UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


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





For the
quarterly period ended March 31, 2010 or





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





For the
transition period from __________ to __________


Commission
File Number: 001-12555











ATRINSIC,
INC





(Exact
name of registrant as specified in its charter)




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





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


(Address
of principal executive offices) (ZIP Code)




(212)
716-1977





(Registrant’s
telephone number, including area code)






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





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


Yesx No ̈





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


Yes ̈ Nox


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




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





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


Yes ̈ Nox


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.  Yesx  No ̈





As of May
11, 2010, the Company had 20,853,933 shares of Common Stock, $0.01 par value,
outstanding, which excludes 2,741,318 shares held in treasury.







Table
of Contents




PagePART
      I
              FINANCIAL
      INFORMATIONItem
      1
              Financial
      Statements
              3Item
      2
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              15Item
      3
              Quantitative
      and Qualitative Disclosures about Market Risk
              22Item
      4T
              Controls
      and Procedures
              22PART
      II
              OTHER
      INFORMATION
              23Item
      1A
              Risk
      Factors
              23Item
      6
              Exhibits
              30







Item 1
Financial Statements




ATRINSIC,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Dollars
in thousands, except per share data)





As
      of
                
                
                As
      ofMarch
      31,
                
                
                December
      31,2010
                
                
                2009(Unaudited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                
                $
                12,475
                
                
                $
                16,913Accounts
      receivable, net of allowance for doubtful accounts of $4,208 and
      $4,295
                
                
                9,542
                
                
                
                7,985Income
      tax receivable
                
                
                3,609
                
                
                
                4,373Prepaid
      expenses and other current assets
                
                
                1,912
                
                
                
                2,643Total
      Current Assets
                
                
                27,538
                
                
                
                31,914PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $995 and
      $1,078
                
                
                3,466
                
                
                
                3,553INTANGIBLE
      ASSETS, net of accumulated amortization of $4,242 and
    $8,605
                
                
                7,080
                
                
                
                7,253INVESTMENTS,
      ADVANCES AND OTHER ASSETS
                
                
                1,768
                
                
                
                1,878TOTAL
      ASSETS
                
                $
                39,852
                
                
                $
                44,598LIABILITIES
      AND EQUITYCurrent
      LiabilitiesAccounts
      payable
                
                $
                5,074
                
                
                $
                6,257Accrued
      expenses
                
                
                9,015
                
                
                
                9,584Deferred
      revenues and other current liabilities
                
                
                852
                
                
                
                725Total
      Current Liabilities
                
                
                14,941
                
                
                
                16,566DEFERRED
      TAX LIABILITY, NET
                
                
                1,715
                
                
                
                1,697OTHER
      LONG TERM LIABILITIES
                
                
                908
                
                
                
                988TOTAL
      LIABILITIES
                
                
                17,564
                
                
                
                19,251COMMITMENTS
      AND CONTINGENCIES (see note 12)
                
                
                -
                
                
                
                -STOCKHOLDERS'
      EQUITYCommon
      stock - par value $0.01, 100,000,000 authorized, 23,586,080 and 23,583,581
      shares issued at 2010 and 2009, respectively; and, 20,844,762 and
      20,842,263 shares outstanding at 2010 and 2009,
    respectively.
                
                
                236
                
                
                
                236Additional
      paid-in capital
                
                
                178,772
                
                
                
                178,442Accumulated
      other comprehensive income (loss)
                
                
                26
                
                
                
                (20
                )Common
      stock, held in treasury, at cost, 2,741,318 shares at 2010 and
      2009.
                
                
                (4,992
                )
                
                
                (4,992
                )Accumulated
      deficit
                
                
                (151,754
                )
                
                
                (148,319
                )Total
      Stockholders' Equity
                
                
                22,288
                
                
                
                25,347TOTAL
      LIABILITIES AND EQUITY
                
                $
                39,852
                
                
                $
                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 EndedMarch
      31,2010
                    
                    
                    2009Subscription
                    
                    $
                    5,982
                    
                    
                    $
                    6,974Transactional
      and Marketing Services
                    
                    
                    6,218
                    
                    
                    
                    16,574REVENUE
                    
                    
                    12,200
                    
                    
                    
                    23,548OPERATING
      EXPENSESCost
      of media-third party
                    
                    
                    7,344
                    
                    
                    
                    15,475Product
      and distribution
                    
                    
                    4,362
                    
                    
                    
                    2,254Selling
      and marketing
                    
                    
                    950
                    
                    
                    
                    2,785General,
      administrative and other operating
                    
                    
                    2,440
                    
                    
                    
                    3,266Depreciation
      and amortization
                    
                    
                    323
                    
                    
                    
                    1,55515,419
                    
                    
                    
                    25,335LOSS
      FROM OPERATIONS
                    
                    
                    (3,219
                    )
                    
                    
                    (1,787
                    )OTHER
      (INCOME) EXPENSEInterest
      income and dividends
                    
                    
                    (2
                    )
                    
                    
                    (46
                    )Interest
      expense
                    
                    
                    1
                    
                    
                    
                    50Other
      expense (income)
                    
                    
                    43
                    
                    
                    
                    (1
                    )42
                    
                    
                    
                    3LOSS
      BEFORE TAXES AND EQUITY IN LOSS OF INVESTEE
                    
                    
                    (3,261
                    )
                    
                    
                    (1,790
                    )INCOME
      TAXES
                    
                    
                    64
                    
                    
                    
                    (670
                    )EQUITY
      IN LOSS OF INVESTEE, AFTER TAX
                    
                    
                    110
                    
                    
                    
                    85NET
      LOSS
                    
                    
                    (3,435
                    )
                    
                    
                    (1,205
                    )LESS:
      NET INCOME ATTRIBUTABLE TO NONCONTROLLINGINTEREST,  AFTER
      TAX
                    
                    
                    -
                    
                    
                    
                    (18
                    )NET
      LOSS ATTRIBUTABLE TO ATRINSIC, INC.
                    
                    $
                    (3,435
                    )
                    
                    $
                    (1,187
                    )NET
      LOSS PER SHARE ATTRIBUTABLE TO ATRINSIC COMMON
STOCKHOLDERSBasic
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.06
                    )Diluted
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.06
                    )WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                    
                    
                    20,844,123
                    
                    
                    
                    20,790,942Diluted
                    
                    
                    20,844,123
                    
                    
                    
                    20,790,942





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)





Three
      Months EndedMarch
      31,2010
                  
                  
                  2009Cash
      Flows From Operating ActivitiesNet
      loss
                  
                  $
                  (3,435
                  )
                  
                  $
                  (1,187
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Allowance
      for doubtful accounts
                  
                  
                  15
                  
                  
                  
                  988Depreciation
      and amortization
                  
                  
                  323
                  
                  
                  
                  1,555Stock-based
      compensation expense
                  
                  
                  330
                  
                  
                  
                  341Deferred
      income taxes
                  
                  
                  16
                  
                  
                  
                  (863
                  )Net
      loss attributable to noncontrolling interest
                  
                  
                  -
                  
                  
                  
                  (18
                  )Equity
      in loss of investee
                  
                  
                  110
                  
                  
                  
                  153Changes
      in operating assets and liabilities of business, net of
      acquisitions:Accounts
      receivable
                  
                  
                  (1,582
                  )
                  
                  
                  1,179Prepaid
      income tax
                  
                  
                  781
                  
                  
                  
                  (225
                  )Prepaid
      expenses and other current assets
                  
                  
                  732
                  
                  
                  
                  (593
                  )Accounts
      payable
                  
                  
                  (1,182
                  )
                  
                  
                  3,404Other,
      principally accrued expenses
                  
                  
                  (515
                  )
                  
                  
                  (5,010
                  )Net
      cash used in operating activities
                  
                  
                  (4,407
                  )
                  
                  
                  (276
                  )Cash
      Flows From Investing ActivitiesCash
      paid to investees
                  
                  
                  -
                  
                  
                  
                  (309
                  )Proceeds
      from sales of marketable securities
                  
                  
                  -
                  
                  
                  
                  4,000Capital
      expenditures
                  
                  
                  (29
                  )
                  
                  
                  (214
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (29
                  )
                  
                  
                  3,477Cash
      Flows From Financing ActivitiesRepayments
      of notes payable
                  
                  
                  -
                  
                  
                  
                  (20
                  )Purchase
      of common stock held in treasury
                  
                  
                  -
                  
                  
                  
                  (939
                  )Net
      cash used in financing activities
                  
                  
                  -
                  
                  
                  
                  (959
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (2
                  )
                  
                  
                  (6
                  )Net
      (Decrease) Increase In Cash and Cash Equivalents
                  
                  
                  (4,438
                  )
                  
                  
                  2,236Cash
      and Cash Equivalents at Beginning of Year
                  
                  
                  16,913
                  
                  
                  
                  20,410Cash
      and Cash Equivalents at End of Period
                  
                  $
                  12,475
                  
                  
                  $
                  22,646SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for interest
                  
                  $
                  -
                  
                  
                  $
                  (4
                  )Cash
      refunded (paid) for taxes
                  
                  $
                  727
                  
                  
                  $
                  (264
                  )





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


5





ATRINSIC, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF EQUITY


(UNAUDITED)


For
the Three Months Ended March 31,


(Dollars
in thousands, except per share data)





AccumulatedAdditional
                    
                    
                    
                    
                    
                    OtherComprehensive
                    
                    
                    CommonStock
                    
                    
                    Paid-In
                    
                    
                    (Accumulated
                    
                    
                    Comprehensive
                    
                    
                    TreasuryStock
                    
                    
                    TotalLoss
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit)
                    
                    
                    Loss
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    EquityBalance
      at January 1, 2010
                    
                    
                    -
                    
                    
                    
                    23,583,581
                    
                    
                    $
                    236
                    
                    
                    $
                    178,442
                    
                    
                    $
                    (148,319
                    )
                    
                    $
                    (20
                    )
                    
                    
                    2,741,318
                    
                    
                    $
                    (4,992
                    )
                    
                    $
                    25,347Net
      loss
                    
                    $
                    (3,435
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,435
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,435
                    )Foreign currency translation adjustment
                    
                    
                    46
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    46
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    46Comprehensive
      loss
                    
                    $
                    (3,389
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Stock
      based compensation expense
                    
                    
                    -
                    
                    
                    
                    2,499
                    
                    
                    
                    -
                    
                    
                    
                    330
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    330Tax shortfall on Stock based compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at March 31, 2010
                    
                    
                    -
                    
                    
                    
                    23,586,080
                    
                    
                    $
                    236
                    
                    
                    $
                    178,772
                    
                    
                    $
                    (151,754
                    )
                    
                    $
                    26
                    
                    
                    
                    2,741,318
                    
                    
                    $
                    (4,992
                    )
                    
                    $
                    22,288





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 March 31, 2010 and
December 31, 2009, the Condensed Consolidated Statements of Operations for the
three months ended March 31, 2010 and 2009, and the Condensed Consolidated
Statements of Cash Flows for the three months ended March 31, 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.





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





Funding
and Management’s Plans





Since the
Company’s inception, it has met its liquidity and capital expenditure needs
primarily through funds generated from operations, cash acquired through
acquisitions and proceeds from sale of common stock.  During the three
months ended March 31, 2010, the Company’s cash used in operating activities was
approximately $4.4 million.  This was the result of cash used to pay third
party media suppliers, employees and consultants, represented by a decrease in
accounts payable and accrued expenses, net of prepaid expenses, of approximately
$1.0 million and cash used as a result of the increase in accounts receivable of
approximately $1.6 million, which was offset by approximately $781,000 decrease
in prepaid taxes (of which $727,000 was net cash refunded for taxes).  The
Company’s cash used in investing activities during the three months ended March
31, 2010 was approximately $29,000, which resulted from capital
expenditures.  As a result, the Company’s cash and cash equivalents at
March 31, 2010 decreased $4.4 million to approximately $12.5 million from
approximately $16.9 million at December 31, 2009.





The
Company believes that its existing cash, cash equivalents, together with cash
flows from expected sales of its subscription and transactional marketing
services, and other potential sources of cash flows, including income tax
refunds of $3.6 million expected to be received in 2010, will be sufficient
to enable it to continue its activities for at least 12 months.  However,
the Company’s projections of future cash needs and cash flows may differ from
actual results.  If current cash and cash equivalents, and cash that may be
generated from operations, are insufficient to satisfy the Company’s liquidity
requirements, the Company may seek to sell debt or equity securities or to
obtain a line of credit.  The sale of additional equity securities or
convertible debt could result in dilution to the Company’s stockholders. 
The Company currently has no arrangements with respect to additional
financing.  The Company can give no assurance that it will generate
sufficient revenues in the future to satisfy its liquidity requirements or
sustain future operations, that the Company will be able to acquire
sufficient quantities of cost effective media, that other subscription and
marketing services will not be provided by other companies that will render the
Company’s services obsolete, or that other sources of funding would be
available, if needed, on favorable terms or at all.  If the Company cannot
obtain such funds if needed, it would need to curtail or cease some or all of
its operations.





Note 2 – Investments and
Advances





Investment
in The Billing Resource, LLC





On
October 30, 2008, the Company acquired a 36% non-controlling interest in The
Billing Resource, LLC (“TBR”). TBR is an aggregator of fixed telephone line
billing, providing alternative billing services to the Company and unrelated
third parties. The Company contributed $2.2 million in cash on formation, of
which, $1.9 million was later distributed by TBR to the Company. The Company
also provided an additional $0.9 million of working capital advances in 2009 to
support near term growth. As of March 31, 2010, the Company’s net investment in
TBR totals $1.3 million and is included in Investments, Advances and Other
Assets on the accompanying Condensed Consolidated Balance Sheet.





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


7


The
Company records its investment in TBR under the equity method of accounting and
as such presents its pro-rata share of the equity in earnings and losses of TBR
within its quarterly and year end reported results. The Company recorded $
110,000 and $85,000 as equity in loss for the three months ended March 31, 2010
and 2009, respectively.
 
 Note 3 – Kazaa
 
 Kazaa is
a subscription-based music service providing unlimited online access to hundreds
of thousands of CD-quality tracks for a monthly fee of approximately
$19.98.  Subscribers of this service are signed up for this service on the
Internet and are billed monthly to their credit card, mobile phone or landline
phone.  Kazaa allows users to download unlimited music files to up to three
PCs that the user owns.  Kazaa is owned by Brilliant Digital Entertainment,
Inc. (“BDE”), an online distributor of licensed digital content. The Kazaa
digital music service is a collaborative arrangement between the Company and BDE
and is not conducted in a separate legal entity.
  On March
26, 2010, the Company entered into a Marketing Services Agreement (the
“Marketing Agreement”) and a Master Services Agreement (the “Services
Agreement”) with BDE effective as of July 1, 2009 (collectively, the
“Agreements”), relating to the operation and marketing of the Kazaa digital
music service.  The Agreements have a term of three years from the
effective date, contain provisions for automatic one year renewals, subject to
notice of non-renewal by either party, and may only be terminated generally
upon a bankruptcy or liquidation event or in the event of an uncured material
breach by either party.
 
 Under the
Marketing Agreement, the Company is responsible for marketing, promotional, and
advertising services in respect of the Kazaa service.  In exchange for
these marketing services, the Company is entitled to full recoupment for all
pre-approved costs and expenses incurred in connection with the provision of the
services plus all other agreed budgeted amounts.
  Pursuant
to the Services Agreement, the Company is to provide services related to the
operation of the Kazaa website and service, including billing and collection
services and the operation of the Kazaa online storefront.  BDE is
obligated to provide certain other services with respect to the service,
including licensing the intellectual property underlying the Kazaa service to
us, obtaining all licenses to the content offered as part of the service and
delivering that content to the subscribers via the service
interface.
 
 As
part of the Agreements, the Company is required to make advance payments and
expenditures in respect of certain expenses incurred in order to provide the
required services and operate the Kazaa music service.  These advances and
expenditures are recoverable on a dollar for dollar basis against current and
future revenues.  In addition, BDE has agreed to repay $2.5 million of
these advances and expenditures which are not otherwise recovered from Kazaa
generated revenues and this repayment obligation has been secured under separate
agreement. All advances and expenditures that the Company makes are fully
recoupable from the cash flow generated by the Kazaa music service, although
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. 
Similarly, the Company is not obligated to make additional expenditures if more
than $5.0 million remains unrecovered or unrecouped by the Company from
Kazaa revenues.
 
 In
accordance with the Agreements, Atrinsic and BDE will share equally in the “Net
Profit” generated by the Kazaa music subscription service only after all of our
costs and expenses that we have incurred are fully recouped by us.  For the
three months ending March 31, 2010, the Company has presented in its statement
of operations, Kazaa revenue of $2.9 million and expenses incurred for the Kazaa
music service of $4.4 million, offset by $626,000 of reimbursements from
BDE.  As of March 31, 2010, the Company has presented in its balance sheet,
an other receivable due from BDE of $1.1 million. Subsequent to March 31, 2010,
the Company collected $621,000 of this other receivable.
 
 Note 4 – Fair Value
Measurements
 
 The
carrying amounts of cash equivalents, accounts receivable, accounts payable and
accrued expenses are believed to approximate fair value due to the short-term
maturity of these financial instruments.  The following tables present
certain information for our assets and liabilities that are measured at fair
value on a recurring basis at March 31, 2010 and December 31,
2009:
  8





Level I
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalMarch
      31, 2010:Assets:Cash
      and cash equivalents
                  
                  $
                  12,475
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  12,475Liabilities:Put
      options
                  
                  $
                  -
                  
                  
                  $
                  308
                  
                  
                  $
                  -
                  
                  
                  $
                  308December
      31, 2009:Assets:Cash
      and cash equivalents
                  
                  $
                  16,913
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  16,913Liabilities:Put
      options
                  
                  $
                  -
                  
                  
                  $
                  267
                  
                  
                  $
                  -
                  
                  
                  $
                  267





At March
31, 2010, put option liabilities on our common stock issued in connection with
the Shop-It acquisition are included in other current liabilities in our
condensed consolidated balance sheets. These were valued using a Black Scholes
model using a share price of $0.82, strike price of $2.00, interest rate of
0.38% and maturities ranging from 62 to 122 days.




Note 5 - Concentration of Business and Credit
Risk





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





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





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





For
      The Three Months EndedMarch
      31,2010
                  
                  
                  2009RevenuesAggregator
      A
                  
                  
                  20
                  %
                  
                  
                  3
                  %Customer
      B
                  
                  
                  10
                  %
                  
                  
                  6
                  %Customer
      C
                  
                  
                  9
                  %
                  
                  
                  0
                  %Other
      Customers & Aggregators
                  
                  
                  61
                  %
                  
                  
                  91
                  %





As
      ofMarch
      31,
                  
                  
                  December
      31,2010
                  
                  
                  2009Accounts
      ReceivableAggregator
      A
                  
                  
                  31
                  %
                  
                  
                  12
                  %Aggregator
      D
                  
                  
                  13
                  %
                  
                  
                  16
                  %Customer
      B
                  
                  
                  8
                  %
                  
                  
                  9
                  %Other
      Customers & Aggregators
                  
                  
                  48
                  %
                  
                  
                  63
                  %


9





NOTE
6 - Property and Equipment





Property
and equipment consists of the following:





Useful
      Life
                  
                  
                  March
      31,
                  
                  
                  December 31,in years
                  
                  
                  2010
                  
                  
                  2009Computers
      and software applications
                  
                  
                  3
                  
                  
                  $
                  1,677
                  
                  
                  $
                  1,874Leasehold
      improvements
                  
                  
                  10
                  
                  
                  
                  1,833
                  
                  
                  
                  1,830Building
                  
                  
                  40
                  
                  
                  
                  788
                  
                  
                  
                  766Furniture
      and fixtures
                  
                  
                  7
                  
                  
                  
                  163
                  
                  
                  
                  161Gross
      PP&E
                  
                  
                  
                  
                  
                  
                  4,461
                  
                  
                  
                  4,631Less:
      accumulated depreciation
                  
                  
                  
                  
                  
                  
                  (995
                  )
                  
                  
                  (1,078
                  )Net
      PP&E
                  
                  
                  
                  
                  
                  $
                  3,466
                  
                  
                  $
                  3,553





Depreciation
expense for the three months ended March 31, 2010 and 2009 totaled $150,000 and
$163,500, respectively, and is recorded on a straight line
basis.


10




Note
7 –Intangibles





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





Useful Life
                  
                  
                  Gross
      Book
                  
                  
                  Accumulated
                  
                  
                  
                  
                  
                  Net
      Bookin Years
                  
                  
                  Value
                  
                  
                  Amortization
                  
                  
                  Impairment
                  
                  
                  ValueAs
      of March 31, 2010Indefinite
      Lived assetsTradenames
                  
                  
                  
                  
                  $
                  4,325
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  4,325Domain
      names
                  
                  
                  
                  
                  
                  1,298
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,298Amortized
      Intangible AssetsAcquired
      software technology
                  
                  
                  3 -
      5
                  
                  
                  
                  2,516
                  
                  
                  
                  1,683
                  
                  
                  
                  -
                  
                  
                  
                  833Domain
      names
                  
                  
                  3
                  
                  
                  
                  426
                  
                  
                  
                  369
                  
                  
                  
                  -
                  
                  
                  
                  57Tradenames
                  
                  
                  9
                  
                  
                  
                  559
                  
                  
                  
                  291
                  
                  
                  
                  -
                  
                  
                  
                  268Customer
      lists
                  
                  
                  1.5
      - 3
                  
                  
                  
                  1,531
                  
                  
                  
                  1,412
                  
                  
                  
                  -
                  
                  
                  
                  119Restrictive
      covenants
                  
                  
                  5
                  
                  
                  
                  667
                  
                  
                  
                  487
                  
                  
                  
                  -
                  
                  
                  
                  180Total
                  
                  
                  
                  
                  
                  $
                  11,322
                  
                  
                  $
                  4,242
                  
                  
                  $
                  -
                  
                  
                  $
                  7,080As
      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.





Note
8 - Stock-based compensation





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





2010Strike
      Price
                  
                  $0.75
      - $0.91Expected
      life
                  
                  5.6
      yearsRisk
      free interest rate
                  
                  2.34%
      - 2.36%Volatility
                  
                  58%
      - 59%Fair
      market value per share
                  
                  $0.41
      - $0.49





During
the three months ended March 31, 2010, the Company granted 1,435,000 stock
options and 41,666 restricted stock units to employees. There were
no significant forfeitures or exercises of stock options or restricted
stock units for the three months ended March 31, 2010.


11





Stock
based compensation expense of $330,000 and $341,000 was recorded for the three
months ended March 31, 2010 and 2009, respectively, as follows:





For the Three Months EndedMarch 31,2010
                    
                    
                    2009Product
      and distribution
                    
                    $
                    16
                    
                    
                    $
                    45Selling
      and marketing
                    
                    
                    4
                    
                    
                    
                    -General
      and administrative and other operating
                    
                    
                    310
                    
                    
                    
                    296Total
                    
                    $
                    330
                    
                    
                    $
                    341





Note
9 – Loss per Share Attributable to Atrinsic, Inc





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





Three Months EndedMarch 31,2010
                  
                  
                  2009EPS
      Denominator:Basic
      weighted average shares
                  
                  
                  20,844,123
                  
                  
                  
                  20,790,942Effect
      of dilutive securities
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average shares
                  
                  
                  20,844,123
                  
                  
                  
                  20,790,942EPS
      Numerator (effect on net income):Net
      loss attributable to Atrinsic, Inc.
                  
                  $
                  (3,435
                  )
                  
                  $
                  (1,187
                  )Effect
      of dilutive securities
                  
                  
                  -
                  
                  
                  
                  -Diluted
      loss attributable to Atrinsic, Inc.
                  
                  $
                  (3,435
                  )
                  
                  $
                  (1,187
                  )Net
      loss per common share:Basic
      weighted average loss attributable to Atrinsic, Inc.
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.06
                  )Effect
      of dilutive securities
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average loss attributable to Atrinsic, Inc.
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.06
                  )





Common
stock underlying outstanding options and convertible securities were not
included in the computation of diluted earnings per share for the three months
ended March 31, 2010 and 2009, because their inclusion would be anti dilutive
when applied to the Company’s net loss per share.


12




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 DisclosureMarch
      31,2010
                  
                  
                  2009Convertible
      note payable
                  
                  
                  -
                  
                  
                  
                  322,878Options
                  
                  
                  3,167,059
                  
                  
                  
                  2,773,372Warrants
                  
                  
                  314,443
                  
                  
                  
                  314,443Restricted
      Shares
                  
                  
                  9,171
                  
                  
                  
                  70,280Restricted
      Stock Units
                  
                  
                  316,666
                  
                  
                  
                  -








The per
share exercise prices of the options were $0.48 - $14.00 for the three months
ended March 31, 2010 and 2009. The per share exercise prices of the warrants
were $3.44 - $5.50 for the three months ended March 31, 2010 and
2009.





Note 10 -Income Taxes





Income
tax expense (benefit) before noncontrolling interest and equity in loss of for
the three months ended March 31, 2010 and 2009, was $64,000 and ($0.7) million,
respectively and reflects an effective tax rate of (2%) and 37%, respectively.
The Company has provided a valuation allowance against its deferred tax assets
because it is more likely than not that such benefits will not be realized by
the Company.




Uncertain
Tax Positions


The
Company is subject to taxation in the United States for Federal and State, and
certain foreign jurisdictions. The Company’s tax years for 2007, 2008 and 2009
are subject to examination by the tax authorities.  In addition, the tax
returns for certain acquired entities are also subject to examination. As of
March 31, 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 to the extent
such adjustments relate to acquired entities.  Although the timing or the
resolution and/or closure of the audits is highly uncertain, the Company does
not believe that its unrecognized tax benefit will materially change in the next
twelve months





Note
11- New Accounting Pronouncements





Adopted
in 2010





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





Not
Yet Adopted




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





Note
12 - Commitments and Contingencies





On March
10, 2010, Atrinsic received final approval of its settlement to its Class Action
proceeding in the State of California in Allen v. Atrinsic, Inc. f/k/a New
Motion, Inc., pending in Los Angeles County Superior Court. The settlement
covers all of the Company’s mobile products, web sites and advertizing practices
through December 2009. All costs of the settlement and defense were accrued for
in 2008; therefore this settlement did not impact the Company’s results of
operations in 2009 and is not expected to impact the Company’s results of
operations in 2010.  Subsequent to March 31, 2010, the Company paid the
$1.0 million settlement for the Class Action.


13





As a
result of the State of California Settlement and final approval of the judgment,
Atrinsic has filed stays, and will file dispositive motions, in the following
actions, which it is either directly named in or has assumed the defense of the
following cases: Baker v. Sprint Nextel Corp., Motricity, Inc., and New Motion,
Inc. pending in Dade County Superior Court in Florida,  Stewart v New
Motion, Inc. and Motricity, Inc., pending in Hennepin County District Court in
Minnesota, Rynearson v. Motricty, Inc, pending in King County Superior Court in
Washington and Walker v. Motricity, Inc., pending in Alameda County Superior
Court in California.  Management has accrued for all probable and estimable
related costs of these actions.





In the
ordinary course of business, the Company is involved in various disputes, which
are routine and incidental to the business and the industry in which it
operates. In the opinion of management, the results of such disputes will not
have a significant adverse effect on the financial position or the results of
operations of the Company. Of approximately $9.0 million in total accrued
expenses as of March 31, 2010, $1.8 million is associated with the legal
contingencies disclosed above.





Note
13 – Subsequent Events





We have evaluated events subsequent to
the balance sheet date through the date of our Form10-Q filing for the quarter
ended March 31, 2010 and determined there have not been any material events that
have occurred that would require adjustment to or disclosure in our unaudited
condensed consolidated financial statements.


14




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 three months ended March 31, 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 three months ended March 31, 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 three months
ended March 31, 2010 and 2009.





Executive
Overview





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





As a
direct to consumer Internet marketing company, our strategy is to maximize the
value of each media impression by maximizing the revenue and profit from each
visitor to our media network.  We do this by using proprietary technology
to match each consumer touch point (visit, registration or lead submission) with
the highest value offer or series of offers.  These offers are sourced from
a large pool of advertisers or from our own portfolio of consumer subscription
products.  We also engage in targeted performance marketing activities
where we focus on acquiring customers for an advertiser on an exclusive
basis.





Our
premium subscription products, which are marketed directly to consumers, are an
important component of the maximization strategy.  By maintaining
alternatives to third party offers, we are able to make use of and derive more
profit from a larger proportion of acquired Internet traffic and leads generated
than would be the case with only third party advertisers’ offerings, since our
owned products typically provide a higher effective value for each media
impression.





Over an
extended period of time, our ability to generate incremental revenues relies on
our ability to increase the size and scope of our media network, our ability to
target campaigns, and our ability to convert qualified leads into appropriate
revenue generating opportunities, including into subscribers of our own
products.  Revenue growth also depends on our ability to market and sell
our services, including search services and lead generation activities, to third
parties.





We
combine our direct response capability with an Internet-based customer
acquisition model, which allows us to use proprietary lead generation, search
and email marketing strategies, to generate a greater volume of Internet traffic
at a lower effective cost of acquisition.  Our success at acquiring
qualified customers at a low effective cost is due, in part to our portfolio of
attractive web properties, content and licensed media. This performance
marketing media network ensures a continual base of subscribers to our
subscription products, and also generates qualified traffic that is
complementary to our third-party advertisers.





Our
direct response marketing business principally serves two sets of customers.
Corporate clients and third party advertisers use our products and services to
enhance their online marketing programs (our transactional and marketing
services).  Consumers subscribe to our services to receive premium content
on the Internet and on their mobile device (our subscription services). Each of
these business activities – transactional and marketing services and
subscriptions – may utilize the same originating media or derive a customer from
the same source; the difference is reflected in the type of customer
billing.  In the case of transactional and marketing services, the billing
is generally carried out on a service fee, percentage, or on a performance
basis. For subscriptions, the end user (the consumer) is able to access premium
content and in return is charged a recurring monthly fee to a credit card,
mobile phone, or land-line phone.





In
managing our business, we internally develop programming or partner with online
content providers to match users with our service offerings and those of our
advertising clients. Our prospects for growth are dependent on our ability to
acquire content in a cost effective manner. Our results may also be impacted by
economic conditions and the relative strengths and weakness of the U.S. economy,
trends in the online marketing and telecommunications industry, including client
spending patterns and increases or decreases in our portfolio of service
offerings, including the overall demand for such offerings, competitive and
alternative programs and advertising mediums, and risks inherent in our customer
database, including customer attrition.


15





Similar
to other media based companies, our ability to specifically isolate the relative
historical aggregate impact of price and volume regarding our revenue is not
practical as the majority of our services are sold and managed on an order by
order basis and our revenues are greatly impacted by our ability to qualify,
validate and enhance leads that we acquire.  Factors impacting the pricing
of our services include, but are not limited to: (1) the dollar value, length
and breadth of the order; (2) the quality of the desired action; (3) the
quantity of actions or services requested by our clients; (4) our ability to
enhance the value of leads through validation and traffic disaggregation; (5)
matching leads to the highest relative value offer; and (6) the level of
customization required by our clients.





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





As a
growing part of our direct-to-consumer business, the Kazaa music service is an
important focus for management. The Kazaa digital music service is a
collaborative arrangement that we have with Brilliant Digital
Entertainment, Inc. (“BDE”), an online distributor of licensed digital content,
and is not conducted in a separate legal entity.  On March 26, 2010, we
entered into a Marketing Services Agreement (the “Marketing Agreement”) and a
Master Services Agreement (the “Services Agreement”) with BDE effective as of
July 1, 2009 (collectively, the “Agreements”), relating to the operation and
marketing of the Kazaa digital music service.  The Agreements have a term
of three years from the effective date, contain provisions for automatic one
year renewals, subject to notice of non-renewal by either party, and may
only be terminated generally upon a bankruptcy or liquidation event or in the
event of an uncured material breach by either party.  In accordance with
the Agreements, Atrinsic and BDE will share equally in the “Net Profit”
generated by the Kazaa music subscription service after all of our costs and
expenses have first been recovered.





Under the
Marketing Agreement, we are responsible for marketing, promotional,
and advertising services in respect of the Kazaa service.  In exchange for
these marketing services, we are entitled to full recoupment for all
pre-approved costs and expenses incurred in connection with the provision of the
services plus all other agreed budgeted amounts. Pursuant to the Services
Agreement, we are to provide services related to the operation of the Kazaa
website and service, including billing and collection services and the operation
of the Kazaa online storefront.  BDE is obligated to provide certain other
services with respect to the service, including licensing the intellectual
property underlying the Kazaa service to us, obtaining all licenses to the
content offered as part of the service and delivering that content to the
subscribers via the service interface.





As part
of the Agreements, we are required to make advance payments and expenditures in
respect of certain expenses incurred in order to provide the required services
and operate the Kazaa music service.  These advances and expenditures are
recoverable on a dollar for dollar basis against future revenues. In addition,
BDE has agreed to repay $2.5 million of these advances and expenditures
which are not otherwise recovered from Kazaa generated revenues and this
repayment obligation has been secured under separate agreement.  All
advances and expenditures that we make are fully recoupable from the cash flow
generated by the Kazaa music service, although 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.  Similarly, we are not obligated
to make additional expenditures if more than $5.0 million remains
unrecovered or unrecouped by us from Kazaa revenues.





For the three months ended March 31,
2010, we have recorded Kazaa revenue of $2.9 million and expenses incurred
for the Kazaa music service of $4.4 million, offset by $626,000 of
reimbursements from BDE.





Business
Strategy




To become a leading direct to consumer
Internet marketing company, our strategy is to continue to develop a broad
marketing and media network that allows us to cost-efficiently acquire consumers
for our subscription-based services and for our third-party lead generation
activities.  To generate long term value for our stockholders and
profitably grow our revenue over time, we are spending on media, product and
distribution and marketing expense to acquire customers today so that we can
build a substantial subscriber base to generate subscription revenue in the
future.  We also must continually develop best in class service offerings
for our clients in the area of search related services.


16





Expand Online Distribution
Capabilities: we consider our distribution capabilities as encompassing
the various ways we generate Internet traffic by attracting users to various web
properties and converting visitors into subscribers and third-party leads. 
We employ a multifaceted approach to generating traffic: (i) users may navigate
directly to our web properties, (ii) users respond to our email marketing, (iii)
we garner users of our promotional and sweepstakes sites, (iv) we attract users
to our content sites by offering valuable media and other content, (v) we
utilize call center technology in the acquisition process, and (vi) we use
search engine optimization and search marketing efforts which attract users to
our sites and services on a Pay Per Click basis.  Our strategy is to
increase our volume of visitors, subscribers, and third-party leads by improving
the reach and widening our breadth of distribution. We expect to do this by
increasing our portfolio of web properties and sites, and improving existing, or
employing innovative techniques, to source traffic.  We expect that by
expanding our online distribution capability, we will lower our customer
acquisition costs by improving margins through greater scale.





Publish High-Quality, Branded
Subscription Content:As a direct to consumer
Internet marketing company, we are focused on partnering with companies, and
developing proprietary sources of content, for our direct to consumer
subscription products.  We believe that publishing a diversified portfolio
of the highest quality content, like the Kazaa music service, is important to
our business. We intend to continue to develop innovative and sought-after
content and intend to continue to devote significant resources to the
development of high-quality and innovative products and services.  We will
focus on subscription based products in the entertainment and lifestyle
categories as these products correspond to the visitor base in our media
network.




Lead Generation Product
Development:  In order to be competitive in the performance
marketing areas, companies must de-commoditize the leads they generate.  We
are pursuing a number of value enhancing strategies to increase the
marketability of our leads to third parties and to increase the conversion of
leads into subscribers of our direct-to-consumer subscription services. 
These innovations include ad units designed to drive direct telephone calls,
where a call center operator will respond instantly to a user’s request for
information and, in some instances, transfer the consumer directly to an
advertiser.  We also actively increase the value of a consumer inquiry by
validating the submission of online information through automated data lookups
and validation, or through call center confirmation.  All of these lead
value enhancement techniques assist us in increasing the average sales price of
leads sold to our advertisers, or improves the conversion of users into
subscribers to our direct-to-consumer subscription services and the
corresponding increases in Life Time Value 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.





Online Marketing
Services:In
order to be competitive in the area of online marketing services, particularly
in search related marketing services, we must continue to expand our staff and
technology capabilities.  Our product offering will not remain competitive
if we don’t offer our clients leading edge technology and strategies designed to
drive their online sales efforts.  Adding more services revenue will
involve prospecting a targeted set of clients who are natural consumers of our
services.  Our initiatives include delivering an integrated suite of
services, which include search engine marketing services, search engine
optimization, display advertising, and affiliate marketing.  Our ability to
integrate brand protection and competitive intelligence is a source of
differentiation and growth for our existing and new client base.





Technology:Through our use of
technology, we attempt to display the highest value offer to the consumer. 
On a real-time basis, our technology dynamically analyzes user data, media
source, and estimated offer values and progressions to gauge which offer
maximizes the value of the media impression.  If the user is “qualified,”
we will expose one of our targeted consumer subscription offers.  In the
event that the user does not correspond to our internal targeting criteria, the
most profitable third-party offers will be displayed.  In every case, we
are continually working on technology to improve targeting capability so as to
maximize the value of each media impression.  We also employ proprietary
technology which measures, in real time, the effectiveness of our media buying
by media source.  This allows us to adjust marketing efforts immediately
towards the most effective partners. These tools allow us to be more effective
in our media buying, reducing our acquisition costs and improving convertibility
and profitability.


17




Results
of Operations for the three months ended March 31, 2010 compared to the three
months ended March 31, 2009.





Revenues
presented by type of activity are as follows for the three month periods ending
March 31, 2010 and 2009:





For the Three Months Ended
                  
                  
                  Change
                  
                  
                  ChangeMarch 31,
                  
                  
                  Inc.(Dec.)
                  
                  
                  Inc.(Dec.)2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Subscription
                  
                  $
                  5,982
                  
                  
                  $
                  6,974
                  
                  
                  $
                  (992
                  )
                  
                  
                  -14
                  %Transactional
      and Marketing Services
                  
                  $
                  6,218
                  
                  
                  $
                  16,574
                  
                  
                  $
                  (10,356
                  )
                  
                  
                  -62
                  %Total
      Revenues (1)
                  
                  $
                  12,200
                  
                  
                  $
                  23,548
                  
                  
                  $
                  (11,348
                  )
                  
                  
                  -48
                  %








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





Revenues
decreased approximately $11.3 million or 48%, to $12.2 million for the three
months ended March 31, 2010, compared to $23.5 million for the three months
ended March 31, 2009.





Subscription
revenue decreased by approximately $1.0 million, or 14%, to $6.0 million for the
three months ended March 31, 2010, compared to $7.0 million for the three months
ended March 31, 2009. Subscription revenue for the three months ended March 31,
2010 includes Kazaa revenue of $2.9 million, without which, our subscription
revenue would have decreased by $3.9 million. The decrease in subscription
revenue was principally attributable to a decrease in the number of billable
subscribers during the first quarter of 2010, as compared to the first quarter
of 2009.  The year-over-year decrease in subscribers was due primarily to
lower customer acquisition rates as a result of an uncertain regulatory
environment and changing consumer tastes.  As of March 31, 2010, the
Company had approximately 330,000 subscribers across all of its entertainment
and lifestyle subscription products, compared to approximately 340,000
subscribers as of December 31, 2009.  During the first quarter of 2010, the
Company added approximately 158,000 new subscribers.  More than 50% of
these new subscribers were new users of the Kazaa music subscription
service.  As of March 31, 2010, the Company estimates that it has
approximately 100,000 Kazaa subscribers. During the first quarter of 2010, the
Company estimates that its average revenue per user, or “ARPU,” was
approximately $6.00, an increase of 27% when compared to the year ago
period.  This ARPU represents a blended rate across all of the Company’s
subscription products.  The Company expects that due to the higher price
point for the Kazaa music service, that the Company’s blended ARPU will increase
as the proportion of Kazaa subscribers to total subscribers
increases.





Transactional
and Marketing services revenue is derived from our online marketing and lead
generation activities, which are targeted and measurable online campaigns
and programs for marketing partners, corporate advertisers, or their agencies,
generating qualified customer leads, online responses and activities, or
increased brand recognition. Transactional and Marketing services revenue
decreased by approximately $10.4 million or 62% to $6.2 million for the three
months ended March 31, 2010 compared to $16.6 million for the three months ended
March 31, 2009. The decrease was primarily attributable to the loss of accounts
and a reduction in discretionary advertising expenditures by our
clients.





Operating
Expenses





For the Three Months Ended
                  
                  
                  Change
                  
                  
                  ChangeMarch 31,
                  
                  
                  Inc.(Dec.)
                  
                  
                  Inc.(Dec.)2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Operating
      ExpensesCost
      of Media – 3rd
      party
                  
                  $
                  7,344
                  
                  
                  $
                  15,475
                  
                  
                  
                  (8,131
                  )
                  
                  
                  -53
                  %Product
      and distribution
                  
                  
                  4,362
                  
                  
                  
                  2,254
                  
                  
                  
                  2,108
                  
                  
                  
                  94
                  %Selling
      and marketing
                  
                  
                  950
                  
                  
                  
                  2,785
                  
                  
                  
                  (1,835
                  )
                  
                  
                  -66
                  %General,
      administrative and other operating
                  
                  
                  2,440
                  
                  
                  
                  3,266
                  
                  
                  
                  (826
                  )
                  
                  
                  -25
                  %Depreciation
      and Amortization
                  
                  
                  323
                  
                  
                  
                  1,555
                  
                  
                  
                  (1,232
                  )
                  
                  
                  -79
                  %Total
      Operating Expenses
                  
                  $
                  15,419
                  
                  
                  $
                  25,335
                  
                  
                  $
                  (9,916
                  )
                  
                  
                  -39
                  %


18




Cost
of Media





Cost of
Media – 3rd Party
decreased by $8.1 million or 53% to $7.3 million for the three months ended
March 31, 2010 from $15.5 million for the three months ended March 31, 2009.
Cost of Media – 3rd Party
includes media purchased for monetization of both transactional and marketing
services and subscription revenues. Although the decrease was due to the decline
in the related revenue, the Company is actively spending media to acquire new
customers to increase its base of subscribers, in particular Kazaa
subscribers. The Company added approximately 158,000 new subscribers in the
first quarter, over half of which were Kazaa subscribers.  Cost of media
for the three months ended March 31, 2010 includes Kazaa-related Cost of Media
of $1.5 million.  We expect to recoup these Kazaa cost of media expenses
from the future cash flows of the Kazaa music service, although there can be no
assurance in this regard.





During
the first quarter of 2010, the Company estimates that its subscriber acquisition
cost, or “SAC,” was approximately $12.80. This compares to SAC of approximately
$13.30 in 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 and that
management will continue to monitor SAC closely to ensure that the Company
acquires customers in a cost effective manner.




Product
and Distribution





Product
and distribution expense increased by $2.1 million or 94% to $4.4 million for
the three months ended March 31, 2010 as compared to $2.3 million for the three
months ended March 31, 2009. Product and distribution expenses are costs
necessary to develop and maintain proprietary content and support and
maintain our websites and technology platforms – which drive both our
Transactional and Marketing Services and Subscription based revenues. Compared
to the year ago period, in the first quarter of 2010, we experienced higher
product and distribution expense of $2.3 million as a result of costs incurred
to further develop the Kazaa music service and greater royalty and license
expense payable to music labels, also associated with Kazaa. We expect to recoup
these Kazaa product and distribution expenses from the future cash flows of the
Kazaa music service, although there can be no assurance in this regard. 
Included in product and distribution cost is stock compensation expense of
$16,000 and $45,000 for the three months ended March 31, 2010 and 2009,
respectively.





Selling and
Marketing





Selling
and marketing expense decreased $1.8 million or 66% to $1.0 million in the three
months ended March 31, 2010 as compared to $2.8 million for the three months
ended March 31, 2009. The Company’s bad debt expense decreased by approximately
$0.9 million for the three months ended March 31, 2010 compared to the three
months ended March 31, 2009. The decrease in selling and marketing was due
mainly to a decrease in salaries and employee related costs. Included in selling
and marketing cost is stock compensation expense of $4,000 and $0 for the three
months ended March 31, 2010 and 2009 respectively.





General,
Administrative and Other Operating





General
and administrative expenses decreased by $0.8 million to $2.4 million for the
three months ended March 31, 2010 compared to $3.3 million for the three months
ended March 31, 2009. The decrease is primarily due to a reduction in workforce
and consolidation of office space. Included in general and administrative
expense is stock compensation expense of $310,000 and $296,000 for the three
months ended March 31, 2010 and 2009 respectively.





Depreciation
and Amortization





Depreciation
and amortization expense decreased $1.3 million to $0.3 million for the three
months ended March 31, 2010 compared to $1.6 million for the three months ended
March 31, 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 $1.4 million or 78% to $3.2 million for the three months ended
March 31, 2010, compared to an operating loss of $1.8 million for the three
months ended March 31, 2009. The Company’s revenue decreased by 48% with a
corresponding decrease in operating expenses of 39%.




Interest
Income and Dividends





Interest
and dividend income decreased $44,000 to $2,000 for the three months ended March
31, 2010, compared to $46,000 for the three months ended March 31, 2009. The
reduction is mainly due to a decrease in the balances of cash and marketable
securities at March 31, 2010 compared to March 31, 2009, as well as a reduction
in market rate of return on cash and cash equivalents.


19


Interest
Expense





Interest
expense was $1,000 for the three months ended March 31, 2010 compared to $50,000
for the three months ended March 31, 2009.





Income
Taxes





Income
tax expense (benefit), before noncontrolling interest and equity in loss of
investee, for the three months ended March 31, 2010 and 2009 was $64,000 and
($0.7) million respectively and reflects an effective tax rate of (2%) and 37%
respectively. The Company had a loss before taxes of $3.3 million for the three
months ended March 31, 2010 compared to loss before taxes of $1.8 million for
the three months ended March 31, 2009. The Company has not provided a
valuation allowance against its tax benefits because it is more likely than not
that such benefits will be utilized by the Company.





Equity
in Loss of Investee





Equity in
loss of investee was $110,000 for the three months ended March 31, 2010 compared
to $85,000 for the three months ended March 31, 2009. The Equity represents the
Company’s 36% interest in The Billing Resource, LLC (TBR). The company acquired
its interest in TBR in the 4thQuarter 2008.





Net
Income Attributable to Noncontrolling Interest





Net
income attributable to noncontrolling interest for the three months ended March
31, 2009 was $18,000. This related to our investment in MECC which was dissolved
in June 2009.





Net
Loss Attributable to Atrinsic, Inc





Net loss
increased by $2.2 million to $3.4 million for the three months ended March 31,
2010 as compared to a net loss of $1.2 million for the three months ended March
31, 2009. This increase in loss resulted from the factors described
above.





Liquidity
and Capital Resources





We
continually project anticipated cash requirements, which may include business
combinations, capital expenditures, and working capital requirements. As of
March 31, 2010, we had cash and cash equivalents of approximately $12.5 million
and working capital of approximately $12.6 million. We used approximately $4.4
million in cash for operations for the three months ended March 31,
2010.  This was the result of cash used to pay third party media
suppliers, employees and consultants, represented by a decrease in accounts
payable and accrued expenses, net of prepaid expenses, of approximately $1.0
million and cash used as a result of the increase in accounts receivable of
approximately $1.6 million, which was offset by approximately $781,000 decrease
in prepaid taxes (of which $727,000 was net cash refunded for
taxes).  We used $29,000 in investing activities. As a result,
our cash and cash equivalents at March 31, 2010 decreased $4.4 million to
approximately $12.5 million from approximately $16.9 million at December 31,
2009.





We
believe that our existing cash, cash equivalents, together with cash flows from
expected sales of our subscription and transactional marketing services, and
other potential sources of cash flows, including income tax refunds $3.6
million, expected to be received in 2010, will be sufficient to enable us to
continue activities for at least 12 months.  However, our projections
of future cash needs and cash flows may differ from actual
results.  If current cash and cash equivalents, and cash that may be
generated from operations, are insufficient to satisfy our liquidity
requirements, we may seek to sell debt or equity securities or to obtain a line
of credit.  The sale of additional equity securities or convertible
debt could result in dilution to our stockholders.  We currently have
no arrangements with respect to additional financing.  We can give no
assurance that we will generate sufficient revenues in the future to satisfy our
liquidity requirements or sustain future operations, that we will be able to
acquire sufficient quantities of cost effective media, that other subscription
and marketing services will not be provided by other companies that will render
our services obsolete, or that other sources of funding would be available, if
needed, on favorable terms or at all.  If we cannot obtain such funds
if needed, we would need to curtail or cease some or all of our
operations.





New
Accounting Pronouncements





Adopted
in 2010





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


20


Not
Yet Adopted





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


21


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 Chief Executive Officer, Jeffrey Schwartz,
and Interim 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 March 31, 2010, the end of the
period covered by this report. Based upon that evaluation, Messrs. Schwartz and
Plotts concluded that our disclosure controls and procedures were effective for
the period ended March 31, 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 first quarter
ended March 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.


22


PART II 
  - OTHER
INFORMATION





ITEM
1A. RISK FACTORS





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





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





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





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





·
            Maintain
      existing and develop new carrier and billing aggregator relationships upon
      which our direct-to-consumer subscription business currently
      depends;


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




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


·
            Increase
      brand awareness and consumer recognition to grow our
    business;


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


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


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





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





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





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





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


23


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
associated with any transition to a new service provider would be substantial,
requiring the reengineering of computer systems and telecommunications
infrastructure to accommodate a new service provider to allow for a rapid
replacement and return to normal network operations. This process would be both
expensive and time-consuming. In addition, failure of the Internet and related
telecommunications providers to provide the data communications capacity in the
time frame required by us could cause interruptions in the services we provide
across all of our business activities. In addition to service interruptions
arising from third-party service providers, unanticipated problems affecting our
proprietary internal computer and telecommunications systems have the potential
to occur in future fiscal periods, and could cause interruptions in the delivery
of services, causing a loss of revenue and related gross margins, and the
potential loss of customers, all of which could materially and adversely affect
our business, results of operations and financial condition.





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





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





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





Under the
Marketing Services Agreement and Master Services Agreement we entered into with
Brilliant Digital, Inc. (“BDE”), relating to the operation and marketing of the
Kazaa digital music service, we are responsible for making advance payments and
expenditures in relation to certain expenses incurred in order to provide the
required services and operate the Kazaa music service.  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 and these advances and expenditures are recoverable on a dollar for
dollar basis against current and future revenues. We are dependent on the future
net cash flow of the Kazaa music service to fully recoup the expenditures we
have made although BDE has agreed to repay $2.5 million of these advances and
expenditures which are not otherwise recovered from Kazaa generated revenues and
this repayment obligation has been secured under separate
agreement.  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.


24


Our
working capital requirements are significant and we may need to raise cash in
the future to fund our working capital requirements.





Our
working capital requirements are significant.  If our cash flows from
operations are less than anticipated or our working capital requirements or
capital expenditures are greater than expectations, or if we expand our business
by acquiring or investing in additional products or technologies, we may need to
secure additional debt or equity financing. We are continually evaluating
various financing strategies to be used to expand our business and fund future
growth. There can be no assurance that additional debt or equity financing will
be available on acceptable terms, if at all. The potential inability to obtain
additional debt or equity financing, if required, could have a material adverse
effect on our operations.





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 continue to
grow, we may experience difficulty in attracting publishers, and our revenue
could decline.





We
no longer meet the minimum bid price requirement for continued listing on the
NASDAQ Global Market and have until June 22, 2010 to correct it.





We
received a notice from NASDAQ that we no longer meet the minimum bid price
requirement for continued listing on the NASDAQ Global Market as set forth in
NASDAQ’s Marketplace Rule 5450(a)(1), as a result of the bid price of our common
stock closing below the required minimum $1.00 per share for 30 consecutive
business days.  We have been provided with a customary grace period of
180 calendar days in which to regain compliance with the minimum bid price
rule.  If at any time before June 22, 2010, the bid price of our stock
closes at $1.00 per share or more for a minimum of 10 consecutive business days,
NASDAQ will provide written confirmation to us that we have regained compliance.
If we do not regain compliance with the bid price rule by June 22, 2010, NASDAQ
will notify us that our common stock is subject to delisting from The NASDAQ
Global Market. However, we may appeal the delisting determination to a NASDAQ
hearing panel and the delisting will be stayed pending the panel's
determination. Alternatively, we may apply to transfer the listing of our common
stock to the NASDAQ Capital Market if we satisfy all criteria for initial
listing on the NASDAQ Capital Market, other than compliance with the minimum bid
price requirement. If such application to the NASDAQ Capital Market is approved,
then we may be eligible for an additional grace period.


25


We intend
to actively monitor the bid price for our common stock between now and June 22,
2010, and will consider available options to regain compliance with the NASDAQ
minimum bid price requirements. If we are unable to regain compliance with the
minimum bid rule and is delisted, or unable to qualify for listing on the NASDAQ
Capital Market, market liquidity for our common stock could be severely
affected, and our stockholders’ ability to sell securities in the secondary
market could be limited. Delisting from NASDAQ would negatively affect the value
of our common stock. Delisting could also have other negative results,
including, but not limited to, the potential loss of confidence by employees,
the loss of institutional investor interest and fewer business development
opportunities.





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





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





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.


26


Our
success depends on our ability to continue forming relationships with other
Internet and interactive media content, service and product
providers.





The
Internet includes an ever-increasing number of businesses that offer and market
consumer products and services. These entities offer advertising space on their
websites, as well as profit sharing arrangements for joint effort marketing
programs. We expect that with the increasing number of entrants into the
Internet commerce arena, advertising costs and joint effort marketing programs
will become extremely competitive. This competitive environment might limit, or
possibly prevent us from obtaining profit generating advertising or reduce our
margins on such advertising, and reduce our ability to enter into joint
marketing programs in the future. If we fail to continue establishing new, and
maintain and expand existing, profitable advertising and joint marketing
arrangements, we may suffer substantial adverse consequences to our financial
condition and results of operations. Additionally, we, as a result of our
acquisition of Traffix, now have a significant economic dependence on the major
search engine companies that conduct business on the Internet; such search
engine companies maintain ever changing rules regarding scoring and indexing
their customers marketing search terms. If we cannot effectively monitor the
ever changing scoring and indexing criteria, and affectively adjust our search
term applications to conform to such scoring and indexing, we could suffer a
material decline in our search term generated acquisitions, correspondingly
reducing our ability to fulfill our clients marketing needs. This would have an
adverse impact on our company’s revenues and profitability.





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





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





We
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.





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.





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.


27


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 March 31, 2010, many of our outstanding employee stock options have
exercise prices in excess of the stock price on that date. To the extent this
continues to occur, our ability to retain employees may be adversely
affected.


28


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





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





On March
10, 2010, Atrinsic received final approval of its settlement to its Class Action
proceeding in the State of California in Allen v. Atrinsic, Inc. f/k/a New
Motion, Inc., pending in Los Angeles County Superior Court. The settlement
covers all of the Company’s mobile products, web sites and advertizing practices
through December 2009. All costs of the settlement and defense were accrued for
in 2008; therefore this settlement did not impact the Company’s results of
operations in 2009 and is not expected to impact the Company’s results of
operations in 2010.  Subsequent to March 31, 2010, the Company paid
the $1.0 million settlement for the Class Action.





As a
result of the State of California Settlement and final approval of the judgment,
Atrinsic has filed stays, and will file dispositive motions, in the following
actions, which it is either directly named in or has assumed the defense of the
following cases: Baker v. Sprint Nextel Corp., Motricity, Inc., and New Motion,
Inc. pending in Dade County Superior Court in Florida,  Stewart v New
Motion, Inc. and Motricity, Inc., pending in Hennepin County District Court in
Minnesota, Rynearson v. Motricty, Inc, pending in King County Superior Court in
Washington and Walker v. Motricity, Inc., pending in Alameda County Superior
Court in California.  Management believes that it has accrued for all
probable and estimable related costs of these actions.





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





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





Our
performance is subject to United States economic conditions and its impact on
levels of consumer spending.   Consumer spending recently has
deteriorated significantly as a result of the current economic situation in the
United States and may remain depressed, or be subject to further deterioration
for the foreseeable future.  Purchases of our subscription based
services as well as our transactional 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..





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





Effective
internal control over financial reporting is necessary for us to provide
reliable financial reports and effectively prevent fraud. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal
control over financial reporting. Our independent registered public accounting
firm will need to annually attest to the Company’s evaluation, and issue their
own opinion on the Company’s internal control over financial reporting beginning
with the Company’s Annual Report on Form 10-K for the fiscal year ending
December 31, 2010. The process of complying with Section 404 is expensive and
time consuming, and requires significant management attention. We cannot be
certain that the measures we will undertake will ensure that we will maintain
adequate controls over our financial processes and reporting in the future.
Furthermore, if we are able to rapidly grow our business, the internal controls
over financial reporting that we will need, will become more complex, and
significantly more resources will be required to ensure that our internal
controls over financial reporting remain effective. Failure to implement
required controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting
obligations. If we or our auditors discover a material weakness in our internal
control over financial reporting, the disclosure of that fact, even if the
weakness is quickly remedied, could diminish investors’ confidence in our
financial statements and harm our stock price. In addition, non-compliance with
Section 404 could subject us to a variety of administrative sanctions, including
the suspension of trading, ineligibility for listing on one of the Nasdaq Stock
Markets or national securities exchanges, and the inability of registered
broker-dealers to make a market in our common stock, which would further reduce
our stock price.


29


Item
6. Exhibits




Exhibit
                          Number
                        
                        Description of Exhibit10.1
                        
                        Employment Agreement by and between Jeffery
      Schwartz and Atrinsic, Inc. dated January 27, 2010.  Incorporated by
      reference to the Registrant’s Current Report on Form 10-K (File No.
      001-12555) filed with the Commission on March 30,
      2010.*10.2
                        
                        Employment offer by and between Thomas Plotts and
      Atrinsic, Inc. dated January 29, 2010.  Incorporated by
      reference to the Registrant’s Current Report on Form 10-k (File No.
      001-12555) filed with the Commission on March 30,
      2010.*10.3
                        
                        Master Services Agreement between Atrinsic, Inc.
      and Brilliant Digital Entertainment, Inc. dated March 26, 2010 but
      effective as of July 1, 2009.10.4
                        
                        Marketing Services Agreement between Atrinsic,
      Inc. and Brilliant Digital Entertainment, Inc. dated March 26, 2010 but
      effective as of July 1, 2009.31.1
                        
                        Certification
      of Principal Executive Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                        
                        Certification
      of Principal Financial Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                        
                        Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
      Sarbanes-Oxley Act of
2002.





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





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:
May 11 , 2010




BY:
            /s/
      Jeffrey Schwartz
            
            BY:
            /s/
      Thomas PlottsJeffrey
      Schwartz
            
            Thomas
      PlottsChief
      Executive Officer
            
            Chief
      Financial Officer (Interim)(Principal
      Financial and Accounting
Officer)


30