UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





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, 2009 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)





New
      Motion, Inc.(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.


YesxNo ̈





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 ̈Nox





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 oNo 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 x  
  Noo





As of
August 11, 2009, the Company had 20,801,424 shares of Common Stock, $.01 par
value, outstanding, which excludes 2,741,318 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
                22Item
      4T
                Controls
      and Procedures
                22PART
      II
                OTHER
      INFORMATIONItem
      1A
                Risk
      Factors
                23Item
      2
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                30Item
      4
                Submission
      of Matters to a Vote of Security Holders
                32Item
      6
                Exhibits
                34


2




ATRINSIC,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 (Dollars
in thousands, except per share data)


June
      30,
                                
                                December
      31,2009
                                
                                
                                2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                                
                                $
                                20,435
                                
                                
                                $
                                20,410Marketable
      securities
                                
                                
                                -
                                
                                
                                
                                4,245Accounts
      receivable, net of allowance for doubtful accounts of $4,375 and$2,938
                                
                                
                                11,338
                                
                                
                                
                                16,790Income
      tax receivable
                                
                                
                                2,992
                                
                                
                                
                                2,666Prepaid
      expenses and other current assets
                                
                                
                                4,697
                                
                                
                                
                                3,686Total
      Currents Assets
                                
                                
                                39,462
                                
                                
                                
                                47,797PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $760 and$1,435
                                
                                
                                3,320
                                
                                
                                
                                3,525GOODWILL
                                
                                
                                12,096
                                
                                
                                
                                11,075INTANGIBLE
      ASSETS, net of accumulated amortization of $7,765 and
    $5,683
                                
                                
                                10,426
                                
                                
                                
                                12,508DEFERRED
      TAXES
                                
                                
                                2,305
                                
                                
                                
                                778INVESTMENTS,
      ADVANCES AND OTHER ASSETS
                                
                                
                                2,696
                                
                                
                                
                                3,080TOTAL
      ASSETS
                                
                                $
                                70,305
                                
                                
                                $
                                78,763LIABILITIES
      AND EQUITYCurrent
      LiabilitiesAccounts
      payable
                                
                                $
                                7,008
                                
                                
                                $
                                7,194Accrued
      expenses
                                
                                
                                9,895
                                
                                
                                
                                13,941Note
      payable
                                
                                
                                -
                                
                                
                                
                                1,858Deferred
      revenues and other current liabilities
                                
                                
                                2,147
                                
                                
                                
                                1,121Total
      Current Liabilities
                                
                                
                                19,050
                                
                                
                                
                                24,114STOCKHOLDERS'
      EQUITYCommon
      stock - par value $.01, 100,000,000 authorized, 23,065,056 and 22,992,280
      shares issued at 2009 and 2008, respectively; and, 20,323,738 and
      21,083,354 shares outstanding at 2009 and 2008,
    respectively.
                                
                                
                                231
                                
                                
                                
                                230Additional
      paid-in capital
                                
                                
                                178,184
                                
                                
                                
                                177,347Accumulated
      other comprehensive loss
                                
                                
                                (183
                                )
                                
                                
                                (286
                                )Common
      stock, held in treasury, at cost, 2,741,318 and 1,908,926 shares as of
      June 30, 2009 and December 31, 2008.
                                
                                
                                (4,992
                                )
                                
                                
                                (4,053
                                )Accumulated
      deficit
                                
                                
                                (121,985
                                )
                                
                                
                                (118,849
                                )Total
      Stockholders' Equity
                                
                                
                                51,255
                                
                                
                                
                                54,389NONCONTROLLING
      INTEREST
                                
                                
                                -
                                
                                
                                
                                260TOTAL
      EQUITY
                                
                                
                                51,255
                                
                                
                                
                                54,649TOTAL
      LIABILITIES AND EQUITY
                                
                                $
                                70,305
                                
                                
                                $
                                78,763





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
      30,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Subscription
                              
                              $
                              4,833
                              
                              
                              $
                              10,274
                              
                              
                              $
                              10,210
                              
                              
                              $
                              23,556Transactional
                              
                              
                              12,175
                              
                              
                              
                              21,177
                              
                              
                              
                              30,346
                              
                              
                              
                              36,633NET
      REVENUE
                              
                              
                              17,008
                              
                              
                              
                              31,451
                              
                              
                              
                              40,556
                              
                              
                              
                              60,189OPERATING
      EXPENSESCost
      of media-third party
                              
                              
                              10,472
                              
                              
                              
                              19,854
                              
                              
                              
                              25,948
                              
                              
                              
                              39,924Product
      and distribution
                              
                              
                              2,597
                              
                              
                              
                              2,591
                              
                              
                              
                              4,851
                              
                              
                              
                              4,953Selling
      and marketing
                              
                              
                              2,142
                              
                              
                              
                              2,210
                              
                              
                              
                              4,927
                              
                              
                              
                              4,161General,
      administrative and other operating
                              
                              
                              3,639
                              
                              
                              
                              4,625
                              
                              
                              
                              6,905
                              
                              
                              
                              9,040Depreciation
      and amortization
                              
                              
                              1,007
                              
                              
                              
                              715
                              
                              
                              
                              2,562
                              
                              
                              
                              1,28019,857
                              
                              
                              
                              29,995
                              
                              
                              
                              45,193
                              
                              
                              
                              59,358(LOSS)
      INCOME FROM OPERATIONS
                              
                              
                              (2,849
                              )
                              
                              
                              1,456
                              
                              
                              
                              (4,637
                              )
                              
                              
                              831OTHER
      (INCOME) EXPENSEInterest
      income and dividends
                              
                              
                              (16
                              )
                              
                              
                              (75
                              )
                              
                              
                              (62
                              )
                              
                              
                              (360
                              )Interest
      expense
                              
                              
                              26
                              
                              
                              
                              -
                              
                              
                              
                              76
                              
                              
                              
                              -Other
      expense (income)
                              
                              
                              6
                              
                              
                              
                              (255
                              )
                              
                              
                              5
                              
                              
                              
                              (125
                              )16
                              
                              
                              
                              (330
                              )
                              
                              
                              19
                              
                              
                              
                              (485
                              )(LOSS)
      INCOME BEFORE TAXES AND EQUITY IN LOSS OF INVESTEE
                              
                              
                              (2,865
                              )
                              
                              
                              1,786
                              
                              
                              
                              (4,656
                              )
                              
                              
                              1,316INCOME
      TAXES
                              
                              
                              (930
                              )
                              
                              
                              768
                              
                              
                              
                              (1,600
                              )
                              
                              
                              594EQUITY
      IN (EARNINGS) LOSS OF INVESTEE, AFTER TAX
                              
                              
                              (33
                              )
                              
                              
                              -
                              
                              
                              
                              52
                              
                              
                              
                              -NET
      (LOSS) INCOME
                              
                              
                              (1,902
                              )
                              
                              
                              1,018
                              
                              
                              
                              (3,108
                              )
                              
                              
                              722LESS:
      NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST, AFTER
      TAX
                              
                              
                              46
                              
                              
                              
                              (48
                              )
                              
                              
                              28
                              
                              
                              
                              (76
                              )NET
      (LOSS) INCOME ATTRIBUTABLE TO ATRINSIC, INC
                              
                              $
                              (1,948
                              )
                              
                              $
                              1,066
                              
                              
                              $
                              (3,136
                              )
                              
                              $
                              798NET
      (LOSS) INCOME ATTRIBUTABLE TO ATRINSIC, INC PER SHAREBasic
                              
                              $
                              (0.10
                              )
                              
                              $
                              0.05
                              
                              
                              $
                              (0.15
                              )
                              
                              $
                              0.04Diluted
                              
                              $
                              (0.10
                              )
                              
                              $
                              0.05
                              
                              
                              $
                              (0.15
                              )
                              
                              $
                              0.04WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                              
                              
                              20,294,869
                              
                              
                              
                              22,664,860
                              
                              
                              
                              20,537,557
                              
                              
                              
                              20,613,896Diluted
                              
                              
                              20,294,869
                              
                              
                              
                              23,176,573
                              
                              
                              
                              20,537,557
                              
                              
                              
                              21,209,564





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
      30,2009
                  
                  
                  2008Cash
      Flows From Operating ActivitiesNet
      (loss) income
                  
                  $
                  (3,108
                  )
                  
                  $
                  722Adjustments
      to reconcile net loss to net cashprovided
      by (used in) operating activities:Allowance
      for doubtful accounts
                  
                  
                  1,474
                  
                  
                  
                  738Depreciation
      and amortization
                  
                  
                  2,562
                  
                  
                  
                  1,280Stock-based
      compensation expense
                  
                  
                  822
                  
                  
                  
                  1,080Net
      loss on sale of marketable securities
                  
                  
                  -
                  
                  
                  
                  175Deferred
      income taxes
                  
                  
                  (1,661
                  )
                  
                  
                  (88
                  )Equity
      in loss of investee
                  
                  
                  81
                  
                  
                  
                  -Changes
      in operating assets and liabilities of business, net of
      acquisitions:Accounts
      receivable
                  
                  
                  4,995
                  
                  
                  
                  1,407Prepaid
      income tax
                  
                  
                  (326
                  )
                  
                  
                  -Prepaid
      expenses and other current assets
                  
                  
                  (206
                  )
                  
                  
                  (1,126
                  )Accounts
      payable
                  
                  
                  (185
                  )
                  
                  
                  (6,692
                  )Other,
      principally accrued expenses
                  
                  
                  (5,120
                  )
                  
                  
                  936Net
      cash used in operating activities
                  
                  
                  (672
                  )
                  
                  
                  (1,568
                  )Cash
      Flows From Investing ActivitiesCash
      received from investee
                  
                  
                  1,080
                  
                  
                  
                  -Cash
      paid for investments and other advances
                  
                  
                  (781
                  )
                  
                  
                  (7,041
                  )Purchases
      of marketable securities
                  
                  
                  -
                  
                  
                  
                  (6,332
                  )Proceeds
      from sales of marketable securities
                  
                  
                  4,242
                  
                  
                  
                  20,658Business
      combinations
                  
                  
                  (115
                  )
                  
                  
                  12,271Acquistion
      of loan receivable
                  
                  
                  (480
                  )
                  
                  
                  -Capital
      expenditures
                  
                  
                  (264
                  )
                  
                  
                  (972
                  )Net
      cash provided by investing activities
                  
                  
                  3,682
                  
                  
                  
                  18,584Cash
      Flows From Financing ActivitiesRepayments
      of notes payable
                  
                  
                  (1,750
                  )
                  
                  
                  (1
                  )Liquidation
      of non-controlling interest
                  
                  
                  (288
                  )
                  
                  
                  -Purchase
      of common stock held in treasury
                  
                  
                  (939
                  )
                  
                  
                  (1,047
                  )Proceeds
      from exercise of options
                  
                  
                  -
                  
                  
                  
                  197Net
      cash used in financing activities
                  
                  
                  (2,977
                  )
                  
                  
                  (851
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (8
                  )
                  
                  
                  -Net
      Increase In Cash and Cash Equivalents
                  
                  
                  25
                  
                  
                  
                  16,165Cash
      and Cash Equivalents at Beginning of Year
                  
                  
                  20,410
                  
                  
                  
                  987Cash
      and Cash Equivalents at End of Year
                  
                  $
                  20,435
                  
                  
                  $
                  17,152SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for interest
                  
                  $
                  68
                  
                  
                  $
                  16Cash
      paid for taxes
                  
                  $
                  264
                  
                  
                  $
                  1,776





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


5




ATRINSIC,
INC. AND SUBSIDIARY
 CONDENSED
CONSOLIDATED STATEMENT OF EQUITY
 (UNAUDITED)
 For
the Six Months Ended June 30,
 (Dollars
in thousands, except per share data)


Retained
                        
                        
                        AccumulatedAdditional
                        
                        
                        Earnings
                        
                        
                        OtherComprehensive
                        
                        
                        Common
      Stock
                        
                        
                        Paid-In
                        
                        
                        (Accumulated
                        
                        
                        Comprehensive
                        
                        
                        Treasury
      Stock
                        
                        
                        Noncontrolling
                        
                        
                        TotalLoss
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Deficit)
                        
                        
                        Loss
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Interest
                        
                        
                        EquityBalance
      at December 31, 2008
                        
                        
                        
                        
                        
                        22,992,280
                        
                        
                        $
                        230
                        
                        
                        $
                        177,347
                        
                        
                        $
                        (118,849
                        )
                        
                        $
                        (286
                        )
                        
                        
                        1,908,926
                        
                        
                        $
                        (4,053
                        )
                        
                        $
                        260
                        
                        
                        $
                        54,649Net
      loss
                        
                        $
                        (3,108
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (3,136
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        28
                        
                        
                        
                        (3,108
                        )Foreign
      currency translation adjustment
                        
                        
                        103
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        103
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        103Comprehensive
      loss
                        
                        $
                        (3,005
                        )Liquidation
      of non controlling interest
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (288
                        )
                        
                        
                        (288
                        )Stock
      based compensation expense
                        
                        
                        -
                        
                        
                        
                        72,776
                        
                        
                        
                        1
                        
                        
                        
                        821
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        822Tax
      shortfall on Stock based compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (122
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (122
                        )Purchase
      of common stock, at cost
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        832,392
                        
                        
                        
                        (939
                        )
                        
                        
                        -
                        
                        
                        
                        (939
                        )Return
      of Equity
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        138
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        138Balance
      at June 30, 2009
                        
                        
                        -
                        
                        
                        
                        23,065,056
                        
                        
                        $
                        231
                        
                        
                        $
                        178,184
                        
                        
                        $
                        (121,985
                        )
                        
                        $
                        (183
                        )
                        
                        
                        2,741,318
                        
                        
                        $
                        (4,992
                        )
                        
                        $
                        -
                        
                        
                        $
                        51,255





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, 2009 and
December 31, 2008, the Consolidated Statements of Operations for the three and
six months ended June 30, 2009 and 2008, and the Consolidated Statements of Cash
Flows for the six months ended June 30, 2009 and 2008 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, 2008. 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, 2008, included
in the Company’s Annual Report on Form 10-K filed on March 27,
2009.





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 returns and chargebacks,
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.





Certain
prior year amounts have been reclassified to conform to the current year’s
presentation, specific to account groupings within the Company’s unaudited
condensed consolidated financial statements.





Note2–Investments
and Advances





Investments
in Central Internet Corporation d/b/a Shopit.com





On
December 2, 2008 the Company entered into a Marketing Services and License
Agreement (the “Agreement”) with Shopit.  Under the Agreement the
Company performed certain marketing and administrative services for Shopit and
distributed proprietary and third party advertisements through Shopit.com and
its social media advertising network. The Agreement provided Shopit with a
revenue share of all leads monetized by the Company. Under the Agreement, the
Company made periodic advance payments totaling $1.025 million and made
incremental advances of $150,000 to support continued marketing and product
development.  The advances were recoverable on a dollar for dollar basis
against future revenues and were secured by the assets of Shopit. On
June 8, 2009 the Company purchased $ 640,000 face amount of Shopit’s
notes payable from the holders for cash consideration of $480,000 and share
consideration of 80,000 shares of the Company’s common stock which were issued
subsequent to June 30, 2009.  As a result of the cumulative aforementioned
transactions, as of June 30, 2009, including all advances and investments in the
Shopit notes payable, the Company’s cumulative investment totaled $1.65 million
which is included in Prepaid Expenses and Other Current Assets on the June 30,
2009 Condensed Consolidated Balance Sheet.





On July
31, 2009 the Company entered into an Asset Purchase Agreement (“APA”) with
Shopit pursuant to which the Company acquired certain assets of Shopit,
including, but not limited to, the underlying product code, domain names, brand
name and trademarks, and certain non-compete provisions. Upon closing, the
Company paid approximately $450,000 in cash and delivered 380,000 shares of the
Company’s Common stock of which 200,000 will be placed in escrow pending the
outcome of certain defined matters.  Further, the Company agreed to the
cancellation of $1.8 million in aggregate indebtedness. The valuation of the
associated intangibles is in process, and the Company’s balance sheet at
September 30, 2009 will include the Company’s estimate of the fair values of the
assets acquired and the related estimated useful lives.





Joint Venture
with Visionaire and Mango Networks





On July
30, 2008, the Company entered into an agreement to launch online and mobile
marketing services and offer the Company’s mobile products in the Indian
market.  Under the agreement, the Company owns 19% of the Joint
Venture and is required to pay up to $325,000 in return for Compulsory
Convertible Debentures which can be converted to common stock at any time, at
the Company’s sole discretion. Under the agreement, the Company is entitled to
one of three seats on the Board of Directors. The Company is accounting for the
investment under the cost method of accounting. Amounts paid under the agreement
as of June 30, 2009 were $225,000.


7


Investment
in The Billing Resource, LLC





On
October 30, 2008, the Company acquired a 36% noncontrolling interest in The
Billing Resource, LLC (“TBR”). TBR provides alternative billing services to the
Company and unrelated third parties. The Company contributed $2.2 million on
formation and has committed to provide an additional $1.0 million of working
capital to support near term growth. As of June 30, 2009, the Company has
contributed $0.9 million of working capital to TBR and received a return of
capital of $1.08 million from TBR. As of June 30, 2009 the Company’s net
investment in TBR totals $1.9 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 was transacted in the normal course of business and negotiated on an
arm’s length basis. At June 30, 2009 TBR, its affiliated entities, and entities
under common control are indebted to the Company $812,000 which are included in
accounts receivables within the accompanying condensed consolidated balance
sheet.





The
Company records its investment in TBR under the equity method of accounting and
as such presents its prorata share of the equity in earnings and losses of TBR
within its quarterly and year end reported results. The Company recorded $33,000
and ($52,000) as equity in earnings (loss) for the three and six months ended
June 30, 2009.





Note3-Notes
Payable





In
connection with the acquisition of Ringtone.com, the Company delivered a
convertible promissory note (the “Note”) with an aggregate principal amount of
$1.75 million, which accrues interest at a rate of 10% per annum. The Note was
payable on the earlier of (i) July 1, 2009, or (ii) 5 days after the Company
gives written notice to Ringtone.com of its intent to prepay the Note (the
“Maturity Date”). The Note was optionally convertible by Ringtone.com on the
Maturity Date into the Company’s common stock at a conversion price of $5.42 per
share. As the effective conversion price was significantly greater than the fair
value of the Company’s stock at the commitment date, no value was assigned to
the conversion feature upon issuance. The Note plus accrued interest was paid in
full in May 2009.





Note4-Concentration
of Business and Credit Risk





Atrinsic
is currently utilizing several billing partners in order to provide content and
subsequent billings to the end user. These billing partners, or aggregators, act
as a billing interface between Atrinsic and the mobile phone carriers that
ultimately bill Atrinsic’s end user subscribers. These partner companies have
not had long operating histories in the U.S. or operations with traditional
business models. These companies face a greater business risk in the
marketplace, due to a constant evolving business environment that stems from the
infancy of the U.S. mobile content industry.





In
addition, the Company also has customers other than aggregators that represent
significant amounts of revenues and accounts receivable.





Six
      MonthsEnded
      June 30,2009
                                
                                
                                2008RevenuesCustomer
      A
                                
                                
                                29
                                %
                                
                                
                                15
                                %Billing
      Aggregator B
                                
                                
                                9
                                %
                                
                                
                                1
                                %Billing
      Aggregator C
                                
                                
                                7
                                %
                                
                                
                                31
                                %Other
      Customers & Aggregators
                                
                                
                                55
                                %
                                
                                
                                53
                                %


8


Six
      MonthsEnded
      June 30,2009
                      
                      
                      2008Accounts
      ReceivableBilling
      Aggregator B
                      
                      
                      12
                      %
                      
                      
                      0
                      %Customer
      A
                      
                      
                      20
                      %
                      
                      
                      11
                      %Billing
      Aggregator C
                      
                      
                      26
                      %
                      
                      
                      26
                      %Other
      Customers & Aggregators
                      
                      
                      42
                      %
                      
                      
                      63
                      %





Note5–
Goodwill





The gross
carrying value of goodwill and intangibles as well as the accumulated
amortization of the intangibles are as follows:





June
      30,
                                              
                                              
                                              December
      31,2009
                                              
                                              
                                              2008Useful
                                              
                                              
                                              Gross
                                              
                                              
                                              
                                              
                                              
                                              Impairment/
                                              
                                              
                                              Net
                                              
                                              
                                              Gross
                                              
                                              
                                              Impairment/
                                              
                                              
                                              NetLife
                                              
                                              
                                              Carrying
                                              
                                              
                                              Acquisition
                                              
                                              
                                              Accumulated
                                              
                                              
                                              Carrying
                                              
                                              
                                              Carrying
                                              
                                              
                                              Accumulated
                                              
                                              
                                              Carrying(in
      years)
                                              
                                              
                                              Value
                                              
                                              
                                              Adjustments
                                              
                                              
                                              Amortization
                                              
                                              
                                              Value
                                              
                                              
                                              Value
                                              
                                              
                                              Amortization
                                              
                                              
                                              ValueUnamortized
      intangible assets:Goodwill
                                              
                                              
                                              
                                              
                                              $
                                              11,075
                                              
                                              
                                              $
                                              1,021
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              
                                              12,096
                                              
                                              
                                              $
                                              125,858
                                              
                                              
                                              $
                                              (114,783
                                              )
                                              
                                              $
                                              11,075Other
      unamortized identifiable intangible assets:Trademarks
                                              
                                              
                                              
                                              
                                              
                                              11
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              11
                                              
                                              
                                              
                                              11
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              11Trademarks
                                              
                                              
                                              
                                              
                                              
                                              5,323
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              5,323
                                              
                                              
                                              
                                              5,323
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              5,323Domain
      Name
                                              
                                              
                                              
                                              
                                              
                                              1,174
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,174
                                              
                                              
                                              
                                              1,174
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,174Other
      amortized identifiable intangible assets:Acquired
      Software Technology
                                              
                                              3
                                              
                                              
                                              
                                              2,431
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (1,148
                                              )
                                              
                                              
                                              1,283
                                              
                                              
                                              
                                              2,431
                                              
                                              
                                              
                                              (743
                                              )
                                              
                                              
                                              1,688Domain
      Name
                                              
                                              3
                                              
                                              
                                              
                                              550
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (260
                                              )
                                              
                                              
                                              290
                                              
                                              
                                              
                                              550
                                              
                                              
                                              
                                              (168
                                              )
                                              
                                              
                                              382Licensing
                                              
                                              2
                                              
                                              
                                              
                                              580
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (580
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              580
                                              
                                              
                                              
                                              (580
                                              )
                                              
                                              
                                              -Trade
      names
                                              
                                              9
                                              
                                              
                                              
                                              1,320
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (208
                                              )
                                              
                                              
                                              1,112
                                              
                                              
                                              
                                              1,320
                                              
                                              
                                              
                                              (134
                                              )
                                              
                                              
                                              1,186Customer
      list
                                              
                                              1.5
                                              
                                              
                                              
                                              949
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (949
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              949
                                              
                                              
                                              
                                              (949
                                              )
                                              
                                              
                                              -Customer
      list
                                              
                                              3
                                              
                                              
                                              
                                              669
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (316
                                              )
                                              
                                              
                                              353
                                              
                                              
                                              
                                              669
                                              
                                              
                                              
                                              (205
                                              )
                                              
                                              
                                              464Subscriber
      Database
                                              
                                              1
                                              
                                              
                                              
                                              3,956
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (3,956
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,956
                                              
                                              
                                              
                                              (2,679
                                              )
                                              
                                              
                                              1,277Restrictive
      Covenants
                                              
                                              5
                                              
                                              
                                              
                                              1,228
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (348
                                              )
                                              
                                              
                                              880
                                              
                                              
                                              
                                              1,228
                                              
                                              
                                              
                                              (225
                                              )
                                              
                                              
                                              1,003Total
      identifiable intangible assets
                                              
                                              
                                              
                                              
                                              $
                                              18,191
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (7,765
                                              )
                                              
                                              $
                                              10,426
                                              
                                              
                                              $
                                              18,191
                                              
                                              
                                              $
                                              (5,683
                                              )
                                              
                                              $
                                              12,508





During
the first quarter of 2009, the Company revised its estimate of the fair market
value of certain pre acquisition contingencies and other merger related
liabilities for its acquisitions of Traffix, Inc., and Ringtone.com. This
resulted in an increase of the Company’s liabilities by approximately $0.9
million. In the second quarter of 2009 the Company increased its liabilities by
a further $0.1 million in relation to its acquisition of Ringtone.com. At
December 31, 2009, the Company will perform its annual impairment test and
believes it is possible that it will have an impairment of goodwill and other
long lived identified intangibles in the future, which will result in a non cash
impairment charge reflected in the statement of operations.





Note6- Stock-basedcompensation





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


9





Following
adoption of the 2009 Stock Incentive Plan, executives were granted 750,000
restricted stock units under the plan which will vest after the closing of
trading on the date that the average per share trading price of the Company’s
common stock during any period of 10 consecutive trading days equals or exceeds
$7.50 or upon a change in control of the Company, as defined in the plan. In
addition, the Company adopted a one-time option exchange program pursuant to
which 283,334 restricted stock units were granted in exchange for 850,000
options held by certain executives of the Company. On each of December 31, 2009,
December 31, 2010, and December 31, 2011, one-third of the restricted stock
units held by each individual will be eligible for vesting in accordance with
quantitative and qualitative measures to be determined by the Compensation
Committee of the Board.





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 highly sensitive.





The
Company recorded $0.82 million and $1.08 million of share based compensation
expenses for the six months ended June 30, 2009 and 2008, respectively, as
follows:




Six Months EndedJune 30,2009
                    
                    
                    2008Product
      and distribution
                    
                    $
                    106
                    
                    
                    $
                    137General
      and administrative and other operating
                    
                    
                    716
                    
                    
                    
                    943$
                    822
                    
                    
                    $
                    1,080




Note7–(Loss) Incomeper
Share Attributable toAtrinsic,
Inc




Basic
(loss) income per share attributable to Atrinsic, Inc. is computed by dividing
reported (loss) income by the weighted average number of shares of common stock
outstanding for the period. Diluted (loss) income 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, warrants and convertible debt.




The
computational components of basic and diluted (loss) income per share are as
follows:




Three Months Ended
                    
                    
                    Six Months EndedJune 30,
                    
                    
                    June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008EPS
      Denominator:Basic
      weighted average shares
                    
                    
                    20,294,869
                    
                    
                    
                    22,664,860
                    
                    
                    
                    20,537,557
                    
                    
                    
                    20,613,896Effect
      of dilutive securities
                    
                    
                    -
                    
                    
                    
                    511,713
                    
                    
                    
                    -
                    
                    
                    
                    595,668Diluted
      weighted average shares
                    
                    
                    20,294,869
                    
                    
                    
                    23,176,573
                    
                    
                    
                    20,537,557
                    
                    
                    
                    21,209,564EPS
      Numerator (effect on net income):Net
      (loss) income attributable to Atrinsic, Inc.
                    
                    $
                    (1,948
                    )
                    
                    $
                    1,066
                    
                    
                    $
                    (3,136
                    )
                    
                    $
                    798Effect
      of dilutive securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Diluted
      (loss) income attributable to Atrinsic, Inc.
                    
                    $
                    (1,948
                    )
                    
                    $
                    1,066
                    
                    
                    $
                    (3,136
                    )
                    
                    $
                    798Net
      (loss) income per common share:Basic
      weighted average (loss) income attributable to Atrinsic,
    Inc.
                    
                    $
                    (0.10
                    )
                    
                    $
                    0.05
                    
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.04Effect
      of dilutive securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Diluted
      weighted average (loss) income attributable to Atrinsic,
    Inc.
                    
                    $
                    (0.10
                    )
                    
                    $
                    0.05
                    
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.04
  10





The
Company has issued options, a convertible note payable and warrants, which may
have a dilutive effect on reported earnings if they are exercised or converted
to common stock. Common stock underlying outstanding options, convertible
securities and warrants were not included in the computation of diluted earnings
per share for the three and six months ended June 30, 2009 and 2008, because
their inclusion would be anti dilutive when applied to the Company’s net loss
per share.





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


Anti
Diluted EPS Disclosure
 Three Months Ended
                    
                    
                    Six Months EndedJune 30,
                    
                    
                    June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Convertible
      note payable
                    
                    
                    -
                    
                    
                    
                    322,878
                    
                    
                    
                    -
                    
                    
                    
                    322,878Options
                    
                    
                    1,919,902
                    
                    
                    
                    2,470,857
                    
                    
                    
                    1,919,902
                    
                    
                    
                    2,453,957Warrants
                    
                    
                    314,443
                    
                    
                    
                    290,909
                    
                    
                    
                    314,443
                    
                    
                    
                    -Restricted
      Shares
                    
                    
                    27,781
                    
                    
                    
                    -
                    
                    
                    
                    27,781
                    
                    
                    
                    -Restricted
      Stock Units
                    
                    
                    750,000
                    
                    
                    
                    -
                    
                    
                    
                    750,000
                    
                    
                    
                    -





The per
share exercise prices of the options were $0.48 - $14.00 for the six months
ended June 30, 2009 and 2008. The per share exercise prices of the warrants were
$3.44 - $5.50 for the six months ended June 30, 2009 and 2008. The convertible
note payable with a face value of $1,750,000, and a conversion price of $5.42,
had a post conversion effect of 322,878 shares in 2008. The convertible note was
paid in cash in 2009.





Note8—Stockholders’
Equity




On April
8, 2008, the Company’s Board of Directors authorized management to repurchase up
to $10 million of common stock through May 31, 2009. During the six months ended
June 30, 2009, the Company repurchased 832,392 shares at an average purchase
price of $1.13. For the year ended December 31, 2008, the Company repurchased
1,908,926 shares of its common stock at an average purchase price of $2.12 per
share. Total cash consideration for the repurchased stock to date is $5.0
million at an average price of $1.82.





Note9-Income
Taxes





The
effective tax rate for income (loss) before noncontrolling interest and loss on
investee was 34% and 45% for the six months ended June 30, 2009 and 2008,
respectively. The Company has not provided a valuation allowance against its
deferred tax assets because it is more likely than not that such benefits will
be utilized by the Company.





FIN
48 Disclosures




The
Company recognizes interest accrued related to unrecognized tax benefits and
penalties as income tax expense. There were accrued penalties and interest
recorded on the Balance Sheet in Merger Related Accruals for the six months
ended June 30, 2009, related to uncertain tax benefits for Traffix
Inc.




The
Company is subject to taxation in the US Federal, State and many foreign
jurisdictions. The Company’s tax years for 2006 and 2007 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, 2009,
the total liability for uncertain tax liabilities recorded in our balance sheet
in Merger Related accruals is $393,000. 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, or goodwill, to the extent such
adjustments relate to acquired entities.  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





Note10–Noncontrolling
Interest in Consolidated Financial Statements





Mobile
Entertainment Channel Corporation (MECC) is a Nevada corporation in which
Atrinsic owned 49%. Atrinsic received 50% of the amount of any dividends or
other distributions made by the joint venture. The results of MECC are
consolidated within the financial statements under FIN 46(R). MECC was
dissolved in June 2009 and $288,000 was distributed to
shareholders..


11





Note 11 -Recent Accounting
Pronouncements





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of


Generally
Accepted Accounting Principles: a replacement of FASB Statement No.
162.”  This Statement establishes two levels of U.S. generally
accepted accounting principles (GAAP) – authoritative and
nonauthoritative.  The FASB Accounting Standards Codification (ASC)
will become the source of authoritative, nongovernmental GAAP, except for rules
and interpretive releases of the Securities and Exchange Commission
(SEC).  SFAS No. 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009, and will be adopted
by the Company in the third quarter of 2009.  The adoption of SFAS No.
168 will not have any impact on the Company’s Consolidated Financial
Statements.




In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 amends
FIN 46(R), “Consolidation of Variable Interest Entities (revised
December 2003)—an interpretation of ARB No. 51” (“FIN 46(R)”) 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. SFAS
No. 167 will be effective as of the beginning of the annual reporting
period commencing after November 15, 2009 and will be adopted by the
Company in the first quarter of 2010. The Company is assessing the potential
impact, if any, of the adoption of SFAS No. 167 on its consolidated
financial statements.





In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165,
“Subsequent Events” (“SFAS 165”).  SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued.  The
effective date of SFAS 165 is interim or annual financial periods ending after
June 15, 2009.  The adoption of SFAS 165 did not have a material
effect on the Company’s consolidated financial statements. Subsequent events
have been evaluated through August 10, 2009.





In
December 2008, the EITF issued EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets(EITF 08-7). This issue clarifies the accounting for defensive
assets, which are separately identifiable intangible assets acquired in an
acquisition which an entity does not intend to actively use but does intend to
prevent others from using. EITF 08-7 requires an acquirer to account for these
assets as a separate unit of accounting, which should be amortized to expense
over the period the asset diminishes in value. This issue is effective for
intangible assets acquired on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The adoption of EITF
08-7 did not have an impact on the Company’s financial statements.





FASB
issued Staff Position APB14-1 (FSP APB 14-1) which requires that issuers of
convertible debt separately account for the liability and equity components in a
manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The application of FSP APB 14-1 did not result in a material change to the
Company’s financial statements.





In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” EITF 03-6-1 gives guidance as to the circumstances
when unvested share-based payment awards should be included in the computation
of EPS. EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. The adoption of EITF 03-6-1 did not have an impact on
the Company’s financial statements.





In
April 2008, the FASB issued FASB Staff Position No. FSP 142-3,
“Determining the Useful Life of Intangible Assets” FSP 142-3 amends the factors
to be considered in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an intangible asset and
the period of expected cash flows used to measure its fair value. FSP 142-3 is
effective for fiscal years beginning after December 15, 2008. The adoption
of FSP 142-3 did not have an impact on the Company’s financial
statements.





On
February 12, 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-2,
“Effective Date of SFAS No. 157,” which defers the effective date of SFAS 157
for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. This
FSP delayed the implementation of SFAS 157 for the Company’s accounting of
goodwill, acquired intangibles, and other nonfinancial assets and liabilities
that are measured at the lower of cost or market until January 1, 2009. There is
no impact on the financial statements for the six months ended June 30,
2009.


12


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which we refer to as SFAS No. 160. SFAS No.
160 establishes requirements for ownership interests in subsidiaries held by
parties other than us (minority interests) be clearly identified and disclosed
in the consolidated statement of financial position within equity, but separate
from the parent's equity. Any changes in the parent's ownership interests are
required to be accounted for in a consistent manner as equity transactions and
any noncontrolling equity investments in deconsolidated subsidiaries must be
measured initially at fair value. SFAS No. 160 is effective, on a prospective
basis, for fiscal years beginning after December 15, 2008; however, presentation
and disclosure requirements must be retrospectively applied to comparative
financial statements. Except for presentation and disclosure requirements, the
adoption of SFAS 160 had no material impact on the Company’s financial
statements.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R establishes the principles and requirements for how an
acquirer: (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree; (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (iii) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS 141R
is to be applied prospectively to business combinations consummated on or after
the beginning of the first annual reporting period on or after December 15,
2008, with early adoption prohibited. We are currently evaluating the impact
SFAS 141R will have on adoption on our accounting for future acquisitions.
Previously, any release of valuation allowances for certain deferred tax assets
would serve to reduce goodwill, whereas under the new standard any release of
the valuation allowance related to acquisitions currently or in prior periods
will serve to reduce our income tax provision in the period in which the reserve
is released. Additionally, under SFAS 141R transaction-related expenses, which
were previously capitalized, will be expensed as incurred. The impact of SFAS
141R will depend on the nature of acquisitions completed after
adoption.





Note 12 - Commitments and
Contingencies





The
Company is named in two Class Action Lawsuits (in Florida and California)
involving allegations concerning the Company's marketing practices associated
with some of its services billed and delivered via wireless carriers. The
Company is disputing the allegations and is vigorously defending itself in these
matters. In one of these matters the Company has received a Summary Judgment on
its Motion to Dismiss related to a number of the allegations made in the
original complaint. In addition, during the quarter ended June 30, 2009 a class
was certified in connection with the California matter.  Also in connection
with these matters, as they relate to the Company and its business partners
within the industry, it is possible there could be secondary claims for which
any associated liabilities are not probable or estimable.  The Company has
accrued for the probable and estimable related costs in the amount of $350,000
in connection with these matters which are included in Accrued Expenses in the
Consolidated Balance Sheet.





On
February 2, 2009 the Company filed a complaint against Mobile Messenger PTY LTD
and its subsidiary Mobile Messenger Americas, Inc. (“Mobile Messenger”) to
recover monies owed the Company in connection with transaction activity incurred
in the ordinary and normal course and also included declaratory relief
concerning demands made by Mobile Messenger's for indemnification in Mobile
Messenger's settlement in its Florida Class Action Matter which it settled in
late 2008  (“Grey vs. Mobile Messenger”). Mobile Messenger brought
upon the Company a cross complaint seeking injunctive relief, indemnification,
and recoupment of attorney’s fees. The Company disputes the allegations and
continues to vigorously defend itself in these matters considering, among other
things, the specific facts surrounding the underlying claims against the
Company, which we believe, are without merit.




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 except as otherwise disclosed.





In
certain situations, the Company does have minimum fee obligations assuming the
counterparty performs the required level of services.  We feel that the
level of business activity under normal and ordinary circumstances exceeds the
minimum thresholds.


13





Item
2 Management’s Discussion and Analysis





CAUTIONARY
STATEMENT





This discussion summarizes the
significant factors affecting our consolidated operating results, financial
condition and liquidity and cash flows for the three and six months ended June
30, 2009 and 2008. 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 three and six months ended June
30, 2009 and 2008, is intended to update the information contained in our Annual
Report on Form 10-K for the year ended December 31, 2008 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 three and six
months ended June 30, 2009 and 2008.





Executive
Overview





Atrinsic,
Inc., is one of the leading digital advertising and marketing services companies
in the United States. Atrinsic has two main service offerings, Transactional
services and Subscription services. Transactional services offers full service
online marketing and distribution services which are targeted and measurable
online campaigns and programs for marketing partners, corporate advertisers, or
their agencies, generating qualified customer leads, online responses and
activities, or increased brand recognition. Subscription services offer our
portfolio of subscription based content applications direct to users working
with wireless carriers and other distributors.





Atrinsic
brings together the power of the Internet, the latest in mobile technology, and
traditional marketing/advertising methodologies, creating a fully integrated
multi platform vehicle for the advanced generation of qualified leads monetized
by the sale and distribution of subscription content, brand-based distribution
and pay-for-performance advertising. Atrinsic’s service’s content is organized
into four strategic content groups - digital music, casual games, interactive
contests, and communities/lifestyles. The Atrinsic brands include GatorArcade, a
premium online and mobile gaming site, Ringtone.com, a mobile music download
service, and iMatchUp, one of the first integrated web-mobile dating services.
Feature-rich Transactional advertising services include a mobile ad network,
extensive search capabilities, email marketing, one of the largest and growing
publisher networks, and proprietary subscription  content. Services
are provided on a variety of pricing models including cost per action, fixed
fee, or commission based arrangements.





Our goal
is to optimize revenues from each of our qualified leads, regardless of the
nature of the services we provide to such parties. Over an extended period of
time our ability to generate incremental revenues relies on our ability to
increase the size and scope of our media, our ability to target campaigns, and
our ability to convert qualified leads into appropriate revenue generating
opportunities





In
managing our business, we internally develop programming or partner with online
content providers to match users with our service offerings, and those of our
advertising clients. Our continued success and prospects for growth are
dependent on our ability to acquire content in a cost effective manner. Our
results may also be impacted by overall economic conditions, trends in the
online marketing and telecommunications industry, competition, and risks
inherent in our customer database, including customer attrition.





There are
a variety of factors that influence our revenues on a periodic basis including
but not limited to: (1) economic conditions and the relative strengths and
weakness of the U.S. economy; (2) client spending patterns and their overall
demand for our service offerings; (3) increases or decreases in our portfolio of
service offerings; and (4) competitive and alternative programs and advertising
mediums.





Similar
to other media based companies, our ability to specifically isolate the relative
historical aggregate impact of price and volume regarding our revenue is not
practical as the majority of our services are sold and managed on an order by
order basis and our revenues are greatly impacted by our decisions regarding
qualified lead monetization. Factors impacting the pricing of our services
include, but are not limited to: (1) the dollar value, length and breadth of the
order; (2) the quality of the desired action; (3) the quantity of actions or
services requested by our clients; and (4) the level of customization required
by our clients.


14




The
principal components of operating expenses are labor, media and media related
expenses (including affiliate compensation, content development and licensing
fees), marketing and promotional expenses (including sales commissions and
customer acquisition and retention expenses) and corporate general and
administrative expenses. We consider our operating cost structure to be
predominantly variable in nature over a short time horizon, and as a result, we
are immediately able to make modifications to our cost structure to what we
believe to be increases or decreases in revenue and market trends. This factor
is important in monitoring our performance in periods when revenues are
increasing or decreasing. In periods where revenues are increasing as a result
of improved market conditions, we will make every effort to best utilize
existing resources, but there can be no guarantee that we will be able to
increase revenues without incurring additional marketing or operating costs and
expenses. Conversely, in a period of declining market conditions we are
immediately able to reduce certain operating expenses and preserve operating
income. Furthermore, if we perceive a decline in market conditions to be
temporary, we may choose to maintain or increase operating expenses for the
future maximization of operating results.





STRATEGIC
INITIATIVES




Our
business strategy involves increasing our overall scale and profitability by
offering a large number of diversified products through a unique distribution
network in the most cost effective manner possible. To achieve this goal, we are
pursuing the following objectives.




Achieve Cross Media Benefits.
One of our strategic objectives is to leverage the cross media benefit derived
primarily from the combination of Atrinsic and Traffix which was consummated on
February 4, 2008. Our premium-billed subscriptions allow us to integrate and to
leverage online and mobile distribution channels to deliver compelling media and
entertainment. The advantage of the fixed Internet is that from a marketing
expense standpoint, the cost of customer acquisitions is generally determinable.
In addition, the Internet is full of free content that is advertisement
supported. The Internet also allows for the delivery of rich media over
broadband. The advantage of mobile media is that it already has a well
established customer activation and customer retention capability and is
accessible and portable for those using it to access content. Our cross media
strategy seamlessly enables our subscriber to realize true convergence. Atrinsic
enables subscribers to interact with our content at work, at home or on a remote
basis.





Vertically Integrate and Expand
Distribution Channels. We own a large library of wholly owned content,
proprietary premium billed services, and our own media and distribution. By
allocating a large proportion of the qualified leads acquired by our
subscription properties to our owned marketing and distribution networks, we
expect to generate cost savings through the elimination of third-party margins.
These cost savings are expected to result in lower customer acquisition costs
throughout our business. We also expect to continue to enhance our distribution
channels by expanding existing channels to market and sell our products and
services online and explore alternative marketing mediums. We also expect, with
limited modification, to market and sell our existing online-only content
directly to wireless customers. Finally, we expect to continue to drive a
portion of our consumer traffic directly to our proprietary products and
services without the use of third-party media outlets and media
publishers.




Multiple Revenue Streams and
Advertiser Network. Our merger with Traffix has allowed for a reduction
in customer concentration and more diversification of the combined company’s
revenue streams. We will continue to generate recurring revenue streams from a
subscription -based model, which is targeted at end user mobile subscribers. We
will also have the traditional revenue streams inherent in our online
performance-based model, which is targeted to publishers and advertisers.
Further revenue diversification is expected to result from our larger
distribution reach, and our ability to generate ad revenue across the combined
company’s portfolio of web properties.




Publish High-Quality, Branded
Subscription Content. We believe that publishing a diversified portfolio
of the highest quality, most innovative applications is critical 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, innovative products, services and Internet storefronts. The U.S.
consumer’s propensity to use the fixed Internet to acquire, redeem and use
mobile subscription products is unique. In this regard, we aim to provide
complementary services between these two high-growth media channels. We also
expect to continue to create Atrinsic-branded applications, products and
services, which typically generate higher margins. In order to enhance the
Atrinsic brand, and our product brands, we plan to continue building brands
through product and service quality, subscriber, customer and carrier support,
advertising campaigns, public relations and other marketing
efforts.





Results
of Operations for the three months ended June 30, 2009 compared to the three
months ended June 30, 2008.





In terms
of comparability, the three months ended June 30, 2008 total revenue and
operating expenses include three months of Traffix, Inc. activity and none for
Ringtone.com LLC whereas June 30, 2009 total revenue and operating expenses
includes three full months of Traffix, Inc. and Ringtone.com LLC
activity.


15





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





For the Three Months
                        
                        
                        Change
                        
                        
                        ChangeJune 30,
                        
                        
                        Inc.(Dec.)
                        
                        
                        Inc.(Dec.)2009
                        
                        
                        2008
                        
                        
                        $
                        
                        
                        %Subscription
                        
                        $
                        4,833
                        
                        
                        $
                        10,274
                        
                        
                        $
                        (5,440
                        )
                        
                        
                        -53
                        %Transactional
                        
                        $
                        12,175
                        
                        
                        $
                        21,177
                        
                        
                        $
                        (9,002
                        )
                        
                        
                        -43
                        %Total
      Revenues (1)
                        
                        $
                        17,008
                        
                        
                        $
                        31,451
                        
                        
                        $
                        (14,443
                        )
                        
                        
                        -46
                        %







(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
      Subscription and Transactional
services.




Revenues
decreased approximately $14.4 million, or 46%, to $17.0 million for the three
months ended June 30, 2009, compared to $31.4 million for the three months ended
June 30, 2008.





Subscription
revenue decreased by approximately $5.4 million, or 53%, to $4.8 million for the
three months ended June 30, 2009, compared to $10.2 million for the three months
ended June 30, 2008. The decrease in subscription service revenue was
principally attributable to a decrease in the average number of billable
subscribers during the period. For the three months ended June 2009 the average
number of subscribers was 335,000 compared to 925,000 for the three months ended
June 30, 2008. The number of subscribers is largely, but not precisely,
correlated to the periodic reported revenues as a result of inter-period
volatility, varied monthly billing cycles, and specific transactions including
acquisition of subscriber base, the rate of refunds and other
adjustments.





Transactional
revenue decreased by approximately $9.0 million or 43% to $12.2 million for the
three months ended June 30, 2009 compared to $21.2 million for the three months
ended June 30, 2008. The decrease was primarily attributable to the reduction in
discretionary advertising expenditures by our clients.





Operating
Expenses





For the Three Months
                      
                      
                      Change
                      
                      
                      ChangeJune 30,
                      
                      
                      Inc.(Dec.)
                      
                      
                      Inc.(Dec.)2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      %Operating
      ExpensesCost
      of Media – 3rd
      party
                      
                      $
                      10,472
                      
                      
                      $
                      19,854
                      
                      
                      
                      (9,382
                      )
                      
                      
                      -47
                      %Product
      and distribution
                      
                      
                      2,597
                      
                      
                      
                      2,591
                      
                      
                      
                      6
                      
                      
                      
                      0
                      %Selling
      and marketing
                      
                      
                      2,142
                      
                      
                      
                      2,210
                      
                      
                      
                      (68
                      )
                      
                      
                      -3
                      %General,
      administrative and other operating
                      
                      
                      3,639
                      
                      
                      
                      4,625
                      
                      
                      
                      (986
                      )
                      
                      
                      -21
                      %Depreciation
      and Amortization
                      
                      
                      1,007
                      
                      
                      
                      715
                      
                      
                      
                      292
                      
                      
                      
                      41
                      %Total
      Operating Expenses
                      
                      $
                      19,857
                      
                      
                      $
                      29,995
                      
                      
                      $
                      (10,138
                      )
                      
                      
                      -34
                      %





Cost
of Media




Cost of
Media decreased by $9.4 million to $10.5 million for the three months ended June
30, 2009 from $19.9 million for the three months ended June 30, 2008. For 2009,
Cost of Media – 3 rd party
includes media purchased for monetization of both transactional and subscription
revenues. The decrease was proportionately correlated to the decline in the
related revenue. Management is actively monitoring the marketplace and
coordinating media purchases with product launches in an effort to have the
appropriate level of media activity to support long term strategic product
initiatives.




Product
and Distribution




Product
and distribution expense was $2.6 million for the three months ended June 30,
2009 and 2008. Product and distribution expenses are costs necessary to develop
and maintain proprietary content, support and maintain our websites, user data
and technology platforms which drive both our transactional and subscription
based revenues. Included in product and distribution cost is stock compensation
expense of $61,000 and $66,000 for the three months ended June 30, 2009 and 2008
respectively.


16





Selling
and Marketing




Selling
and marketing expense was $2.1 million in the three months ended June 30, 2009
as compared to $2.2 million for the three months ended June 30, 2008. The
Company’s bad debt expense increased by approximately $143,000 for the three
months ended June 30, 2009 compared to the three months ended June 30, 2008
partially offset by a reduction in salaries and other marketing
costs.




General,
Administrative and Other Operating




General
and administrative expenses decreased by approximately $1.0 to $3.6 million for
the three months ended June 30, 2009 compared to $4.6 million for the three
months ended June 30, 2008. The decrease is primarily due to a reduction in
labor and related costs, professional and consulting fees, facilities and
related costs. The Company continues to make appropriate and modest investments
in labor, facilities, and utilization of third party professional service
providers to support its continued growth, business development and corporate
governance initiatives. Included in general and administrative expense is stock
compensation expense of $421,000 and $321,000 for the three months ended June
30, 2009 and 2008 respectively.


Depreciation
and Amortization




Depreciation
and amortization expense increased $0.3 million to $1.0 million for the three
months ended June 30, 2009 compared to $0.7 million for the three months ended
June 30, 2008 principally as a result of the increase in intangible assets as a
result of the acquisitions of Traffix, Inc. on February 4, 2008 and Ringtone.com
LLC on June 30, 2008, and an increase in leasehold improvements for the
Company’s New York City headquarters.


Loss
from Operations


Operating
loss increased to approximately $2.8 million for the three months ended June 30,
2009, compared to an operating gain of $1.5 million for the three months ended
June 30, 2008. The Company’s revenue decreased by 46% with a corresponding
decrease in operating expenses of 34%.


Management
has reduced operating and strategic expenses, launched numerous operational and
strategic initiatives, and continued to monitor the marketplace for additional
opportunities. The nature, timing, and magnitude of future activities will
depend on, among other things, operating performance, and market conditions.
Management continuously seeks to build long term shareholder value by prudently
deploying capital with expectations for an anticipated risk adjusted
return.


The
Company continues to execute on its long term strategic plans amidst a business
climate that is volatile and uncertain. Despite these challenges, management
remains committed, if necessary, to reduce discretionary operating expenses and
reevaluate new initiatives in order to preserve operating margins and generate
positive cash flow.


Interest
Income and Dividends




Interest
and dividend income decreased $59,000 to $16,000 for the three months ended June
30, 2009, compared to $75,000 for the three months ended June 30, 2008. The
reduction is mainly due to a decrease in the balances of cash and marketable
securities at June 30, 2009 compared to June 30, 2008, 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 compared to $0 for
the three months ended June 30, 2008.  The increase is due principally
to interest paid on the note payable related to
Ringtone.com.


Income
Taxes


Income
tax (benefit) expense, before noncontrolling interest and loss on investee, for
the three months ended June 30, 2009 and 2008 was ($0.9) million and $0.8
million respectively and reflects an effective tax rate of 32% and 43%
respectively. The Company had a loss before taxes of $2.9 million for the three
months ended June 30, 2009 compared to income before taxes of $1.8 million for
the three months ended June 30, 2008.  The Company has not provided a
valuation allowance against its tax benefits because it is more likely than not
that such benefits will be utilized by the Company.


17





Equity
in (Earnings) Loss of Investee




Equity in
earnings of investee was $33,000, net of taxes and represents the Company’s 36%
interest in The Billing Resource, LLC (TBR). The company acquired its interest
in TBR in the 4th Quarter
2008 so there are no comparable earnings for the three months ended June 30,
2008.





Net
Loss (Income) Attributable to Noncontrolling Interest




Net Loss
attributable to noncontrolling interest for the three months ended June 30, 2009
was $46,000 compared to net income of $48,000 for the three months ended June
30, 2008. MECC was dissolved in June 2009.





Net
Loss Attributable to Atrinsic, Inc.




Net loss
increased by $3.0 million to $1.9 million for the three months ended June 30,
2009 as compared to a net income of $1.1 million for the three months ended June
30, 2008. This increase resulted from the factors described
above.





Results
of Operations for the six months ended June 30, 2009 compared to the six months
ended June 30, 2008.





In terms
of comparability, for the six months ended June 30, 2008 total revenue and
operating expenses include five months of Traffix, Inc. activity and none for
Ringtone.com LLC whereas June 30, 2009 total revenue and operating expenses
includes six full months of Traffix, Inc. and Ringtone.com LLC
activity.





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





For the Six Months
                      
                      
                      Change
                      
                      
                      ChangeJune 30,
                      
                      
                      Inc.(Dec.)
                      
                      
                      Inc.(Dec.)2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      %Subscription
                      
                      $
                      10,210
                      
                      
                      $
                      23,556
                      
                      
                      $
                      (13,346
                      )
                      
                      
                      -57
                      %Transactional
                      
                      $
                      30,346
                      
                      
                      $
                      36,633
                      
                      
                      $
                      (6,287
                      )
                      
                      
                      -17
                      %Total
      Revenues (1)
                      
                      $
                      40,556
                      
                      
                      $
                      60,189
                      
                      
                      $
                      (19,633
                      )
                      
                      
                      -33
                      %








(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
      Subscription and Transactional
services.




Revenues
decreased approximately $19.6 million, or 33%, to $40.6 million for the six
months ended June 30, 2009, compared to $60.2 million for the six months ended
June 30, 2008.


Subscription
revenue decreased by approximately $13.3 million, or 57%, to $10.2 million for
the six months ended June 30, 2009, compared to $23.5 million for the six months
ended June 30, 2008. The decrease in subscription service revenue was
principally attributable to a decrease in the average number of billable
subscribers during the period. For the six months ended June 30, 2009 the
average number of subscribers was 335,000 compared to 925,000 for the six months
ended June 30, 2008. The number of subscribers is largely, but not precisely,
correlated to periodic reported revenues as a result of inter-period volatility
and the circumstance that subscribers are billed on a monthly
basis.


Transactional
revenue decreased by approximately $6.3 million or 17% to $30.3 million for the
six months ended June 30, 2009 compared to $36.6 million for the six months
ended June 30, 2008. The decrease is principally attributed to the reduction in
discretionary advertising spending by our search customers.


18





Operating
Expenses





For the Six Months
                      
                      
                      Change
                      
                      
                      ChangeJune 30,
                      
                      
                      Inc.(Dec.)
                      
                      
                      Inc.(Dec.)2009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      %Operating
      ExpensesCost
      of Media – 3rd
      party
                      
                      $
                      25,948
                      
                      
                      $
                      39,924
                      
                      
                      
                      (13,976
                      )
                      
                      
                      -35
                      %Product
      and distribution
                      
                      
                      4,851
                      
                      
                      
                      4,953
                      
                      
                      
                      (102
                      )
                      
                      
                      -2
                      %Selling
      and marketing
                      
                      
                      4,927
                      
                      
                      
                      4,161
                      
                      
                      
                      766
                      
                      
                      
                      18
                      %General,
      administrative and other operating
                      
                      
                      6,905
                      
                      
                      
                      9,040
                      
                      
                      
                      (2,135
                      )
                      
                      
                      -24
                      %Depreciation
      and Amortization
                      
                      
                      2,562
                      
                      
                      
                      1,280
                      
                      
                      
                      1,282
                      
                      
                      
                      100
                      %Total
      Operating Expenses
                      
                      $
                      45,193
                      
                      
                      $
                      59,358
                      
                      
                      $
                      (14,165
                      )
                      
                      
                      -24
                      %





Cost
of Media




Cost of
Media decreased by $14.0 million to $25.9 million for the six months ended June
30, 2009 from $39.9 million for the six months ended June 30, 2008. For 2009,
Cost of Media – 3 rd party
includes media purchased for monetization of both transactional and subscription
revenues. The decrease was proportionately correlated to the decline in the
related revenue. Management is actively monitoring the marketplace and
coordinating media purchases with product launches in an effort to have the
appropriate level of media activity to support long term strategic product
initiatives.




Product
and Distribution




Product
and distribution expense was $4.9 million for the six months ended June 30, 2009
and 2008. Product and distribution expenses are costs necessary to develop and
maintain proprietary content, support and maintain our websites, user data and
technology platforms which drive both our transactional and subscription based
revenues. Included in product and distribution cost is stock compensation
expense of $106,000 and $137,000 for the six months ended June 30, 2009 and 2008
respectively.





Selling
and Marketing




Selling
and marketing expense increased by $0.8 million to $5.0 million in the six
months ended June 30, 2009 as compared to $4.2 million for the six months ended
March, 2008. The increase primarily resulted from the Company’s bad debt expense
increasing to $1.5 million for the six months ended June 30, 2009 compared to
$333,000 for the six months ended June 30, 2008 partially offset by a reduction
in salaries and other marketing costs.




General,
Administrative and Other Operating




General
and administrative expenses decreased by approximately $2.1 million to $6.9
million for the six months ended June 30, 2009 compared to $9.0 million for the
six months ended June 30, 2008. The decrease is primarily due to a reduction in
labor and related costs, professional and consulting fees, facilities and
related costs. The Company continues to make appropriate and modest investments
in labor, facilities, technology infrastructure, and utilization of third party
professional service providers to support its continued growth, business
development and corporate governance initiatives. Included in general and
administrative expense is stock compensation expense of $716,000 and $943,000
for the six months ended June 30, 2009 and 2008 respectively.





Depreciation
and Amortization




Depreciation
and amortization expense increased $1.3 million to $2.6 million for the six
months ended June 30, 2009 compared to $1.3 million for the six months ended
June 30, 2008 principally as a result of the increase in intangible assets as a
result of the acquisitions of Traffix, Inc. on February 4, 2008 and Ringtone.com
LLC on June 30, 2008, and an increase in leasehold improvements for the
Company’s New York City headquarters.





Loss
from Operations





Operating
loss increased to approximately $4.6 million for the six months ended June 30,
2009, compared to an operating gain of $0.8 million for the six months ended
June 30, 2008. The Company’s revenue decreased by 33% with a corresponding
decrease in operating expenses of 24%.


19


In
addition, management has reduced operating and strategic expenses, launched
numerous operational initiatives, and continued to monitor the marketplace for
additional opportunities. The nature, timing, and magnitude of future activities
will depend on, among other things, operating performance, and market
conditions. Management continuously seeks to build long term shareholder value
by prudently deploying capital with expectations for an anticipated risk
adjusted return.





The
Company continues to execute on its long term strategic plans amidst a business
climate that is volatile and uncertain. Despite these challenges, management
remains committed, if necessary, to reduce discretionary operating expenses and
reevaluate new initiatives in order to preserve operating margins and generate
positive cash flow.





Interest
Income and Dividends




Interest
and dividend income decreased $298,000 to $62,000 for the six months ended June
30, 2009, compared to $360,000 for the six months ended June 30, 2008. The
reduction is mainly due to a decrease in the balances of cash and marketable
securities at June 30, 2009 compared to June 30, 2008, as well as a reduction in
the rate of return on invested capital.





Interest
Expense




Interest
expense was $76,000 for the six months ended June 30, 2009 compared to $0 for
the six months ended June 30, 2008.  The increase is due principally
to interest paid on the note payable related to Ringtone.com.





Income
Taxes





Income
tax (benefit) expense, before noncontrolling interest and loss on investee, for
the six months ended June 30, 2009 and 2008 was ($1.6) million and $594,000
respectively and reflects an effective tax rate of 34% and 45% respectively. The
Company had a loss before taxes of $4.7 million for the six months ended June
30, 2009 compared to income before taxes of $1.3 million for the six months
ended June 30, 2008. The Company has not provided a valuation allowance
against its tax benefits because it is more likely than not that such benefits
will be utilized by the Company.





Equity
in (Earnings) Loss of Investee




Equity in
loss of investee was $52,000, net of taxes for the six months ended June 30,
2009 and represents the Company’s 36% interest in The Billing Resource, LLC. The
company acquired its interest in TBR in the 4th Quarter
2008 so there are no comparable earnings for the six months ended June 30,
2008.





Net
Loss (Income) Attributable to Noncontrolling Interest




Net loss
attributable to noncontrolling interest was $28,000 for the six months ended
June 30, 2009 compared to a net income of $76,000 for the six months ended June
30, 2008. MECC was dissolved in June 2009.





Net
(Loss) Income Attributable to Atrinsic, Inc.




Net loss
increased by $3.9 million to ($3.1) million for the six months ended June 30,
2009 as compared to a net income of $0.8 million for the six months ended June
30, 2008. This increase resulted from the factors described above.





Liquidity
and Capital Resources




The
Company continually projects anticipated cash requirements, which may include
business combinations, capital expenditures, and working capital requirements.
As of June 30, 2009, the Company had cash and cash equivalents of approximately
$20.4 million and a working capital of approximately $20.4 million. The Company
used approximately $0.7 million in cash for operations for the six months ended
June 30, 2009 and, contingent on prospective operating performance, may require
reductions in discretionary variable costs and other realignments to permanently
reduce fixed operating costs.




In
conjunction with the Company’s objective of enhancing shareholder value, the
Company’s Board of Directors authorized a share repurchase program which expired
in May 2009. Under this share repurchase program, the Company purchased 832,392
shares of the Company’s common stock for an aggregate price of approximately
$0.9 million during the six months ended June 30, 2009.


20


The
Company believes that its existing cash and cash equivalents and anticipated
cash flows from operating activities will be sufficient to fund minimum working
capital and capital expenditure needs for at least the next twelve months. The
extent of the Company’s future capital requirements will depend on many factors,
including its results of operations. If the Company’s cash flows from operations
is less than anticipated or its working capital requirements or capital
expenditures are greater than expectations, or if the Company expands its
business by acquiring or investing in additional products or technologies, it
may need to secure additional debt or equity financing. The Company is
continually evaluating various financing strategies to be used to expand its
business and fund future growth. There can be no assurance that additional debt
or equity financing will be available on acceptable terms, it at all. The
potential inability to obtain additional debt or equity financing, if required,
could have a material adverse effect on the Company’s operations.




In
connection with its investments the Company is obligated to fund approximately
$0.2 million in 2009. Furthermore, management anticipates the risk adjusted
return is sufficiently in excess of the contributed capital obligations, as of
this date.  There is however, no guarantee of the anticipated returns.
In addition, management has taken considerable actions to secure its interest in
achieving such a return.





In
certain situations, the Company does have minimum fee obligations assuming the
counterparty performs the required level of services.  We feel that the
level of business activity under normal and ordinary circumstances exceeds the
minimum thresholds.





New
Accounting Standards and Interpretations





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of


Generally
Accepted Accounting Principles: a replacement of FASB Statement No.
162.”  This Statement establishes two levels of U.S. generally
accepted accounting principles (GAAP) – authoritative and
nonauthoritative.  The FASB Accounting Standards Codification (ASC)
will become the source of authoritative, nongovernmental GAAP, except for rules
and interpretive releases of the Securities and Exchange Commission
(SEC).  SFAS No. 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009, and will be adopted
by the Company in the third quarter of 2009.  The adoption of SFAS No.
168 will not have any impact on the Company’s Consolidated Financial
Statements.





In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 amends
FIN 46(R), “Consolidation of Variable Interest Entities (revised
December 2003)—an interpretation of ARB No. 51” (“FIN 46(R)”) 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. SFAS
No. 167 will be effective as of the beginning of the annual reporting
period commencing after November 15, 2009 and will be adopted by the
Company in the first quarter of 2010. The Company is assessing the potential
impact, if any, of the adoption of SFAS No. 167 on its consolidated
financial statements.





In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165,
“Subsequent Events” (“SFAS 165”).  SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued.  The
effective date of SFAS 165 is interim or annual financial periods ending after
June 15, 2009.  The adoption of SFAS 165 did not have a material
effect on the Company’s consolidated financial statements. Subsequent
events have been evaluated through August 10, 2009.





In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” EITF 03-6-1 gives guidance as to the circumstances
when unvested share-based payment awards should be included in the computation
of EPS. EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. The adoption of EITF 03-6-1 will not have an impact on
the Company’s financial statements.




In
April 2008, the FASB issued FASB Staff Position No. FSP 142-3,
“Determining the Useful Life of Intangible Assets” FSP 142-3 amends the factors
to be considered in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an intangible asset and
the period of expected cash flows used to measure its fair value. FSP 142-3 is
effective for fiscal years beginning after December 15, 2008. The adoption
of FSP 142-3 will not have an impact on the Company’s financial
statements.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R establishes the principles and requirements for how an
acquirer: (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree; (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (iii) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS 141R
is to be applied prospectively to business combinations consummated on or after
the beginning of the first annual reporting period on or after December 15,
2008, with early adoption prohibited. We are currently evaluating the impact
SFAS 141R will have on adoption on our accounting for future acquisitions.
Previously, any release of valuation allowances for certain deferred tax assets
would serve to reduce goodwill, whereas under the new standard any release of
the valuation allowance related to acquisitions currently or in prior periods
will serve to reduce our income tax provision in the period in which the reserve
is released. Additionally, under SFAS 141R transaction-related expenses, which
were previously capitalized, will be expensed as incurred. The impact of SFAS
141R will depend on the nature of acquisitions completed after
adoption.




21





Item
3. Quantitative and Qualitative Disclosures about Market Risk





None.




Item
4T. Disclosure Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Members
of the our management, including our Chief Executive Officer, Burton Katz, and
Chief Financial Officer Andrew Zaref, 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, 2009, the end of the period covered by
this report. Based upon that evaluation, Messrs. Katz and Zaref concluded that
our disclosure controls and procedures were effective for the period ended June
30, 2009.





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, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.


22




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 we face. Additional risks and uncertainties that
management is unaware of, or that it currently deems immaterial, also may become
important factors that affect us. If any of the following risks occur, our
business, financial condition, cash flows and/or results of operations could be
materially and adversely affected. In that case, the trading price of our
common stock could decline, and stockholders are at risk of losing some or all
of the money invested in purchasing our common stock.





We
have a limited operating history in an emerging market, which may make it
difficult to evaluate our business.




Our
wholly-owned subsidiary, New Motion Mobile, commenced offering subscription
products and services directly to consumers in 2005.  In addition, our
merger with Traffix, which is responsible for generating the majority of our
Transactional revenues, was completed at the beginning of
2008.  Accordingly, we have a limited history of generating revenues,
and our future revenue and income generating potential is uncertain and unproven
based on our limited operating history. As a result of our short operating
history, we have limited financial data that can be used to develop trends and
other historical based evaluation methods to project and forecast our business.
Any evaluation of our business and the potential prospects derived from such
evaluation must be considered in light of our limited operating history and
discounted accordingly. Evaluations of our current business model and our future
prospects must address the risks and uncertainties encountered by companies in
early stages of development, that possess limited operating history, and that
are conducting business in new and emerging markets.





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




·
            Maintain
      and develop new wireless carrier and billing aggregator relationships upon
      which a portion of our business currently
  depends;


·
            Maintain
      a compliance based control system to render our products and services
      compliant with carrier and aggregator demands, as well as marketing
      practices imposed by private marketing rule makers, such as the Mobile
      Marketing Association (MMA), and to conform with the stringent marketing
      demands as imposed by various States’ Attorney
  Generals;


·
            Respond
      effectively to competitive pressures in order to maintain our market
      position;


·
            Increase
      brand awareness and consumer recognition to secure continued
      growth;


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


·
            Continue
      to upgrade our technology to process increased usage and remain
      competitive with message delivery;


·
            Continue
      to upgrade our information processing systems to assess marketing results
      and customer satisfaction ;


·
            Continue
      to develop and source high-quality content that achieves significant
      market acceptance;


·
            Maintain
      and continue to grow our distribution, including such distribution through
      our web sites and third-party direct-to-consumer
    distributors;


·
            Execute
      our business and marketing strategies
  successfully.





If we are
unable to address these risks, and respond accordingly, our operating results
may not meet our publicly forecasted expectations, and/or the expectations as
derived by our investors, which could cause the price of our common stock to
decline.





A
portion of our business relies on telecommunications carriers and aggregators to
facilitate billing and collections in connection with our subscription products
sold and services rendered. The loss of, or a material change in, any of these
relationships could materially and adversely affect our business, operating
results and financial condition.




During
the second quarter ended June 30, 2009, we generated a significant portion of
our revenues from the sale of our products and services directly to consumers
which are billed through aggregators and telecommunications 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.


23


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 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 currently affecting the
      United States; or


·
            a
      carrier’s decision to increase the fees it charges to market and
      distribute our applications, thereby increasing its own revenue and
      decreasing our share of revenue.




If one or
more of these telecommunications carriers decides to suspend the offering of
applications, we may be unable to replace such revenue source with an acceptable
alternative, within an acceptable time frame. This could cause us to lose the
capability to derive revenue from those subscribers, which could materially harm
our business, operating results and financial condition.




We
depend on third-party internet and telecommunications providers, over whom we
have no control, for the conduct of our subscription business and transactional
business. Interruptions in or the discontinuance of the services provided by one
of the providers could have an adverse effect on revenue; and securing alternate
sources of these services could significantly increase expenses and cause
significant interruption to both our transactional and subscription
businesses.




We depend
heavily on several third-party providers of Internet and related
telecommunication services, including hosting and co-location facilities, in
conducting our business. These companies may not continue to provide services to
us without disruptions in service, at the current cost or at all. The costs
associated with any transition to a new service provider would be substantial,
requiring the reengineering of computer systems and telecommunications
infrastructure to accommodate a new service provider to allow for a rapid
replacement and return to normal network operations. This process would be both
expensive and time-consuming. In addition, failure of the Internet and related
telecommunications providers to provide the data communications capacity in the
time frame required by us could cause interruptions in the services we provide
across all of our business activities. In addition to service interruptions
arising from third-party service providers, unanticipated problems affecting our
proprietary internal computer and telecommunications systems have the potential
to occur in future fiscal periods, and could cause interruptions in the delivery
of services, causing a loss of revenue and related gross margins, and the
potential loss of customers, all of which could materially and adversely affect
our business, results of operations and financial condition.





If
advertising on the internet loses its appeal, our revenue could
decline.




Companies
doing business on the Internet must compete with traditional advertising media,
including television, radio, cable and print, for a share of advertisers' total
marketing budgets. Potential customers may be reluctant to devote a significant
portion of their marketing budget to Internet advertising or digital marketing
if they perceive the Internet to be trending towards a limited or ineffective
marketing medium. Any shift in marketing budgets away from Internet advertising
spending or digital marketing solutions, could directly, materially and
adversely affect our transactional business, as well as our subscription
business, with both having a materially negative impact on our results of
operations and financial condition.





During
the six months ended June 30, 2009, all of our revenue was generated, directly
or indirectly, through the Internet in part by delivering advertisements that
generate leads, impressions, click-throughs, and other actions to our advertiser
customers' websites as well as confirmation and management of mobile
services.  This business model may not continue to be effective in the
future for the following reasons:




·
            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;


24


·
            companies
      may prefer other forms of Internet advertising we do not offer, including
      certain forms of search engine
placements;


·
            companies
      may reject or discontinue the use of certain forms of online promotions
      that may conflict with their brand
objectives;


·
            companies
      may not utilize online advertising due to concerns of "click-fraud",
      particularly related to search engine placements;


·
            regulatory
      actions may negatively impact certain business practices that we currently
      rely on to generate a portion of our revenue and profitability;
      and


·
            perceived
      lead quality.




If the
number of companies who purchase online advertising from us does not continue to
grow, we may experience difficulty in attracting publishers, and our revenue
could decline.




Our
revenue could decline if we fail to effectively monetize our content and our
growth could be impeded if we fail to acquire or develop new
content





Our success depends in
part on our ability to effectively manage our existing content. The Web
publishers and email list owners that list their unsold leads, data or offers
with us are not bound by long-term contracts that ensure us a consistent supply
of same. In addition, Web publishers or email list owners can change the amount
of content they make available to us at any time. If a Web publisher or email
list owner decides not to make content from its websites, newsletters or email
lists available to us, we may not be able to replace this content with content
from other Web publishers or email list owners that have comparable traffic
patterns and user demographics quickly enough to fulfill our advertisers'
requests. This would result in lost revenue.




If
we are unable to successfully keep pace with the rapid technological changes
that may occur in the wireless communication, internet and e-commerce arenas, we
could lose customers or advertising inventory and our revenue and results of
operations could decline.




To remain
competitive, we must continually monitor, enhance and improve the
responsiveness, functionality and features of our services, offered both in our
subscription and transactional activities. Wireless network and mobile phone
technologies, the Internet and the online commerce industry in general are
characterized by rapid innovation and technological change, changes in user and
customer requirements and preferences, frequent new product and service
introductions requiring new technologies to facilitate commercial delivery, as
well as the emergence of new industry standards and practices that could render
existing technologies, systems, business methods and/or our products and
services obsolete or unmarketable in future fiscal periods. Our success in our
business activities will depend, in part, on our ability to license or
internally develop leading technologies that address the increasingly
sophisticated and varied needs of prospective consumers, and respond to
technological advances and emerging industry standards and practices on a
timely-cost-effective basis. Website and other proprietary technology
development entails significant technical and business risks, including the
significant cost and time to complete development, the successful implementation
of the application once developed, and time period for which the application
will be useful prior to obsolescence. There can be no assurance that we will use
internally developed or acquired new technologies effectively or adapt existing
websites and operational systems to customer requirements or emerging industry
standards. If we are unable, for technical, legal, financial or other reasons,
to adopt and implement new technologies on a timely basis in response to
changing market conditions or customer requirements, our business, prospects,
financial condition and results of operations could be materially adversely
affected.





We
could be subject to legal claims, government enforcement actions, and be held
accountable for our or our customers' failure to comply with federal, state and
foreign laws, regulations or policies, all of which could materially harm
our business.




As a
direct-to-consumer marketing company, we are subject to a variety of federal,
state and local laws and regulations designed to protect consumers that govern
certain of aspects of our business.  For instance, recent growing
public concern regarding privacy and the collection, distribution and use of
information about Internet users has led to increased federal, state and foreign
scrutiny and legislative and regulatory activity concerning data collection and
use practices. Any failure by us to comply with applicable federal, state and
foreign laws and the requirements of regulatory authorities may result in, among
other things, indemnification liability to our customers and the advertising
agencies we work with, administrative enforcement actions and fines, class
action lawsuits, cease and desist orders, and civil and/or 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.


25




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. We now have 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.





The
demand for a portion of our transactional services may decline due to the
proliferation of “spam” and the expanded commercial adoption of software
designed to prevent its delivery.




Our
business may be adversely affected by the proliferation of "spam" or unwanted
internet solicitations. In response to the proliferation of spam, Internet
Service Providers ("ISP's") have been adopting technologies, and individual
computer users are installing software on their computers that are designed to
prevent the delivery of certain Internet advertising, including legitimate
solicitations such as those delivered by us. We cannot assure you that the
number of ISP's and individual computer users who employ these or other similar
technologies and software will not increase, thereby diminishing the efficacy of
our transactional, as well as our subscription service activities. In the case
that one or more of these technologies, or software applications, realize
continued and/or widely increased adoption, demand for our services could
decline in response.





We
have no intention 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.




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




In both
our subscription services and transaction services, we compete primarily on the
basis of marketing acquisition cost, brand awareness, consumer penetration and
carrier and distribution depth and breadth.  We consider our primary
subscription business competitors to be Buongiorno, Playphone, Dada Mobile,
Acotel, Glu Mobile, Cellfish (Lagadere), Jamster (Fox), Hands on Mobile and
Thumbplay. In our transactional business, we consider Azoogle, Value Click,
Miva, Kowabunga! (Think Partnership), Right Media, iCrossing, 360i, iProspect,
Publicis (Formerly Digitas), Omnicom and Blue Lithium to be our primary
competitors. In the future, likely competitors may include other major media
companies, traditional video game publishers, wireless carriers, content
aggregators, wireless software providers and other pure-play wireless
subscription publishers, and Internet affiliate and network
companies.





If we are
not as successful as our competitors in executing on our strategy in targeting
new markets, increasing customer penetration in existing markets, executing on
marquee brand alignment, and/or effectively executing on business level
accretive acquisition identification and successful closing and post acquisition
integration, our sales could decline, our margins could be negatively impacted
and we could lose market share, any and all of which could materially harm our
business prospects, and potentially have a negative impact on our share
price.




If
we do not successfully execute our international strategy, our revenue, results
of operations and the growth of our business could be harmed.





Our
planned international expansion and the integration of international operations
present unique challenges and risks to our company, and require management
attention. Our foreign operations subject us to foreign currency exchange rate
risks and we currently do not utilize hedging instruments to mitigate foreign
currency exchange rate risks.


26




Our
continued international expansion will subject us to additional foreign currency
exchange rate risks and will require additional management attention and
resources. We cannot assure you that we will be successful in our international
expansion and operations efforts. Our international operations and expansion
subject us to other inherent risks, including, but not limited to: the
impact of recessions in economies outside of the United States; changes in
and differences between regulatory requirements between countries; U.S. and
foreign export restrictions, including export controls relating to encryption
technologies; reduced protection for and enforcement of intellectual property
rights in some countries; potentially adverse tax consequences;
difficulties and costs of staffing and managing foreign operations; political
and economic instability; tariffs and other trade barriers; and seasonal
reductions in business activity.




Our
failure to address these risks adequately could materially and adversely affect
our business, revenue, results of operations and financial
condition.




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.





We
are dependent on our key personnel for managing our business affairs. The loss
of their services could materially and adversely affect the conduct and the
continuation of our business.




We are
and will be highly dependent upon the efforts of the members of our management
team, particularly those of our Chief Executive Officer, Burton Katz, our
President, Andrew Stollman, our Executive Vice President, Corporate Development,
Raymond Musci and our Chief Financial Officer, Andrew Zaref. The loss of the
services of Messrs. Katz, Stollman, Musci or Zaref may impede the execution of
our business strategy and the achievement of our business objectives. We can
give you no assurance that we will be able to attract and retain the qualified
personnel necessary for the development of our business. Our failure to recruit
key personnel or our failure to adequately train, motivate and supervise our
existing or future personnel will adversely affect our operations.





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, 2009, some of our outstanding employee stock options have exercise
prices in excess of the stock price on that date. To the extent this continues
to occur, our ability to retain employees may be adversely affected. Moreover,
applicable NASDAQ listing standards relating to obtaining stockholder approval
of equity compensation plans could make it more difficult or expensive for us to
grant stock options or other stock-based awards to employees in the future. As a
result, we may incur increased compensation costs, change our equity
compensation strategy or find it difficult to attract, retain and motivate
employees, any of which could materially, adversely affect
our business.




27




We
have been named as a defendant in litigation, either directly, or indirectly,
with the outcome of such litigation being unpredictable; a materially adverse
decision in any such matter could have a material adverse affect on our
financial position and results of operations.




As
described below and as described under the heading "Legal Proceedings" in our
periodic reports filed pursuant to the Securities Exchange Act of 1934, from
time to time we are named as a defendant in litigation matters. The defense of
these claims may divert financial and management resources that would otherwise
be used to benefit our operations. Although we believe that we have meritorious
defenses to the claims made in each and all of the litigation matters to which
we have been a named party, whether directly or indirectly, and intend to
contest each lawsuit vigorously, no assurances can be given that the results of
these matters will be favorable to us. A materially adverse resolution of any of
these lawsuits could have a material adverse affect on our financial position
and results of operations.





The
Company is named in two Class Action Lawsuits (in Florida and California)
involving allegations concerning the Company's marketing practices associated
with some of its services billed and delivered via wireless carriers. The
Company is disputing the allegations and is vigorously defending itself in these
matters. In one of these matters the Company has received a Summary Judgment on
its Motion to Dismiss related to a number of the allegations made in the
original complaint. In addition, during the quarter ended June 30, 2009 a class
was certified in connection with the California matter.  Also in connection
with these matters, as they relate to the Company and its business partners
within the industry, it is possible there could be secondary claims for which
any associated liabilities are not probable or estimable.  The Company has
accrued for the probable and estimable related costs in the amount of $350,000
in connection with these matters which are included in Accrued Expenses in the
Consolidated Balance Sheet.





On
February 2, 2009 the Company filed a complaint against Mobile Messenger PTY LTD
and its subsidiary Mobile Messenger Americas, Inc. (“Mobile Messenger”) to
recover monies owed the Company in connection with transaction activity incurred
in the ordinary and normal course and also included declaratory relief
concerning demands made by Mobile Messenger's for indemnification in Mobile
Messenger's settlement in its Florida Class Action Matter which it settled in
late 2008  (“Grey vs. Mobile Messenger”). Mobile Messenger brought
upon the Company a cross complaint seeking injunctive relief, indemnification,
and recoupment of attorney’s fees. The Company disputes the allegations and
continues to vigorously defend itself in these matters considering, among other
things, the specific facts surrounding the underlying claims against the
Company, which we believe, are without merit.





We
recorded a significant amount of goodwill and other intangible assets in
connection with our merger with Traffix and the acquisition of the assets of
Ringtone.com, which may result in significant future charges against earnings if
the goodwill and other intangible assets become impaired.




In
accounting for the merger with Traffix and the acquisition of the assets of
Ringtone.com, we allocated and recorded a large portion of the purchase price
paid in the merger to goodwill and other intangible assets. Under SFAS No.142,
we must assess, at least annually and potentially more frequently, whether the
value of goodwill and other intangible assets has been impaired. Any reduction
or impairment of the value of goodwill or other intangible assets, such as the
charge that was taken in the fourth quarter of 2008, could materially adversely
affect Atrinsic’s results of operations in future periods.




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.




The
preparation of our consolidated financial statements requires estimates of the
amount of income tax that will become payable in each of the jurisdictions in
which we operate. We may be challenged by the taxing authorities in these
jurisdictions and, in the event that we are not able to successfully defend our
position, we may incur significant additional income tax liabilities and related
interest and penalties which may have an adverse impact on our results of
operations and financial condition.





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




Our
performance is subject to worldwide economic conditions and their impact on
levels of consumer spending.   Consumer spending recently has
deteriorated significantly as a result of the current economic situation in the
United States and may remain depressed, or be subject to further deterioration
for the foreseeable future.  Purchases of our subscription based
services as well as our transactional services tend to decline in periods of
recession or uncertainty regarding future economic prospects, as disposable
income declines. Many factors affect the level of spending for our products and
services, including, among others: prevailing economic conditions, levels of
employment, salaries and wage rates, energy costs, interest rates, the
availability of consumer credit, taxation and consumer confidence in future
economic conditions. During periods of recession or economic
uncertainty, we may not be able to maintain or increase our sales to
existing customers, make sales to new customers or maintain or increase our
international operations on a profitable basis. As a result, our operating
results may be adversely and materially affected by downward trends in the
United States or global economy, including the current recession in the
United States.


28





The
requirements of the Sarbanes-Oxley act, including section 404, are burdensome,
and our failure to comply with them could have a material adverse affect on the
company’s business and stock price.




Effective
internal control over financial reporting is necessary for us to provide
reliable financial reports and effectively prevent fraud. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal
control over financial reporting. Our independent registered public accounting
firm will need to annually attest to the Company’s evaluation, and issue their
own opinion on the Company’s internal control over financial reporting beginning
with the Company’s Annual Report on Form 10-K for the fiscal year ending
December 31, 2009. The process of complying with Section 404 is expensive and
time consuming, and requires significant management attention. We cannot be
certain that the measures we will undertake will ensure that we will maintain
adequate controls over our financial processes and reporting in the future.
Furthermore, if we are able to rapidly grow our business, the internal controls
over financial reporting that we will need, will become more complex, and
significantly more resources will be required to ensure that our internal
controls over financial reporting remain effective. Failure to implement
required controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting
obligations. If we or our auditors discover a material weakness in our internal
control over financial reporting, the disclosure of that fact, even if the
weakness is quickly remedied, could diminish investors’ confidence in our
financial statements and harm our stock price. In addition, non-compliance with
Section 404 could subject us to a variety of administrative sanctions, including
the suspension of trading, ineligibility for listing on one of the Nasdaq Stock
Markets or national securities exchanges, and the inability of registered
broker-dealers to make a market in our common stock, which would further reduce
our stock price.





Investment
in new business strategies and initiatives and/or our merger and acquisition
activity could disrupt our ongoing business and present risks not
originally contemplated.





We have
invested, and in the future may invest, in new business strategies or
acquisitions. Such endeavors may involve significant risks and uncertainties,
including distraction of management from current operations, insufficient
revenue to offset liabilities assumed and expenses associated with the strategy,
inadequate return of capital, and unidentified issues not discovered in our
due diligence.  Because these new ventures are inherently risky, no
assurance can be given that such strategies and initiatives will be successful
and that we will be able to successfully operate any business that we
develop or acquire. Consequently, our investments in new business
strategies and acquisitions could have a material adverse effect
on our financial condition and operating results.


29




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.





Common Stock
Repurchases.




On April
8, 2008, the Company’s Board of Directors authorized management to repurchase up
to $10 million of common stock through May 31, 2009. The amount and timing of
specific repurchases are subject to market conditions, applicable legal
requirements, and other factors, including management’s discretion. Repurchases
may be made through privately negotiated transactions and in the open market.
The Board of Directors of the Company may modify, extend, or terminate the share
repurchase program at any time, and there is no guarantee of the exact number of
shares that will be repurchased under the program. Repurchases will be funded
from available working capital, and subject to other limitations.




During
the six months ended June 30, 2009, the Company repurchased an aggregate of
832,392 shares of its common stock at a cost of approximately $0.9 million, at
an average of $1.13 per share.





Issuer
      Purchases of Equity Securities(c)
      Total Number
                                  
                                  
                                  (d)
      Approximateof
      Shares
                                  
                                  
                                  Dollar
      Value ofPurchased
      as Part
                                  
                                  
                                  Shares
      That May(a)
      Total Number
                                  
                                  
                                  
                                  
                                  
                                  Of
      Publicly
                                  
                                  
                                  Yet
      Be PurchasedOf Shares
                                  
                                  (b) Average Price
                                  
                                  
                                  announced
      Plans
                                  
                                  
                                  Under
      Plans OrPurchased
                                  
                                  
                                  Paid per Share
                                  
                                  
                                  or Programs
                                  
                                  
                                  ProgramsBeginning
      balance March 31, 2009
                                  
                                  
                                  2,741,318
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,741,318
                                  
                                  
                                  $
                                  5,007,737April
      1 to April 30, 2009
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  5,007,737May
      1 to May 31, 2009
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  5,007,737June
      1 to June 30, 2009
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  5,007,737Total
                                  
                                  
                                  2,741,318
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,741,318





Investments in Central Internet
Corporation d/b/a Shopit.com




On
December 2, 2008, we entered into a Marketing Services and License Agreement
(the “Agreement”) with Shopit, Inc., a Delaware corporation.  Under
the Agreement, we performed certain marketing and administrative services for
Shopit and distributed proprietary and third party advertisements through
Shopit.com and its social media advertising network. The Agreement provided
Shopit with a revenue share of all leads monetized by us. Under the Agreement,
we made periodic advance payments totaling $1.025 million and made incremental
advances of $150,000 to support continued marketing and product
development.  The advances were recoverable on a dollar for dollar basis
against future revenues and were secured by the assets of Shopit.  On
June 8, 2009, we purchased $640,000 face amount of Shopit’s notes payable
from the holders of such notes for cash consideration of $480,000 and share
consideration of 80,000 shares of our common stock which were issued subsequent
to June 30, 2009.





In
issuing the 80,000 shares of our common stock without registration under the
Securities Act, as amended (the “Securities Act”), we relied upon one or more of
the exemptions from registration contained in Sections 4(2) of the Securities
Act, and in Regulation D promulgated thereunder, as the shares were issued to
accredited investors, without a view to distribution, and were not issued
through any general solicitation or advertisement. We made this determination
based on the representations of each investor which included, in pertinent part,
that such investor is an “accredited investor” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, that the shares are being
acquired for such investor’s own account without a view to any public resale or
other distribution thereof in violation of the Securities Act or any other
applicable securities laws and that such investor understood that the shares may
not be sold or otherwise disposed of without registration under the Securities
Act or an applicable exemption there from.


30




On July
31, 2009, we entered into an Asset Purchase Agreement (“APA”) with Shopit
pursuant to which we acquired certain net assets, including, but not limited to,
the underlying product code, domain names, brand name and trademarks, and
certain non-compete provisions. Upon closing, we paid approximately $450,000 in
cash and delivered 380,000 shares of our common stock of which 200,000 will be
placed in escrow pending the outcome of certain defined matters.  Further,
we agreed to the cancellation of $1.8 million in aggregate
indebtedness.





In
issuing the 380,000 shares of our common stock without registration under the
Securities Act, we relied upon one or more of the exemptions from registration
contained in Sections 4(2) of the Securities Act, as the shares were issued
without a view to distribution, and were not issued through any general
solicitation or advertisement. We made this determination based on the
representations of the investors which included, in pertinent part, that the
investors (i) understand and agree that the shares have not been, and will not
be, registered under the Securities Act, or under any state securities laws, and
are being offered and sold in reliance upon federal and state exemptions for
transactions not involving any public offering, (ii) are acquiring the shares
solely for their own account for investment purposes, and not with a view to the
distribution thereof, (iii) are sophisticated with knowledge and experience in
business and financial matters, (iv) have received certain information
concerning the company and have had the opportunity to obtain additional
information as desired in order to evaluate the merits and the risks inherent in
holding the shares, and (v) are able to bear the economic risk and lack of
liquidity inherent in holding the shares.




31





Item
4.  Submission of Matters to a Vote Security Holders.





At our
Annual Meeting of Stockholders held on June 25, 2009, we submitted certain
matters to a vote of security holders through the solicitation of
proxies.  The proxy statement was dated May 26, 2009, and was first
mailed to stockholders about June 2, 2009.  At the meeting, our
stockholders:




·
            elected
      Burton Katz, Raymond Musci, Robert Ellin, Lawrence Burstein, Jerome
      Chazen, Mark Dyne and Jeffrey Schwartz to serve as Directors on our Board
      of Directors for one year or until their respective successors have been
      elected;




·
            approved
      an amendment to our Restated Certificate of Incorporation to change
      our company name to Atrinsic, Inc.




·
            approved
      our 2009 Stock Incentive Plan, which authorizes the issuance of up to
      2,750,000 shares of our common stock pursuant to equity awards granted
      under the plan.




·
            approved
      our one-time Option Exchange Program pursuant to which certain
      out-of-the-money stock options previously issued to each of Burton Katz,
      our Chief Executive Officer, Andrew Stollman, our President, Andrew Zaref,
      our Chief Financial Officer, and Zack Greenberger, our Chief Technology
      Officer and Vice President, Operations, were exchanged for restricted
      stock units.




·
            Approved
      our 2010 Annual Incentive Compensation Plan pursuant to which selected
      senior executives of the Company  may be rewarded for their
      significant contributions to our growth, profitability ans success from
      year to year.




The
following table provides the number of votes cast for or against or withheld, as
well as the number of abstentions and broker non-votes as to each such
matter.




Matters
      Voted
                      
                      For
                      
                      Against
      or
                        Withheld
                      
                      Abstentions
                      
                      Broker Non-
                        VotesElection
      of Burton Katz to Board of Directors
                      
                      17,579,538
                      
                      713,671
                      
                      0
                      
                      0Election
      of Raymond Musci to Board of Directors
                      
                      17,661,608
                      
                      631,601
                      
                      0
                      
                      0Election
      of Lawrence Burstein to Board of Directors
                      
                      17,349,634
                      
                      943,575
                      
                      0
                      
                      0Election
      of Mark Dyne to Board of Directors
                      
                      17,658,245
                      
                      634,964
                      
                      0
                      
                      0Election
      of Jerome Chazen to Board of Directors
                      
                      17,397,664
                      
                      895,545
                      
                      0
                      
                      0




32




Election
      of Robert Ellin to Board of Directors
                        
                        17,402,224
                        
                        890,985
                        
                        0
                        
                        0Election
      of Jeffrey Schwartz to Board of Directors
                        
                        17,224,733
                        
                        1,068,476
                        
                        0
                        
                        0Amendment
      to restated certificate of incorporation to change the company’s name to
      Atrinsic, Inc.
                        
                        17,872,391
                        
                        355,087
                        
                        65,730
                        
                        0Approval
      of company’s 2009 Stock Incentive Plan
                        
                        11,740,399
                        
                        2,163,720
                        
                        24,856
                        
                        4,364,235Approval
      of Option Exchange Program
                        
                        11,628,736
                        
                        2,277,400
                        
                        22,839
                        
                        4,364,235Approval
      of company’s 2010 Annual Incentive Compensation Plan
                        
                        12,888,194
                        
                        1,007,642
                        
                        33,139
                        
                        4,364,235




33




Item
6. Exhibits




Exhibit
                                    Number
                                  
                                  Description
      of Exhibit3.1
                                  
                                  Restated
      Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to
      the Registrant’s Form 10-SB (File No. 000-51353) filed with the Commission
      on June 10, 2005.3.2
                                  
                                  Certificate
      of Amendment to the Restated Certificate of Incorporation, dated October
      12, 2004. Incorporated by reference to Exhibit 3.2 to the Registrant’s
      Form 10-SB (File No. 000-51353) filed with the Commission on June 10,
      2005.3.3
                                  
                                  Certificate
      of Amendment to the Restated Certificate of Incorporation, dated April 8,
      2005. Incorporated by reference to Exhibit 3.3 to the Registrant’s Form
      10-SB (File No. 000-51353) filed with the Commission on June 10,
      2005.3.4
                                  
                                  Certificate
      of Amendment to the Restated Certificate of Incorporation, dated May 2,
      2007. Incorporated by reference to Exhibit 3.1 to the Registrant’s Current
      Report on Form 8-K (File No. 000-51353) filed with the Commission on May
      7, 2007.3.5
                                  
                                  Certificate of Amendment to Restated Certificate
      of Incorporation, dated June 25, 2009.Incorporated by
      reference to Exhibit 3.i1 to the Registrant’s Current Report on Form 8-K
      (File No. 001-12555) filed with the Commission on July 1,
      2009.10.1
                                  
                                  Atrinsic, Inc. 2009 Stock Incentive
      Plan.Incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (File No. 001-12555) filed with
      the Commission on July 1, 2009.10.2
                                  
                                  Atrinsic, Inc. 2010 Annual Incentive Compensation
      Plan.Incorporated by reference to Exhibit 10.2 to the
      Registrant’s Current Report on Form 8-K (File No. 001-12555) filed with
      the Commission on July 1, 2009.31.1
                                  
                                  Certification of Principal Executive Officer
      pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as
      adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                                  
                                  Certification of Principal Financial Officer
      pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as
      adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                                  
                                  Certification of Principal Executive Officer and
      Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to section 906 of the Sarbanes-Oxley Act of
      2002.99.1
                                  
                                  Asset Purchase Agreement entered into on July 31,
      2009 by and among the registrant and ShopIt, Inc., a Delaware corporation.
      Incorporated by reference to Exhibit 99.1 to the Registrant's Current
      Report on Form 8-K (File 001-12555) filed with the Commission on August 6,
      2009.




34




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 14, 2009




BY:
              /s/ Burton Katz
              
              BY:
              /s/ Andrew ZarefBurton
      Katz
              
              Andrew
      ZarefChief
      Executive Officer
              
              Chief
      Financial Officer(Principal
      Financial and Accounting
Officer)




35