketing services revenue
decreased by approximately $6.4 million or 52% to $5.8 million for the three
months ended June 30, 2010 compared to $12.2 million for the three months ended
June 30, 2009. The decrease was primarily attributable to the loss of accounts
and a reduction in discretionary advertising expenditures by our clients. During
the three months ended June 30, 2010, the Company also took proactive steps to
eliminate unprofitable or marginally profitable lead generation activities and
marketing programs from its product and services offerings. These steps had the
effect of reducing lead generation sales volume, further contributing to the
decrease in revenue compared to the year ago period.





Operating
Expenses





For
      the
                Three
      Months Ended
              
              
              Change
              
              
              ChangeJune
      30,
              
              
              Inc.(Dec.)
              
              
              Inc.(Dec.)2010
              
              
              2009
              
              
              $
              
              
              %Operating
      ExpensesCost
      of Media – 3rd
      party
              
              $
              6,009
              
              
              $
              10,472
              
              
              
              (4,463
              )
              
              
              -43
              %Product
      and distribution
              
              
              5,128
              
              
              
              2,597
              
              
              
              2,531
              
              
              
              97
              %Selling
      and marketing
              
              
              1,337
              
              
              
              2,142
              
              
              
              (805
              )
              
              
              -38
              %General,
      administrative and other operating
              
              
              2,503
              
              
              
              3,639
              
              
              
              (1,136
              )
              
              
              -31
              %Depreciation
      and Amortization
              
              
              324
              
              
              
              1,007
              
              
              
              (683
              )
              
              
              -68
              %Total
      Operating Expenses
              
              $
              15,301
              
              
              $
              19,857
              
              
              $
              (4,556
              )
              
              
              -23
              %




17




Cost
of Media





Cost of
Media – 3rd party
decreased by $4.5 million or 43% to $6.0 million for the three months ended June
30, 2010 from $10.5 million for the three months ended June 30, 2009. Cost of
Media – 3rd party
includes media purchased for monetization of both transactional and marketing
services and subscription revenues. Although the decrease in Cost of Media –
3rd
party was primarily due to the decline in related revenue, from quarter to
quarter, the level of Cost of Media – 3rd party,
is also dependent upon the Company’s rate of new subscriber acquisition, which
may move independently of revenues. During the quarter ended June 30, 2010, the
Company added approximately 113,000 new subscribers, over half of which were
Kazaa subscribers. This overall level of subscription-related Cost of Media –
3rd
party spend and rate of customer acquisition was not sufficient to replace the
Company’s existing subscriber base during the quarter.  Cost of media
for the quarter ended June 30, 2010, includes Kazaa-related Cost of Media –
3rd
party of $1.3 million. We expect to recoup these Kazaa cost of media expenses
from the future cash flows of the Kazaa music service, although there can be no
assurance in this regard.





During
the second quarter of 2010, the Company estimates that its subscriber
acquisition cost, or “SAC,” was approximately $14.08, which reflects an
approximate 7% improvement in SAC from the year ago period. SAC is dependent on
a number of factors, including prevailing market conditions, the type of media,
and the ability of the Company to convert leads into subscribers. The Company
expects that SAC will fluctuate from period to period based on all of these
factors. Management will continue to monitor SAC closely to ensure that the
Company acquires customers in a cost effective manner.





Product
and Distribution





Product
and distribution expense increased by $2.5 million or 97% to $5.1 million for
the three months ended June 30, 2010 as compared to $2.6 million for the three
months ended June 30, 2009. Product and distribution expenses are costs
necessary to provide licensed content and development and support for our
products, websites and technology platforms – which drive both our Transactional
and Marketing Service and Subscription-based revenues. Compared to the year ago
period, in the second quarter of 2010, we experienced higher product and
distribution expenses of $3.2 million as a result of costs incurred to further
develop the Kazaa music service and greater royalty and license expense payable
to music labels, also associated with Kazaa. We expect to recoup these Kazaa
product and distribution expenses from the future cash flows of the Kazaa music
service, although there can be no assurance in this regard. Included in product
and distribution cost is stock compensation expense of $5,000 and $61,000 for
the three months ended June 30, 2010 and 2009, respectively.





Selling and
Marketing





Selling
and marketing expense decreased $0.8 million or 38% to $1.3 million in the three
months ended June 30, 2010 as compared to $2.1 million for the three months
ended June 30, 2009. This decrease in selling and marketing expense was
primarily attributable to the Company’s efforts to eliminate unprofitable or
marginally profitable lead generation activities and marketing programs from its
product and services offerings.  The Company’s bad debt expense, a
component of selling and marketing, decreased by approximately $0.5 million for
the three months ended June 30, 2010 compared to the three months ended June 30,
2009. The decrease in selling and marketing was also due to a decrease in
salaries and employee related costs. Included in selling and marketing cost is
stock compensation expense of $13,000 and $0 for the three months ended June 30,
2010 and 2009 respectively.





General,
Administrative and Other Operating





General
and administrative expenses decreased by $1.1 million to $2.5 million for the
three months ended June 30, 2010 compared to $3.6 million for the three months
ended June 30, 2009. The decrease is primarily due to a reduction in workforce,
and associated savings, a decrease in professional fees and other efforts to
reduce the Company’s overall levels of overhead.  The rate of decrease
in general, administrative and other operating expense, on a year-over-year
basis, is slower than for some other components of operating expenses because of
the fixed nature of general and administrative costs, relative to the more
variable based costs inherent in other categories of operating
expense.  Included in general and administrative expense is stock
compensation expense of $0.3 million and $0.4 million for the three months ended
June 30, 2010 and 2009 respectively.





Depreciation
and Amortization





Depreciation
and amortization expense decreased $0.7 million to $0.3 million for the three
months ended June 30, 2010 compared to $1.0 million for the three months ended
June 30, 2009 principally as a result of the decrease in amortization expense
due to the full amortization of a major intangible asset in 2009.





Loss
from Operations





Operating
loss increased by $1.7 million or 61% to $4.5 million for the three months ended
June 30, 2010, compared to an operating loss of $2.8 million for the three
months ended June 30, 2009. The Company’s revenue decreased by 36%, with a
corresponding decrease in operating expenses of 23%.




18




Interest
Income and Dividends





Interest
and dividend income decreased $14,000 to $2,000 for the three months ended June
30, 2010, compared to $16,000 for the three months ended June 30, 2009. The
reduction is mainly due to a decrease in the balances of cash and marketable
securities at June 30, 2010 compared to June 30, 2009, as well as a reduction in
market rate of return on cash and cash equivalents.





Interest
Expense





Interest
expense was $26,000 for the three months ended June 30, 2009.





Income
Taxes





Income
tax expense (benefit), before noncontrolling interest and equity in loss of
investee, for the three months ended June 30, 2010 and 2009 was $0.1 million and
($0.9) million respectively and reflects an effective tax rate of (2%) and 32%
respectively. The Company had a loss before taxes of $4.4 million for the three
months ended June 30, 2010 compared to $2.9 million for the three months ended
June 30, 2009. The Company has provided a valuation allowance against its
tax benefits because it is more likely than not that such benefits will not be
utilized by the Company.





Equity
in Loss (Earnings) of Investee




Equity in
earnings of investee was $50,000 for the three months ended June 30, 2010
compared to $33,000 for the three months ended June 30, 2009. The Equity
represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The
company acquired its interest in TBR in the 4thQuarter 2008.





Net
Loss Attributable to Noncontrolling Interest




Net loss
attributable to noncontrolling interest for the three months ended June 30, 2009
was $46,000. This related to our investment in MECC which was dissolved in June
2009.





Net
Loss Attributable to Atrinsic, Inc




Net loss
increased by $2.6 million to $4.5 million for the three months ended June 30,
2010 as compared to a net loss of $1.9 million for the three months ended June
30, 2009. This increase in loss resulted from the factors described
above.





Results
of Operations for the six months ended June 30, 2010 compared to the six months
ended June 30, 2009.





Revenues
presented by type of activity are as follows for the six month periods ending
June 30, 2010 and 2009:





For
      the
                Six
      Months Ended
              
              
              Change
              
              
              ChangeJune
      30,
              
              
              Inc.(Dec.)
              
              
              Inc.(Dec.)2010
              
              
              2009
              
              
              $
              
              
              %Subscription
              
              $
              10,973
              
              
              $
              10,210
              
              
              $
              763
              
              
              
              7
              %Transactional
      and Marketing Services
              
              $
              12,040
              
              
              $
              30,346
              
              
              $
              (18,306
              )
              
              
              -60
              %Total
      Revenues (1)
              
              $
              23,013
              
              
              $
              40,556
              
              
              $
              (17,543
              )
              
              
              -43
              %


(1)
            As
      described above, the Company currently aggregates revenues based on the
      type of user activity monetized. The Company’s objective is to optimize
      total revenues from the user experience. Accordingly, this factor should
      be considered in evaluating the relative revenues generated from our
      Subscriptions and from our Transactional and Marketing
      Services.





Revenues
decreased approximately $17.5 million or 43%, to $23.0 million for the six
months ended June 30, 2010, compared to $40.5 million for the six months ended
June 30, 2009.




19





Subscription
revenue increased by approximately $0.8 million, or 7%, to $11.0 million for the
six months ended June 30, 2010, compared to $10.2 million for the six months
ended June 30, 2009. Subscription revenue for the six months ended June 30, 2010
includes Kazaa revenue of $5.8 million, without which, our subscription revenue
would have decreased by $5.1 million. The increase in subscription revenue was
principally attributable to a significant increase in average revenue per user,
or “ARPU,” which increased to approximately $5.88 for the six months ended June
30, 2010, representing a 34% improvement in ARPU compared to the year ago
period.  This increase in ARPU is due to the combination of a higher
retail price point of the Kazaa music subscription service, relative to our
other subscription products, and the greater number of Kazaa subscribers, as a
proportion of our total  subscriber base. As of June 30, 2010, the
Company had approximately 284,000 subscribers across all of its entertainment
and lifestyle subscription products, compared to approximately 340,000
subscribers as of December 31, 2009.  During the six months ended June
30, 2010, the Company added approximately 271,000 new subscribers. More than 50%
of these new subscribers were new users of the Kazaa music subscription service.
As of June 30, 2010, the Company estimates that it has approximately 86,000
Kazaa subscribers.





Transactional
and Marketing services revenue is derived from our online marketing activities,
which consist of targeted and measurable online campaigns and programs for
marketing partners, corporate advertisers, or their agencies, to generate
qualified customer leads, online responses and sales transactions , or
increased brand recognition. Transactional and Marketing services revenue
decreased by approximately $18.3 million or 60% to $12.0 million for the six
months ended June 30, 2010 compared to $30.3 million for the six months ended
June 30, 2009. The decrease was primarily attributable to the loss of accounts
and a reduction in discretionary advertising expenditures by our clients. During
the second quarter, the Company also took proactive steps to eliminate
unprofitable or marginally profitable lead generation activities and marketing
programs from its product and services offerings. These steps had the effect of
reducing lead generation sales volume, further contributing to the decrease in
revenue compared to the year ago period.





Operating
Expenses





For
      the
                Six
      Months Ended
              
              
              Change
              
              
              ChangeJune
      30,
              
              
              Inc.(Dec.)
              
              
              Inc.(Dec.)2010
              
              
              2009
              
              
              $
              
              
              %Operating
      ExpensesCost
      of Media – 3rd
      party
              
              $
              13,353
              
              
              $
              25,948
              
              
              
              (12,595
              )
              
              
              -49
              %Product
      and distribution
              
              
              9,489
              
              
              
              4,851
              
              
              
              4,638
              
              
              
              96
              %Selling
      and marketing
              
              
              2,287
              
              
              
              4,927
              
              
              
              (2,640
              )
              
              
              -54
              %General,
      administrative and other operating
              
              
              4,943
              
              
              
              6,905
              
              
              
              (1,962
              )
              
              
              -28
              %Depreciation
      and Amortization
              
              
              647
              
              
              
              2,562
              
              
              
              (1,915
              )
              
              
              -75
              %Total
      Operating Expenses
              
              $
              30,719
              
              
              $
              45,193
              
              
              $
              (14,474
              )
              
              
              -32
              %


Cost
of Media





Cost of
Media – 3rd party
decreased by $12.6 million or 49% to $13.4 million for the six months ended June
30, 2010 from $25.9 million for the six months ended June 30, 2009. Cost of
Media – 3rd party
includes media purchased for monetization of both transactional and marketing
services and subscription revenues. Although the decrease in Cost of Media –
3rd
party was primarily due to the decline in related revenue from period to period,
the level of Cost of Media – 3rd party,
is also dependent upon the Company’s rate of new subscriber acquisition, which
may move independently of revenues. During the six months ended June 30, 2010,
the Company added approximately 271,000 new subscribers, over half of which were
Kazaa subscribers. This overall level of subscription-related Cost of Media –
3rd
party spend and rate of customer acquisition was not sufficient to replace the
Company’s existing subscriber base during this period. Cost of media for the six
months ended June 30, 2010, includes Kazaa-related Cost of Media – 3rd party
of $2.7 million. We expect to recoup these Kazaa cost of media expenses from the
future cash flows of the Kazaa music service, although there can be no assurance
in this regard.





During
the first half of 2010, the Company estimates that its subscriber acquisition
cost, or “SAC,” was approximately $13.32, which reflects an approximate 5%
improvement in SAC from the year ago period. SAC is dependent on a number of
factors, including prevailing market conditions, the type of media, and the
ability of the Company to convert leads into subscribers. The Company expects
that SAC will fluctuate from period to period based on all of these factors.
Management will continue to monitor SAC closely to ensure that the Company
acquires customers in a cost effective manner.




Product
and Distribution





Product
and distribution expense increased by $4.6 million or 96% to $9.5 million for
the six months ended June 30, 2010 as compared to $4.9 million for the six
months ended June 30, 2009. Product and distribution expenses are costs
necessary to provide licensed content and development and support for our
products, websites and technology platforms – which drive both our Transactional
and Marketing Services and Subscription based revenues. Compared to the year ago
period, in the first half of 2010, we experienced higher product and
distribution expense of $5.5 million as a result of costs incurred to further
develop the Kazaa music service and greater royalty and license expense payable
to music labels, also associated with Kazaa. We expect to recoup these Kazaa
product and distribution expenses from the future cash flows of the Kazaa music
service, although there can be no assurance in this regard. The Kazaa costs
are offset by a decrease in non Kazaa related labor and professional fees.
Included in product and distribution cost is stock compensation expense of
$21,000 and $0.1 million for the six months ended June 30, 2010 and 2009,
respectively.




20





Selling and
Marketing





Selling
and marketing expense decreased $2.6 million or 54% to $2.3 million in the six
months ended June 30, 2010 as compared to $4.9 million for the six months ended
June 30, 2009. This decrease in selling and marketing expense was primarily
attributable to the Company’s efforts to eliminate unprofitable or marginally
profitable lead generation activities and marketing programs from its product
and services offerings.  The Company’s bad debt expense, a component
of selling and marketing, decreased by approximately $1.5 million for the six
months ended June 30, 2010 compared to the six months ended June 30, 2009. The
decrease in selling and marketing was also due to a decrease in salaries and
employee related costs. Included in selling and marketing cost is stock
compensation expense of $17,000 and $0 for the six months ended June 30, 2010
and 2009 respectively.





General,
Administrative and Other Operating





General
and administrative expenses decreased by $2.0 million to $4.9 million for the
six months ended June 30, 2010 compared to $6.9 million for the six months ended
June 30, 2009. The decrease is primarily due to a reduction in workforce, and
associated savings, a decrease in professional fees and other efforts to reduce
the Company’s overall levels of overhead.  The rate of decrease in
general, administrative and other operating expense, on a year-over-year basis,
is slower than for some other components of operating expenses because of fixed
nature of general and administrative costs, relative to the more variable based
costs inherent in other categories of operating expense. Included in general and
administrative expense is stock compensation expense of $0.6 million and $0.7
million for the six months ended June 30, 2010 and 2009
respectively.





Depreciation
and Amortization





Depreciation
and amortization expense decreased $1.9 million to $0.6 million for the six
months ended June 30, 2010 compared to $2.6 million for the six months ended
June 30, 2009 principally as a result of the decrease in amortization expense
due to the full amortization of a major intangible in 2009.





Loss
from Operations





Operating
loss increased by $3.1 million or 67% to $7.7 million for the six months ended
June 30, 2010, compared to an operating loss of $4.6 million for the six months
ended June 30, 2009. The Company’s revenue decreased by 43% with a corresponding
decrease in operating expenses of 32%.




Interest
Income and Dividends





Interest
and dividend income decreased $58,000 to $4,000 for the six months ended June
30, 2010, compared to $62,000 for the six months ended June 30, 2009. The
reduction is mainly due to a decrease in the balances of cash and marketable
securities at June 30, 2010 compared to June 30, 2009, as well as a reduction in
market rate of return on cash and cash equivalents.





Interest
Expense





Interest
expense was $1,000 for the six months ended June 30, 2010 compared to $76,000
for the six months ended June 30, 2009.





Income
Taxes





Income
tax expense (benefit), before noncontrolling interest and equity in loss of
investee, for the six months ended June 30, 2010 and 2009 was $0.2 million and
($1.6) million respectively and reflects an effective tax rate of (2%) and 34%
respectively. The Company had a loss before taxes of $7.7 million for the six
months ended June 30, 2010 compared to loss before taxes of $4.7 million for the
six months ended June 30, 2009. The Company has provided a valuation
allowance against its tax benefits because it is more likely than not that such
benefits will not be utilized by the Company.





Equity
in Loss of Investee




Equity in
loss of investee was $60,000 for the six months ended June 30, 2010 compared to
$52,000 for the six months ended June 30, 2009. The Equity represents the
Company’s 36% interest in The Billing Resource, LLC (TBR). The company acquired
its interest in TBR in the 4thQuarter 2008.




21





Net
Income Attributable to Noncontrolling Interest




Net
income attributable to noncontrolling interest for the six months ended June 30,
2009 was $28,000. This related to our investment in MECC which was dissolved in
June 2009.





Net
Loss Attributable to Atrinsic, Inc




Net loss
increased by $4.8 million to $7.9 million for the six months ended June 30, 2010
as compared to a net loss of $3.1 million for the six months ended June 30,
2009. This increase in loss resulted from the factors described
above.





Liquidity
and Capital Resources




As of
June 30, 2010, we had cash and cash equivalents of approximately $7.3 million
and working capital of approximately $8.7 million. We used approximately $9.6
million in cash for operations for the six months ended June 30,
2010.  This was the result of cash used to pay third party media
suppliers, employees and consultants, represented by a decrease in accounts
payable and accrued expenses, net of prepaid expenses, of approximately $2.9
million and cash used as a result of the increase in accounts receivable of
approximately $0.9 million, which was offset by approximately $0.9
million decrease in prepaid taxes (of which $0.7 million was net cash
refunded for taxes). As a result, our cash and cash equivalents at June 30, 2010
decreased $9.6 million to approximately $7.3 million from approximately $16.9
million at December 31, 2009.





We
believe that our existing cash, cash equivalents, together with cash flows from
expected sales of our subscription and transactional marketing services, and
other potential sources of cash flows, including income tax refunds $3.5 million
will be sufficient to enable us to continue our marketing, production, and
distribution activities for at least 12 months.  However, our
projections of future cash needs and cash flows may differ from actual results.
If current cash and cash equivalents, and cash that may be generated from
operations, are insufficient to satisfy our liquidity requirements, we may seek
to sell debt or equity securities or to obtain a line of credit.  The
sale of additional equity securities or convertible debt could result in
dilution to our stockholders. We currently have no arrangements with respect to
additional financing. We can give no assurance that we will generate sufficient
revenues in the future (through sales, license fees, or otherwise) to satisfy
our liquidity requirements or sustain future operations, or that other sources
of funding would be available, if needed, on favorable terms or at all. If we
cannot obtain such funds if needed, we would need to curtail or cease some or
all of our operations.




New
Accounting Pronouncements





Adopted
in 2010





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 are effective as of January
1, 2010 and the adoption of these revisions to ASC 810 had no impact on our
interim results of operations or financial position.





Not
Yet Adopted




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 the 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.




22




Item
3. Quantitative and Qualitative Disclosures about Market Risk





Not
required.




Item
4T. Disclosure Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Members
of the our management, including our President, Andrew Stollman 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 June 30, 2010, the end of the period covered by
this report. Based upon that evaluation, Messrs. Stollman and Plotts concluded
that our disclosure controls and procedures were effective for the period ended
June 30, 2010.





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 second quarter
ended June 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





23




PART
II  - OTHER
INFORMATION




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 experienced a significant reduction in revenue and have been using cash to
fund operations. If we cannot halt this revenue decline and reduce expenditures
we may have to cease operations.




The
Company has experienced a significant revenue decline and degradation in
business prospects over the past two years, and as a result the Company has used
a significant amount of cash to fund its operations.  The Company’s
cash and cash equivalents was $7.3 million as of June 30, 2010, which is a
$9.6MM decline from the $16.9 million as of December 31, 2009.  If we
are unsuccessful at stabilizing or slowing the decline in our revenue, and our
associated use of cash to fund operations, or if we cannot raise cash through
financing alternatives, then we may need to significantly curtail or cease
operations.





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.  In the six months ended
June 30, 2010, we used approximately $9.6 million in cash. If our cash flows
from operations continue to be 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 will need to secure additional debt or equity financing. In
addition to stabilizing and growing our cash flow from operations, we are
continually evaluating various financing strategies to be used to expand our
business and fund future growth. There can be no assurance that we will be able
to improve our cash flow from operations or 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.





We face intense competition in the
sale of our subscription services and transactional and marketing
services.




In our
subscription service business, which includes the Kazaa music service, and
our transactional and marketing services business, 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 and increasing customer penetration in existing markets 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.





We
may continue to be impacted by the affects of the current weakness 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 and marketing services have declined 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, 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 or make sales to
new customers 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 downturn in the United States which
has impacted our business, and which may continue to affect our results of
operations.




24





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.




We
generate 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.





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 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
and marketing 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
marketing 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 and
time 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. 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 for the Kazaa music service.  We are reliant on such
companies to maintain licenses with content providers, including 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. 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.




25





We
may not fully recoup the expenses and other costs we have expended with respect
to the Kazaa music service




Under the
Marketing Services Agreement and Master Services Agreement we entered into with
Brilliant Digital, Inc. (“BDE”), relating to the operation and marketing of the
Kazaa digital music service, we are responsible for marketing, promotional, and
advertising services.  In exchange for these marketing services, the
Company is entitled to full recoupment for all pre-approved costs and expenses
incurred in connection with the provision of the services plus all other agreed
budgeted amounts. The first $2.5 million of these expenses are to be directly
reimbursed by BDE and all other expenses beyond this amount are fully recoupable
by the Company from the cash flow generated by the Kazaa music service. As of
June 30, 2010, the Company has received the $2.5 million in repayments from BDE
and we are are dependent on the future net cash flow of the Kazaa music service
to fully recoup the approximately $6.2 million of advances and expenditures we
have made, net of cash received or reimbursed, as of June 30, 2010. There can be
no assurance that the future net cash flows from the Kazaa music service will be
sufficient to allow us to fully recoup our expenditures, which could materially
and adversely affect our financial condition.




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 and marketing business, as well as our
subscription business, with both having a materially negative impact on our
results of operations and financial condition.




All of
our revenue is 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 grow, we
will experience difficulty in attracting publishers, and our revenue
will decline.




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 such information. 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.





26





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 and marketing 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.





27




The
demand for a portion of our transactional and marketing 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 and marketing, 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
no longer meet the minimum bid price requirement for continued listing on the
NASDAQ Global Market and face delisting pending the outcome of an appeal with
the NASDAQ Listing Qualification Panel.





On June
23, 2010, we were notified by the NASDAQ Staff that we do not comply with the
minimum $1.00 bid price requirement set forth in Listing Rule
5450(a)(1).  As a result, our common stock is subject to delisting
from The NASDAQ Stock Market unless we requested a hearing before a NASDAQ
Listing Qualifications Panel (the “Panel”).  We requested a hearing
and presented our plan to regain compliance at such hearing before the Panel on
August 5, 2010.  The delisting continues to be stayed until the Panel
issues its decision following the hearing.




Under
NASDAQ’s Listing Rules, the Panel may, in its discretion, decide to continue the
Company’s listing pursuant to an exception to the Rule for a maximum of 180
calendar days from the date of the Staff’s notification or through December 20,
2010.  However, there can be no assurances that the Panel will do
so.





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.   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.




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.




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 June 30, 2010, many 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.




28





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 under the heading “Commitments and Contingencies,” or "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.




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 10," Income Taxes" to our condensed consolidated
financial statements contained in this Quarterly report on Form 10-Q, we
have recorded significant income tax receivables. 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. Also included in
income taxes receivable is a carryback of $0.7 million and our 2007 tax
year is currently under examination by the Internal Revenue Service in
connection with this receivable. Our remaining tax receivable may be
subject to audit by the IRS.





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Item 6. Exhibits




Exhibit
              Number
            
            Description of Exhibit10.1
            
            Employment
      Agreement dated June 30, 2010 by and between Atrinsic, Inc. and Thomas
      Plotts.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.







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




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Signatures





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.





Dated:
August 16, 2010






BY:
            /s/
      Andrew Stollman
            
            BY:
            /s/
      Thomas PlottsAndrew
      Stollman
            
            
            Thomas
      PlottsPresident
            
            
            Chief
      Financial Officer(Principal
      Executive Officer)
            
            
            (Principal
      Financial and Accounting Officer)





31