Protagenic Therapeutics, Inc.\new - Quarter Report: 2011 September (Form 10-Q)

Unassociated Document

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 September 30, 2011 or

¨	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		(I.R.S. Employer Identification No.)
incorporation or organization)

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

(Address of principal executive offices) (ZIP Code)

(212) 716-1977

(Registrant’s telephone number, including area code)

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

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

Yes x 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 x No ¨

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

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

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

Yes ¨ No x

As of November 8, 2011, the Company had 7,205,719 shares of Common Stock, $0.01 par value, outstanding, which includes 681,509 shares held in treasury.

Table of Contents

		Page

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4	Controls and Procedures	29

PART II	OTHER INFORMATION	30

Item 1A	Risk Factors	30

Item 6	Exhibits	38

[2]

Item1. Financial Statements

ATRINSIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	As of			As of
	September 30,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	1,998		$	6,319
Accounts receivable, net of allowance for doubtful accounts of $849 and $1,168		5,297			4,994
Income tax receivable		81			437
Asset held for sale		787			-
Prepaid expenses and other current assets		900			565

Total Current Assets		9,063			12,315

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,107 and $1,813		2,484			2,692
INTANGIBLE ASSETS, net of accumulated amortization of $3,027 and $3,813		1,380			3,083
DEFERRED TAX ASSET		278			276
INVESTMENTS, ADVANCES AND OTHER ASSETS		869			976

TOTAL ASSETS	$	14,074		$	19,342

LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	5,231		$	4,470
Accrued expenses		6,799			5,172
Convertible notes		4,020			-
Derivative liability		1,883			-
Deferred tax liability		347			347
Deferred revenues and other current liabilities		542			274

Total Current Liabilities		18,822			10,263

OTHER LONG TERM LIABILITIES		903			907

TOTAL LIABILITIES		19,725			11,170

COMMITMENTS AND CONTINGENCIES (See Note 15)		-			-

STOCKHOLDERS' EQUITY
Common stock - par value $0.01, 100,000,000 shares authorized, 7,022,289 and 6,964,125 shares issued at September 30, 2011 and December 31, 2010, respectively; and, 6,340,780 and 6,282,616 shares outstanding at September 30, 2011 and December 31, 2010, respectively.		70			70
Additional paid-in capital		181,462			181,087
Accumulated other comprehensive income		32			42
Common stock, held in treasury, at cost, 681,509 shares at September 30, 2011 and December 31, 2010.		(4,981	)		(4,981	)
Accumulated deficit		(182,234	)		(168,046	)

Total Stockholders' Equity		(5,651	)		8,172

TOTAL LIABILITIES AND EQUITY	$	14,074		$	19,342

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

[3]

ATRINSIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(Dollars in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Subscriptions	$	2,496		$	4,261		$	9,495		$	15,234
Transactional services		9,830			4,916			16,157			16,956

NET REVENUE		12,326			9,177			25,652			32,190

OPERATING EXPENSES
Cost of media – 3rd party		9,208			4,589			16,119			17,943
Content costs		1,997			1,831			6,210			5,689
Product and distribution		1,799			2,565			6,529			8,197
Selling and marketing		793			938			2,908			3,225
General, administrative and other operating		1,893			2,597			5,720			7,538
Depreciation and amortization		233			325			640			972
Impairment of intangible assets		1,421			-			1,421			-

		17,344			12,845			39,547			43,564

LOSS FROM OPERATIONS		(5,018	)		(3,668	)		(13,895	)		(11,374	)

OTHER (INCOME) EXPENSE
Interest income and dividends		(0	)		(4	)		(2	)		(9	)
Interest expense, net		(550	)		1			619			2
Other expense (income)		0			(77	)		(384	)		(87	)

		(550	)		(80	)		233			(94	)

LOSS BEFORE TAXES AND EQUITY IN (EARNINGS) LOSS OF INVESTEE		(4,468	)		(3,588	)		(14,128	)		(11,280	)

INCOME TAXES		45			35			107			208

EQUITY IN (EARNINGS) LOSS OF INVESTEE, AFTER TAX		9			13			(47	)		74

NET LOSS ATTRIBUTABLE TO ATRINSIC, INC.	$	(4,522	)	$	(3,636	)	$	(14,188	)	$	(11,562	)

NET LOSS PER SHARE ATTRIBUTABLE TO ATRINSIC COMMON STOCKHOLDERS:
Basic	$	(0.72	)	$	(0.70	)	$	(2.25	)	$	(2.22	)
Diluted	$	(0.72	)	$	(0.70	)	$	(2.25	)	$	(2.22	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		6,298,662			5,216,274			6,314,795			5,214,889
Diluted		6,298,662			5,216,274			6,314,795			5,214,889

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)

	Nine Months Ended
	September 30,
	2011			2010

Cash Flows From Operating Activities
Net loss	$	(14,188	)	$	(11,562	)
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for doubtful accounts		(319	)		(20	)
Depreciation and amortization		640			972
Impairment of intangible assets		1,421			-
Stock-based compensation expense		285			860
Deferred income taxes		-			37
Equity in loss (earnings) of investee		(47	)		74
Interest expense relating to debt discount and derivative liability losses		648			-
Changes in operating assets and liabilities:
Accounts receivable		15			1,310
Prepaid income tax		334			896
Prepaid expenses and other assets		234			1,765
Accounts payable		766			(1,993	)
Deferred revenue		148			-
Other, principally accrued expenses		2,313			(5,306	)
Net cash used in operating activities		(7,750	)		(12,967	)

Cash Flows From Investing Activities
Cash received from investee		-			360
Capital expenditures		(911	)		(41	)

Net cash provided by (used in) investing activities		(911	)		319

Cash Flows From Financing Activities
Proceeds from issuance of convertible notes and warrants		4,715			-
Financing costs for the convertible notes and warrants		(446	)		-
Proceeds from exercise of stock options and issuance of common stock		90			-
Purchase of common stock held in treasury		-			(9	)
Net cash provided by (used in) financing activities		4,359			(9	)

Effect of exchange rate changes on cash and cash equivalents		(19	)		(7	)

Net Decrease In Cash and Cash Equivalents		(4,321	)		(12,664	)
Cash and Cash Equivalents at Beginning of Year		6,319			16,913
Cash and Cash Equivalents at End of Period	$	1,998		$	4,249

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash refunded for taxes	$	241		$	696
Cash paid for interest	$	-		$	2
Reduction of proceeds from issuance of convertible notes (see Note 17)	$	535		$	-
Non-cash financing costs	$	51		$	-

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

[5]

ATRINSIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS

(UNAUDITED)

For the Nine Months Ended September 30, 2011

(Dollars in thousands, except per share data)

													Accumulated
								Additional					Other
	Comprehensive			Common Stock				Paid-In		(Accumulated			Comprehensive			Treasury Stock					Total
	Loss			Shares		Amount		Capital		Deficit)			Income			Shares		Amount			Equity

Balance at January 1, 2011		-			6,964,125	$	70	$	181,087	$	(168,046	)	$	42			681,509	$	(4,981	)	$	8,172
Net loss	$	(14,188	)		-		-		-		(14,188	)		-			-		-			(14,188	)
Foreign currency translation adjustment		(10	)		-		-		-		-			(10	)		-		-			(10	)
Comprehensive loss	$	(14,198	)		-		-		-		-			-			-		-			-
Stock based compensation expense		-					-		285		-			-			-		-			285
Issuance of common stock					58,164				90													90
Balance at September 30, 2011		-			7,022,289	$	70	$	181,462	$	(182,234	)	$	32			681,509	$	(4,981	)	$	(5,651	)

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

[6]

ATRINSIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation

The accompanying Condensed Consolidated Balance Sheet as of September 30, 2011, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 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, 2010. 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, 2010, on Form 10-K filed on April 7, 2011.

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 impairment of intangible assets, pre-acquisition contingencies, income taxes, convertible notes, warrants and derivative liabilities 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.

Atrinsic, Inc. (the “Company”) is organized into two operating segments: Subscription Services and Transactional Services. See Note 16 – Business Segments, for further information about the Company’s operating segments.

On December 2, 2010, the Company effected a 1-for-4 reverse stock split of its common stock. Unless clearly indicated in this report or other sections of the Form 10-Q to the contrary, all references to stock price or number of shares of common stock contained in this report (whether prior to, on or after December 2, 2010) are presented on an “as adjusted” basis to reflect the effect of the reverse stock split.

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

Note 2 - Going Concern and Liquidity Considerations

The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The accompanying historical consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The assessment of the Company’s ability to continue as a going concern was made by management considering, among other factors: (i) the Company’s current levels of expenditures, including subscriber acquisition costs, operating expense, including product development, and overhead, (ii) the Company’s ongoing working capital needs, (iii) the uncertainty concerning the outcome of future financings, (iv) the Company’s history of losses and use of cash for operating activities (v) outstanding balance of cash and cash equivalents of $2.0 million at the end of the quarter, and (vi) the Company’s budgets and financial projections of future operations, including the likelihood of achieving operating profitability without the need for additional financing.

For periods subsequent to September 30, 2011, the Company expects to continue to incur losses and negative cash flows as it continues to incur expenditures to develop the Kazaa digital music service, acquire subscribers for the Kazaa service, and is not able to reduce other operating expenses and overhead sufficiently to a level in line with its level of revenues. If the Company is unable to increase revenues sufficiently or decrease its expenditures to a sustainable level, its financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

For the nine months ended September 30, 2011, the Company incurred a net loss of $14.2 million, and used $7.8 million of cash in operations.

[7]

Based on current financial projections, management believes the continuation of the Company as a going concern is primarily dependent on its ability to, among other factors: (i) consummate a suitable financing, or obtain financing from the sale of its assets or lines of business , (ii) scale the Kazaa subscriber base to a level where the monthly revenue generated from the Company’s subscriber base exceeds subscriber acquisition costs, net of expenses required to operate Kazaa, (iii) eliminate or reduce operating and overhead expenditures to a level more in line with the Company’s revenue (iv) improve utilization of the Kazaa digital music service and improve lifetime values (LTVs) of subscribers to that service, (v) acquire profitable subscribers to the Kazaa digital music service at cost effective rates (vi) grow the Company’s search marketing agency revenue base through the addition of new customers or expansion of business with existing customers and, (vii) expand margins in the Company’s search marketing agency and on its affiliate platform.

While the Company addresses these operating matters, it must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with developing and operating the Kazaa digital music service, as well as funding overhead and the working capital needs of the Company’s other businesses. If the Company is not able to obtain sufficient funds through future financings, or if the Company experiences adverse outcomes with respect to its operational forecasts, the Company’s financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected.

In the near term, the Company is focused on: (i) raising additional debt or equity capital to fund the Company’s cash needs and to finance its longer term growth to further develop the Kazaa business and grow its subscriber base, and (ii) pursuing various means to minimize operating costs and increase cash, including the potential sale of assets. The Company cannot provide assurance that it will be able to realize cost reductions in the Company’s operations, or that it can obtain additional cash through asset sales or the issuance of equity or raising debt. If the Company is unsuccessful in its efforts it will be required to further reduce the Company’s operations or it may be required to cease certain or all of its operations in order to offset the lack of available funding.

Note 3 – 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. As of September 30, 2011, the Company’s net investment in TBR totals $0.5 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.

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 equity in earnings of $47,000 for the nine months ended September 30, 2011 and equity in loss of $74,000 for the nine months ended September 30, 2010.

Note 4 – Kazaa

Kazaa is a subscription-based digital music service that gives users unlimited access to millions of CD-quality tracks. For a monthly fee users can stream and download unlimited music files and play those files on multiple computers and mobile devices. Unlike other music services that charge each time a song is downloaded, Kazaa allows users to listen to and explore as much music as they want for one monthly fee, without having to pay for every track or album. Consumers are billed for this service on a monthly recurring basis through a credit card, or mobile device. Royalties are paid to the rights’ holders for licenses to the music utilized by this digital service. Atrinsic and Brilliant Digital Entertainment, Inc. (“Brilliant Digital”) jointly offer the Kazaa digital music service pursuant to a Marketing Services Agreement and a Master Services Agreement between the two companies, each entered into effective as of July 1, 2009.

Under the Marketing Services Agreement, Atrinsic is responsible for marketing, promotional, and advertising services in respect of the Kazaa business. Pursuant to the Master Services Agreement, Atrinsic provides services related to the operation of the Kazaa business, including billing and collection services and the operation of the Kazaa online storefront. Brilliant Digital is obligated to provide certain other services with respect to the Kazaa business, including licensing the intellectual property underlying the Kazaa business to Atrinsic, obtaining all licenses to the content offered as part of the Kazaa business and delivering that content to subscribers. As part of the agreements, Atrinsic is required to make advance payments and expenditures in respect of certain expenses incurred in order to operate the Kazaa business. Since inception on July 1, 2009, and through September 30, 2011, the Company has incurred $17.4 million of cumulative net losses, net of recouped funds in order to support the development of the Kazaa brand.

[8]

Also in accordance with the original Marketing Service Agreement and Master Service Agreement, Atrinsic and Brilliant Digital were to share equally in the “Net Profit” generated by the Kazaa music subscription service after all of the Company’s costs and expenses have been recouped. For the nine months ended September 30, 2011 and 2010, the Company has included in its statement of operations, Kazaa revenue of $7.1 million, net of deferred revenue, and Kazaa revenue of $8.4 million, respectively, and expenses incurred for the Kazaa music service of $12.7 million and $11.5 million, respectively, net of reimbursements from Brilliant Digital. Kazaa revenue and expenses are recorded as part of subscription services segment.

Effective January, 2011, in order to more accurately report revenue based upon the effective date of customer subscriptions, the Company began recognizing subscription revenue related to the Kazaa business, net of deferred revenue.

On October 13, 2010, Atrinsic entered into amendments to its existing Marketing Services Agreement and Master Services Agreement with Brilliant Digital and entered into an agreement with Brilliant Digital to acquire all of the assets of Brilliant Digital that relate to its Kazaa subscription based music service business.

Among other things, the amendments extend the term of each of the Marketing Services Agreement and Master Services Agreement from three years to thirty years, provide Atrinsic with an exclusive license to the Kazaa trademark in connection with Atrinsic’s services under the agreements, and modify the Kazaa digital music service profit share payable to Atrinsic under the agreements from 50% to 80%. In addition, the amendments remove Brilliant Digital’s obligation to repay up to $2.5 million of Atrinsic’s advances and expenditures which are not otherwise recovered from Kazaa generated revenues and remove the $5.0 million cap on expenditures that Atrinsic was required to advance in relation to the operation of the Kazaa business. As consideration for entering into the amendments, Atrinsic issued 1,040,358 unregistered shares of its common stock to Brilliant Digital on October 13, 2010. The issuance of these shares resulted in the Company recording an intangible asset of $1.4 million which is being amortized over 10 years.

The amendments to the Marketing Services Agreement and Master Services Agreement are part of a broader transaction between Atrinsic and Brilliant Digital pursuant to which Atrinsic will acquire all of the assets of Brilliant Digital that relate to its Kazaa digital music service business in accordance with the terms of an asset purchase agreement entered into between the parties. The purchase price for the acquired assets includes the issuance by Atrinsic of an additional 1,781,416 shares of its common stock at the closing of the transactions contemplated by the asset purchase agreement as well as the assumption of certain liabilities related to the Kazaa business. The closing of the transactions contemplated by the asset purchase agreement will occur when all of the assets associated with the Kazaa business, including the Kazaa trademark and associated intellectual property, as well as Brilliant Digital’s content management, delivery and customer service platforms and licenses with third parties, have been transferred to Atrinsic. The closing of the transactions contemplated by the asset purchase agreement is subject to receipt of all necessary third party consents as well as other customary closing conditions. At the closing of the transactions contemplated by the asset purchase agreement, Atrinsic has agreed to appoint two individuals to be selected by Brilliant Digital to serve on Atrinsic’s Board of Directors. In addition, at the closing, each of the Marketing Services Agreement and Master Services Agreement will terminate.

Note 5 – Convertible Notes and Warrants

On May 31, 2011, the Company entered into a Securities Purchase Agreement, pursuant to which it sold Notes and issued Warrants (defined below) to certain buyers (the “Buyers”).

Pursuant to the terms of the Securities Purchase Agreement, the Company sold to the Buyers senior secured convertible notes in the aggregate original principal amount of $5,813,500 (the “Notes”), which Notes are convertible into shares of the Company’s common stock. The Notes were issued with an original issue discount of approximately 9.1%, and the aggregate proceeds of the Notes were $5,285,000, before certain financing costs of $35,000. The Notes are not interest bearing, unless the Company is in default on the Notes, in which case the Notes carry an interest rate of 18% per annum.

The Notes are initially convertible into shares of common stock at a conversion price of $2.90 per share, provided that if the Company makes certain dilutive issuances (with limited exceptions), the conversion price of the Notes will be lowered to the per share price paid in the applicable dilutive issuance. The Company is required to repay the Notes in six equal monthly installments commencing on December 31, 2011 and ending on May 31, 2012, either in cash or in shares of its common stock at the option of the Company. If the Company chooses to utilize shares of its common stock for all or part of the payment, it must make an irrevocable decision to use shares 23 trading days prior to the installment payment date, and the value of the Company’s shares will be equal to the lower of the conversion price then in effect or 85% of the arithmetic average of the closing bid prices of its common stock during the 20 trading day period prior to payment of the installment amount (the “Installment Conversion Price”). If the Company chooses to make an installment payment in shares of common stock, it must make a pre-installment payment of shares (the “Pre-Installment Shares”) to the Note holder 21 trading days prior to the applicable installment date based on the value of its shares equal to the lower of the conversion price then in effect or 85% of the arithmetic average of the closing bid prices of its common stock during the 20 trading day period prior to payment of the installment amount. On the installment date, to the extent the Company owes a Note holder additional shares in excess of the Pre-Installment Shares to satisfy the installment payment, the Company will issue such Note holder additional shares, and to the extent it has issued excess Pre-Installment Shares, such shares will be applied to future payments. If an event of default occurs under the Notes, each Buyer may require the Company to redeem its Note in cash at the greater of up to 110% of the unconverted principal amount or 110% of the greatest equity value of the shares of common stock underlying the Notes from the date of the default until the redemption is completed. The conversion price of each Note is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The convertibility of each Note may be limited if, upon conversion, the holder or any of its affiliates would beneficially own more than 4.9% or 19.9% (as applicable) of the Company’s common stock.

[9]

Brilliant Digital, which prior to the transaction held approximately 16.5% of the Company’s issued and outstanding common stock, purchased Notes in the aggregate principal amount of $2,200,000.

Pursuant to the terms of the Purchase Agreement, the Company also agreed to issue to each Buyer warrants to acquire shares of common stock, in the form of three warrants: (i) “Series A Warrants,” (ii) “Series B Warrants” and (iii) “Series C Warrants” (collectively, the “Warrants”).

The Series B Warrants are exercisable immediately after issuance and expire nine months after the date the Company obtains shareholder approval (discussed below). The Series B Warrants provide that the holders are initially entitled to purchase an aggregate of 1,002,329 shares at an initial exercise price of $2.93 per share. If the Company makes certain dilutive issuances (with limited exceptions), the exercise price of the Series B Warrants will be lowered to the per share price paid in the applicable dilutive issuance. The number of shares underlying the Series B Warrants will adjust whenever the exercise price adjusts, such that at all times the aggregate exercise price of the Series B Warrants will be $2,936,824. To the extent the Company enters into a fundamental transaction (as defined in the Series B Warrants and which include, without limitation, the Company entering into a merger or consolidation with another entity, selling all or substantially all of its assets, or a person acquiring 50% of the Company’s common stock), the Company has agreed to purchase the Series B Warrants from the holders at their Black-Scholes value (if a holder so elects to have its Series B Warrant so purchased). If our common stock trades at a price at least 200% above the Series B Warrants exercise price for a period of 10 trading days at any time after the Company obtains shareholder approval (discussed below), the Company may force the exercise of the Series B Warrants if it meets certain conditions.

The Series A and Series C Warrants are exercisable immediately after issuance and have a five year term. The Series A Warrants provide that the holders are initially entitled to purchase an aggregate of 2,004,656 shares at an initial exercise price of $2.90 per share. The Series C Warrants provide that the holders are initially entitled to purchase an aggregate of 952,212 shares at an initial exercise price of $2.97 per share. If on the expiration date of the Series B Warrants, a holder of such warrant has not exercised such warrant for at least 80% of the shares underlying such warrant, we have the right to redeem from such holder its Series C Warrant for $1,000 under certain circumstances. If the Company makes certain dilutive issuances (with limited exceptions), the exercise price of the Series A and Series C Warrants will be lowered to the per share price paid in the applicable dilutive issuance. The number of shares underlying the Series A Warrants and the Series C Warrants will adjust whenever the exercise price adjusts, such that at all times the aggregate exercise price of the Series A Warrants and Series C Warrants will be $5,813,502 and $2,828,070, respectively. To the extent the Company enters into a fundamental transaction (as defined in the Series A and Series C Warrants and which include, without limitation, the Company entering into a merger or consolidation with another entity, selling all or substantially all of its assets, or a person acquiring 50% of the Company’s common stock), the Company has agreed to purchase the Series A and Series C Warrants from the holder at their Black-Scholes value (if a holder so elects to have its Series A Warrant or Series C Warrant so purchased).

The exercise price of all the Warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The exercisability of the Warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.9% or 19.9% (as applicable) of the Company’s common stock. The Notes may not be converted and the Warrants may not be exercisable if the total number of shares that would be issued would exceed 19.99% of our common stock outstanding on the date the Purchase Agreement was executed prior to our receiving shareholder approval (as discussed below).

Atrinsic and its subsidiaries, New Motion Mobile, Inc. and Traffix, Inc., entered into a security agreement (“Security Agreement”) with the Buyers pursuant to which the Company granted each of the Buyers a security interest in all of its assets securing the Company’s obligations under the Notes. In addition, New Motion Mobile, Inc. and Traffix, Inc. executed guaranties (each, a “Guaranty”) with each Buyer pursuant to which such subsidiaries guarantee our obligations under the Notes.

The Company also entered into a registration rights agreement (“Registration Rights Agreement”) with the Buyers pursuant to which, among other things, it agreed to register the resale of the shares of common stock underlying the Notes and Warrants. The Company agreed to file a registration statement by June 30, 2011 and to the extent it fails to file the registration statement on a timely basis or if the registration statement is not declared effective within 90 days after the closing of the transaction (120 days if reviewed by the Securities and Exchange Commission), the Company agreed to make certain payments to the Buyers. The Company filed a registration statement on Form S-3 with the Securities Exchange Commission registering for re-sale the common stock underlying the Notes and Warrants on July 1, 2011, which was subsequently declared effective on September 30, 2011.

[10]

In the Purchase Agreement, the Company has agreed to, among other things, (i) subject to certain exceptions, not issue any securities for a period of beginning on May 31, 2011 to the date that is 30 trading days from the date on which the resale by the Buyers of all registrable securities (as defined in the Registration Rights Agreement) is covered by one or more registration statements, (ii) not to enter into a variable rate transaction at any time while the Notes are outstanding and (iii) for a period of one year from the date of the Purchase Agreement, to allow the Buyers to participate in future financing transactions

The Company engaged Wedbush Securities, Inc. to act as placement agent, on a reasonable best efforts basis in connection with the offering and in addition to a placement fee, received five year warrants to purchase 41,234 shares of the Company’s common stock. The warrant is exercisable immediately at an exercise price of $2.90 per share.

The Company recorded the issuance of the convertible note payable, original issue discount, net of additional debt discount, in its balance sheet and is amortizing the debt discount using the effective interest method over the 12-month term of the Notes. The table below summarizes the transactions and components related to this convertible notes financing:

	Convertible		Original			Debt			Net Value of
(in thousands)	Notes Payable		Issue Discount			Discount			Convertible Notes Payable
Issuance of notes on May 31, 2011	$	5,814	$	(529	)	$	(2,308	)	$	2,977
Accretion: June - September 2011		-		194			849			1,043
Value as of September 30, 2011	$	5,814	$	(335	)	$	(1,459	)	$	4,020

The Company also recorded a derivative liability, representing the fair market value of the Notes’ embedded convertible derivative and the fair market value of the Warrants. This derivative liability will be marked-to-market each period and any resulting increase or (decrease) in the derivative liability will be recorded as interest expense (income). As a result of the marked-to-market adjustment, the Company recorded interest expense of $0.6 million during 2011. See Note 11 for further information on the accounting for the derivative liability.

Note 6 – Fair Value Measurements

U.S. GAAP includes a framework for measuring fair value, which also addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

Under the measurement framework, a fair valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels that reflect the degree of subjectivity necessary to determine fair value measurements, as follows. Level 1 inputs are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly, through market corroboration, for substantially the full term of the asset or liability. Level 3 inputs are unobservable inputs and reflect the Company’s estimates of assumptions that market participants would use to measure assets and liabilities at fair value. The fair values are therefore determined using model-based techniques that include option pricing models and discounted cash flow models. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2011 (unaudited):

Quoted Prices in

Active Markets

Significant

for Identical

Unobservable

Total

(in thousands)

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Fair Value

Gain

Derivative liabilities

1,883

441

[11]

The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors, and are classified within Level 3 of the valuation hierarchy, due to use of an estimate of volatility factors.

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.

Note 7 - 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 Nine Months Ended
	September 30,
	2011			2010

Revenues
Aggregator A		14	%		19	%
Customer B		9	%		6	%
Customer C		27	%		0	%
Other Customers & Aggregators		50	%		75	%

	As of
	September 30,			December 31,
	2011			2010

Accounts Receivable
Aggregator A		29	%		44	%
Customer B		5	%		5	%
Customer C		30	%		0	%
Other Customers & Aggregators		36	%		51	%

[12]

Note 8 - Property and Equipment

Property and equipment consists of the following:

	Useful Life		September 30,			December 31,
(dollars in thousands)	in years		2011			2010

Computers and software applications		3	$	2,611		$	1,700
Leasehold improvements		10		1,813			1,835
Building		40		-			804
Furniture and fixtures		7		167			166
Gross PP&E				4,591			4,505
Less: accumulated depreciation				(2,107	)		(1,813	)
Net PP&E			$	2,484		$	2,692

Depreciation expense for the nine months ended September 30, 2011 and 2010 totaled $0.4 million and $0.5 million, respectively, and is recorded on a straight line basis.

In the first quarter of 2011, the Company put its building and land up for sale as part of the closing of its Canadian facility. The net fixed asset value of the building and land has been reclassified as an Asset held for Sale in the Current Assets section of the Balance Sheet and depreciation on the asset was terminated as of December 31, 2010.

Note 9 –Intangibles

ASC 360 requires that an entity test for the recoverability of long-lived assets if events or changes in circumstances indicate that the carrying value may not be recoverable. As a result of significant adverse changes in the business climate, the Company concluded that triggering events had occurred and the Company tested long-lived assets for impairment as of September 30, 2011, and concluded that the carrying value of certain amortizable intangibles may not be recoverable.

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

The Company then determined the fair value of such amortizable intangible assets and recognized an impairment charge of $0.7 million and $3.4 million during the quarter ended September 30, 2011 and December 31, 2010, respectively.

An intangible asset that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired in accordance with ASC 350. The Company concluded that triggering events had occurred and performed impairment test for the intangible assets. The impairment test consisted of a comparison of the fair value of intangible assets with their carrying amount. If the carrying amount of the intangible assets exceed their fair value, an impairment loss shall be recognized in an amount equal to that excess. In valuing the intangible assets, the Company applied the relief from royalty method. This method assumes that the assets have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. Factors used to determine the fair value of the intangible assets included estimates and assumptions of the Company’s projected revenue, cash flows, operating expenses, weighted average cost of capital, operating ratios and valuation of comparable companies. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital.

As a result of the impairment analysis, the Company recorded an impairment loss of $0.7 million and $1.5 million during the quarter ended September 30, 2011 and December 31, 2010, respectively, for its indefinite lived intangible assets.

[13]

The carrying amount and accumulated amortization of intangible assets as of September 30, 2011 and December 31, 2010, respectively, are as follows:

	Weighted average	Gross Book		Accumulated				Net Book
(dollars in thousands)	Useful Life in Years	Value		Amortization		Impairment		Value

As of September 30, 2011

Indefinite Lived assets
Tradenames		$	11	$	-	$	-	$	11
Domain names			773		-		689		84

Amortized Intangible Assets
Acquired software technology	0.4		1,809		1,809		-		-
Domain names	0.1		426		426		-		-
Tradenames	5		805		121		669		15
Restrictive covenants	2.1		631		568		63		-
Kazaa Marketing Services Agreement	10		1,373		103		-		1,270

Total		$	5,828	$	3,027	$	1,421	$	1,380

As of December 31, 2010

Indefinite Lived assets
Tradenames		$	918	$	-	$	907	$	11
Domain names			1,298		-		525		773

Amortized Intangible Assets
Acquired software technology	0.4		2,516		1,968		531		17
Domain names	0.1		426		420		-		6
Tradenames	5		3,966		320		2,841		805
Customer lists	0.1		582		570		12		-
Restrictive Covenants	2.1		667		535		34		98
Kazaa Marketing Services Agreement	10		1,373		-		-		1,373

Total		$	11,746	$	3,813	$	4,850	$	3,083

Note 10 - 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. The key assumptions for this model 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.

During the nine months ended September 30, 2011, the Company granted no stock options and 75,000 restricted stock units. There were 30,000 stock options exercised, 210,000 stock options and 91,000 restricted stock units forfeited.

[14]

Stock based compensation expense for the three and nine months ended September 30, 2011and 2010 are as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2011		2010		2011		2010

Product and distribution	$	3	$	23	$	23	$	44
Selling and marketing		6		11		29		28
General and administrative and other operating		24		191		233		788

Total	$	33	$	225	$	285	$	860

Note 11- Derivative Liabilities

Accounting Standard Codification “ASC” 815 – Derivatives and Hedging, which provides guidance on determining what types of instruments or embedded features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can affect the accounting for the Warrants and Notes issued by the Company. As the conversion features within, and the detachable warrants issued with the Company’s Notes do not have fixed settlement provisions because their conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future, we have concluded that the instruments are not indexed to the Company’s stock, are to be bifurcated from notes and are to be treated as derivative liabilities. The derivative liability is booked as a current liability in the Company's balance sheet and will be marked to market each reporting period, with a corresponding entry to interest income or expense, until their respective exercise or extinguishment.

The following table shows the inputs and assumptions used to determine the fair market values of the Warrants and embedded derivative portion of the Notes as of September 30, 2011. The table also discloses the number of underlying common shares into which the Notes or Warrants can be converted or exercised.

	Series A			Series B			Series C			Convertible Notes
	Warrants			Warrants			Warrants			Imbedded Derivative
Stock price	$	2.25		$	2.25		$	2.25		$	2.25
Strike price	$	2.90		$	2.93		$	2.97		$	2.90	(1)
Maturity (years)		4.67			0.42			4.67			0.67
Risk free interest rate		0.96	%		0.06	%		0.96	%		0.13	%
Volatility		65	%		57	%		65	%		54	%
Fair market value of derivative liability (in thousands)	$	822		$	10		$	53		$	984	(2)
Underlying Common Shares		2,004,656			1,002,329			952,212			2,004,656

(1)

Strike price based on original contractual agreement

(2)

The convertible note embedded derivative liability is calculated as the full value of the convertible note, using the assumptions above, minus the straight debt and dilution protection value of $5.3 million.

Note 12 – 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 convertible notes, outstanding stock options and warrants.

[15]

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except per share data)	2011			2010			2011			2010
EPS Denominator:
Basic weighted average shares		6,298,662			5,216,274			6,314,795			5,214,889
Effect of dilutive securities		-			-			-			-
Diluted weighted average shares		6,298,662			5,216,274			6,314,795			5,214,889

EPS Numerator (effect on net loss):
Net loss attributable to Atrinsic, Inc.	$	(4,522	)	$	(3,636	)	$	(14,188	)	$	(11,562	)
Effect of dilutive securities		-			-			-			-
Diluted loss attributable to Atrinsic, Inc.	$	(4,522	)	$	(3,636	)	$	(14,188	)	$	(11,562	)

Net loss per common share:
Basic weighted average loss attributable to Atrinsic, Inc.	$	(0.72	)	$	(0.70	)	$	(2.25	)	$	(2.22	)
Effect of dilutive securities		-			-			-			-
Diluted weighted average loss attributable to Atrinsic, Inc.	$	(0.72	)	$	(0.70	)	$	(2.25	)	$	(2.22	)

Common stock underlying outstanding options and convertible securities were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2011 and 2010, because their inclusion would be anti-dilutive when applied to the Company’s net loss per share.

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

Anti-Dilutive EPS Disclosure

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010

Options		306,550		670,460		306,550		670,460
Warrants		4,080,286		78,611		4,080,286		78,611
Restricted Shares		-		1,043		-		8,543
Restricted Stock Units		97,660		136,122		97,660		136,122
Convertible Note		2,004,656		-		2,004,656		-

The per share weighted average exercise prices of the options were $1.92 for the three and nine months ended September 30, 2011 and 2010. The per share exercise prices of the warrants ranged from $2.90 - $22.00 and $13.76 - $22.00 for the three and nine months ended September 30, 2011 and 2010, respectively.

Note 13 - Income Taxes

Income tax expense before equity in (earnings) loss of investee for the nine months ended September 30, 2011 and 2010, was $107,000 and $208,000, respectively and reflects an effective tax rate of (1%) and (2%) 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 at Federal and State levels, and is also subject to taxation in certain foreign jurisdictions. The Company’s tax years for 2007 and forward are subject to examination by the tax authorities (except California is open for 2006 and forward). In addition, the tax returns for certain acquired entities are also subject to examination. As of September 30, 2011, an estimated liability of $0.5 million for uncertain tax positions related to pending examinations by taxing authorities 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.

[16]

Note 14 - New Accounting Pronouncements

In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). Upon adoption of ASU 2010-28, an entity with reporting units that have carrying amounts that are zero or negative is required to assess the likelihood of the reporting units’ goodwill impairment. ASU 2010-28 is effective January 1, 2011 and the adoption of ASU 2010-28 did not have any impact on our results of operations or financial position.

Also in December 2010, FASB issued amendments to Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of the aforementioned amendment did not have any impact on our results of operations or financial position.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). Under ASU 2011-05, an entity will have the option to present comprehensive income on the income statement or as a separate financial statement. ASU 2011-05 is effective January 1, 2012 and requires retrospective adoption. ASU 2011-05 affects financial statement presentation only and has no effect on results of operations or financial position.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment ("ASU 2011-08") that gives an entity the option of performing a qualitative assessment to determine whether it is necessary to perform step 1 of the annual goodwill impairment test. An entity is required to perform step 1 only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit in any period and proceed directly to step 1 of the impairment test. ASU 2011-08 is effective January 1, 2012 and we do not believe that the adoption of ASU 2011-08 will have a significant effect on our results of operations or financial position.

Note 15 - Commitments and Contingencies

In November, 2009, the Company reached a settlement regarding a suit it had filed earlier that year against Mobile Messenger Americas, Inc. and Mobile Messenger Americas Pty, Ltd. (collectively Mobile Messenger) to recover monies owed to the Company in connection with transaction activity incurred in the ordinary and normal course of business. The complaint also sought declaratory relief concerning demands made by Mobile Messenger for indemnification for amounts paid by Mobile Messenger in late 2008 in settlement of a class action lawsuit in Florida, Grey v. Mobile Messenger, et al. (the “Florida Class Action”). Mobile Messenger brought upon the Company a cross complaint, seeking injunctive relief, indemnification for the settlement of the Florida Class Action and other matters. The terms of the settlement are confidential, but in general resulted in a complete dismissal of the entire action, including the cross-complaint, with prejudice. Pursuant to the settlement agreement, independent auditors conducted an accounting of payments made to the Company by Mobile Messenger. In August, 2010, the independent auditors issued their report detailing their findings which Mobile Messenger disputed, and as dictated by the terms of the settlement agreement, the parties have engaged in arbitration. Rather than continuing with litigation, the Company and Mobile Messenger have agreed to settle all of the disputes remaining in the litigation. The terms of the settlement are confidential, but in general the settlement will conclude the litigation between Company and Mobile Messenger with regards to the amount determined by the Auditor to be paid to the Company and releases the Company of all obligations in this matter. It is anticipated that the litigation will conclude by the end of the 4th quarter of 2011.

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. The results of such disputes are not expected to have a significant adverse effect on the Company’s financial position or results of operations.

[17]

Note 16 – Business Segments

Starting in 2011, the Company has begun segmenting operating results into two segments: Consumer Subscription Services and Transactional Services. This change was precipitated by the fact that effective January 1, 2011, the Company’s Chief Operating Decision Maker (“CODM”) began to review the operating results in assessing performance and allocating resources in a manner based upon the operations of these separate segments. This change in approach was caused by changes in the structure of the organization due to the restructuring of the Company that took place in the second half of 2010 and was completed at year end. During this restructuring, the Company closed its unprofitable lead generation business. As a result of this, beginning in 2011, the Company purchases media separately for each business segment and no longer looks at this purchase as a fungible transaction between the segments. Additionally, due to the restructuring and turnover among executive personnel, the members of the Company’s management making up the CODM function changed in 2011.

The Company’s CODM reviews the revenue (as it had in previous periods), operating expenses and operating income (loss) information for each of the reportable segments.

The Subscription Services segment derives revenue from monthly subscription services consisting of music content and other services. The Transactional Services segment derives revenue from the development and management of search engine marketing campaigns for third party advertising clients.

Segment operating income (loss) includes allocations of “Cost of media-3rd party,” as well as allocations of “Product and distribution,” and “Selling and marketing.” There are no internal revenue transactions between the Company’s reporting segments and the Company does not identify or allocate its assets by reportable segment since assets are not a measure used by our CODM function.

The Company does not allocate Administrative Overhead expenditures such as rent, insurance, technology costs and compensation for certain corporate employees such as finance, human resources, information technology and executive staff members. These are analyzed by the Company’s CODM separate from the Subscription Service and Transactional Service operating segments.

The Company’s accounting policies are discussed in more detail in the Company’s Annual Report on Form 10-K, under the heading, Note 2 – Summary of Significant Accounting Policies.

Segment information for the three and nine months ended September 30, 2011 and 2010 are as follows:

	For the Three Months Ended												For the Nine Months Ended
(in thousands)	Subscriptions			Transactional Services			Administrative Overhead			Consolidated			Subscriptions			Transactional Services			Administrative Overhead			Consolidated
September 30, 2011
Revenues	$	2,496		$	9,830		$	-		$	12,326		$	9,495		$	16,157		$	-		$	25,652
Impairment, depreciation and amortization		-			-			1,654			1,654									2,061			2,061
Operating Income (Loss)		(1,604	)		16			(3,430	)		(5,018	)		(5,799	)		(725	)		(7,371	)		(13,895	)

September 30, 2010
Revenues	$	4,261		$	4,916		$	-		$	9,177		$	15,234		$	16,956		$	-		$	32,190
Impairment, depreciation & amortization		-			-			325			325			-			-			972			972
Operating Income (Loss)		(466	)		(439	)		(2,763	)		(3,668	)		(266	)		(3,159	)		(7,949	)		(11,374	)

Note 17 – Related Party Transactions

On May 23, 2011, the Company issued a demand promissory note (the “Demand Note”) to Brilliant Digital, a related party, in exchange for the principal sum of $0.5 million. The Demand Note was subject to an annual simple interest rate of 0.56% on the unpaid principal. The proceeds of the note were used to satisfy a portion of the Company’s accrued expenses. On May 31, 2011, the Company applied the full principal balance of the Demand Note, along with accrued interest, against Brilliant Digital’s purchase of Convertible Promissory Notes and warrants for $2.2 million and the Demand Note was cancelled.

Brilliant Digital is the owner of the Kazaa digital music service, which is jointly operated with the Company. See Note 4 – Kazaa, for details of the agreements in effect between the Company and Brilliant Digital. Brilliant Digital is also the holder of 1,040,358 shares of the Company’s common stock, representing approximately 16.4% of the Company’s issued and outstanding shares.

[18]

Note 18 – Subsequent Events

Subsequent to September 30, 2011, the Company delisted its shares from the NASDAQ Capital Market, based in part, on the Company’s continued non-compliance with the minimum stockholders’ equity requirement for continued listing on The NASDAQ Capital Market.

The decision to delist its shares from NASDAQ was also made in view of the Company’s contractual obligations to the Buyers of the Company’s Notes and Warrants – see Note 5. On October 27, 2011, the Company and each of the Buyers entered into separate Letter Agreements which modified certain terms of the transaction documents entered into with the Buyers. Pursuant to the terms of the Notes, as amended, the Company was contractually obligated to delist its shares of common stock from the Nasdaq Capital Market and simultaneously list or designate for quotation its common stock on another eligible market by November 4, 2011, to avoid an event of default under the Notes and to regain compliance with various other terms of the transaction documents. The result of these modifications will result in a fourth quarter mark-to-market adjustment to the warrants and derivative liabilities increasing the value of the derivative liability by approximately $0.5 million with an offsetting increase to interest expense.

We have evaluated events subsequent to the balance sheet date through the date of our Form 10-Q filing for the quarter ended September 30, 2011 and determined there have not been any other material events that have occurred that would require adjustment to or disclosure in our unaudited condensed consolidated financial statements.

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT

This discussion summarizes the significant factors affecting our condensed consolidated operating results, financial condition and liquidity and cash flows for the three and nine months ended September 30, 2011 and 2010. Except for historical information, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Actual results could differ materially from those projected in the “forward-looking statements” as a result of, among other things, the factors described under the “Cautionary Statements and Risk Factors” included elsewhere in this report. The information contained in this Form 10-Q, as at and for the three and nine months ended September 30, 2011 and 2010, is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2010 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 of Financial Condition and Results of Operations” and other information contained in our Annual Report on Form 10-K.

[19]

Executive Overview

Our business is focused on two key segments:

Direct to consumer subscriptions, built around the Kazaa brand, and

Transactional services, built around search and affiliate marketing, within the Atrinsic Interactive brand.

Our Subscription business is built around a recurring-revenue business model. We are focused on digital music in the rapidly growing mobile space, and our lead offering, Kazaa, is a recognizable brand in this market. Our core strategic focus for our Kazaa music service is to build and sustain a large and profitable subscriber base and a growing and engaged audience and to deliver entertainment content to our customers anywhere, anytime and on any device, in a manner our customers choose.

Transactional Services is built around Atrinsic Interactive, our affiliate network and search marketing agency. Atrinsic Interactive is a leading search agency and a top-tier affiliate network. We offer advertisers an integrated service offering across paid search, or search engine marketing (“SEM”), search engine optimization (“SEO”), display advertising, affiliate marketing, as well as offering business intelligence and brand protection services to our clients. We work with all types and sizes of advertisers on a performance basis to assist them in acquiring customers at an attractive return on investment. Our core strategic focus for Atrinsic Interactive is to build a leading independent search marketing agency and a top-five affiliate network.

Our business principally serves two sets of customers – consumers and advertisers. Consumers subscribe to our entertainment services, like Kazaa, to receive premium content on the internet and on their mobile device (Subscriptions). Advertisers use our products and services to enhance their online marketing programs (Transactional). Each of these business activities – Subscriptions and Transactional Services – may utilize the same originating media or derive a customer from the same source (e.g. search); the difference is reflected in the type of customer billing and in the service that is provided. In the case of Transactional revenue, which is primarily generated from our search marketing agency business, 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, or mobile phone. In managing our business, we internally develop marketing programs to match users with our service offerings or with those of our advertising clients.

For Subscriptions, our prospects for growth are dependent on our ability to acquire subscribers in a cost effective manner, have those customers stay as paying subscribers and to provide content and services to those subscribers in a cost effective manner. For our Transactional Services, our prospects for growth are dependent on our ability to sell our services to new advertisers, expand our existing customer relationships and to improve our margins. Results may also be impacted by economic conditions and the relative strengths and weakness of the U.S. economy, trends in the online marketing and telecommunications industry, including client spending patterns and increases or decreases in our portfolio of service offerings, including the overall demand for such offerings, competitive and alternative programs and advertising mediums, and risks inherent in our customer database, including customer attrition.

The principal components of our operating expense are labor, media and media related expenses, royalty and licensing fees, product or content development, marketing and promotional expenses (including sales commissions, customer service and customer retention expense) and corporate general and administrative expenses. We consider our third party media cost and a portion of our operating cost structure to be predominantly variable in nature over a short time horizon, and as a result, we are immediately able to make modifications to this portion of our cost structure to what we believe to be increases or decreases in revenue and market trends. Conversely, a significant portion of our operating cost structure is considered to be predominantly fixed in nature over a short time horizon, making it more difficult to make modifications to this portion of our cost structure in response to increases or decreases in revenue and market trends. These factors are important in monitoring our performance in periods when revenues are increasing or decreasing.

In addition to the two operating segments; Subscription Services and Transactional Services, there is an additional component of expenditures for Administrative Overhead. Some of the costs related to this area are rent, insurance, technology systems and compensation related to finance, human resources, information technology and executive personnel. These expenditures do not relate directly to the generation of revenue and as such are not considered to be an operating segment.

[20]

Kazaa Music Service

Atrinsic and Brilliant Digital Entertainment, Inc. (“Brilliant Digital”) jointly offer the Kazaa digital music service pursuant to a Marketing Services Agreement and a Master Services Agreement between the two companies. Under the Marketing Services Agreement, we are responsible for marketing, promotional, and advertising services in respect of the Kazaa business. Pursuant to the Master Services Agreement, Atrinsic provides services related to the operation of the Kazaa business, including billing and collection services and the operation of the Kazaa online storefront. Brilliant Digital is obligated to provide certain other services with respect to the Kazaa business, including licensing the intellectual property underlying the Kazaa business to us, obtaining all licenses to the content offered as part of the Kazaa business and delivering that content to subscribers. As part of the agreements, we are required to make advance payments and expenditures in respect of certain expenses incurred in order to operate the Kazaa business. Since inception on July 1, 2009, and through September 30, 2011, we have made advance payments and expenditures related to Kazaa of $17.4 million in excess of revenue and recouped funds.

Also in accordance with the original Marketing Service Agreement and Master Service Agreement, Atrinsic and Brilliant Digital were to share equally in the “Net Profit” generated by the Kazaa music subscription service after all of our costs and expenses have been recouped. For the nine months ended September 30, 2011 and 2010, the Company has included in its statement of operations Kazaa revenue of $7.1 million, net of deferred revenue and $8.4 million, respectively, and expenses incurred for the Kazaa music service of $12.7 million and $11.5 million, net of reimbursements from Brilliant Digital. Kazaa revenue and expenses are recorded as part of our subscription segment.

On October 13, 2010, we entered into amendments to our existing Marketing Services Agreement and Master Services Agreement with Brilliant Digital and entered into an agreement with Brilliant Digital to acquire all of the assets of Brilliant Digital that relate to its Kazaa subscription based music service business.

Among other things, the amendments extend the term of each of the Marketing Services Agreement and Master Services Agreement from three years to thirty years, provide us with an exclusive license to the Kazaa trademark in connection with our services under the agreements, and modify the Kazaa digital music service profit share payable to us under the agreements from 50% to 80%. In addition, the amendments remove Brilliant Digital’s obligation to repay up to $2.5 million of Atrinsic’s advances and expenditures which are not otherwise recovered from Kazaa generated revenues and remove the $5.0 million cap on expenditures that we are required to advance in relation to the operation of the Kazaa business. As consideration for entering into the amendments, we issued 1,040,358 unregistered shares of our common stock to Brilliant Digital.

The amendments to the Marketing Services Agreement and Master Services Agreement are part of a broader transaction between us and Brilliant Digital pursuant to which we will acquire all of the assets of Brilliant Digital that relate to its Kazaa digital music service business in accordance with the terms of an asset purchase agreement entered into between the parties. The purchase price for the acquired assets includes the issuance by us of an additional 1,781,416 unregistered shares of our common stock at the closing of the transactions contemplated by the asset purchase agreement as well as the assumption of certain liabilities related to the Kazaa business. The closing of the transactions contemplated by the asset purchase agreement will occur when all of the assets associated with the Kazaa business, including the Kazaa trademark and associated intellectual property, as well as Brilliant Digital’s content management, delivery and customer service platforms, and licenses with third parties, have been transferred to us. The closing of the transactions contemplated by the asset purchase agreement is subject to receipt of all necessary third party consents as well as other customary closing conditions. There is no guarantee that such conditions will be satisfied. At the closing of the transactions contemplated by the asset purchase agreement, we have agreed to appoint two individuals to be selected by Brilliant Digital to serve on our Board of Directors. In addition, at the closing, each of the Marketing Services Agreement and Master Services Agreement will terminate.

Ability to Continue as Going Concern

Our consolidated financial statements are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The accompanying historical consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The assessment of our ability to continue as a going concern was made by management considering, among other factors: (i) our current levels of expenditures, including subscriber acquisition costs, operating expense, including product development, and overhead, (ii) our ongoing working capital needs, (iii) the uncertainty concerning the outcome of future financings, (iv) our history of losses and use of cash for operating activities (v) outstanding balance of cash and cash equivalents of $2.0 million at the end of the quarter, and (vi) our budgets and financial projections of future operations, including the likelihood of achieving operating profitability without the need for additional financing.

[21]

For periods subsequent to September 30, 2011, we expect losses if we continue to incur expenditures to develop the Kazaa digital music service, acquire subscribers for the Kazaa service, and if we are not able to reduce other operating expenses and overhead sufficiently to a level in line with our level of revenues. If we are unable to increase revenues sufficiently or decrease our expenditures to a sustainable level, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about our ability to continue as a going concern.

While we address these operating matters, we must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with developing and operating the Kazaa digital music service, as well as funding overhead and the working capital needs of our other businesses. If we are not able to obtain sufficient funds through a financing, or if we experience adverse outcomes with respect to our operational forecasts, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected.

Anticipated Financing

In order to carry out our business strategy and to fund our Kazaa music service, we intend to make an offering of securities not registered under the Securities Act of 1933, as amended (the “Securities Act”). The securities to be offered will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. At this time, the title, amount and basic terms of the securities to be offered and the amount and timing of the offering are not known, but the Company anticipates that the terms of the offering may be substantially similar to the financing transaction the Company completed on May 31, 2011, as reported in the Company’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on June 1, 2011 and October 27, 2011. The proceeds of the offering will be used for general working capital purposes, including to fund Atrinsic’s Kazaa digital music subscription business.

Results of Operations for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.

Detailed segment operating results for the three months ended September 30, 2011 and 2010 are summarized below:

	For the Three Months Ended						Change			Change
	September 30,						Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011			2010			$			%
Segment Revenues:
Subscription Services	$	2,496		$	4,261		$	(1,765	)		-41	%
Transactional Services		9,830			4,916			4,914			100	%
Total Revenues		12,326			9,177			3,149			34	%

Segment Operating Expenses:
Subscription Services		4,100			4,727			(627	)		-13	%
Transactional Services		9,814			5,355			4,459			83	%
Administrative Overhead		3,430			2,763			667			24	%
Total Operating Expenses		17,344			12,845			4,499			35	%

Segement Operating Income/(Loss):
Subscription Services		(1,604	)		(466	)		(1,138	)		244	%
Transactional Sevices		16			(439	)		455			-104	%
Administrative Overhead		(3,430	)		(2,763	)		(667	)		24	%
Total Operating Loss	$	(5,018	)	$	(3,668	)	$	(1,350	)		37	%

[22]

Total revenue increased $3.1 million, or 34%, to $12.3 million for the three months ended September 30, 2011 compared to $9.2 million for the three months ended September 30, 2010 due to the reasons discussed in the below analyses of segment operations.

Total operating expenses increased $4.5 million, or 35%, to $17.3 million for the three months ended September 30, 2011 compared to $12.8 million for the three months ended September 30, 2010 due to the reasons discussed in the below analyses of segment operations.

Subscription Services Segment

	For the Three Months Ended						Change			Change
	September 30,						Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011			2010			$			%

Segment Revenue	$	2,496		$	4,261		$	(1,765	)		-41	%

Segment Operating Expenses
Cost of media – 3rd party		392			848			(456	)		-54	%
Content costs		1,997			1,831			166			9	%
Product and distribution		1,563			1,877			(314	)		-17	%
Selling and marketing		111			21			90			429	%
General, administrative and other operating		37			150			(113	)		-75	%
Total Segment Operating Expenses		4,100			4,727			(627	)		-13	%
Subscriptions services Segment Operating Income (Loss)	$	(1,604	)	$	(466	)	$	(1,138	)		244	%

Subscription segment revenues decreased $1.8 million or 41% to $2.5 million for the three months ended September 30, 2011 from $4.3 million for the three months ended September 30, 2010. This reduction was the result of a lower number of billable subscribers in the third quarter of 2011, compared to the year ago period, offset partly by an increase in average revenue per user (“ARPU”). As of September 30, 2011, the Company had approximately 78,000 total subscribers, compared to 217,000 as of September 30, 2010, representing a reduction of 64% in the total number of billable subscribers. Across all of our subscription products, our ARPU was approximately $5.95 for the third quarter of 2011, compared to $5.74 in the year ago period. As of September 30, 2011, the Company has approximately 55,000 Kazaa subscribers (representing September 2011 net billing transactions), compared to approximately 64,000 as of September 30, 2010 and 77,000 at December 31, 2010. Our rate of customer acquisition in the third quarter did not exceed the pace of customer attrition, and as a result, we lost approximately 16,000 net Kazaa subscribers (new subscriber additions, net of attrition) in the third quarter of 2011, compared to 71,000 Kazaa subscribers as of June 30, 2011.

As the Kazaa business becomes the central focus of our subscription segment, management expects that it will continue to evaluate the operating metrics it communicates to the public, including, number of subscribers, ARPU and other key metrics.

Cost of media -3rd party decreased $0.5 million, or 54%, to $0.4 million for the three months ended September 30, 2011 from $0.9 million for the three months ended September 30, 2010. This decrease in Cost of media -3rd party was due to a conscious effort to moderate marketing spends, resulting in a lower rate of Kazaa customer acquisitions, which we also see continuing into the fourth quarter as management more closely monitors and evaluates prevailing market conditions, the type of media, and the cost effectiveness of its various marketing programs. Cost of media -3rd party did not decrease in proportion to the decline in subscription services revenue because most of the revenue decline was the result of fewer non-Kazaa legacy subscribers - which account for a relatively smaller proportion of cost of media -3rd party.

Content costs, which are costs necessary to provide licensed content, principally for Kazaa, increased $0.2 million or 9% to $2.0 million for the three months ended September 30, 2011from $1.8 million for the three months ended September 30, 2010. The content costs reflect the actual royalties and license fees incurred from music labels and publishers of licensed music in the period.

Product and distribution expenses decreased by $0.3 million, or 17%, to $1.6 million for the three months ended September 30, 2011 from $1.9 million for the three months ended September 30, 2010, due to a decrease in labor related costs, as a result of the Company’s restructuring during 2010.

[23]

Transactional Services Segment

	For the Three Months Ended					Change			Change
	September 30,					Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011		2010			$			%

Segment Revenue	$	9,830	$	4,916		$	4,914			100	%

Segment Operating Expenses
Cost of media – 3rd party		8,816		3,742			5,074			136	%
Product and distribution		236		688			(452	)		-66	%
Selling and marketing		682		918			(236	)		-26	%
General, administrative and other operating		80		7			73			1043	%
Total Segment Operating Expenses		9,814		5,355			4,459			83	%
Transactional services Segment Operating Income (Loss)	$	16	$	(439	)	$	455			-104	%

Transactional Service segment revenues increased $4.9 million, or 100%, to $9.8 million for the three months ended September 30, 2011 from $4.9 million for the three months ended September 30, 2010. Transactional revenue is principally derived from our search marketing agency business, which consists of targeted and measurable online campaigns and programs for advertisers to generate qualified customer leads, sales transactions, or increased brand recognition. The increase in revenue was primarily related to sales volume improvement from existing clients as well as new client acquisitions during the third quarter. The increase was offset by the restructuring of our lead generation business in which we eliminated a number of unprofitable (on a gross margin basis) revenue lines. As a result of this restructuring, the bulk of our Transactional revenue now consists of revenue generated from our search marketing agency business, together with higher yielding marketing campaigns.

Transactional Service segment expenses increased by $4.4 million, or 83%, to $9.8 million for the three months ended September 30, 2011 from $5.4 million for the three months ended September 30, 2010. This increase in expenditures was primarily due an increase in Cost of media-3rd party (principally search costs), which is correlated to the corresponding increase in revenue. During the three months ended September 30, 2011 Cost of media – 3rd party increased $5.1 million or 136% to $8.8 million from $3.7 million for the three months ended September 30, 2011 due to the increase in Transactional related revenue, which resulted in a corresponding increase in purchased media.

Product and distribution expenses decreased $0.5 million or 66% to $0.2 million for the three months ended September 30, 2011 from $0.7 million for the three months ended September 30, 2010. This reduction resulted from the termination of several unprofitable or marginally profitable transactional services lines of business during the Company’s restructuring during 2010.

Selling and marketing expenses decreased $0.2 million or 26% to $0.7 million for the three months ended September 30, 2011 from $0.9 million for the three months ended September 30, 2010. This reduction resulted from the termination of several unprofitable or marginally profitable transactional services lines of business during the Company’s restructuring during 2010.

Administrative Overhead

	For the Three Months Ended				Change			Change
	September 30,				Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011		2010		$			%

Segment Operating Expenses
General, administrative and other operating	$	1,776	$	2,438	$	(662	)		-27	%
Depreciation & amortization		233		325		(92	)		-28	%
Impairment of intangible assets		1,421		-	$	1,421			100	%
Administrative overhead Expense	$	3,430	$	2,763	$	667			24	%

General, administrative and other operating expenses decreased $0.6 million, or 27%, to $1.8 million for the three months ended September 30, 2011 from $2.4 million for the three months ended September 30, 2010 due to the decrease in expenditures for salaries and technological costs as part of the Company’s restructuring that took place in the second half of 2010, including the closing of our technological facility in Canada during the fourth quarter of 2010.

[24]

Depreciation and amortization decreased $0.1 million, or 28%, to $0.2 million for the three months ended September 30, 2011 from $0.3 million for the three months ended September 30, 2010 due primarily to a reduction in amortization for intangibles, due to the $3.4 million impairment charge to reduce the carrying value of our amortizable intangibles at the end of 2010. Depreciation decreased due to a reduction in property, plant and equipment related to the decision to shut down the Canada facility in the second half of 2010.

An impairment charge of $1.4 million was recorded by the Company during the third quarter of 2011, as a result of the carrying value of the intangible assets of $2.8 million exceeding their fair market value of $1.4 million. No such charge was recorded during the comparative period in the prior year.

Loss from Operations

Operating loss increased by $1.3 million, or 37%, to $5.0 million for the three months ended September 30, 2011, compared to an operating loss of $3.7 million for the three months ended September 30, 2010. As described above, the increase in operating loss was driven by declining revenue related to the Subscription Services Segment along with the 2011 impairment charge.

Interest Expense, net

Interest expense decreased $0.6 million to ($0.6 million) for the three months ended September 30, 2011from $0.0 million for the three months ended September 30, 2010 due to the discount amortization partly offset by the mark-to-market gain on the derivatives. The interest income in the third quarter is a non-cash item.

Income Taxes

Income tax expense, before equity in loss of investee, for the three months ended September 30, 2011 and 2010 was $45,000 and $35,000 respectively and reflects an effective tax rate of (1%) and (1%) respectively. The Company had a loss before taxes of $4.5 million for the three months ended September 30, 2011 compared to loss before taxes of $3.6 million for the three months ended September 30, 2010.

Equity in Loss (Earnings) of Investee

Equity in loss of investee was $9,000 for the three months ended September 30, 2011 compared to a loss of $13,000 for the three months ended September 30, 2010. The equity represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The company acquired its interest in TBR in the 4th quarter of 2008.

Net Loss Attributable to Atrinsic, Inc.

Net loss increased by $0.9 million to $4.5 million for the three months ended September 30, 2011 as compared to a net loss of $3.6 million for the three months ended September 30, 2010. This increase in loss resulted from the factors described above.

[25]

Results of Operations for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Detailed segment operating results for the nine months ended September 30, 2011 and 2010 are summarized below:

	For the Nine Months Ended						Change			Change
	September 30,						Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011			2010			$			%
Segment Revenues:
Subscription Services	$	9,495		$	15,234		$	(5,739	)		-38	%
Transactional Services		16,157			16,956			(799	)		-5	%
Total Revenues		25,652			32,190			(6,538	)		-20	%

Segment Operating Expenses:
Subscription Services		15,294			15,500			(206	)		-1	%
Transactional Services		16,882			20,115			(3,233	)		-16	%
Administrative Overhead		7,371			7,949			(578	)		-7	%
Total Operating Expenses		39,547			43,564			(4,017	)		-9	%

Segement Operating Income/(Loss):
Subscription Services		(5,799	)		(266	)		(5,533	)		2080	%
Transactional Sevices		(725	)		(3,159	)		2,434			-77	%
Administrative Overhead		(7,371	)		(7,949	)		578			-7	%
Total Operating Loss	$	(13,895	)	$	(11,374	)	$	(2,521	)		22	%

Total revenue decreased $6.5 million, or 20%, to $25.7 million for the nine months ended September 30, 2011 compared to $32.2 million for the nine months ended September 30, 2010 due to the reasons discussed in the below analyses of segment operations.

Total operating expenses decreased $4.0 million, or 9%, to $39.5 million for the nine months ended September 30, 2011 compared to $43.5 million for the nine months ended September 30, 2010 due to the reasons discussed in the below analyses of segment operations.

Subscription Services Segment

	For the Nine Months Ended						Change			Change
	September 30,						Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011			2010			$			%

Segment Revenue	$	9,495		$	15,234		$	(5,739	)		-38	%

Segment Operating Expenses
Cost of media – 3rd party		2,868			3,626			(758	)		-21	%
Content costs		6,210			5,689			521			9	%
Product and distribution		5,310			5,615			(305	)		-5	%
Selling and marketing		672			140			532			380	%
General, administrative and other operating		234			430			(196	)		-46	%
Total Segment Operating Expenses		15,294			15,500			(206	)		-1	%
Subscriptions services Segment Operating Income (Loss)	$	(5,799	)	$	(266	)	$	(5,533	)		2080	%

Subscription segment revenues decreased $5.7 million, or 38%, to $9.5 million for the nine months ended September 30, 2011 from $15.2 million for the nine months ended September 30, 2010. This reduction was the result of a lower number of billable subscribers during the nine months ended September 30, 2011, compared to the year ago period. Across all of our subscription products, our average revenue per user (“ARPU”) was approximately $7.59 for the nine months ended September 30, 2011, compared to $6.22 in the year ago period. As of September 30, 2011, the Company had 55,000 Kazaa subscribers compared to 77,000 as of December 31, 2010. We lost approximately 22,000 net Kazaa subscribers, net of new subscriber additions, during the nine months ended September 30, 2011.

[26]

Cost of media -3rd party decreased $0.8 million, or 21%, to $2.9 million for the nine months ended September 30, 2011 from $3.6 million for the nine months ended September 30, 2010. This decrease in Cost of Media -3 rd party was due to a conscious effort to moderate marketing spends, resulting in a lower rate of Kazaa customer acquisitions, which we also see continuing into the fourth quarter as management more closely monitors and evaluates prevailing market conditions, the type of media, and the cost effectiveness of its various marketing programs.

Content costs, which are costs necessary to provide licensed content, principally for Kazaa, increased $0.5 million or 9% to $6.2 million for the nine months ended September 30, 2011from $5.7 million for the nine months ended September 30, 2010. The content costs reflect the actual royalties and license fees incurred from music labels and publishers of licensed music in the period.

Product and distribution expenses decreased $0.3 million, or 5%, to $5.3 million for the nine months ended September 30, 2011 from $5.6 million for the nine months ended September 30, 20110, due to a decrease in labor related costs, as a result of the Company’s restructuring during 2010. Selling and Marketing expenses increased by $0.5 million or 380% to $0.6 million for the nine months ended September 30, 2011 from $0.1 million for the nine months ended September 30, 2010, as a result of increased customer service expenditures in 2011, reflecting the Company's recent efforts to control and manage the customer service experience.

Transactional Services Segment

	For the Nine Months Ended						Change			Change
	September 30,						Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011			2010			$			%

Segment Revenue	$	16,157		$	16,956		$	(799	)		-5	%

Segment Operating Expenses
Cost of media – 3rd party		13,250			14,317			(1,067	)		-7	%
Product and distribution		1,219			2,582			(1,363	)		-53	%
Selling and marketing		2,236			3,085			(849	)		-28	%
General, administrative and other operating		177			131			46			35	%
Total Segment Operating Expenses		16,882			20,115			(3,233	)		-16	%
Transactional services Segment Operating Income (Loss)	$	(725	)	$	(3,159	)	$	2,434			-77	%

Transactional Service segment revenues decreased $0.8 million, or 5%, to $16.2 million for the nine months ended September 30, 2011 from $17.0 million for the nine months ended September 30, 2010. Transactional revenue is principally derived from our search marketing agency business, which consists of targeted and measurable online campaigns and programs for advertisers to generate qualified customer leads, sales transactions, or increased brand recognition. The decrease in revenue was due to reduced advertising expenditures by our clients and the restructuring of our lead generation business in which we eliminated a number of unprofitable (on a gross margin basis) revenue lines, offset by new client acquisitions during the third quarter. As a result of this restructuring, the bulk of our Transactional revenue now consists of revenue generated from our search agency business, together with higher yielding marketing campaigns.

Transactional Service segment expenses decreased by $3.2 million, or 16%, to $16.9 million for the nine months ended September 30, 2011 from $20.1 million for the nine months ended September 30, 2010. This reduction in expenditures was primarily due to lower Cost of media-3rd party (principally search costs) which is correlated to the corresponding reduction in revenue; and Product and distribution costs. During the nine months ended September 30, 2011 Cost of media – 3rd party decreased $1.1 million or 7% to $13.2 million from $14.3 million for the nine months ended September 30, 2010 due to the decline in Transactional related revenue which resulted in a corresponding reduction in purchased media.

Product and distribution expenses decreased $1.4 million or 53% to $1.2 million for the nine months ended September 30, 2011 from $2.6 million for the nine months ended September 30, 2010. This reduction resulted principally from labor related costs, as a result of the termination of several unprofitable or marginally profitable transactional services lines of business during the Company’s restructuring during 2010.

Selling and marketing expenses decreased $0.8 million or 28% to $2.2 million for the nine months ended September 30, 2011 from $3.1 million for the nine months ended September 30, 2010. This reduction resulted principally from labor related costs, as a result of the termination of several unprofitable or marginally profitable transactional services lines of business during the Company’s restructuring during 2010.

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Administrative Overhead

	For the Nine Months Ended				Change			Change
	September 30,				Inc.(Dec.)			Inc.(Dec.)
(dollars in thousands)	2011		2010		$			%

Segment Operating Expenses
General, administrative and other operating	$	5,310	$	6,977	$	(1,667	)		-24	%
Depreciation & amortization		640		972		(332	)		-34	%
Impairment of intangible assets		1,421		-		1,421			100	%
Administrative Overhead Expense	$	7,371	$	7,949	$	(578	)		-7	%

General, administrative and other operating expenses decreased $1.7 million or 24% to $5.3 million for the nine months ended September 30, 2011 from $7.0 million for the nine months ended September 30, 2010 due to the decrease in expenditures for salaries and technological costs as part of the Company’s restructuring that took place in the second half of 2010, including the closing of our technological facility in Canada during the fourth quarter of 2010.

Depreciation and amortization decreased $0.3 million or 34% to $0.6 million for the nine months ended September 30, 2011 from $0.9 million for the nine months ended September 30, 2010 primarily due to a reduction in amortization for intangibles, as a result of a $3.4 million impairment charge to reduce the carrying value of our amortizable intangibles at the end of 2010. Depreciation decreased due to a reduction in property, plant and equipment related to the decision to shut down the Canada facility in the second half of 2010.

Loss from Operations

Operating loss increased by $2.5 million or 22% to $13.9 million for the nine months ended September 30, 2011, compared to an operating loss of $11.4 million for the nine months ended September 30, 2010. As described above, this was caused by declining revenue related to the Subscription Services Segment along with the 2011 impairment charge.

Interest Expense, net

Interest expense increased $0.6 million to $0.6 million for the nine months ended September 30, 2011from $0.0 million for the nine months ended September 30, 2010 due to the discount amortization party offset by the mark-to-market gain on the derivatives. The interest expense is a non-cash item.

Other Expenses (Income)

Other income was $0.4 million for the nine months ended September 30, 2011 compared to other income of $0.1 million for the nine months ended September 30, 2010. This variance was due primarily to the write off of old Accounts Payables which are no longer outstanding.

Income Taxes

Income tax expense, before equity in (earnings) loss of investee, for the nine months ended September 30, 2011 and 2010 was $0.1 million and $0.2 million, respectively and reflects an effective tax rate of (1%) and (2%), respectively. The Company had a loss before taxes of $14.1 million for the nine months ended September 30, 2011 compared to loss before taxes of $11.3 million for the nine months ended September 30, 2010.

Equity in Loss (Earnings) of Investee

Equity in earnings of investee was $47,000 for the nine months ended September 30, 2011 compared to loss of $74,000 for the nine months ended September 30, 2010. The equity represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The company acquired its interest in TBR in the 4th quarter of 2008.

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Net Loss Attributable to Atrinsic, Inc.

Net loss increased by $2.6 million to $14.2 million for the nine months ended September 30, 2011 as compared to a net loss of $11.6 million for the nine months ended September 30, 2010. This increase in loss resulted from the factors described above.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of approximately $2.0 million and a working capital deficit of approximately $9.8 million. We used approximately $7.8 million in cash for operations during the nine months ended September 30, 2011 which consisted primarily of a net loss of $14.2 million along with a decrease in allowance for doubtful accounts of $0.3 million. This was offset by impairment of intangible assets of $1.4 million during the third quarter of 2011, depreciation and amortization of $0.6 million, interest expense relating to debt discount and mark to market of derivative liability of $0.6 million, stock based compensation of $0.3 million,a decrease in current asset accounts of $0.6 million, and an increase in current liabilities of $3.2 million. Our cash used in investing activities was $0.9 million for the nine months ended September 30, 2011 representing capital expenditures on Kazaa iphone application and enhancements to the agency platform. Our cash provided by financing activities was $4.4 million for the nine months ended September 30, 2011 due to proceeds from issuance of notes payable of $4.7 million offset by payment of issuance cost on notes of $0.4 million. Overall, our cash and cash equivalent at September 30, 2011 decreased $4.3 million to approximately $2.0 million from approximately $6.3 million at December 31, 2010.

In the near term, we are focused on: (i) raising additional debt or equity capital to fund our immediate cash needs and to finance our longer term growth to further develop the Kazaa business and grow our subscriber base, (ii) exploring the potential sale of assets and (iii) pursuing various means to minimize operating costs and increase cash.

We intend to make an offering of securities not registered under the Securities Act of 1933, as amended (the “Securities Act”). The securities to be offered will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. At this time, the title, amount and basic terms of the securities to be offered and the amount and timing of the offering are not known, but the Company anticipates that the terms of the offering may be substantially similar to the financing transaction the Company completed on May 31, 2011, as reported in the Company’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on June 1, 2011 and October 27, 2011. The proceeds of the offering will be used for general working capital purposes, including to fund Atrinsic’s Kazaa digital music subscription business.

We cannot provide assurance that we will be able to realize the cost reductions in our operations, or that we can obtain additional cash through asset sales or the issuance of equity. If we are unsuccessful in our efforts we will be required to further reduce our operations, including further reductions of our employee base, or we may be required to cease certain or all of our operations in order to offset the lack of available funding. In addition, the sale of additional equity securities or convertible debt will likely result in dilution to our stockholders.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4. Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Members of the our management, including our Chief Executive Officer, Stuart Goldfarb, and Chief Financial Officer Nathan Fong, have evaluated the effectiveness of our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15 and 15d-15, as of September 30, 2011, the end of the period covered by this report. Based upon that evaluation, Messrs. Goldfarb and Fong concluded that our disclosure controls and procedures were effective for the period ended September 30, 2011.

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 and 15d-15 that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.

There is substantial doubt about our ability to continue as a going concern.

The assessment of our ability to continue as a going concern was made by management considering, among other factors: (i) our current levels of expenditures, including subscriber acquisition costs, operating expense, including product development, and overhead, (ii) our ongoing working capital needs, (iii) the uncertainty concerning the outcome of any financing, (iv) our history of losses and use of cash for operating activities (v) outstanding balance of cash and cash equivalents of $2.0 million at the end of the quarter, and (vi) our budgets and financial projections of future operations, including the likelihood of achieving operating profitability without the need for additional financing.

Based on current financial projections, we believe the continuation of our Company as a going concern is primarily dependent on our ability to, among other factors: (i) consummate a suitable financing, or obtain cash from the sale of our assets or lines of business, (ii) scale our Kazaa subscriber base to a level where the monthly revenue generated from our subscriber base exceeds subscriber acquisition costs, net of expenses required to operate Kazaa, (iii) eliminate or reduce operating and overhead expenditures to a level more in line with our revenue, (iv) improve utilization of the Kazaa digital music service and improve the long term value of subscribers to that service, (v) acquire profitable subscribers to the Kazaa digital music service at cost effective rates, (vi) grow our search marketing agency revenue base through the addition of new customers or expansion of business with existing customers and, (vii) expand margins in our search marketing agency and on our affiliate platform. While we address these operating matters, we must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with developing and operating the Kazaa digital music service, as well as funding overhead and the working capital needs of our other businesses. If we are not able to obtain sufficient funds through a financing, or if we experience adverse outcomes with respect to our operational forecasts, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected.

In the near term, we are focused on: (i) raising additional debt or equity capital to fund our immediate cash needs and to finance our longer term growth to further develop the Kazaa business and grow our subscriber base, and (ii) pursuing various means to minimize operating costs and increase cash including through the sale of assets or business. We cannot provide assurance that we will be able to realize the cost reductions in our operations, or that we can obtain additional cash through asset sales or the issuance of equity on favorable terms, or at all. If we are unsuccessful in our efforts we will be required to further reduce our operations, including further reductions of our employee base, or we may be required to cease certain or all of our operations in order to offset the lack of available funding.

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We continue to evaluate the sale of certain of our assets and businesses. We cannot provide any assurance that we will be successful in finding suitable purchasers for the sale of such assets. Even if we are able to find purchasers, we may not be able to obtain attractive terms and conditions for such sales, including attractive pricing. In addition, divestitures of businesses involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in revenues associated with the divested business, and the disruption of operations in the affected business. Furthermore, divestitures potentially involve significant post-closing separation activities, which could involve the expenditure of significant financial and employee resources. An inability to consummate identified asset sales or manage the post-separation transition arrangements could adversely affect our business, financial condition, results of operations and cash flows.

The Convertible Note financing may result in significant dilution for existing stockholders.

On May 31, 2011, we entered into a securities purchase agreement with certain buyers pursuant to which we sold convertible notes and warrants. Both the notes and warrants contain “down round” provisions, which provides that if the Company makes certain dilutive issuances, the conversion price of the notes and the strike price of the warrants will be lowered to the per share price paid in the applicable dilutive issuance.

The Company is required to repay the notes in six equal monthly installments commencing on December 31, 2011 and ending on May 31, 2012, either in cash or in shares of its common stock. The Company does not currently have sufficient cash available to repay the notes. If the Company chooses to utilize shares of its common stock to repay the notes, the value of the Company’s shares will be equal to the lower of the conversion price then in effect (which is initially $2.90) or 85% of the average closing bid prices of the Company’s common stock during the 20 trading day period prior to payment of the installment amount.

In addition to an issuance of shares initiated by the Company, the note holders have the right to convert the principal amount of their notes into shares of common stock at any time at their discretion. If a note holder elects to convert their note, the value of the Company’s shares used to calculate the number of shares issuable upon such conversion will be equal to the lower of (i) the conversion price then in effect (which is initially $2.90) or (ii) 85% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 trading day period prior to such conversion. Both the down round terms of the notes and warrants, and the payment of the notes in stock rather than cash (whether as a result of a Company initiated note conversion or a note holder initiated note conversion) could result in significant dilution to current stockholders.

If we default on our convertible notes, we may lose all of our assets and intellectual property.

Our obligations under the convertible notes issued on May 31, 2011 are secured pursuant to the terms of a Security Agreement entered into by Atrinsic and certain of our subsidiaries and the buyers of such notes. Pursuant to the Security Agreement, we granted each of the buyers a security interest in all of our assets. In addition, certain of our subsidiaries executed guaranties with the buyers pursuant to which such subsidiaries guarantee our obligation under the notes. In the event we default under the notes, the noteholders may obtain our assets, including all of our intellectual property. If we lose all or a substantial portion of our assets, our shares will significantly decline in value or become worthless.

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

The Company's and Brilliant Digital’s obligations to complete the purchase and sale of the Kazaa assets is subject to conditions, many of which are beyond the control of the parties. If the transaction is not completed for any reason:

The price of our common stock may decline;

We will incur costs related to the transaction, such as financial advisory, legal, and accounting fees even if the transaction is not completed;

We will not be able to realize the expected benefits of the acquisition which are a significant component of our growth strategy;

We may not be able to operate as effectively under the existing Marketing Services Agreement and Master Services Agreement; which agreements are to remain in place if the transaction does not close,

All of which may harm our business and operations.

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

The Company has experienced a significant revenue decline and degradation in business prospects over the past two years, and as a result the Company has used a significant amount of cash to fund its operations. The Company’s cash and cash equivalents were $2.0 million as of September 30, 2011, which is a $4.3 million decline from the $6.3 million as of December 31, 2010. If we are unsuccessful at stabilizing or slowing the decline in our revenue, and our associated use of cash to fund operations, or if we cannot raise cash through financing alternatives, then we will need to significantly curtail or cease operations.

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The working capital requirements for companies in the digital music industry is significant.

The digital music industry is highly competitive and as a result of the industry’s characteristics, subjects market participants to significant working capital requirements, as is evidenced by the numerous companies in the industry that have experienced significant losses. If we are to attract and retain talented employees, acquire subscribers and enhance and improve the Kazaa digital music service, which we will need to do if we are to be successful, we will have significant capital requirements. There is no guarantee additional capital will be available on favorable terms or at all.

We face risks in implementing our restructuring plan.

In connection with our announcement to purchase the assets of the Kazaa digital music service, we are undertaking a restructuring of our existing operations. Although the reorganization and consolidation of activities are expected to yield cost savings as a result of the reduction in headcount, the elimination of duplicative activities and combining or eliminating networking and other overhead costs, there can be no assurance that we will achieve the forecasted savings. Our remaining business may also suffer as a result of the restructuring due to the loss of employees, who have been involuntarily terminated, or employees who leave voluntarily. We may also face defections from customers who are unsure of our viability and may also receive less favorable terms than we currently receive from our vendors, as a result of their perception of the restructuring. There can be no assurance that the restructuring will be completed effectively, with limited negative impact on our business.

As part of our restructuring plan and in connection with the integration of activities with the Kazaa business, we will be migrating many of our technological assets. We face risks with such migrations, including disruptions in service. Also, the costs and time associated with any migration could be substantial, requiring the reengineering of computer systems and telecommunications infrastructure. We may also face interruptions in the services we provide across all of our business activities. In addition to service interruptions arising from third-party service providers, unanticipated problems affecting our proprietary internal computer and telecommunications systems have the potential to occur in future fiscal periods, and could cause interruptions in the delivery of services, causing a loss of revenue and related gross margins, and the potential loss of customers, all of which could materially and adversely affect our business, results of operations and financial condition.

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

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

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

In our subscription service business, which includes the Kazaa music service, and our transactional 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.

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

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

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

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

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

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

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

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

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

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

the potential for concentrations of credit risk embedded in the amounts receivable from the aggregator should any one, or group of 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.

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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 these providers could have an adverse effect on revenue; and securing alternate sources of these services could significantly increase expenses and cause significant interruption to both our transactional and marketing and subscription businesses.

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

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

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

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

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

As of September 30, 2011, the Company has received the $2.5 million in repayments from Brilliant Digital and we are dependent on the future net cash flow of the Kazaa music service to fully recoup the approximately $17.4 million of advances and expenditures we have made, net of cash received or reimbursed, as of September 30, 2011. There can be no assurance that the future net cash flows from the Kazaa music service will be sufficient to allow us to fully recoup our expenditures, which could materially and adversely affect our financial condition.

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

All of our transactional services 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;

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

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

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

perceived lead quality.

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

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.

The recent voluntary delisting of our common stock from the NASDAQ stock exchange may have an adverse impact on our stock price and the ability of shareholders to trade our stock.

On November 3, 2011, we gave formal written notice to The NASDAQ Stock Market of our intention to voluntarily delist our common stock from NASDAQ, in part due to the Company’s non-compliance with the minimum stockholders’ equity requirement for continued listing on The NASDAQ Capital Market. As a result of the foregoing, trading in the Company’s securities was suspended on NASDAQ effective on that date. Upon suspension from NASDAQ on November 3, 2011, the Company’s common stock will begin trading on the over-the-counter (“OTC”) market tier, OTCQB. Operated by OTC Markets Group Inc., the OTCQB is a market tier for OTC traded companies that are registered and reporting with the SEC.

The voluntary delisting of our shares from the NASDAQ Capital Market may be perceived negatively by investors and may also impact the ability of our shareholders to expediently find buyers for their shares. Both of these factors may have an adverse impact on our stock price.

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.

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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. Through the end of 2010, we operated a data center in Canada. We have begun the process of closing down and transferring data to servers owned by third parties in 2011 and have a co-location agreement with a service provider to support our operations. Therefore, any of the above factors affecting any of these areas could substantially harm our business. Moreover, despite network security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems in part because we cannot control the maintenance and operation of our third-party data centers. Despite the precautions taken, unanticipated problems affecting our systems could cause interruptions in the delivery of our solutions in the future and our ability to provide a record of past transactions. Our data centers and systems incorporate varying degrees of redundancy. All data centers and systems may not automatically switch over to their redundant counterpart. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.

We 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 effect on our financial position and results of operations.

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

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

We have recorded significant income tax receivables. In November 2009 Congress passed the Worker Homeownership & Business Assistance Act of 2009 which allows businesses to carryback operating losses for up to 5 years. As a result of this Act we were able to carryback some of our 2009 taxable loss, resulting in a refund of $2.7 million, which was received in 2010. In the event that we are not able to successfully defend our tax positions, 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.

If our efforts to attract prospective subscribers and to retain existing subscribers pertaining to our Kazaa business are not successful, our growth prospects and revenue will be adversely affected.

Our ability to grow our business and generate subscriber revenue depends on retaining and expanding our subscriber base. We must convince prospective listeners of the benefits of our service and existing listeners of the continuing value of our service.

Our ability to increase the number of our subscribers depends on effectively addressing a number of challenges and we may fail to do so. Some of these challenges include:

Providing subscribers with a consistent high quality, user-friendly and personalized experience;

continuing to build our catalog of music content that our listeners enjoy; and

continuing to innovate and keep pace with changes in technology and our competitors.

We depend upon third-party licenses for musical works and a change to or loss of these licenses could increase our operating costs or adversely affect our ability to retain and expand our listener base, and therefore could adversely affect our business.

To secure the rights to stream musical works embodied in sound recordings over the internet, Brilliant Digital maintains licenses from or for the benefit of copyright owners and pays royalties to copyright owners or their agents. We reimburse Brilliant Digital for these royalty payments. These royalty payments represent a substantial cost in operating the Kazaa business. Those who own copyrights in musical works are vigilant in protecting their rights and seek royalties that are very high in relation to the revenue that can be generated from the public performance of such works. There is no guarantee that the licenses available to Brilliant Digital now will continue to be available in the future or that such licenses will be available at the royalty rates associated with the current licenses. If we or Brilliant Digital are unable to secure and maintain rights to stream musical works or if we cannot do so on terms that are acceptable to us, our ability to stream music content to our listeners, and consequently our ability to attract subscribers, will be adversely impacted.

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In order to stream musical works embodied in sound recordings over the internet, we must obtain public performance licenses and pay license fees to three performing rights organizations: Broadcast Music, Inc., or BMI, SESAC, Inc., or SESAC, and the American Society of Composers, Authors and Publishers, or ASCAP. These organizations represent the rights of songwriters and music publishers, negotiate with copyright users such as Brilliant Digital, collect royalties and distribute those royalties to the copyright owners they represent, namely songwriters and music publishers. Performing rights organizations have the right to audit our playlists and royalty payments, and any such audit could result in disputes over whether we have paid the proper royalties. If such a dispute were to occur, we could be required to pay additional royalties and the amounts involved could be material.

If our security systems are breached, we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract listeners and advertisers.

Techniques used to gain unauthorized access to computer networks are constantly evolving, and we may be unable to anticipate or prevent unauthorized access to data pertaining to our listeners, including credit card information and other personally identifiable information. If an actual or perceived breach of security occurs of our systems or a vendor’s systems, we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract subscribers. We also would be required to expend significant resources to mitigate the breach of security and to address related matters.

We cannot control the actions of third parties who may have access to the subscriber data we collect. If such third parties’ use of subscriber data is not in compliance with the terms of our privacy policies, or if they fail to prevent unauthorized access to, or use of or disclosure of, subscriber information, our business may be adversely impacted.

Any failure, or perceived failure, by us to maintain the security of data relating to our listeners and employees, to comply with our posted privacy policy, laws and regulations, rules of self-regulatory organizations, industry standards, and contractual provisions to which we may be bound, could result in the loss of confidence in us, or result in actions against us by governmental entities or others, all of which could result in litigation and financial losses, and could potentially cause us to lose listeners, advertisers, revenue, and employees.

We are subject to a number of risks related to credit card and debit card payments we accept.

We accept payments through credit card transactions. For credit card payments, we pay processing and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our products, or suffer an increase in our operating expenses, either of which could adversely affect our business, financial condition and results of operations.

If we or any of our processing vendors have problems with our billing software, or the billing software malfunctions, it could have an adverse effect on our subscriber satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our subscribers’ credit cards on a timely basis or at all, our business, financial condition and results of operations could be adversely affected.

We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it more difficult for us to comply. We must remain fully compliant with the Payment Card Industry, or PCI, Data Security Standard, or PCI DSS, a security standard with which companies that collect, store, or transmit certain data regarding credit, credit card holders, and credit card transactions are required to comply. Our failure to comply fully with PCI DSS may violate payment card association operating rules, federal and state laws and regulations, and the terms of our contracts with payment processors and merchant banks. Such failure to comply fully also may subject us to fines, penalties, damages, and civil liability, and may result in the loss of our ability to accept credit card payments. Further, there is no guarantee that, even if PCI DSS compliance is achieved, we will maintain PCI DSS compliance or that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of data pertaining to credit and debit cards, credit and debit card holders and credit and debit card transactions.

If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card-related costs, each of which could adversely affect our business, financial condition and results of operations.

If we are unable to maintain our chargeback rate or refund rates at acceptable levels, credit card companies may increase our transaction fees or terminate their relationships with us. Any increases in our credit card could adversely affect our results of operations, particularly if we elect not to raise our rates for our service to offset the increase. The termination of our ability to process payments on any major credit card would significantly impair our ability to operate our business.

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Item 6. Exhibits

Exhibit Number		Description of Exhibit
10.1		Employment Agreement dated September 15, 2011 by and between Nathan Fong and Atrinsic, Inc. *
10.2		Form of Letter Agreement dated October 27, 2011. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-12555) filed with the Commission on October 28, 2011.
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.

* Indicates a management contract or compensatory plan or arrangement.

Signatures

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

Dated: November 14, 2011

BY:	/s/ Stuart Goldfarb		BY:	/s/ Nathan Fong
	Stuart Goldfarb Chief Executive Officer and Director (Principal Executive Officer)			Nathan Fong Chief Financial Officer (Principal Financial and Accounting Officer)

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