UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington
D.C. 20549





FORM
10-Q


(Mark
One)


x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
quarterly period ended September 30, 2010 or





o
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
transition period from __________ to __________


Commission
File Number: 001-12555











ATRINSIC,
INC


(Exact
name of registrant as specified in its charter)




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





469 7
thAvenue, 10 thFloor, New York, NY 10018





(Address
of principal executive offices) (ZIP Code)





(212)
716-1977





(Registrant’s
telephone number, including area code)







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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes xNo   
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈No x


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




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





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





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes xNo  ̈





As of
November 10, 2010, the Company had 25,077,311 shares of Common Stock, $0.01 par
value, outstanding, which excludes 2,726,036 shares held in treasury.





Table
of Contents




PagePART
      I
              FINANCIAL
      INFORMATIONItem
      1
              Financial
      Statements
              3Item
      2
              Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
              17Item
      3
              Quantitative
      and Qualitative Disclosures about Market Risk
              28Item
      4T
              Controls
      and Procedures
              28PART
      II
              OTHER
      INFORMATION
              29Item
      1A
              Risk
      Factors
              29Item
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              34Item
      6
              Exhibits
              35





Item 1
Financial Statements





ATRINSIC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Dollars
in thousands, except per share data)





As of
                    
                    
                    As ofSeptember 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(Unaudited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                    
                    $
                    4,249
                    
                    
                    $
                    16,913Accounts
      receivable, net of allowance for doubtful accounts of $2,302 and $4,295
                    
                    
                    6,678
                    
                    
                    
                    7,985Income
      tax receivable
                    
                    
                    3,492
                    
                    
                    
                    4,373Prepaid
      expenses and other current assets
                    
                    
                    878
                    
                    
                    
                    2,643Total
      Current Assets
                    
                    
                    15,297
                    
                    
                    
                    31,914PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $1,297 and $1,078
                    
                    
                    3,172
                    
                    
                    
                    3,553INTANGIBLE
      ASSETS, net of accumulated amortization of $3,640 and $8,605
                    
                    
                    6,733
                    
                    
                    
                    7,253INVESTMENTS,
      ADVANCES AND OTHER ASSETS
                    
                    
                    1,446
                    
                    
                    
                    1,878TOTAL
      ASSETS
                    
                    $
                    26,648
                    
                    
                    $
                    44,598LIABILITIES
      AND EQUITYCurrent
      LiabilitiesAccounts
      payable
                    
                    $
                    4,264
                    
                    
                    $
                    6,257Accrued
      expenses
                    
                    
                    4,125
                    
                    
                    
                    9,584Other
      current liabilities
                    
                    
                    945
                    
                    
                    
                    725Total
      Current Liabilities
                    
                    
                    9,334
                    
                    
                    
                    16,566DEFERRED
      TAX LIABILITY, NET
                    
                    
                    1,735
                    
                    
                    
                    1,697OTHER
      LONG TERM LIABILITIES
                    
                    
                    906
                    
                    
                    
                    988TOTAL
      LIABILITIES
                    
                    
                    11,975
                    
                    
                    
                    19,251COMMITMENTS
      AND CONTINGENCIES (see note 12)
                    
                    
                    -
                    
                    
                    
                    -STOCKHOLDERS'
      EQUITYCommon
      stock - par value $0.01, 100,000,000 authorized, 23,621,078 and 23,583,581
      shares issued at September 30, 2010 and 2009, respectively; and,
      20,895,042 and 20,842,263 shares outstanding at September 30, 2010 and
      2009, respectively.
                    
                    
                    236
                    
                    
                    
                    236Additional
      paid-in capital
                    
                    
                    179,282
                    
                    
                    
                    178,442Accumulated
      other comprehensive income (loss)
                    
                    
                    17
                    
                    
                    
                    (20
                    )Common
      stock, held in treasury, at cost, 2,726,036 and 2,741,318 shares at 2010
      and 2009, respectively.
                    
                    
                    (4,981
                    )
                    
                    
                    (4,992
                    )Accumulated
      deficit
                    
                    
                    (159,881
                    )
                    
                    
                    (148,319
                    )Total
      Stockholders' Equity
                    
                    
                    14,673
                    
                    
                    
                    25,347TOTAL
      LIABILITIES AND EQUITY
                    
                    $
                    26,648
                    
                    
                    $
                    44,598





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


3


ATRINSIC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


(Dollars
in thousands, except per share data)





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Subscription
                  
                  $
                  4,261
                  
                  
                  $
                  4,889
                  
                  
                  $
                  15,234
                  
                  
                  $
                  15,099Transactional
      and Marketing Services
                  
                  
                  4,916
                  
                  
                  
                  9,984
                  
                  
                  
                  16,956
                  
                  
                  
                  40,330NET
      REVENUE
                  
                  
                  9,177
                  
                  
                  
                  14,873
                  
                  
                  
                  32,190
                  
                  
                  
                  55,429OPERATING
      EXPENSESCost
      of media-third party
                  
                  
                  4,589
                  
                  
                  
                  9,911
                  
                  
                  
                  17,943
                  
                  
                  
                  35,859Product
      and distribution
                  
                  
                  4,396
                  
                  
                  
                  3,651
                  
                  
                  
                  13,886
                  
                  
                  
                  8,502Selling
      and marketing
                  
                  
                  938
                  
                  
                  
                  2,168
                  
                  
                  
                  3,225
                  
                  
                  
                  7,095General,
      administrative and other operating
                  
                  
                  2,597
                  
                  
                  
                  3,659
                  
                  
                  
                  7,538
                  
                  
                  
                  10,563Depreciation
      and amortization
                  
                  
                  325
                  
                  
                  
                  549
                  
                  
                  
                  972
                  
                  
                  
                  3,11112,845
                  
                  
                  
                  19,938
                  
                  
                  
                  43,564
                  
                  
                  
                  65,130LOSS
      FROM OPERATIONS
                  
                  
                  (3,668
                  )
                  
                  
                  (5,065
                  )
                  
                  
                  (11,374
                  )
                  
                  
                  (9,701
                  )OTHER
      (INCOME) EXPENSEInterest
      income and dividends
                  
                  
                  (4
                  )
                  
                  
                  (5
                  )
                  
                  
                  (9
                  )
                  
                  
                  (67
                  )Interest
      expense
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  2
                  
                  
                  
                  76Other
      (income) expense
                  
                  
                  (77
                  )
                  
                  
                  -
                  
                  
                  
                  (87
                  )
                  
                  
                  5(80
                  )
                  
                  
                  (4
                  )
                  
                  
                  (94
                  )
                  
                  
                  14LOSS
      BEFORE TAXES AND EQUITY IN LOSS OF INVESTEE
                  
                  
                  (3,588
                  )
                  
                  
                  (5,061
                  )
                  
                  
                  (11,280
                  )
                  
                  
                  (9,715
                  )INCOME
      TAXES
                  
                  
                  35
                  
                  
                  
                  (2,736
                  )
                  
                  
                  208
                  
                  
                  
                  (4,336
                  )EQUITY
      IN (EARNINGS) LOSS OF INVESTEE, AFTER TAX
                  
                  
                  13
                  
                  
                  
                  61
                  
                  
                  
                  74
                  
                  
                  
                  113NET
      LOSS
                  
                  
                  (3,636
                  )
                  
                  
                  (2,386
                  )
                  
                  
                  (11,562
                  )
                  
                  
                  (5,492
                  )LESS:
      NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST,  AFTER TAX
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  28NET
      LOSS ATTRIBUTABLE TO ATRINSIC, INC
                  
                  $
                  (3,636
                  )
                  
                  $
                  (2,386
                  )
                  
                  $
                  (11,562
                  )
                  
                  $
                  (5,520
                  )NET
      LOSS PER SHARE ATTRIBUTABLE TO ATRINSIC COMMON STOCKHOLDERSBasic
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.55
                  )
                  
                  $
                  (0.27
                  )Diluted
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.55
                  )
                  
                  $
                  (0.27
                  )WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                  
                  
                  20,865,096
                  
                  
                  
                  20,634,558
                  
                  
                  
                  20,859,554
                  
                  
                  
                  20,570,326Diluted
                  
                  
                  20,865,096
                  
                  
                  
                  20,634,558
                  
                  
                  
                  20,859,554
                  
                  
                  
                  20,570,326





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)





Nine Months EndedSeptember 30,2010
                        
                        
                        2009Cash
      Flows From Operating ActivitiesNet
      loss
                        
                        $
                        (11,562
                        )
                        
                        $
                        (5,492
                        )Adjustments
      to reconcile net loss to net cash used in operating activities:Allowance
      for doubtful accounts
                        
                        
                        (20
                        )
                        
                        
                        1,824Depreciation
      and amortization
                        
                        
                        972
                        
                        
                        
                        3,111Stock-based
      compensation expense
                        
                        
                        860
                        
                        
                        
                        1,080Stock
      for service
                        
                        
                        -
                        
                        
                        
                        16Deferred
      income taxes
                        
                        
                        37
                        
                        
                        
                        (4,640
                        )Equity
      in loss of investee
                        
                        
                        74
                        
                        
                        
                        186Changes
      in operating assets and liabilities of business, net of acquisitions:Accounts
      receivable
                        
                        
                        1,310
                        
                        
                        
                        4,812Prepaid
      income tax
                        
                        
                        896
                        
                        
                        
                        (11
                        )Prepaid
      expenses and other current assets
                        
                        
                        1,765
                        
                        
                        
                        1,334Accounts
      payable
                        
                        
                        (1,993
                        )
                        
                        
                        (237
                        )Other,
      principally accrued expenses
                        
                        
                        (5,306
                        )
                        
                        
                        (4,330
                        )Net
      cash used in operating activities
                        
                        
                        (12,967
                        )
                        
                        
                        (2,347
                        )Cash
      Flows From Investing ActivitiesCash
      received from investee
                        
                        
                        360
                        
                        
                        
                        1,940Cash
      paid to investees
                        
                        
                        -
                        
                        
                        
                        (914
                        )Proceeds
      from sales of marketable securities
                        
                        
                        -
                        
                        
                        
                        4,242Business
      combinations
                        
                        
                        -
                        
                        
                        
                        (1,740
                        )Acquisition
      of loan receivable
                        
                        
                        -
                        
                        
                        
                        (480
                        )Capital
      expenditures
                        
                        
                        (41
                        )
                        
                        
                        (675
                        )Net
      cash (used in) provided by investing activities
                        
                        
                        319
                        
                        
                        
                        2,373Cash
      Flows From Financing ActivitiesRepayments
      of notes payable
                        
                        
                        -
                        
                        
                        
                        (1,750
                        )Liquidation
      of non-controlling interest
                        
                        
                        -
                        
                        
                        
                        (288
                        )Return
      of investment - noncontrolling interest
                        
                        
                        -
                        
                        
                        
                        138Purchase
      of common stock held in treasury
                        
                        
                        (9
                        )
                        
                        
                        (939
                        )Net
      cash used in financing activities
                        
                        
                        (9
                        )
                        
                        
                        (2,839
                        )Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        (7
                        )
                        
                        
                        (6
                        )Net
      (Decrease) Increase In Cash and Cash Equivalents
                        
                        
                        (12,664
                        )
                        
                        
                        (2,819
                        )Cash
      and Cash Equivalents at Beginning of Year
                        
                        
                        16,913
                        
                        
                        
                        20,410Cash
      and Cash Equivalents at End of Period
                        
                        $
                        4,249
                        
                        
                        $
                        17,591SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for interest
                        
                        $
                        2
                        
                        
                        $
                        72Cash
      (refunded) paid for taxes
                        
                        $
                        (696
                        )
                        
                        $
                        284Non-Cash
      Transactions:Extinguishment
      of loan receivable in connection with business combination
                        
                        $
                        -
                        
                        
                        $
                        480Common
      stock issued for extinguishment of loan receivable in connection with
      business combination
                        
                        $
                        -
                        
                        
                        $
                        146Common
      stock issued in connection with business combination
                        
                        $
                        -
                        
                        
                        $
                        575




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


5




ATRINSIC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF EQUITY


(UNAUDITED)


For
the Nine Months Ended September 30,


(Dollars
in thousands, except per share data)





AccumulatedAdditional
                    
                    
                    
                    
                    
                    OtherComprehensive
                    
                    
                    Common Stock
                    
                    
                    Paid-In
                    
                    
                    (Accumulated
                    
                    
                    Comprehensive
                    
                    
                    Treasury Stock
                    
                    
                    TotalLoss
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit)
                    
                    
                    (Loss)/Income
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    EquityBalance
      at January 1, 2010
                    
                    
                    -
                    
                    
                    
                    23,583,581
                    
                    
                    $
                    236
                    
                    
                    $
                    178,442
                    
                    
                    $
                    (148,319
                    )
                    
                    $
                    (20
                    )
                    
                    
                    2,741,318
                    
                    
                    $
                    (4,992
                    )
                    
                    $
                    25,347Net
      loss
                    
                    $
                    (11,562
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (11,562
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (11,562
                    )Foreign
      currency translation adjustment
                    
                    
                    37
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    37
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    37Comprehensive
      loss
                    
                    $
                    (11,525
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Stock
      based compensation expense
                    
                    
                    -
                    
                    
                    
                    37,497
                    
                    
                    
                    -
                    
                    
                    
                    860
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    860Treasury
      stock issued in connection with employee compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (20
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (25,000
                    )
                    
                    
                    20
                    
                    
                    
                    -Purchase
      of common stock, at cost
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,718
                    
                    
                    
                    (9
                    )
                    
                    
                    (9
                    )Balance
      at September 30, 2010
                    
                    
                    -
                    
                    
                    
                    23,621,078
                    
                    
                    $
                    236
                    
                    
                    $
                    179,282
                    
                    
                    $
                    (159,881
                    )
                    
                    $
                    17
                    
                    
                    
                    2,726,036
                    
                    
                    $
                    (4,981
                    )
                    
                    $
                    14,673





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 September 30, 2010 and
December 31, 2009, the Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2010 and 2009, and the Condensed
Consolidated Statements of Cash Flows for the nine months ended September 30,
2010 and 2009 are unaudited, but in the opinion of management include all
adjustments necessary for the fair presentation of financial position, the
results of operations and cash flows for the periods presented and have been
prepared in a manner consistent with the audited financial statements for the
year ended December 31, 2009. Results of operations for interim periods are
not necessarily indicative of annual results. These financial statements should
be read in conjunction with the audited financial statements for the year ended
December 31, 2009, on Form 10-K filed on March 31, 2010.
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses as well
as the disclosure of contingent assets and liabilities. Management continually
evaluates its estimates and judgments including those related to allowances for
doubtful accounts and the associated allowances for refunds and credits, useful
lives of property, plant and equipment and intangible assets, fair value of
stock options granted, forfeiture rate of equity based compensation grants,
probable losses associated with pre-acquisition contingencies, income taxes and
other contingencies. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable in the
circumstances. Actual results may differ from those estimates. Macroeconomic
conditions may directly, or indirectly through our business partners and
vendors, impact our financial performance and available resources. Such
conditions may, in turn, impact the aforementioned estimates and assumptions.
 
 Funding
and Management’s Plans
 
 Since the
Company’s inception, it has met its liquidity and capital expenditure needs
primarily through the proceeds from sales of common stock through equity
financing and private placement transactions. During the nine months ended
September 30, 2010, the Company’s cash used in operating activities was $13.0
million, which consisted of a net loss of $11.6 million and a decrease in
accounts payable and accrued expenses, net of prepaid expenses, of $5.5 million,
which was offset by a $0.9 million decrease in prepaid taxes (of which $0.7
million was net cash refunded for taxes).  As a result, the Company’s
cash and cash equivalents at September 30, 2010, after adding back non-cash
items, decreased $12.7 million to $4.2 million from $16.9 million at December
31, 2009.  Subsequent to the quarter ended September 30, 2010, the
Company received $2.7 million of cash refunds from the IRS relating to its $3.5
million in taxes receivable on its balance sheet as of September 30,
2010.  The cash used in operating activities during the nine months
ended September 30, 2010 included expenditures to realign the Company’s business
to focus on its direct-to-consumer entertainment and subscription products,
including the Kazaa digital music service.  The Company expects that
the actions it has taken in the first nine months of the year will allow it to
reduce expenditures in the fourth quarter and beyond.
 
 Our
working capital requirements are significant. In order to grow its business and
meet the Company’s objective of becoming a leading direct-to-consumer music and
entertainment subscription business built around the Kazaa brand, the Company
will need to raise additional capital in the next twelve months.  The
sale of additional equity securities or convertible debt could result in
dilution to the Company’s stockholders. The Company currently has no
arrangements with respect to additional financing and there is no guaranty
funding will be available on favorable terms or at all. If the Company cannot
obtain such funds, it will likely need to decrease the rate of growth of its
business, including its efforts to become a leading direct-to-consumer music and
entertainment subscription business built around the Kazaa brand.
  Note 2 –  Investments and Advances
 
 Investment
in The Billing Resource, LLC
 
 On
October 30, 2008, the Company acquired a 36% noncontrolling interest in The
Billing Resource, LLC (“TBR”). TBR is an aggregator of fixed telephone line
billing, providing alternative billing services to the Company and unrelated
third parties. The Company contributed $2.2 million in cash on formation, of
which, $1.9 million was later distributed by TBR to the Company. The Company
also provided an additional $0.9 million of working capital advances in 2009 to
support near term growth. As of September 30, 2010, the Company’s net investment
in TBR totals $0.9 million and is included in Investments, Advances and Other
Assets on the accompanying Condensed Consolidated Balance Sheet.




7




In
addition, the Company has an operating agreement with TBR whereby TBR provides
billing services to the Company and its customers. The agreement reflects
transactions in the normal course of business and was negotiated on an arm’s
length basis.
 
 The
Company records its investment in TBR under the equity method of accounting and
as such presents its pro-rata share of the equity in earnings and losses of TBR
within its quarterly and year end reported results. The Company recorded $74,000
and $113,000 as equity in loss for the nine months ended September 30, 2010
and 2009, respectively.
 
 Note 3 –  Kazaa
 
 Kazaa is
a subscription-based digital music service that gives users unlimited access to
hundreds of thousands of CD-quality tracks. For a monthly fee users can download
unlimited music files and play those files on up to three separate computers and
download unlimited ringtones to a mobile phone. Unlike other music services that
charge you every time a song is downloaded, Kazaa allows users to listen to and
explore as much music as they want for one monthly fee, without having to pay
for every track or album. Consumers are billed for this service on a monthly
recurring basis through a credit card, landline, or mobile device. Royalties are
paid to the rights’ holders for licenses to the music utilized by this digital
service.  Atrinsic and Brilliant Digital Entertainment, Inc.
(“Brilliant Digital”) jointly offer the Kazaa digital music service pursuant to
a Marketing Services Agreement and a Master Services Agreement between the two
companies, each entered into effective as of July 1, 2009.
 
 Under the
Marketing Services Agreement, Atrinsic is responsible for marketing,
promotional, and advertising services in respect of the Kazaa business.
Pursuant to the Master Services Agreement, Atrinsic provides services related to
the operation of the Kazaa business, including billing and collection
services and the operation of the Kazaa online storefront. Brilliant Digital is
obligated to provide certain other services with respect to the Kazaa
business, including licensing the intellectual property underlying the Kazaa
business to Atrinsic, obtaining all licenses to the content offered as part
of the Kazaa business and delivering that content to subscribers. As part of the
agreements, Atrinsic is required to make advance payments and expenditures
of up to $5.0 million in respect of certain expenses incurred in order to
operate the Kazaa business. These advances and expenditures are recoverable on a
dollar for dollar basis against revenues generated by the
business.  Although the Company is not obligated to make expenditures
in excess of $5.0 million, net of revenue and recouped funds, since
inception on July 1, 2009, and through September 30, 2010, the Company has
contributed $7.5 million net of revenue and recouped funds.
 
 The
Marketing Services Agreement and Master Services Agreement originally required
Brilliant Digital to directly repay the first $2.5 million of these
advances and expenditures which are not otherwise recovered from Kazaa generated
revenues and this repayment obligation was to be secured under separate
agreement. As of September 30, 2010, the Company has received the $2.5
million in repayments from Brilliant Digital.
 
 Also in
accordance with the original agreements, Atrinsic and Brilliant Digital were to
share equally in the “Net Profit” generated by the Kazaa music subscription
service after all of the Company’s costs and expenses have been recouped. For
the nine months ending September 30, 2010, the Company has presented in its
statement of operations, Kazaa revenue of $8.4 million and expenses incurred for
the Kazaa music service of $12.1 million, offset by $0.6 million of
reimbursements from Brilliant Digital.
 
 On
October 13, 2010, Atrinsic entered into amendments to its existing Marketing
Services Agreement and Master Services Agreement with Brilliant Digital and
entered into an agreement with Brilliant Digital to acquire all of the assets of
Brilliant Digital that relate to its Kazaa subscription based music service
business.
 
 Among
other things, the amendments extend the term of each of the Marketing Services
Agreement and Master Services Agreement from three years to thirty years,
provide Atrinsic with an exclusive license to the Kazaa trademark in connection
with Atrinsic’s services under the agreements, and modify the Kazaa digital
music service profit share payable to Atrinsic under the agreements from 50% to
80%. In addition, the amendments remove Brilliant Digital’s obligation
to repay up to $2.5 million of advances and expenditures which are not
otherwise recovered from Kazaa generated revenues and remove the $5.0 million
cap on expenditures that Atrinsic is required to advance in relation to the
operation of the Kazaa business. As consideration for entering into the
amendments, Atrinsic issued 4,161,430 shares of its common stock to Brilliant
Digital on October 13, 2010.
 
 The
amendments to the Marketing Services Agreement and Master Services Agreement are
part of a broader transaction between Atrinsic and Brilliant Digital pursuant to
which Atrinsic will acquire all of the assets of Brilliant Digital that relate
to its Kazaa digital music service business in accordance with the terms of an
asset purchase agreement entered into between the parties. The
purchase price for the acquired assets includes the issuance by Atrinsic of an
additional 7,125,665 shares of its common stock at the closing of
the transactions contemplated by the asset purchase agreement as well as
the assumption of certain liabilities related to the Kazaa business. The closing
of the transactions contemplated by the asset purchase agreement will occur
when all of the assets associated with the Kazaa business, including the Kazaa
trademark and associated intellectual property, as well as Brilliant
Digital’s content management, delivery and customer service platforms, and
licenses with third parties, have been transferred to Atrinsic. The closing
of the transactions contemplated by the asset purchase agreement is subject to
approval by the stockholders of Atrinsic and Brilliant Digital, receipt of
all necessary third party consents as well as other customary closing
conditions. At the closing of the transactions contemplated by the asset
purchase agreement, Atrinsic has agreed to appoint two individuals to be
selected by Brilliant Digital to serve on Atrinsic’s Board of Directors. In
addition, at the closing, each of the Marketing Services Agreement and Master
Services Agreement will terminate.


8





Note 4 –  Fair Value Measurements
 
 The
carrying amounts of cash equivalents, accounts receivable, accounts payable and
accrued expenses are believed to approximate fair value due to the short-term
maturity of these financial instruments.  The following table presents
certain information for our assets and liabilities that are measured at fair
value on a recurring basis at September 30, 2010 and December 31, 2009:


Level I
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalSeptember
      30, 2010:Assets:Cash
      and cash equivalents
                  
                  $
                  4,249
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  4,249Liabilities:Put
      options
                  
                  $
                  -
                  
                  
                  $
                  331
                  
                  
                  $
                  -
                  
                  
                  $
                  331December
      31, 2009:Assets:Cash
      and cash equivalents
                  
                  $
                  16,913
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  16,913Liabilities:Put
      options
                  
                  $
                  -
                  
                  
                  $
                  267
                  
                  
                  $
                  -
                  
                  
                  $
                  267





At
September 30, 2010, put option liabilities on our common stock issued in
connection with the Shop-It acquisition are included in other current
liabilities in the Company’s condensed consolidated balance sheets. These
options had certain exercise requirements and as of September 30, 2010, the
Company had received notices to exercise an aggregate of 216,481 shares
underlying options with a share price of $0.47, and a strike price of $2.00,
resulting in a liability of $331,000.  Since the exercise notice, and
subsequent to quarter end, the Company has negotiated with the holders of the
put options to cancel the put options and in exchange, the Company is to pay the
put option holders cash, over a six- to nine-month period.
 
 Note 5 -  Concentration of Business and Credit
Risk
 
 Financial
instruments which potentially subject the Company to credit risk consist
primarily of cash and cash equivalents and accounts receivable.
 
 Atrinsic
is currently utilizing several billing aggregators in order to provide content
and billings to the end users of its subscription products. These billing
aggregators act as a billing interface between Atrinsic and the carriers that
ultimately bill Atrinsic’s end user subscribers. Some of these billing
aggregators have not had long operating histories in the U.S. or operations with
traditional business models. In particular mobile billing aggregators face a
greater business risk in the marketplace, due to a constantly 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.





9





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


For The Nine Months EndedSeptember 30,2010
                  
                  
                  2009RevenuesAggregator
      A
                  
                  
                  19
                  %
                  
                  
                  3
                  %Customer
      A
                  
                  
                  13
                  %
                  
                  
                  0
                  %Aggregator
      B
                  
                  
                  6
                  %
                  
                  
                  3
                  %Other
      Customers & Aggregators
                  
                  
                  62
                  %
                  
                  
                  94
                  %





As
      ofSeptember
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009Accounts
      ReceivableAggregator
      A
                    
                    
                    44
                    %
                    
                    
                    12
                    %Customer
      A
                    
                    
                    15
                    %
                    
                    
                    0
                    %Aggregator
      C
                    
                    
                    6
                    %
                    
                    
                    9
                    %Other
      Customers & Aggregators
                    
                    
                    35
                    %
                    
                    
                    79
                    %





NOTE 6 - Property and Equipment
 
 Property
and equipment consists of the following:





Useful Life
                  
                  
                  September 30,
                  
                  
                  December 31,inyears
                  
                  
                  2010
                  
                  
                  2009Computers
      and software applications
                  
                  
                  3
                  
                  
                  $
                  1,687
                  
                  
                  $
                  1,874Leasehold
      improvements
                  
                  
                  10
                  
                  
                  
                  1,833
                  
                  
                  
                  1,830Building
                  
                  
                  40
                  
                  
                  
                  785
                  
                  
                  
                  766Furniture
      and fixtures
                  
                  
                  7
                  
                  
                  
                  164
                  
                  
                  
                  161Gross
      PP&E
                  
                  
                  
                  
                  
                  
                  4,469
                  
                  
                  
                  4,631Less:
      accumulated depreciation
                  
                  
                  
                  
                  
                  
                  (1,297
                  )
                  
                  
                  (1,078
                  )Net
      PP&E
                  
                  
                  
                  
                  
                  $
                  3,172
                  
                  
                  $
                  3,553





Depreciation
expense for the nine months ended September 30, 2010 and 2009 totaled $0.5
million and $0.6 million, respectively, and is recorded on a straight line
basis.


10




Note
7 –Intangibles
 
 The
carrying amount and accumulated amortization of intangible assets as of
September 30, 2010 and December 31, 2009, respectively, are as follows:


Useful Life
                    
                    
                    Gross Book
                    
                    
                    Accumulated
                    
                    
                    
                    
                    
                    Net BookinYears
                    
                    
                    Value
                    
                    
                    Amortization
                    
                    
                    Impairment
                    
                    
                    ValueAs
      of September 30, 2010Indefinite
      Lived assetsTradenames
                    
                    
                    
                    
                    $
                    4,325
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    4,325Domain
      names
                    
                    
                    
                    
                    
                    1,298
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,298Amortized
      Intangible AssetsAcquired
      software technology
                    
                    3 -
      5
                    
                    
                    
                    2,516
                    
                    
                    
                    1,873
                    
                    
                    
                    -
                    
                    
                    
                    643Domain
      names
                    
                    3
                    
                    
                    
                    426
                    
                    
                    
                    404
                    
                    
                    
                    -
                    
                    
                    
                    22Tradenames
                    
                    9
                    
                    
                    
                    559
                    
                    
                    
                    310
                    
                    
                    
                    -
                    
                    
                    
                    249Customer
      lists
                    
                    3
                    
                    
                    
                    582
                    
                    
                    
                    535
                    
                    
                    
                    -
                    
                    
                    
                    47Restrictive
      covenants
                    
                    5
                    
                    
                    
                    667
                    
                    
                    
                    518
                    
                    
                    
                    -
                    
                    
                    
                    149Total
                    
                    
                    
                    
                    $
                    10,373
                    
                    
                    $
                    3,640
                    
                    
                    $
                    -
                    
                    
                    
                    6,733As
      of December 31, 2009Indefinite
      Lived assetsTradenames
                    
                    
                    
                    
                    $
                    6,241
                    
                    
                    $
                    -
                    
                    
                    $
                    1,916
                    
                    
                    $
                    4,325Domain
      names
                    
                    
                    
                    
                    
                    1,370
                    
                    
                    
                    -
                    
                    
                    
                    72
                    
                    
                    
                    1,298Amortized
      Intangible AssetsAcquired
      software technology
                    
                    3 -
      5
                    
                    
                    
                    3,136
                    
                    
                    
                    1,589
                    
                    
                    
                    620
                    
                    
                    
                    927Domain
      names
                    
                    3
                    
                    
                    
                    550
                    
                    
                    
                    351
                    
                    
                    
                    124
                    
                    
                    
                    75Licensing
                    
                    2
                    
                    
                    
                    580
                    
                    
                    
                    580
                    
                    
                    
                    -
                    
                    
                    
                    -Tradenames
                    
                    9
                    
                    
                    
                    1,320
                    
                    
                    
                    281
                    
                    
                    
                    761
                    
                    
                    
                    278Customer
      lists
                    
                    1.5
      - 3
                    
                    
                    
                    1,618
                    
                    
                    
                    1,377
                    
                    
                    
                    87
                    
                    
                    
                    154Subscriber
      database
                    
                    1
                    
                    
                    
                    3,956
                    
                    
                    
                    3,956
                    
                    
                    
                    -
                    
                    
                    
                    -Restrictive
      covenants
                    
                    5
                    
                    
                    
                    1,228
                    
                    
                    
                    471
                    
                    
                    
                    561
                    
                    
                    
                    196Total
                    
                    
                    
                    
                    $
                    19,999
                    
                    
                    $
                    8,605
                    
                    
                    $
                    4,141
                    
                    
                    $
                    7,253




Except in
the case of a triggering event prior to the fourth quarter of 2010, the Company
will perform its annual impairment test on other long lived identifiable
intangible assets at the end of the fourth quarter.
  11


Note
8 - Stock-based compensation
 
 The fair
value of share-based awards granted is estimated on the date of grant using the
Black-Scholes option pricing model or binominal option model, when appropriate.
The key assumptions for these models are expected term, expected volatility,
risk-free interest rate, dividend yield and strike price. Many of these
assumptions are judgmental and the value of share-based awards is highly
sensitive to changes in these assumptions.  The following table shows
the assumptions used by the Company with respect to the determination of the
fair value of share based awards granted during the nine months ended September
30, 2010:


2010Strike
      Price
                  
                  $
                  0.70
      - $0.91Expected
      life
                  
                  5.6
      yearsRisk
      free interest rate
                  
                  
                  1.47%
      - 2.36
                  %Volatility
                  
                  
                  58%
      - 61
                  %Fair
      market value per share
                  
                  $
                  0.17
      - $0.49





During
the nine months ended September 30, 2010, the Company granted 2,085,000 stock
options and 311,155 restricted stock units. During nine months ended September
30, 2010, 41,666 restricted stock units vested and shares of common stock were
issued or were reserved for issuance by the Company, net of 9,718 shares that
were held back by the Company to cover employee taxes on the shares issued.
During the nine months ended September 30, 2010, 1,280,404 options were
forfeited.
 
 Stock
based compensation expense included in product and distribution, selling and
marketing and general and administrative and other operating for the three and
nine months ended September 30, 2010 and 2009, respectively, are as follows:


For the Three Months Ended
                  
                  
                  For the Nine Months EndedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Product
      and distribution
                  
                  $
                  23
                  
                  
                  $
                  32
                  
                  
                  $
                  44
                  
                  
                  $
                  138Selling
      and marketing
                  
                  
                  11
                  
                  
                  
                  -
                  
                  
                  
                  28
                  
                  
                  
                  -General
      and administrative and other operating
                  
                  
                  191
                  
                  
                  
                  226
                  
                  
                  
                  788
                  
                  
                  
                  942Total
                  
                  $
                  225
                  
                  
                  $
                  258
                  
                  
                  $
                  860
                  
                  
                  $
                  1,080


12


Note
9 – Loss per Share Attributable to Atrinsic, Inc.
 
 Basic
loss per share attributable to Atrinsic, Inc. is computed by dividing reported
loss by the weighted average number of shares of common stock outstanding for
the period. Diluted loss per share includes the effect, if any, of the potential
issuance of additional shares of common stock as a result of the exercise or
conversion of dilutive securities, using the treasury stock method. Potential
dilutive securities for the Company include outstanding stock options and
warrants.
 
 The
computational components of basic and diluted loss per share are as follows:


Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009EPS
      Denominator:Basic
      weighted average shares
                  
                  
                  20,865,096
                  
                  
                  
                  20,634,558
                  
                  
                  
                  20,859,554
                  
                  
                  
                  20,570,326Effect
      of dilutive securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average shares
                  
                  
                  20,865,096
                  
                  
                  
                  20,634,558
                  
                  
                  
                  20,859,554
                  
                  
                  
                  20,570,326EPS
      Numerator (effect on net income):Net
      loss attributable to Atrinsic, Inc.
                  
                  $
                  (3,636
                  )
                  
                  $
                  (2,386
                  )
                  
                  $
                  (11,562
                  )
                  
                  $
                  (5,520
                  )Effect
      of dilutive securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      loss attributable to Atrinsic, Inc.
                  
                  $
                  (3,636
                  )
                  
                  $
                  (2,386
                  )
                  
                  $
                  (11,562
                  )
                  
                  $
                  (5,520
                  )Net
      loss per common share:Basic
      weighted average loss attributable to Atrinsic, Inc.
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.55
                  )
                  
                  $
                  (0.27
                  )Effect
      of dilutive securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average loss attributable to Atrinsic, Inc.
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.55
                  )
                  
                  $
                  (0.27
                  )





Common
stock underlying outstanding options and convertible securities were not
included in the computation of diluted earnings per share for the three and nine
months ended September 30, 2010 and 2009, because their inclusion would be
anti-dilutive when applied to the Company’s net loss per share.
 
 Financial
instruments, which may be exchanged for equity securities are excluded in
periods in which they are anti-dilutive. The following shares were excluded from
the calculation of diluted earnings per share:


Anti-Dilutive EPS DisclosureThree Months Ended
                    
                    
                    Nine Months EndedSeptember 30,
                    
                    
                    September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Options
                    
                    
                    2,681,840
                    
                    
                    
                    1,892,123
                    
                    
                    
                    2,681,840
                    
                    
                    
                    1,892,123Warrants
                    
                    
                    314,443
                    
                    
                    
                    314,443
                    
                    
                    
                    314,443
                    
                    
                    
                    314,443Restricted
      Shares
                    
                    
                    4,173
                    
                    
                    
                    61,969
                    
                    
                    
                    34,173
                    
                    
                    
                    61,969Restricted
      Stock Units
                    
                    
                    544,489
                    
                    
                    
                    750,000
                    
                    
                    
                    544,489
                    
                    
                    
                    750,000





The per
share exercise prices of the options were $0.48 - $8.52 for the three and nine
months ended September 30, 2010 and 2009. The per share exercise prices of the
warrants were $3.44 - $5.50 for the three and nine months ended September 30,
2010 and 2009.
 
 Note 10 - Income Taxes
 
 Income
tax expense (benefit) before noncontrolling interest and equity in loss of
investee for the nine months ended September 30, 2010 and 2009, was $0.2 million
and ($4.3) million, respectively and reflects an effective tax rate of (2%)
and 45%, respectively. The Company has provided a valuation allowance
against its deferred tax assets because it is more likely than not that such
benefits will not be realized by the Company.




13


Subsequent to the quarter ended
September 30, 2010, we received $2.7 million of cash refunds from the IRS
relating to our $3.5 million in taxes receivable on our balance sheet as of
September 30, 2010.
 
 Uncertain
Tax Positions
 
 The
Company is subject to taxation in the United States at Federal and State levels
and is also subject to taxation in certain foreign jurisdictions. The Company’s
tax years for 2007, 2008 and 2009 are subject to examination by the tax
authorities.  In addition, the tax returns for certain acquired
entities are also subject to examination. As of September 30, 2010, an estimated
liability of $42,000 for uncertain tax positions in Canada is recorded in our
Condensed Consolidated Balance Sheets. Management believes that an adequate
provision has been made for any adjustments that may result from tax
examinations. The outcome of tax examinations, however, cannot be predicted with
certainty. If any issues addressed in the Company’s tax audits are resolved in a
manner not consistent with management’s expectations, the Company could be
required to adjust its provision for income tax.  Although the timing
or the resolution and/or closure of the audits is highly uncertain, the Company
does not believe that its unrecognized tax benefit will materially change in the
next twelve months.
 
 Note
11- New Accounting Pronouncements
 
 Adopted
in 2010
 
 In
September 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS No. 167”) which has been superseded
by the FASB Codification and included in ASC 810 to require an enterprise to
perform an analysis to determine whether the enterprise’s variable interest or
interests give it a controlling financial interest in a variable interest
entity. This analysis identifies the primary beneficiary of a variable interest
entity as one with the power to direct the activities of a variable interest
entity that most significantly impact the entity’s economic performance and the
obligation to absorb losses of the entity that could potentially be significant
to the variable interest. These revisions to ASC 810 are effective as of January
1, 2010 and the adoption of these revisions to ASC 810 had no impact on our
interim results of operations or financial position.
 
 Not
Yet Adopted
 
 In
October 2009, FASB approved for issuance Emerging Issues Task Force (EITF) issue
08-01, Revenue Arrangements with Multiple Deliverables which has been superseded
by the FASB codification and included in ASC 605-25. This statement
provides principles for allocation of consideration among its multiple-elements,
allowing more flexibility in identifying and accounting for separate
deliverables under an arrangement. The EITF introduces an estimated selling
price method for valuing the elements of a bundled arrangement if
vendor-specific objective evidence or third-party evidence of selling price is
not available, and significantly expands related disclosure requirements. This
standard is effective on a prospective basis for revenue arrangements entered
into or materially modified in fiscal years beginning on or after
September 15, 2010. Alternatively, adoption may be on a retrospective
basis, and early application is permitted. The Company is currently evaluating
the impact of adopting this pronouncement.
 
 Note
12 - Commitments and Contingencies
 
 On March
10, 2010, Atrinsic received final approval of its settlement of the Class Action
in the case known as Allen v. Atrinsic, Inc. f/k/a New Motion, Inc., formerly
pending in Los Angeles County Superior Court.  This national settlement
covers all of the Company’s mobile products, web sites and advertising practices
through the date the Final Judgment was entered.  All costs of the
settlement and defense were accrued for in 2008; therefore this settlement did
not impact the Company’s results of operations in 2009 and is not expected to
impact the Company’s results of operations in 2010.  In addition to
administrative costs and refunds, during the second quarter of 2010, the Company
paid the $1.0 million settlement for the Class Action.
 
 Because
the terms of the settlement applied nationally, all other consumer class action
cases pending against the Company were dismissed without payment of any monies.
 
 In the
ordinary course of business, the Company is involved in various disputes, which
are routine and incidental to the business and the industry in which it
operates. In the opinion of management, the results of such disputes will not
have a significant adverse effect on the financial position or the results of
operations of the Company. Of the approximately $5.3 million in total accrued
expenses as of September 30, 2010, $0.3 million is associated with the legal
contingencies disclosed above.
  14
 Note
13 – Subsequent Events
 
 On October 13, 2010, Atrinsic entered
into amendments to its existing Marketing Services Agreement and Master
Services Agreement with Brilliant Digital and entered into an agreement
with Brilliant Digital and Altnet, Inc., a wholly-owned subsidiary of Brilliant
Digital, to acquire all of the assets of Brilliant Digital that relate to its
Kazaa subscription based music service business.
 
 The
Marketing Services Agreement and Master Services Agreement govern the operation
of Brilliant Digital’s Kazaa subscription based music service business
which is jointly operated by the Company and Brilliant Digital. Under the
Marketing Services Agreement, Atrinsic is responsible for marketing,
promotional, and advertising services in respect of the Kazaa business.
Pursuant to the Master Services Agreement, Atrinsic provides services related to
the operation of the Kazaa business, including billing and collection
services and the operation of the Kazaa online storefront. Brilliant Digital is
obligated to provide certain other services with respect to the Kazaa
business, including licensing the intellectual property underlying the Kazaa
business to Atrinsic, obtaining all licenses to the content offered as part
of the Kazaa business and delivering that content to subscribers. As part of the
agreements, Atrinsic is required to make advance payments and expenditures
in respect of certain expenses incurred in order to operate the Kazaa business.
These advances and expenditures are recoverable on a dollar for dollar
basis against revenues generated by the business.
 
 Among
other things, the amendments extend the term of each of the Marketing Services
Agreement and Master Services Agreement from three years to thirty years,
provide Atrinsic with an exclusive license to the Kazaa trademark in connection
with Atrinsic’s services under the agreements, and modify the Kazaa digital
music service profit share payable to Atrinsic under the agreements from 50% to
80%. In addition, the amendments remove Brilliant Digital’s obligation
to repay up to $2.5 million of advances and expenditures which are not
otherwise recovered from Kazaa generated revenues and remove the cap on
expenditures that Atrinsic is required to advance in relation to the
operation of the Kazaa business. As consideration for entering into the
amendments, Atrinsic issued 4,161,430 shares of its common stock to Brilliant
Digital subsequent to September 30, 2010.
 
 The
amendments to the Marketing Services Agreement and Master Services Agreement are
part of a broader transaction between Atrinsic and Brilliant Digital pursuant to
which Atrinsic will acquire all of the assets of BDE that relate to its Kazaa
digital music service business in accordance with the terms of an
asset purchase agreement entered into between the parties on October 13,
2010. The purchase price for the acquired assets includes the issuance by
Atrinsic of an additional 7,125,665 shares of its common stock at the closing of
the transactions contemplated by the asset purchase agreement as well as
the assumption of certain liabilities related to the Kazaa business. The closing
of the transactions contemplated by the asset purchase agreement will occur
when all of the assets associated with the Kazaa business, including the Kazaa
trademark and associated intellectual property, as well as Brilliant
Digital’s content management, delivery and customer service platforms, and
licenses with third parties, have been transferred to Atrinsic. The closing
of the transactions contemplated by the asset purchase agreement is subject to
approval by the stockholders of Atrinsic and Brilliant Digital, receipt of
all necessary third party consents as well as other customary closing
conditions. At the closing of the transactions contemplated by the asset
purchase agreement, Atrinsic has agreed to appoint two individuals to be
selected by Brilliant Digital to serve on Atrinsic’s Board of Directors. In
addition, at the closing, each of the Marketing Services Agreement and Master
Services Agreement will terminate.
 
 Subsequent to the quarter ended
September 30, 2010, the Company received $2.7 million of cash refunds from the
IRS relating to its $3.5 million in taxes receivable on the Company’s balance
sheet as of September 30, 2010.
 
 On November 1, 2010, the Company
received notice of final award from an arbitration panel relating to a Statement
of Claim in an arbitration action against a past aggregator for amounts the
Company believes are outstanding under a past aggregation agreement, plus fees
and other costs.  The terms of the award are confidential, but it is
expected that the Company will reflect a gain on legal settlement of
approximately $1.0 million in the fourth quarter of 2010.
 
 In connection with the Company’s
announcement to purchase the assets of the Kazaa digital music service, on
November 10, 2010 the Company approved a restructuring plan to reorganize its
existing operations and also the Kazaa operations that Brilliant Digital is
engaged in to rapidly reduce certain expenditures and to improve product
development and sales and customer acquisition outcomes for the Kazaa digital
music service, and for Atrinsic in general.  The restructuring
involves the consolidation of all of the Company’s activities in New York and
includes the closure of the Company’s Canadian technology facility and the
retrenchment of approximately 40 employees and the intended disposition or
reallocation of fixed assets at that location.  In addition, all of
Brilliant Digital’s Kazaa development, backend and marketing operations,
currently located in Sydney, Australia and Los Angeles, California will
transition functions and activities to personnel in New
York.  Approximately 30 employees or contractors will be affected by
this reduction and transfer of activities.  It is expected that the
bulk of the consolidation process to the Company’s headquarters in New York will
be completed by the end of the fourth quarter, and that the reorganization will
be fully complete by the end of the first quarter. The Company expects to take a
charge of approximately $1.1 million in the fourth quarter to account for costs
associated with the restructuring’s exit and disposal activities that it has
identified and can reasonably estimate. The restructuring costs include
termination benefits for involuntarily terminated employees.  The
restructuring charge also includes costs to consolidate and close facilities and
to relocate certain employees.  The Company expects that the exit
activities and restructuring will be completed by the end of the first quarter.
  15
  The Company has evaluated events
subsequent to the balance sheet date through the date of its Form10-Q filing for
the quarter ended September 30, 2010 and determined there have not been any
material events that have occurred that would require adjustment to its
unaudited condensed consolidated financial statements.
  16
  Item
2 Management’s Discussion and Analysis
 
 CAUTIONARY
STATEMENT
 
 This
discussion summarizes the significant factors affecting our condensed
consolidated operating results, financial condition and liquidity and cash flows
for the nine months ended September 30, 2010 and 2009. Except for historical
information, the matters discussed in this “Management’s Discussion and
Analysis” are forward-looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond our
control. Actual results could differ materially from those projected in
the “forward-looking statements” as a result of, among other things, the
factors described under the “Cautionary Statements and Risk Factors” included
elsewhere in this report. The information contained in this Form 10-Q, as at and
for the nine months ended September 30, 2010 and 2009, is intended to update the
information contained in our Annual Report on Form 10-K for the year ended
December 31, 2009 of Atrinsic, Inc. (“we,” “our,” “us”, the “Company,” or
“Atrinsic”) and presumes that readers have access to, and will have read, the
“Management’s Discussion and Analysis” and other information contained in our
Annual Report on Form 10-K.
 
 A
NOTE CONCERNING PRESENTATION
 
 This
Quarterly Report on Form 10-Q contains information concerning Atrinsic, Inc. as
it pertains to the periods covered by this report - for the nine months
ended September 30, 2010 and 2009.
 
 Executive
Overview
 
 We are a
marketer of direct-to-consumer subscription products and an Internet search
marketing agency.  We sell entertainment subscription products direct
to consumers which we market through the Internet. We also sell Internet
marketing services to our corporate and advertising clients. We have
developed our marketing platforms, web sites, proprietary content and licensed
media to attract consumers, corporate partners and advertisers. We believe
our network of web properties, proprietary content, marketing and billing
platforms and technology allows us to cost-effectively acquire consumers
for our subscription products and for our corporate partners and advertisers.
 
 Direct-to-Consumer Subscriptions.  The Kazaa digital music service is our principal premium
direct-to-consumer subscription product.  Although we have a broad
offering of direct-to-consumer subscription products, Kazaa is central to our
strategy to become a leading direct-to-consumer business and as a result is an
important focus for management. Kazaa gives users unlimited access to hundreds
of thousands of CD-quality tracks. For a monthly fee users can download
unlimited music files and play those files on up to three separate computers and
download unlimited ringtones to a mobile phone. Unlike other music services that
charge you every time a song is downloaded, Kazaa allows users to listen to and
explore as much music as they want for one monthly fee, without having to pay
for every track or album. Consumers are billed for this service on a monthly
recurring basis through a credit card, landline, or mobile device. Royalties are
paid to the rights’ holders for licenses to the music utilized by this digital
service.
 
 Over an
extended period of time, our ability to generate incremental consumer
subscription revenues relies on our ability to increase the number of
subscribers to our products as well as to improve the Life Time Value (“LTV”) of
those subscribers.  In order to increase LTVs, we must improve billing
efficiencies and, importantly, enhance the benefits our subscription products
provide our customers.
 
 Our
strategy is to offer consumers a valuable product to access music or licensed
content and to combine our direct response capability with an Internet-based
customer acquisition model, which allows us to generate Internet traffic at what
we believe a lower effective cost of acquisition.  The success of our
strategy is dependent on acquiring qualified subscribers at a low effective
cost, and improving the features and benefits of Kazaa and our other
subscription products to increase subscriber LTVs.
 
 Internet Search Marketing Agency:
Atrinsic Interactive.  We are also an Internet search
marketing agency, developing and managing search engine marketing campaigns for
advertising clients.  Using proprietary technology, we build, manage
and analyze the effectiveness of hundreds of thousands of Pay Per Click (“PPC”)
keywords in real time across all of the major search engines. We provide our
advertisers scalable search strategies, including organic and paid search
campaigns, as well as managing our clients’ media mix to minimize
cannibalization across marketing channels.  We also offer a display
media platform, online and business intelligence and brand protection – to mount
an optimal defense against online risks to an advertisers’ brand and to provide
transparency of online marketing results and actionable online
intelligence.  Our search marketing agency is also developing a full
service affiliate network platform to facilitate partnerships between
advertisers and publishers to drive website traffic and online sales for
advertisers.
  17
  Overall,
our business principally serves two sets of customers – advertisers and
consumers. Advertisers use our products and services to enhance their online
marketing programs (our Transactional & Marketing
Services).  Consumers subscribe to our entertainment services to
receive premium content on the Internet and on their mobile device (our
Subscription Services). Each of these business activities – Transactional
&Marketing Services and Subscriptions – may utilize the same originating
media or derive a customer from the same source (e.g. search); the difference is
reflected in the type of customer billing.  In the case of
Transactional & Marketing Services, the billing is generally carried out on
a service fee, percentage, or on a performance basis. For Subscriptions, the end
user (the consumer) is able to access premium content and in return is charged a
recurring monthly fee to a credit card, mobile phone, or land-line phone.
 
 In
managing our business, we internally develop marketing programs to match users
with our service offerings or with those of our advertising clients. Our
prospects for growth are dependent on our ability to acquire content in a cost
effective manner. Our results may also be impacted by economic conditions and
the relative strengths and weakness of the U.S. economy, trends in the online
marketing and telecommunications industry, including client spending patterns
and increases or decreases in our portfolio of service offerings, including the
overall demand for such offerings, competitive and alternative programs and
advertising mediums, and risks inherent in our customer database, including
customer attrition.
 
 The
principal components of our operating expense are labor, media and media related
expenses (including media content costs, lead validation and affiliate
compensation), product or content development and royalties or licensing fees,
marketing and promotional expense (including sales commissions, customer service
and customer retention expense) and corporate general and administrative
expense. We consider our third party media cost and a portion of our operating
cost structure to be predominantly variable in nature over a short time horizon,
and as a result, we are immediately able to make modifications to our cost
structure to what we believe to be increases or decreases in revenue and market
trends. This factor is important in monitoring our performance in periods when
revenues are increasing or decreasing. In periods where revenues are increasing
as a result of improved market conditions, we will make every effort to best
utilize existing resources, but there can be no guarantee that we will be able
to increase revenues without incurring additional marketing or operating costs
and expenses. Conversely, in a period of declining market conditions we are able
to reduce certain operating expenses to reduce operating losses. Furthermore, if
we perceive a decline in market conditions to be temporary, we may choose to
maintain or increase operating expenses for the future maximization of operating
results.
 
 Restructuring.  In
connection with our announcement to purchase the assets of the Kazaa digital
music service, we are undertaking a restructuring of our existing operations and
of the Kazaa operations that Brilliant Digital is engaged in to rapidly reduce
certain expenditures and to improve product development and sales and customer
acquisition outcomes for the Kazaa digital music service, and for Atrinsic in
general.
 
 The
restructuring involves the consolidation of all of our activities in New York
and includes the closure of our Canadian technology facility and the
retrenchment of approximately 40 employees and the intended disposition or
reallocation of fixed assets at that location.  In addition, all of
Brilliant Digital’s Kazaa development, backend and marketing operations,
currently located in Sydney, Australia and Los Angeles, California will
transition functions and activities to personnel in New
York.  Approximately 30 employees or contractors will be affected by
this reduction and transfer of activities.  It is expected that the
bulk of the consolidation of operations to our headquarters in New York will be
completed by the end of the fourth quarter, and that the reorganization will be
fully complete by the end of the first quarter 2011.
 
 The
reorganization and consolidation of activities from three locations to a single
location are expected to yield cost savings as a result of the reduction in
headcount, the elimination of duplicative activities and combining or
eliminating networking and other overhead costs.  Management believes
that the effect of the restructuring will be to reduce its quarterly fixed cash
operating expense (which we define as operating expense excluding Cost of Media
– 3 rdparty, royalties and licenses and depreciation, amortization and
stock-based compensation expense) by approximately 30% to 50%.
 
 In
addition, management believes that the reorganization will yield additional
benefits as a result of consolidating the activities, management and personnel
of product development, sales, marketing, subscriber acquisition, customer
service billing and general and administrative activities under one
roof.  Management also believes that it is important for Kazaa’s
marketers, developers and other product personnel to maintain close geographic
and cultural ties to Kazaa’s users and subscriber base.
  We expect
to take a charge of approximately $1.1 million in the fourth quarter to account
for costs associated with the restructuring’s exit and disposal activities that
we have identified and can reasonably estimate. The restructuring costs include
termination benefits for involuntarily terminated employees.  The
restructuring charge also includes costs to consolidate and close facilities and
to relocate certain employees.  We expect that the exit activities and
restructuring will be completed by the end of the first quarter.
  18
  Kazaa. Atrinsic and
Brilliant Digital Entertainment, Inc. (“Brilliant Digital”) jointly offer the
Kazaa digital music service pursuant to a Marketing Services Agreement and a
Master Services Agreement between the two companies.  Under the
Marketing Services Agreement, we are responsible for marketing, promotional, and
advertising services in respect of the Kazaa business. Pursuant to the Master
Services Agreement, Atrinsic provides services related to the operation of the
Kazaa business, including billing and collection services and the operation of
the Kazaa online storefront. Brilliant Digital is obligated to provide certain
other services with respect to the Kazaa business, including licensing the
intellectual property underlying the Kazaa business to us, obtaining all
licenses to the content offered as part of the Kazaa business and delivering
that content to subscribers. As part of the agreements, we are required to make
advance payments and expenditures of up to $5.0 million in respect of certain
expenses incurred in order to operate the Kazaa business. These advances and
expenditures are recoverable on a dollar for dollar basis against revenues
generated by the business.  Although we are not obligated to make
expenditures in excess of $5.0 million, net of revenue and recouped funds, since
inception on July 1, 2009, and through September 30, 2010, we have contributed
$7.5 million net of revenue and recouped funds.
 
 The
Marketing Services Agreement and Master Services Agreement originally required
Brilliant Digital to directly repay the first $2.5 million of these
advances and expenditures which are not otherwise recovered from Kazaa generated
revenues and this repayment obligation was to be secured under separate
agreement. As of September 30, 2010, we have received the $2.5 million in
repayments from Brilliant Digital.
 
 Also in
accordance with the original agreements, Atrinsic and Brilliant Digital were to
share equally in the “Net Profit” generated by the Kazaa music subscription
service after all of our costs and expenses have been recouped. For the nine
months ending September 30, 2010, we have presented in our statement of
operations, Kazaa revenue of $8.4 million and expenses incurred for the Kazaa
music service of $12.1 million, offset by $0.6 million of reimbursements from
Brilliant Digital.
 
 On
October 13, 2010, we entered into amendments to our existing Marketing Services
Agreement and Master Services Agreement with Brilliant Digital and entered into
an agreement with Brilliant Digital to acquire all of the assets of Brilliant
Digital that relate to its Kazaa subscription based music service business.
 
 Among
other things, the amendments extend the term of each of the Marketing Services
Agreement and Master Services Agreement from three years to thirty years,
provide us with an exclusive license to the Kazaa trademark in connection with
our services under the agreements, and modify the Kazaa digital music service
profit share payable to us under the agreements from 50% to 80%. In addition,
the amendments remove Brilliant Digital’s obligation to repay up to $2.5 million
of advances and expenditures which are not otherwise recovered from Kazaa
generated revenues and remove the $5.0 million cap on expenditures that we are
required to advance in relation to the operation of the Kazaa business. As
consideration for entering into the amendments, we issued 4,161,430 shares
of our common stock to Brilliant Digital subsequent to September 30, 2010.
 
 The
amendments to the Marketing Services Agreement and Master Services Agreement are
part of a broader transaction between us and Brilliant Digital pursuant to which
we will acquire all of the assets of Brilliant Digital that relate to its Kazaa
digital music service business in accordance with the terms of an asset purchase
agreement entered into between the parties.  The purchase price for
the acquired assets includes the issuance by us of an additional 7,125,665
shares of our common stock at the closing of the transactions contemplated by
the asset purchase agreement as well as the assumption of certain liabilities
related to the Kazaa business. The closing of the transactions contemplated by
the asset purchase agreement will occur when all of the assets associated with
the Kazaa business, including the Kazaa trademark and associated intellectual
property, as well as Brilliant Digital’s content management, delivery and
customer service platforms, and licenses with third parties, have been
transferred to us. The closing of the transactions contemplated by the asset
purchase agreement is subject to approval by our stockholders and the
stockholders of Brilliant Digital, receipt of all necessary third party consents
as well as other customary closing conditions. At the closing of the
transactions contemplated by the asset purchase agreement, we have agreed to
appoint two individuals to be selected by Brilliant Digital to serve on our
Board of Directors. In addition, at the closing, each of the Marketing Services
Agreement and Master Services Agreement will terminate.
 
 In
connection with the purchase of the Kazaa assets, and prior to entering into the
asset purchase agreement with Brilliant Digital, our Board of directors received
a fairness opinion from an independent valuation firm, concluding that the
proposed asset purchase was fair to our stockholders, from a financial point of
view.
 
 Business
Strategy
 
 To become
a leading marketer of direct-to-consumer subscription products and to maintain
our position as an Advertising Age Top 10 Search Agency, our strategy is to
develop and deliver sought-after music and entertainment content to our
subscribers and to develop a broad marketing and media distribution strategy,
that allows us to cost-efficiently acquire consumers for our subscription-based
services and to deliver marketing services to our advertising
clients.  To generate long term value for our stockholders and
profitably grow our revenue over time, we are incurring media, product and
distribution and marketing expenses to acquire customers today so that we can
build a substantial subscriber base to generate subscription revenue in the
future.  We also must continually develop best in class service
offerings for our clients in the area of search related services.
  19
  Publish High-Quality, Branded
Subscription Content, Like Kazaa.As a direct to consumer
Internet marketing company, we are focused on partnering with companies, and
developing proprietary sources of content, for our direct to consumer
subscription products.  The proposed purchase of the Kazaa assets is
the direct result of our strategy to develop and own valuable proprietary
content to attract users and deliver high quality content to our subscribers. We
believe that publishing a diversified portfolio of the highest quality content,
like the Kazaa digital music service, is important to our business. We intend to
leverage and expand on the sought-after content from the Kazaa digital music
service and to devote significant resources to the development of high-quality
and innovative products and services.
 
 Develop and Expand Marketing
Distribution.  We employ a multifaceted approach to generating
subscribers and Internet traffic for ourselves and for our
advertisers:  (i) We use search engine optimization and search
marketing efforts which attract users to our products and web sites and to our
advertisers’ web sites on a PPC basis; (ii) we employ mobile marketing
activities, generally in the form of display advertising on mobile devices (iii)
users may navigate directly to our web properties and service offerings,
and  (iv) users respond to our email marketing.  Our
strategy is to improve the cost effectiveness of our customer acquisition by
improving the attractiveness of our existing web properties and offerings and by
employing innovative marketing techniques, to source and expand
traffic.  We expect that by expanding our online distribution
capability, we will be able to lower our customer acquisition costs, relative to
the LTV of our subscribers.
 
 Search Agency Online Marketing
Services.In
order to be competitive in the area of online marketing services, particularly
in search related marketing services, we must continue to improve our technology
capabilities.  Our product offering will not remain competitive if we
don’t offer our clients leading edge technology and strategies designed to drive
their online sales efforts.  Adding more services revenue will involve
prospecting a targeted set of clients who are natural consumers of our
services.  Our initiatives include delivering an integrated suite of
services, which include search engine marketing services, search engine
optimization, display advertising, and affiliate marketing.  Our
ability to integrate brand protection and competitive intelligence is a source
of differentiation and growth for our existing and new client base.
 
 Lead Validation and Billing
Efficiency.   We are pursuing a number of value enhancing
strategies to increase the conversion of leads into subscribers of our
direct-to-consumer subscription services.  By validating the
submission of online information through automated data lookups and validation,
we are able to increase the value of a lead or visitor to our web
sites.  Such lead value enhancement techniques assist us in improving
the conversion of users into subscribers to our direct-to-consumer subscription
services and the corresponding increases in LTV that result from more highly
qualified subscribers.
 
 Multiple Billing Platforms.  As a direct result of being proficient in multiple billing
platforms, we are able to create customer acquisition efficiencies because we
can acquire direct subscribers and generate third-party leads.  This
provides us with a competitive advantage over traditional direct response
marketers, who may only offer a single billing modality – credit
cards.  We have agreements through multiple aggregators who have
access to U.S. carriers – both wireless and landline – for
billing.  These relationships include our 36% interest in TBR, which
is an aggregator of fixed-line billing.  In addition to agreements
with aggregators, we also have an agreement in place with AT&T Wireless to
distribute and bill for our services directly to subscribers on their
network.  As a result of our multiple billing protocols, we are able
to expand our potential customer base, attracting consumers who may prefer a
different billing mechanism than is traditionally offered.  Many of
our new product initiatives leverage and expand upon our alternative billing
capabilities.
  20
  Results
of Operations for the three months ended September 30, 2010 compared to the
three months ended September 30, 2009.
 
 Revenues
presented by type of activity are as follows for the three month periods ending
September 30, 2010 and 2009:





For the Three Months Ended
                    
                    
                    Change
                    
                    
                    ChangeSeptember 30,
                    
                    
                    Inc.(Dec.)
                    
                    
                    Inc.(Dec.)2010
                    
                    
                    2009
                    
                    
                    $
                    
                    
                    %Subscription
                    
                    $
                    4,261
                    
                    
                    $
                    4,889
                    
                    
                    $
                    (628
                    )
                    
                    
                    -13
                    %Transactional
      and Marketing Services
                    
                    $
                    4,916
                    
                    
                    $
                    9,984
                    
                    
                    $
                    (5,068
                    )
                    
                    
                    -51
                    %Total
      Revenues
                    
                    $
                    9,177
                    
                    
                    $
                    14,873
                    
                    
                    $
                    (5,696
                    )
                    
                    
                    -38
                    %





Revenues
decreased approximately $5.7 million or 38%, to $9.2 million for the three
months ended September 30, 2010, compared to $14.9 million for the three months
ended September 30, 2009.
 
 Subscription
revenue decreased approximately $0.6 million or 13%, to $4.3 million for the
three months ended September 30, 2010, compared to $4.9 million for the three
months ended September 30, 2009. Subscription revenue for the three months ended
September 30, 2010 includes an increase in Kazaa revenue of $1.6 million,
compared to the three months ended September 30, 2009, without which our
subscription revenue would have decreased by 45%, or $2.2 million
year-over-year.  The decrease in subscription revenue was the result
of a lower number of subscribers for the three months ended September 30, 2010,
compared to the year ago period.  As of September 30, 2010, the
Company had approximately 217,000 subscribers.  The negative impact on
subscription revenue as a result of a smaller subscriber base was offset by an
increase in average revenue per user (“ARPU”) which increased 31% to
approximately $5.74 in the three months ended September 30, 2010, compared to
the year ago period.  This positive ARPU effect was due to the higher
retail price point of the Kazaa digital music subscription service and
improvements in billing efficiency.  During the third quarter of 2010,
across all of its subscription products, the Company added approximately 52,000
new subscribers, more than half of which were new Kazaa
subscribers.  As of September 30, 2010, the Company estimates that it
has approximately 64,000 Kazaa subscribers.
 
 Transactional
and Marketing services revenue is derived from our online marketing activities,
which consist of targeted and measurable online campaigns and programs for
marketing partners, and corporate advertisers or their agencies, to generate
qualified customer leads, online responses and sales transactions , or
increased brand recognition. Transactional and Marketing services revenue
decreased by approximately $5.1 million or 51% to $4.9 million for the three
months ended September 30, 2010 compared to $10.0 million for the three months
ended September 30, 2009. The decrease in revenue was attributable to the
loss of accounts and a reduction in discretionary advertising expenditures by
our clients, as well as a result of a restructuring of our Transactional and
Marketing Services activities. During the three months ended September 30, 2010,
the Company substantially completed its actions to eliminate any unprofitable or
marginally profitable lead generation campaigns and marketing programs from its
Transactional and Marketing Services offerings.  As a result of this
restructuring of our Transactional and Marketing Services revenue generating
activities, the bulk of our Transactional and Marketing Services revenue now
consists of revenue generated from our search agency business, together with
higher yielding marketing campaigns.




21


Operating
Expenses
 
 For the Three MonthsEnded
                    
                    
                    Change
                    
                    
                    ChangeSeptember 30,
                    
                    
                    Inc.(Dec.)
                    
                    
                    Inc.(Dec.)2010
                    
                    
                    2009
                    
                    
                    $
                    
                    
                    %Operating ExpensesCost
      of Media – 3 rdparty
                    
                    $
                    4,589
                    
                    
                    $
                    9,911
                    
                    
                    
                    (5,322
                    )
                    
                    
                    -54
                    %Product
      and distribution
                    
                    
                    4,396
                    
                    
                    
                    3,651
                    
                    
                    
                    745
                    
                    
                    
                    20
                    %Selling
      and marketing
                    
                    
                    938
                    
                    
                    
                    2,168
                    
                    
                    
                    (1,230
                    )
                    
                    
                    -57
                    %General,
      administrative and other operating
                    
                    
                    2,597
                    
                    
                    
                    3,659
                    
                    
                    
                    (1,062
                    )
                    
                    
                    -29
                    %Depreciation
      and Amortization
                    
                    
                    325
                    
                    
                    
                    549
                    
                    
                    
                    (224
                    )
                    
                    
                    -41
                    %Total
      Operating Expenses
                    
                    $
                    12,845
                    
                    
                    $
                    19,938
                    
                    
                    $
                    (7,093
                    )
                    
                    
                    -36
                    %




Cost
of Media
 
 Cost of
Media – 3 rdparty
decreased by $5.3 million or 54% to $4.6 million for the three months ended
September 30, 2010 from $9.9 million for the three months ended September 30,
2009. Cost of Media – 3 rdparty
includes media purchased for monetization of both Transactional and Marketing
Services and Subscription revenues. The decrease in Cost of Media – 3 rdparty
was due to two primary factors.  First, approximately 80% of the
decrease in Cost of Media – 3 rdparty
on a year-over-year basis was due to the decline in Transactional and Marketing
Services related revenue which resulted in a corresponding reduction in
purchased media.  Second, the remaining 20% of the decrease in Cost of
Media – 3 rdparty
on a year-over-year basis was due to significantly lower subscriber acquisition
rates, and in turn, a lower number of subscribers acquired.
 
 The rate
of subscriber acquisitions is based on a number of factors, not least of which
is subscriber acquisition cost, or “SAC.” During the quarter ended September 30,
2010, management moderated and limited the rate of subscriber acquisitions in
response to (i) the need to preserve cash, (ii) changes in its alternative
billing processes, and (iii) anticipation of improvements and enhancements to
the Kazaa digital music service.
 
 During
the quarter ended September 30, 2010, the Company added approximately 52,000 new
subscribers, over half of which were Kazaa subscribers. This level of customer
acquisition was not sufficient to replace the Company’s existing subscriber base
during the quarter: “Net Adds,” which represents the number of subscribers
acquired, net of subscriber attrition, was a negative 66,000 for the three
months ended September 30, 2010.  Cost of media for the quarter ended
September 30, 2010 includes a decrease of Kazaa-related Cost of Media – 3 rdparty
of $0.5 million compared to the quarter ended September 30, 2009. We expect to
recoup these Kazaa cost of media expenses from the future cash flows of the
Kazaa music service, although there can be no assurance in this regard.
 
 During
the third quarter of 2010, the Company estimates that its SAC per subscriber was
approximately $17.64, which reflects a 21% increase in SAC from the year ago
period. SAC is dependent on a number of factors, including prevailing market
conditions, the type of media, and the ability of the Company to convert leads
into subscribers. The Company expects that SAC will fluctuate from period to
period based on all of these factors. Management will continue to monitor SAC
closely to ensure that the Company acquires customers in a cost effective
manner.
 
 Product
and Distribution
 
 Product
and distribution expense increased by $0.7 million or 20% to $4.4 million for
the three months ended September 30, 2010 as compared to $3.7 million for the
three months ended September 30, 2009. Product and distribution expenses are
costs necessary to provide licensed content and development and support for our
products, websites and technology platforms – which drive both our Transactional
and Marketing Services and Subscription-based revenues. Compared to the year ago
period, in the third quarter of 2010, we experienced higher product and
distribution expenses of $1.4 million as a result of costs incurred to further
develop the Kazaa music service and greater royalty and license expense payable
to content owners, also associated with Kazaa. We expect to recoup these Kazaa
product and distribution expenses from the future cash flows of the Kazaa music
service, although there can be no assurance in this regard. Included in product
and distribution cost is stock compensation expense of $23,000 and $32,000 for
the three months ended September 30, 2010 and 2009, respectively.
 
 Selling and Marketing
 
 Selling
and marketing expense decreased $1.2 million or 57% to $0.9 million in the three
months ended September 30, 2010 as compared to $2.2 million for the three months
ended September 30, 2009. This decrease in selling and marketing expense was
primarily attributable to the Company completing its efforts during the third
quarter of 2010 to eliminate unprofitable or marginally profitable lead
generation activities and marketing programs from its product and services
offerings.  The Company’s bad debt expense, a component of selling and
marketing, decreased by approximately $0.3 million for the three months ended
September 30, 2010 compared to the three months ended September 30, 2009. The
decrease in selling and marketing was also due to a decrease in salaries and
employee related costs. Included in selling and marketing cost is stock
compensation expense of $11,000 and $0 for the three months ended September 30,
2010 and 2009 respectively.
  22
  General,
Administrative and Other Operating
 
 General
and administrative expenses decreased by $1.1 million, or 29%, to $2.6 million
for the three months ended September 30, 2010 compared to $3.7 million for the
three months ended September 30, 2009. The decrease is primarily due to a
reduction in workforce, and associated savings, a decrease in professional fees
and other efforts to reduce the Company’s overall levels of
overhead.  The rate of decrease in general, administrative and other
operating expense, on a year-over-year basis, is slower than for some other
components of operating expenses because of the fixed nature of general and
administrative costs, relative to the more variable based costs inherent in
other categories of operating expense.  Included in general and
administrative expense is stock compensation expense of $0.2 million for the
three months ended September 30, 2010 and 2009.
 
 Depreciation
and Amortization
 
 Depreciation
and amortization expense decreased $0.2 million to $0.3 million for the three
months ended September 30, 2010 compared to $0.5 million for the three months
ended September 30, 2009 principally as a result of the decrease in amortization
expense due to the full amortization of a major intangible asset in 2009.
 
 Loss
from Operations
 
 Operating
loss decreased by $1.4 million or 28% to $3.7 million for the three months ended
September 30, 2010, compared to an operating loss of $5.1 million for the three
months ended September 30, 2009. The Company’s revenue decreased by 38%, with a
corresponding decrease in operating expenses of 36%. While Cost of Media – 3
rdparty, is typically variable with respect to revenue, other operating
expenses, in particular, General and administrative expenses tend to consist of
a higher proportion of fixed costs.
 
 Interest
Income and Dividends
 
 Interest
and dividend income decreased $1,000 to $4,000 for the three months ended
September 30, 2010, compared to $5,000 for the three months ended September 30,
2009. The reduction is immaterial.
 
 Interest
Expense
 
 Interest
expense was $1,000 for the three months ended September 30, 2010 and 2009.
 
 Other
(Income) Expense
 
 Other
income increased to $77,000 for the three months ended September 30,
2010.  There was no other income in the three months ended September
30, 2009.
 
 Income
Taxes
 
 Income
tax expense (benefit), before noncontrolling interest and equity in loss of
investee, for the three months ended September 30, 2010 and 2009 was $35,000 and
($2.7) million respectively and reflects an effective tax rate of (1%) and 54%
respectively. The Company had a loss before taxes of $3.6 million for the three
months ended September 30, 2010 compared to $5.1 million for the three months
ended September 30, 2009. The Company has provided a valuation allowance
against its tax benefits because it is more likely than not that such benefits
will not be utilized by the Company.
 
 Subsequent
to the quarter ending September 30, 2010, the Company received $2.7 million of
cash refunds from the IRS relating to its $3.5 million in taxes receivable on
its balance sheet as of September 30, 2010.
 
 Equity
in Loss (Earnings) of Investee
 
 Equity in
losses of investee was $13,000 for the three months ended September 30, 2010
compared to $61,000 for the three months ended September 30, 2009. The equity
represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The
company acquired its interest in TBR in the 4 thQuarter 2008.
 23
 Net
Loss Attributable to Atrinsic, Inc
 Net loss
increased by $1.2 million to $3.6 million for the three months ended September
30, 2010 as compared to a net loss of $2.4 million for the three months ended
September 30, 2009. This increase in loss resulted from the factors described
above.
 
 Results
of Operations for the nine months ended September 30, 2010 compared to the nine
months ended September 30, 2009.
 
 Revenues
presented by type of activity are as follows for the nine month periods ending
September 30, 2010 and 2009:




For the Nine Months Ended
                  
                  
                  Change
                  
                  
                  ChangeSeptember 30,
                  
                  
                  Inc.(Dec.)
                  
                  
                  Inc.(Dec.)2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Subscription
                  
                  $
                  15,234
                  
                  
                  $
                  15,099
                  
                  
                  $
                  135
                  
                  
                  
                  1
                  %Transactional
      and Marketing Services
                  
                  $
                  16,956
                  
                  
                  $
                  40,330
                  
                  
                  $
                  (23,374
                  )
                  
                  
                  -58
                  %Total
      Revenues
                  
                  $
                  32,190
                  
                  
                  $
                  55,429
                  
                  
                  $
                  (23,239
                  )
                  
                  
                  -42
                  %





Revenues
decreased approximately $23.2 million or 42%, to $32.1 million for the nine
months ended September 30, 2010, compared to $55.4 million for the nine months
ended September 30, 2009.
 
 Subscription
revenue increased by approximately $0.1 million, or 1%, to $15.2 million for the
nine months ended September 30, 2010, compared to $15.1 million for the nine
months ended September 30, 2009. Subscription revenue for the nine months ended
September 30, 2010 includes an increase in Kazaa revenue of $7.3 million
compared to the nine months ended September 30, 2009, without which, our
subscription revenue would have decreased by 47%, or $7.2 million
year-over-year.  For the nine months ended September 30, 2010
subscription revenue increased as a result of a 58% increase in ARPU, over the
year ago period.  This increase in subscription revenue was offset by
a lower number of subscribers for the nine months ended September 30, 2010,
compared to the year ago period.  As of September 30, 2010, the
Company had approximately 217,000 subscribers.  The increase in ARPU
was the result of the higher retail price point of the Kazaa digital music
subscription service and improvements in billing efficiency.  During
the nine months ended September 30, 2010, across all of its subscription
products, the Company added approximately 324,000 new subscribers, more than
half of which were new Kazaa subscribers.  As of September 30, 2010,
the Company estimates that it has approximately 64,000 Kazaa subscribers.
 
 Transactional
and Marketing services revenue is derived from our online marketing activities,
which consist of targeted and measurable online campaigns and programs for
marketing partners, corporate advertisers, or their agencies, to generate
qualified customer leads, online responses and sales transactions , or
increased brand recognition. Transactional and Marketing services revenue
decreased by approximately $23.4 million or 58% to $17.0 million for the nine
months ended September 30, 2010 compared to $40.3 million for the nine months
ended September 30, 2009. The decrease in revenue was attributable to the loss
of accounts and a reduction in discretionary advertising expenditures by our
clients, as well as a result of a restructuring of our Transactional and
Marketing Services activities.  Beginning in the second quarter, and
substantially completed by the end of the third quarter, the Company took
proactive steps to eliminate any unprofitable or marginally profitable lead
generation campaigns and marketing programs from its Transactional and Marketing
Services offerings.  These steps had the effect of reducing lead
generation sales volume, contributing to the decrease in revenue compared to the
year ago period.  As a result of this restructuring, the bulk of our
Transactional and Marketing Services revenue now consists of revenue generated
from our search agency business, together with higher yielding marketing
campaigns.




24




Operating
Expenses





For the Nine Months Ended
                        
                        
                        Change
                        
                        
                        ChangeSeptember 30,
                        
                        
                        Inc.(Dec.)
                        
                        
                        Inc.(Dec.)2010
                        
                        
                        2009
                        
                        
                        $
                        
                        
                        %Operating ExpensesCost
      of Media – 3 rdparty
                        
                        $
                        17,943
                        
                        
                        $
                        35,859
                        
                        
                        
                        (17,916
                        )
                        
                        
                        -50
                        %Product
      and distribution
                        
                        
                        13,886
                        
                        
                        
                        8,502
                        
                        
                        
                        5,384
                        
                        
                        
                        63
                        %Selling
      and marketing
                        
                        
                        3,225
                        
                        
                        
                        7,095
                        
                        
                        
                        (3,870
                        )
                        
                        
                        -55
                        %General,
      administrative and other operating
                        
                        
                        7,538
                        
                        
                        
                        10,563
                        
                        
                        
                        (3,025
                        )
                        
                        
                        -29
                        %Depreciation
      and Amortization
                        
                        
                        972
                        
                        
                        
                        3,111
                        
                        
                        
                        (2,139
                        )
                        
                        
                        -69
                        %Total
      Operating Expenses
                        
                        $
                        43,564
                        
                        
                        $
                        65,130
                        
                        
                        $
                        (21,566
                        )
                        
                        
                        -33
                        %




Cost
of Media
 
 Cost of
Media – 3 rdparty
decreased by $17.9 million or 50% to $17.9 million for the nine months ended
September 30, 2010 from $35.9 million for the nine months ended September 30,
2009. Cost of Media – 3 rdparty
includes media purchased for monetization of both Transactional and Marketing
Services and Subscription revenues. The decrease in Cost of Media – 3 rdparty
was due to two primary factors.  First, approximately 75% of the
decrease in Cost of Media – 3 rdparty
on a year-over-year basis was due to the decline in Transactional and Marketing
Services related revenue which resulted in a corresponding reduction in
purchased media.  Second, the remaining 25% of the decrease in Cost of
Media – 3 rdparty
on a year-over-year basis was due to lower subscriber acquisition rates, and in
turn, a lower number of subscribers acquired – although not as pronounced as
during the third quarter of 2010 only.
 
 The rate
of subscriber acquisitions is based on a number of factors, not least of which
is subscriber acquisition cost, or “SAC.” Midway through the second quarter,
2010 and for all of the third quarter, 2010, management moderated and limited
the rate of subscriber acquisitions in response to (i) the need to preserve
cash, (ii) changes in its alternative billing processes, and (iii) anticipation
of improvements and enhancements to the Kazaa digital music service.
 
 During
the nine months ended September 30, 2010, the Company added approximately
324,000 new subscribers, over half of which were Kazaa subscribers. This level
of customer acquisition was not sufficient to replace the Company’s existing
subscriber base during the nine months ended September 30, 2010.  “Net
Adds,” which represents the number of subscribers acquired, net of subscriber
attrition, was a negative 121,000 for the nine months ended September 30,
2010.  Cost of media for the nine months ended September 30, 2010,
includes an increase in Kazaa-related Cost of Media – 3 rdparty
of $1.8 million relative to third quarter 2009. We expect to recoup these Kazaa
cost of media expenses from the future cash flows of the Kazaa music service,
although there can be no assurance in this regard.
 
 During
the nine months ended September 30, 2010, the Company estimates that its SAC was
approximately $14.02 per subscriber, which reflects a 6% decrease in SAC from
the year ago period. SAC is dependent on a number of factors, including
prevailing market conditions, the type of media, and the ability of the Company
to convert leads into subscribers. The Company expects that SAC will fluctuate
from period to period based on all of these factors. Management will continue to
monitor SAC closely to ensure that the Company acquires customers in a cost
effective manner.
 
 Product
and Distribution
 
 Product
and distribution expense increased by $5.4 million or 63% to $13.9 million for
the nine months ended September 30, 2010 as compared to $8.5 million for the
nine months ended September 30, 2009. Product and distribution expenses are
costs necessary to provide licensed content and development and support for our
products, websites and technology platforms – which drive both our Transactional
and Marketing Services and Subscription based revenues. Compared to the year ago
period, in the first half of 2010, we experienced higher product and
distribution expense of $7.7 million as a result of costs incurred to further
develop the Kazaa music service and greater royalty and license expense payable
to music labels, also associated with Kazaa. We expect to recoup these Kazaa
product and distribution expenses from the future cash flows of the Kazaa music
service, although there can be no assurance in this regard. The Kazaa costs
are offset by a decrease in non Kazaa related labor and professional fees.
Included in product and distribution cost is stock compensation expense of
$44,000 and $138,000 for the nine months ended September 30, 2010 and 2009,
respectively.


25




Selling
and Marketing





Selling
and marketing expense decreased $3.9 million or 55% to $3.2 million in the nine
months ended September 30, 2010 as compared to $7.1 million for the nine months
ended September 30, 2009. This decrease in selling and marketing expense was
primarily attributable to the Company’s efforts to eliminate unprofitable or
marginally profitable lead generation activities and marketing programs from its
product and services offerings in 2010.  The Company’s bad debt
expense, a component of selling and marketing, decreased by approximately $1.8
million for the nine months ended September 30, 2010 compared to the nine months
ended September 30, 2009. The decrease in selling and marketing was also due to
a decrease in salaries and employee related costs. Included in selling and
marketing cost is stock compensation expense of $28,000 and $0 for the nine
months ended September 30, 2010 and 2009 respectively.





General,
Administrative and Other Operating





General
and administrative expenses decreased by $3.0 million to $7.5 million for the
nine months ended September 30, 2010 compared to $10.6 million for the nine
months ended September 30, 2009. The decrease is primarily due to a reduction in
workforce, and associated savings, a decrease in professional fees and other
efforts to reduce the Company’s overall levels of overhead.  The rate
of decrease in general, administrative and other operating expense, on a
year-over-year basis, is slower than for some other components of operating
expenses because of fixed nature of general and administrative costs, relative
to the more variable based costs inherent in other categories of operating
expense. Included in general and administrative expense is stock compensation
expense of $0.8 million and $0.9 million for the nine months ended September 30,
2010 and 2009 respectively.





Depreciation
and Amortization





Depreciation
and amortization expense decreased $2.1 million to $1.0 million for the nine
months ended September 30, 2010 compared to $3.1 million for the nine months
ended September 30, 2009 principally as a result of the decrease in amortization
expense due to the full amortization of a major intangible in 2009.





Loss
from Operations





Operating
loss increased by $1.7 million or 17% to $11.4 million for the nine months ended
September 30, 2010, compared to an operating loss of $9.7 million for the nine
months ended September 30, 2009. The Company’s revenue decreased by 42% with a
corresponding decrease in operating expenses of 33%. While Cost of Media – 3
rdparty, is typically variable with respect to revenue, other operating
expenses, in particular, General and administrative expenses tend to consist of
a higher proportion of fixed costs.





Interest
Income and Dividends





Interest
and dividend income decreased $58,000 to $9,000 for the nine months ended
September 30, 2010, compared to $67,000 for the nine months ended September 30,
2009.





Interest
Expense





Interest
expense was $2,000 for the nine months ended September 30, 2010 compared to
$76,000 for the nine months ended September 30, 2009.





Other
(Income) Expense





Other
income increased to $87,000 for the nine months ended September 30,
2010.  There were $5,000 in other expenses in the nine months ended
September 30, 2009.





Income
Taxes





Income
tax expense (benefit), before noncontrolling interest and equity in loss of
investee, for the nine months ended September 30, 2010 and 2009 was $0.2 million
and ($4.3) million respectively and reflects an effective tax rate of (2%) and
45% respectively. The Company had a loss before taxes of $11.3 million for the
nine months ended September 30, 2010 compared to loss before taxes of $9.7
million for the nine months ended September 30, 2009. The Company has
provided for a full valuation allowance against its tax benefits because it is
more likely than not that such benefits will not be utilized by the Company.





Subsequent
to the quarter ending September 30, 2010, the Company received $2.7 million of
cash refunds from the IRS relating to its $3.5 million in taxes receivable on
its balance sheet as of September 30, 2010.  The Company is currently
undergoing an examination of its 2007 Federal Income Tax Return with the
Internal Revenue Service regarding the utilization of Net Operating Loss
carrybacks from prior periods.  As of the date of this filing, the
Company can not reasonably ascertain the expected completion date of this
examination or the expected results of this examination and how much of these
carrybacks will be allowed to be utilized.




26





Equity
in Loss of Investee





Equity in
loss of investee was $74,000 for the nine months ended September 30, 2010
compared to $113,000 for the nine months ended September 30, 2009. The Equity
represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The
company acquired its interest in TBR in the 4 thQuarter 2008.





Net
Income Attributable to Noncontrolling Interest





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





Net
Loss Attributable to Atrinsic, Inc.





Net loss
increased by $6.1 million to $11.6 million for the nine months ended September
30, 2010 as compared to a net loss of $5.5 million for the nine months ended
September 30, 2009. This increase in loss resulted from the factors described
above.





Liquidity
and Capital Resources





As of
September 30, 2010, we had cash and cash equivalents of approximately $4.2
million and working capital of approximately $6.0 million. We used approximately
$13.0 million in cash for operations for the nine months ended September 30,
2010 which consisted of a net loss of $11.6 million, a decrease in accounts
payable and accrued expenses, net of prepaid expenses, of approximately $5.5
million, which was offset by approximately $0.9 million decrease in prepaid
taxes (of which $0.7 million was net of cash refunded for taxes). As a result,
our cash and cash equivalents at September 30, 2010, after adding back non cash
items, decreased $12.7 million to approximately $4.2 million from approximately
$16.9 million at December 31, 2009. Subsequent to the quarter ending
September 30, 2010, the Company received $2.7 million of cash refunds from the
IRS relating to its $3.5 million in taxes receivable on its balance sheet as of
September 30, 2010.  The cash used in operating activities during the
nine months ended September 30, 2010 included expenditures to realign, focus on
and serve the Company’s direct-to-consumer entertainment and subscription
products, including the Kazaa digital music service.  We expect that
the actions we have taken in the first nine months of the year will allow us to
reduce expenditures in the fourth quarter and beyond.





Our
working capital requirements are significant. In order to grow our business and
meet our objective of becoming a leading direct-to-consumer music and
entertainment subscription business built around the Kazaa brand, we will need
to raise additional capital in the next twelve months.  The sale of
additional equity securities or convertible debt could result in dilution to our
stockholders. We currently have no arrangements with respect to additional
financing and there is no guaranty funding will be available on favorable terms
or at all. If we cannot obtain such funds, we will likely need to decrease the
rate of growth of our business, including our efforts to become a leading
direct-to-customer music and entertainment business built around the Kazaa
brand.




New
Accounting Pronouncements





Adopted
in 2010





In
September 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“SFAS No. 167”) which has been superseded
by the FASB Codification and included in ASC 810 to require an enterprise to
perform an analysis to determine whether the enterprise’s variable interest or
interests give it a controlling financial interest in a variable interest
entity. This analysis identifies the primary beneficiary of a variable interest
entity as one with the power to direct the activities of a variable interest
entity that most significantly impact the entity’s economic performance and the
obligation to absorb losses of the entity that could potentially be significant
to the variable interest. These revisions to ASC 810 are effective as of January
1, 2010 and the adoption of these revisions to ASC 810 had no impact on our
interim results of operations or financial position.





Not
Yet Adopted





In
October 2009, FASB approved for issuance Emerging Issues Task Force (EITF) issue
08-01, Revenue Arrangements with Multiple Deliverables which has been superseded
by the FASB codification and included in ASC 605-25. This statement
provides principles for allocation of consideration among its multiple-elements,
allowing more flexibility in identifying and accounting for separate
deliverables under an arrangement. The EITF introduces an estimated selling
price method for valuing the elements of a bundled arrangement if
vendor-specific objective evidence or third-party evidence of selling price is
not available, and significantly expands related disclosure requirements. This
standard is effective on a prospective basis for revenue arrangements entered
into or materially modified in fiscal years beginning on or after
September 15, 2010. Alternatively, adoption may be on a retrospective
basis, and early application is permitted. The Company is currently evaluating
the impact of adopting this pronouncement.


27




Item
3. Quantitative and Qualitative Disclosures about Market Risk





Not
required.





Item
4T. Disclosure Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Members
of the our management, including our President, Andrew Stollman and Chief
Financial Officer, Thomas Plotts, have evaluated the effectiveness of our
disclosure controls and procedures, as defined by paragraph (e) of Exchange Act
Rules 13a-15 or 15d-15, as of September 30, 2010, the end of the period covered
by this report. Based upon that evaluation, Messrs. Stollman and Plotts
concluded that our disclosure controls and procedures were effective as of
September 30, 2010.





Internal
Control Over Financial Reporting





There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during the third quarter
ended September 30, 2010 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.


28




PART II 
   - OTHER
INFORMATION





ITEM
1A. RISK FACTORS





Investing
in our common stock involves a high degree of risk. You should carefully
consider the following risk factors and all other information contained in this
report before purchasing our common stock. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties that
management is unaware of, or that it currently deems immaterial, also may become
important factors that affect us. If any of the following risks occur, our
business, financial condition, cash flows and/or results of operations could be
materially and adversely affected. In that case, the trading price of our common
stock could decline, and stockholders are at risk of losing some or all of the
money invested in purchasing our common stock.





If
the purchase of the Kazaa assets does not close, the price of our common
stock could decline and our future business and operations could be harmed.





The
Company's and Brilliant Digital’s obligations to complete the purchase and sale
of assets is subject to conditions, many of which are beyond the control of the
parties. If the transaction is not completed for any reason, we may be
subject to a number of material risks, including:


·
            The
      decline in the price of our common stock;


·
            Costs
      related to the transaction, such as financial advisory, legal, accounting,
      proxy solicitation and printing fees, must be paid even if the transaction
      is not completed;


·
            Matters
      relating to the transaction (including the negotiation of terms and
      integration planning) required a substantial commitment of time and
      resources by our management, which could otherwise have been devoted to
      other opportunities that may have been beneficial to us;


·
            We
      may not be able to realize the expected benefits of the acquisition;


·
            If
      the transaction is not completed, we may not be able to operate as
      effectively under the existing Marketing Services Agreement and Master
      Services Agreement.





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





The
Company has experienced a significant revenue decline and degradation in
business prospects over the past two years, and as a result the Company has used
a significant amount of cash to fund its operations.  The Company’s
cash and cash equivalents were $4.2 million as of September 30, 2010, which is a
$12.7 million decline from the $16.9 million as of December 31,
2009.  If we are unsuccessful at stabilizing or slowing the decline in
our revenue, and our associated use of cash to fund operations, or if we cannot
raise cash through financing alternatives, then we may need to significantly
curtail or cease operations.





Our
working capital requirements are significant and if we want to grow our business
we will need to raise cash in the future.





Our
working capital requirements are significant.  In the nine months
ended September 30, 2010, we used approximately $12.7 million in
cash.  In order to grow our business and meet our objective of
becoming a leading direct-to-consumer music and entertainment subscription
business, built around the Kazaa brand, we will need to raise additional
capital in the next twelve months.  The sale of additional equity
securities or convertible debt could result in dilution to our stockholders. We
currently have no arrangements with respect to additional financing and there is
no guaranty funding will be available on favorable terms or at all. If we cannot
obtain such funds, we will likely need to decrease the rate of growth of our
business, including our efforts to become a leading direct-to-consumer music and
entertainment subscription business built around the Kazaa brand.





A key
focus of management is to develop, grow and expand the Kazaa digital music
business.  The digital music industry is highly competitive and as a
result of the industry’s characteristics, subjects market participants to
significant working capital requirements, as is evidenced by the numerous
companies in the industry that have experienced significant
losses.  If we are to attract and retain talented employees, acquire
subscribers and enhance and improve the Kazaa digital music service, which we
will need to do if we are to be successful, we will have significant capital
requirements.





29




We face risks in implementing our
restructuring plan.


In
connection with our announcement to purchase the assets of the Kazaa digital
music service, we are undertaking a restructuring of our existing
operations.  Although the reorganization and consolidation of
activities are expected to yield cost savings as a result of the reduction in
headcount, the elimination of duplicative activities and combining or
eliminating networking and other overhead costs, there can be no assurance that
we will achieve the forecasted savings.  Our remaining business may
also suffer as a result of the restructuring due to the loss of employees, who
have been involuntarily terminated, or employees who leave
voluntarily.  We may also face defections from customers who are
unsure of our viability and may also receive less favorable terms than we
currently receive from our vendors, as a result of their perception of the
restructuring.  We expect to take a charge of approximately $1.1
million in the fourth quarter to account for costs associated with the
restructuring’s exit and disposal activities that we have identified and can
reasonably estimate. The restructuring costs include termination benefits for
involuntarily terminated employees.  The restructuring charge also
includes costs to consolidate and close facilities and to relocate certain
employees.  There can be no assurance that the actual costs associated
with the restructuring will not differ from estimated charge, or that the
restructuring will be completed effectively, with limited negative impact on our
business.





As part
of our restructuring plan and in connection with the integration of activities
with the Kazaa business, we will be migrating many of our technological
assets.  We face risks with such migrations, including disruptions in
service.  Also, the costs and time associated with any migration could
be substantial, requiring the reengineering of computer systems and
telecommunications infrastructure.  We may also face 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.





The
anticipated benefits of the acquisition of the Kazaa business may not be
realized fully or at all or may take longer to realize than expected.





The
integration of Atrinsic and the business of Kazaa faces challenges as a result
of the differing geographical locations of the two business. In the event the
transactions contemplated by the asset purchase agreement close, the combined
company will be required to devote significant management attention and
resources to integrating the Kazaa business and the assets into our
operations.  Delays in this process could adversely affect our
business, financial results, financial condition and stock price. Even if
we are able to integrate the business operations successfully, there can be
no assurance that this integration will result in the realization of the full
benefits of synergies, cost savings, innovation and operational
efficiencies that may be possible from this integration or that these benefits
will be achieved within a reasonable period of time.





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





In our
subscription service business, which includes the Kazaa music service, and
our transactional and marketing services business, we compete primarily on the
basis of marketing acquisition cost, brand awareness, consumer penetration and
carrier and distribution depth and breadth.  We face numerous
competitors, many of whom are much larger than us, who have greater financial
and operating resources than we do and who have been operating in our target
markets longer than we have.  In the future, likely competitors may
include other major media companies, traditional video game publishers,
telephone carriers, content aggregators, wireless software providers and other
pure-play direct response marketers publishing content and media, and Internet
affiliate and network companies.





If we are
not as successful as our competitors in executing on our strategy in targeting
new markets and increasing customer penetration in existing markets our sales
could decline, our margins could be negatively impacted and we could lose market
share, any and all of which could materially harm our business prospects, and
potentially have a negative impact on our share price.





We
may continue to be impacted by the affects of the current weakness of the United
States economy.





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


30


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


We
generate a significant portion of our revenues from the sale of our products and
services directly to consumers which are billed through aggregators and
telephone carriers. We expect that we will continue to bill a significant
portion of our revenues through a limited number of aggregators for the
foreseeable future, although these aggregators may vary from period to period.
In a risk diversification and cost saving effort, we have established a direct
billing relationship with a carrier that mitigates a portion of our revenue
generation risk as it relates to aggregator dependence; conversely this risk is
replaced with internal performance risk regarding our ability to successfully
process billable messages directly with the carrier.  Moreover, in an
effort to further mitigate such operational risk, we obtained a 36% equity stake
in a landline telephone aggregator, TBR, to give us more visibility in the
billing and collection process associated with subscription services billed to
customers of local exchange carriers.





Our
aggregator agreements are not exclusive and generally have a limited term of
less than three years with automatic renewal provisions upon expiration in the
majority of the agreements. These agreements set out the terms of our
relationships with the aggregator and carriers, and provide that either party to
the contract can terminate such agreement prior to its expiration, and in some
instances, terminate without cause.





Many
other factors exist that are outside of our control and could impair our
carrier relationships, including:




·
            a
      carrier’s decision to suspend delivery of our products and services to its
      customer base;


·
            a
      carrier’s decision to offer its own competing subscription applications,
      products and services;


·
            a
      carrier’s decision to offer similar subscription applications, products
      and services to its subscribers for price points less than our offered
      price points, or for free;


·
            a
      network encountering technical problems that disrupt the delivery of, or
      billing for, our applications;


·
            the
      potential for concentrations of credit risk embedded in the amounts
      receivable from the aggregator should any one, or group if aggregators
      encounter financial difficulties, directly or indirectly, as a result of
      the current period of slower economic growth affecting the United States;
      or


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





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





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





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





We
depend on partners and third-parties for our content and for the delivery of
services underlying our subscriptions.





We depend
heavily on partners and third parties to provide us with licensed content
including for the Kazaa music service.  We are reliant on such
companies to maintain licenses with content providers, including music labels,
so that we can deliver services that we are contractually obligated to deliver
to our customers. These companies may not continue to provide services to
us without disruption, or maintain licenses with the owners of the delivered
content.  In addition to licensed content, we are also reliant on
partners and third parties to provide services and to perform other activities
which allow us to bill our subscribers. The costs associated with any
transition to a new service or content provider would be substantial, even if a
similar partner is available. Failure of our partners or other third
parties to provide content or deliver services has the potential to cause
interruptions in the delivery of services, causing a loss of revenue and related
gross margins, and the potential loss of customers, all of which could
materially and adversely affect our business, results of operations and
financial condition.


31




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





On March
26, 2010, we entered into three-year Marketing Services Agreement and Master
Services Agreement with Brilliant Digital, effective July 1, 2009, relating to
the operation and marketing of the Kazaa digital music service.  Under
the agreements, we are responsible for marketing, promotional, and advertising
services.  In exchange for these marketing services, the Company is
entitled to full recoupment for all pre-approved costs and expenses incurred in
connection with the provision of the services plus all other agreed budgeted
amounts. On October 13, 2010, Atrinsic entered into amendments to its existing
Marketing Services Agreement and Master Services Agreement with Brilliant
Digital.  The amendments extend the term of each of the Marketing
Services Agreement and Master Services Agreement from three years to thirty
years, provide Atrinsic with an exclusive license to the Kazaa trademark in
connection with Atrinsic’s services under the agreements, and modify
the Kazaa digital music service profit share payable to Atrinsic under the
agreements from 50% to 80%. In addition, the amendments remove Brilliant
Digital’s obligation to repay up to $2.5 million of advances and
expenditures which are not otherwise recovered from Kazaa generated revenues and
remove the cap on expenditures that Atrinsic is required to advance in
relation to the operation of the Kazaa business.





As of
September 30, 2010, the Company has received the $2.5 million in repayments from
Brilliant digital and we are dependent on the future net cash flow of the Kazaa
music service to fully recoup the approximately $7.5 million of advances and
expenditures we have made, net of cash received or reimbursed, as of September
30, 2010. There can be no assurance that the future net cash flows from the
Kazaa music service will be sufficient to allow us to fully recoup our
expenditures, which could materially and adversely affect our financial
condition.





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





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





All of
our revenue is generated, directly or indirectly, through the Internet in part
by delivering advertisements that generate leads, impressions, click-throughs,
and other actions to our advertiser customers' websites as well as confirmation
and management of mobile services.  This business model may not
continue to be effective in the future for various reasons, including the
following:




·
            click
      and conversion rates may decline as the number of advertisements and ad
      formats on the Web increases, making it less likely that a user will click
      on our advertisement;


·
            the
      installation of "filter" software programs by web users which prevent
      advertisements from appearing on their computer screens or in their email
      boxes may reduce click-throughs;


·
            companies
      may be reluctant or slow to adopt online advertising that replaces, limits
      or competes with their existing direct marketing efforts;


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


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


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


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


·
            perceived
      lead quality.





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




32




We
recorded intangible assets in connection with our acquisition of ShopIt.com
which may result in significant future charges against earnings if the
intangible assets become impaired.


In
accounting for the acquisition of the assets of Shopit.com, we allocated
and recorded a large portion of the purchase price paid in exchange for the
assets to intangible assets. Under ASC 350 Intangibles – Goodwill and Other,
formerly SFAS No.142, and related authoritative guidance, we must assess,
at least annually and potentially more frequently, whether the value of such
intangible assets has been impaired. Any reduction or impairment of the value of
intangible assets, such as the charge that was taken in the fourth quarter
of 2009, could materially adversely affect Atrinsic’s results of operations in
future periods.





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





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





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





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





Our
customers are also subject to various federal and state laws concerning the
collection and use of information regarding individuals. These laws include the
Children's Online Privacy Protection Act, the Federal CAN-SPAM Act of 2003, as
well as other laws that govern the collection and use of consumer credit
information. We cannot assure you that our customers are currently in
compliance, or will remain in compliance, with these laws and their own privacy
policies. We may be held liable if our customers use our technologies in a
manner that is not in compliance with these laws or their own stated privacy
policies, which would have an adverse impact on our operations.





We
no longer meet the minimum bid price requirement for continued listing on the
NASDAQ Global Market and face delisting.





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





Under
NASDAQ’s Listing Rules, the Panel decided to continue the Company’s listing
pursuant to an exception to the Rule for a maximum of 180 calendar days from the
date of the Staff’s notification or through December 20, 2010.





In order
to maintain our Nasdaq listing, at our annual meeting, scheduled for December 1,
2010, our Stockholders will vote to approve a reverse stock split at a ratio of
up to one for four.  If the reverse split proposal is approved, and
our Board of Directors intends to effect a reverse stock split in a ratio to be
determined by December 6, 2010, in order that that our stock will trade above
$1.00 for at least 10-days, prior to December 20, 2010.  There can be
no assurance that our stockholders will approve the proposal to effect a reverse
stock split, and further there can be no assurance that if the reverse stock
split is deemed effective by December 6, 2010, that our stock price will trade
above the minimum bid price of $1.00 per share for 10-days prior to December 20,
2010.


33




We
do not intend to pay dividends on our equity securities.





It is our
current and long-term intention that we will use all cash flows to fund
operations and maintain excess cash requirements for the possibility of
potential future acquisitions.   Future dividend declarations, if any,
will result from our reversal of our current intentions, and would depend on our
performance, the level of our then current and retained earnings and other
pertinent factors relating to our financial position. Prior dividend
declarations should not be considered as an indication for the potential for any
future dividend declarations.





System failures could
significantly disrupt our operations, which could cause us to lose customers or
content.





Our
success depends on the continuing and uninterrupted performance of our systems.
Sustained or repeated system failures that interrupt our ability to provide
services to customers, including failures affecting our ability to deliver
advertisements quickly and accurately and to process visitors' responses to
advertisements, and, validate mobile subscriptions, would reduce significantly
the attractiveness of our solutions to advertisers and Web publishers. Our
business, results of operations and financial condition could also be materially
and adversely affected by any systems damage or failure that impacts data
integrity or interrupts or delays our operations. Our computer systems are
vulnerable to damage from a variety of sources, including telecommunications
failures, power outages, malicious or accidental human acts, and natural
disasters. We operate a data center in Canada and have a co-location agreement
with a service provider to support our operations. Therefore, any of the above
factors affecting any of these areas could substantially harm our business.
Moreover, despite network security measures, our servers are potentially
vulnerable to physical or electronic break-ins, computer viruses and similar
disruptive problems in part because we cannot control the maintenance and
operation of our third-party data centers. Despite the precautions taken,
unanticipated problems affecting our systems could cause interruptions in the
delivery of our solutions in the future and our ability to provide a record of
past transactions. Our data centers and systems incorporate varying degrees of
redundancy. All data centers and systems may not automatically switch over to
their redundant counterpart. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures in
our systems.





Decreased
effectiveness of equity compensation could adversely affect our ability to
attract and retain employees and harm our business.





We have
historically used stock options as a key component of our employee compensation
program in order to align employees' interests with the interests of our
stockholders, encourage employee retention, and provide competitive compensation
packages. Volatility or lack of positive performance in our stock price may
adversely affect our ability to retain key employees, many of whom have been
granted stock options, or to attract additional highly-qualified personnel. As
of September 30, 2010, many of our outstanding employee stock options have
exercise prices in excess of the stock price on that date. To the extent this
continues to occur, our ability to retain employees may be adversely affected.





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





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





We may incur liabilities to tax
authorities in excess of amounts that have been accrued which may adversely
impact our results of operations and financial condition.





As more
fully described in Note 10," Income Taxes" to our condensed consolidated
financial statements contained in this Quarterly report on Form 10-Q, we
have recorded significant income tax receivables. In November 2009 Congress
passed the Worker Homeownership & Business Assistance Act of 2009 which
allows businesses to carryback operating losses for up to 5 years. As a result
of this Act the company is able to carryback some of its 2009 taxable loss,
resulting in an estimated refund of approximately $2.7 million. Also included in
income taxes receivable is a carryback of $0.7 million which was submitted to
the IRS subsequent to the 2009 Act. We may be challenged. Our tax receivable may
be subject to audit by the IRS.




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


On September 28, 2010, the Company
issued to Barretto Pacific Corporation (“Barretto”) 30,000 shares of common
stock. The shares were issued in partial consideration for consulting services
rendered by Barretto to us. In issuing the 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 to an accredited investor, without a view to
distribution, and were not issued through any general solicitation or
advertisement.


34


Item
6. Exhibits




Exhibit
                Number
              
              Description of Exhibit10.1
              
              Asset
      Purchase Agreement by and Between Atrinsic, Inc. and Brilliant Digital
      Entertainment, Inc. and Altnet, Inc., dated October 13, 2010.10.2
              
              Amendment
      No. 1 to Marketing Services Agreement entered into by and between
      Atrinsic, Inc. and Brilliant Digital Entertainment, Inc., dated October
      13, 2010.10.3
              
              Amendment
      No. 1 to Master Services Agreement entered into by and between Atrinsic,
      Inc. and Brilliant Digital Entertainment, Inc., dated October 13, 2010.31.1
              
              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.





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:
November 15, 2010




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


35