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Article by DailyStocks_admin    (01-12-10 01:03 AM)

Atrinsic Inc. CEO Master Fund Ltd Trinad Capital bought 777992 shares on 21-12-2009 at $0.69

BUSINESS OVERVIEW

With respect to this discussion, the terms “we,” “us,” “our,” “New Motion”, and the “Company” refer to New Motion, Inc., a Delaware corporation and its wholly-owned subsidiaries, including New Motion Mobile, Inc. and Traffix, Inc. (“Traffix”), also Delaware corporations.

A Note Concerning Presentation

This Annual Report on Form 10-K contains information concerning New Motion, Inc. as it pertains to the period covered by this report – for the two years ended December 31, 2008 and 2007. As a result of the acquisitions of Traffix, Inc., a Delaware corporation (“Traffix”), and Ringtone.com LLC (“Ringtone”), a Minnesota limited liability company, by New Motion, Inc. on February 4, 2008 and June 30, 2008 respectively, (explained herein), this Annual Report on Form 10-K also contains information concerning the combination of New Motion, Traffix and Ringtone, as of the date of this Annual Report.

Background and History of New Motion

New Motion, formerly known as MPLC, Inc., and prior to MPLC, Inc. as The Millbrook Press, Inc. was incorporated under the laws of the State of Delaware in 1994. Until 2004, the Company was a publisher of children’s nonfiction books for the school and library market and the consumer market under various imprints. As a result of market factors, and after an unsuccessful attempt to restructure its obligations out of court, on February 6, 2004, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Connecticut (the “Bankruptcy Court”). After filing for bankruptcy, the Company sold its imprints and remaining inventory and by July 31, 2004, had paid all secured creditors 100% of amounts owed. At that point in time, the Company was a “shell” company with nominal assets and no material operations. Beginning in January 2005, after the Bankruptcy Court’s approval, all pre-petition unsecured creditors had been paid 100% of the amounts owed (or agreed) and all post petition administrative claims submitted had been paid. In December 2005, $0.464 per eligible share was available for distribution and was distributed to stockholders of record as of October 31, 2005. The bankruptcy proceedings were concluded in January 2006 and no additional claims were permitted to be filed after that date.

New Motion Mobile, Inc. (our wholly-owned subsidiary) was formed in March 2005 and subsequently acquired the business of Ringtone Channel, an Australian aggregator of ringtones in June 2005. Ringtone Channel was originally incorporated on February 23, 2004. In 2004, Ringtone Channel began to sell ringtones internationally and then launched its first ringtone subscription service in the U.S. in February 2005. In August 2005, New Motion Mobile launched its first successful text message campaign incorporating music trivia. As of December 31, 2007, the Company’s Australian entity was dissolved.

On October 24, 2006, the Company and certain stockholders entered into a Common Stock Purchase Agreement with Trinad Capital Master Fund, Ltd. (“Trinad”), pursuant to which we agreed to redeem 23,448,870 shares of our common stock from existing stockholders and sell an aggregate of 69,750,000 shares of our common stock, representing 93% of our issued and outstanding shares of common stock, to Trinad in a private placement transaction for aggregate gross proceeds of $750,000.

In February 2007, we completed an exchange transaction (the “Exchange”) pursuant to which New Motion Mobile became our wholly-owned subsidiary. In connection with the Exchange, we raised gross proceeds of approximately $20 million in equity financing through the sale of our Series A Preferred Stock, Series B Preferred Stock and Series D Preferred Stock.

After receiving the requisite approval of our stockholders, on May 2, 2007, we filed a certificate of amendment to our restated certificate of incorporation with the Delaware Secretary of State to, among other things, change our corporate name to New Motion, Inc. from MPLC, Inc., and effect a 1-for-300 reverse split. In connection with these corporate actions, we also changed our ticker symbol to “NWMO.”

On February 4, 2008, we completed a merger with Traffix, Inc., a Delaware corporation. Pursuant to the merger, Traffix became our wholly owned subsidiary. Traffix is a leading interactive media and marketing company that provides complete end-to-end marketing solutions for its clients who seek to increase sales and customer contact deploying the numerous facets of online marketing Traffix offers. Following the consummation of our merger with Traffix, Traffix stockholders owned approximately 45% of our capital stock, on a fully-diluted basis. Also upon the closing of our transaction with Traffix, we commenced trading on The NASDAQ Global Market under the symbol “NWMO.”

On June 30 2008, New Motion entered into an Asset Purchase Agreement (“APA”) with Ringtone.com, LLC (“Ringtone”) and W3i Holdings LLC (“W3i”) pursuant to which the Company acquired certain assets from Ringtone.com, including but not limited to short codes, subscriber database, covenant not to compete , working capital, and certain domain names. In consideration for the assets and certain liabilities assumed, the Company at the closing paid to Ringtone.com approximately $7 million in cash. In addition, the Company delivered to Ringtone.com a convertible promissory note (the “Note”) in the aggregate principal amount of $1.75 million, which accrues interest at a rate of 10% per annum. As the effective conversion price was significantly greater than the fair value of the Company's stock at the commitment date, no value was assigned to the conversion feature upon issuance. The Note is payable on the earlier to occur of either (i) July 1, 2009, or (ii) 5 days after the Company gives written notice to Ringtone.com of its intent to prepay the Note (the “Maturity Date”). The Note is optionally convertible by Ringtone.com on the Maturity Date into the Company’s common stock at a conversion price of $5.42 per share. This payment of principal and interest on the Note is subject to certain recoupment provisions contained in the Note and APA.

On July 30, 2008, we entered into a Joint Venture Agreement to launch online and mobile marketing services and offer our mobile products in the Indian market. Under the agreement, we own 19% of the Joint Venture and are required to pay up to $325,000 in return for Compulsory Convertible Debentures which can be converted to common stock at any time, at our sole discretion. Amounts paid under the agreement as of December 31, 2008 were $125,000.

On October 30, 2008, we acquired a 36% minority interest in The Billing Resource, LLC (“TBR”). TBR provides alternative billing services to us and unrelated third parties. We contributed $2.2 million to TBR upon its formation and are committed to provide an additional $1.0 million of working capital to TBR to support its near-term growth.

On December 2, 2008, we entered into a Marketing Services and Content Agreement with Central Internet Corporation which operates the website www.shopit.com (Hereinafter referred to as “Shopit”). Under the agreement, we are required to perform certain marketing and administrative services for Shopit and distribute proprietary and third party advertisements through Shopit.com and its social media advertising network. The agreement provides Shopit with a revenue share of all leads monetized by the Company. As part of the agreement, we are required to make periodic advance payments totaling $1.025 million through March 2009. The advances, which are secured under separate agreement, are recoverable on a dollar for dollar basis against future revenues. As of December 31, 2008, we had advanced $425,000 to Shopit pursuant to the terms of the agreement.

The Business of New Motion

New Motion, Inc., doing business as Atrinsic, is one of the leading digital advertising and marketing services company in the United States. Atrinsic is organized as a single segment with two principal offerings: (1) Transactional services - offering full service online marketing and distribution services which are targeted and measurable online campaigns and programs for marketing partners, corporate advertisers, or their agencies, generating qualified customer leads, online responses and activities, or increased brand recognition, and (2) Subscription services - offering our portfolio of proprietary subscription based content applications direct to consumers distributed on a mobile internet or PC internet billed in three ways: to a mobile phone number, landline phone number , or, a credit card.

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

Transactional Service - Full Service Online Marketing and Lead Generation

Our online marketing and distribution assets provide customers with a full range of marketing alternatives, which includes our wholly owned content network, affiliate marketing services, search engine marketing and optimization and list management – for both email and mobile mediums.

Proprietary Content Network : We own and operate a variety of Internet websites featuring specialized content across four principal content categories: interactive contests; casual games; communities and lifestyles; and digital music. Traffic is directed to these proprietary websites through advertisements on third-party Internet media (e.g., search engines, email and banner advertisements) and through cross-marketing within Atrinsic’s own network. Visitors to a content network website are ultimately directed to the valuable and unique content which they are registering for, but during this registration process, users are given the opportunity to sign-up or submit their contact information, for other offers and for various products and services.

Each of the content sites is designed for a specific consumer interest category that we match with client advertising/promotions that are expected to appeal to such interest category. The advertisements are served across all of the network using internally developed technology that serves ads to websites using an algorithm that takes into account a number of factors, including information supplied by the visitor upon registration, and by taking into account the price paid to Atrinsic by the client for the advertisement (the higher the price the earlier the offer or advertisement is displayed to the user).

Affiliate Marketing : Our affiliate marketing service comprises an online marketplace of more than 5,600 independent publishers who distribute internal and third party offers. The affiliate marketing group manages the online marketing mix for clients on a pay for performance basis via display advertisements and lead generation across a diverse set of industry verticals. This online marketplace allows publishers and advertisers to incorporate numerous unique and exclusive deals and customized promotions. We also provide affiliate partners with detailed tracking capabilities and significant multi-level customer support services.

Search Engine Marketing : We offer search engine marketing services, as well as search engine optimization, giving clients access to organic search engine results, which is one of the most popular mediums on which to advertise websites. We develop and manage search engine marketing campaigns for our third party advertising clients, as well as for our own proprietary websites, promotions and offers. Using proprietary technology, we build, manage and analyze the effectiveness of hundreds of thousands of pay per click keywords in real time across each of the major search engines, like Google, Yahoo and MSN. We also perform search engine optimization services, for which advertising clients are billed a monthly retainer fee.

List Management (Email and Mobile): Our list management services include targeted access to both email addresses and mobile phone numbers. Through online registrations, we capture email and cell phone addresses on free and paid for websites, which allows us to aggregate a large amount of email and mobile data. In addition to utilizing these lists for internal direct to consumer offers, we serve clients through our list management business. We rent and manage our proprietary, profiled databases. Programs can be implemented either through our numerous web properties, through email marketing, or to mobile phones. We, as a result of our regular operations, are constantly adding to our databases of unique mobile phone records and online registrations and cell phone submissions, in the process creating a substantial set of email and mobile lists that can be marketed to clients or utilized for internal marketing programs.

New Motion Subscription Based Services - Direct to Consumer Product

We have a diverse portfolio of products and sites promoted as “direct to consumer” and centered around four key areas: interactive contests; casual games; communities and lifestyles; and digital music. We are focused on selectively increasing our services portfolio with high-quality, innovative applications. This growing portfolio of mobile subscription and Internet media services is based primarily on internally generated content, augmented by licensed identifiable content, such as games, ringtones, wallpapers and images from third parties to whom we pay a licensing fee, generally on a per-download basis. The monthly end user subscription fees for our wireless subscription products and services generally range from $3.99 to $9.99.

Communities and Lifestyles Whether it is cooking, dating, or astrology, we build the spaces where relationships happen. Our communities are themed social networking destinations, designed to connect people to other people with similar interests. This category has users who self-select themselves in, so targeting is easy and advertiser return on investment is high.

Digital Music Everybody’s favorite tune has a home in Atrinsic’s digital music sector. One of the first formats to make the transition from web to phone, we started early on to gather one of the biggest music libraries in the digital space. All music is fully licensed and legal for download. Across this category, our products offer a selection of more than 35 genres and more than 30,000 songs. For our private label customers, our music library is customizable.

Casual Games Our casual gaming portfolio is expansive and growing, capturing most every demographic and interest area, and offering multiple marketing solutions. In addition to brand-building opportunities, our casual gaming destinations can deliver traffic to third-party sites through our search, data, email and publisher network. We also provide the option of flexible configurations and alternative packaging of the casual game portfolio in myriad combinations to suit the needs of publisher partners, to target niche markets, and, of course, to serve our own gaming audience.

Interactive Contests Our interactive contest and sweepstakes sites encourage an engaged, repeat audience ideal for both advertising programs and lead generation. As a result of the feature-rich relationship with participants, advertisers have many ways to reach out and touch subscribers and users, including through product placement through prize system and proprietary stores. The sites feature sweepstakes, games, loyalty programs, discount online stores, and extras like downloadable ringtones and wallpapers.

Our direct to consumer business, regardless of the product or service sold, is primarily a subscription based business. We frequently monitor a range of key metrics that have a direct impact on our ability to retain existing subscribers and our efficiency in acquiring new subscribers. Management regularly monitors the Long Term Value (“LTV”) of those subscribers taking into consideration cost per acquisition, churn rate of existing subscribers, churn rate of recurring subscribers, average revenue per user, billability of new subscribers, billability of existing subscribers and refund rates among others. Our ability to receive information on a daily, weekly, and monthly basis in order to calculate our operational metrics is critical to successfully running our business.

The Mobile Content Market

The wireless market has emerged as a result of the rapid growth and significant technological advancement in the wireless communications industry. Wireless carriers are delivering new handsets to new and existing subscribers which have the capability to download rich media content. Due to the increase in advanced mobile phones with the capabilities to handle rich media downloads, the potential market for mobile services will increase significantly in the coming years.

We believe that the growth in the wireless market has been positively influenced by a number of key factors and trends that we expect to continue in the near future, including:

• Growth in Wireless Subscribers. In 2005, the number of global wireless subscribers surpassed two billion and subscriber growth is expected to continue as wireless communications increase in emerging markets, including China and India. According to ITFacts Mobile Usage, which information is available publicly, the number of global wireless subscribers will grow from approximately 2 billion in 2005 to 2.3 billion in 2009. The North American wireless subscriber base currently exceeds 219 million. New handset delivery and adoption is expected to continue to accelerate in the U.S. market as current and new subscribers embrace newer mobile technology and media.

• Deployment of Advanced Wireless Networks. Wireless carriers are deploying high-speed, next-generation digital networks to enhance wireless voice and data transmission. These advanced networks have enabled the provisioning and billing of data applications and have increased the ability of wireless subscribers to quickly download large amounts of data, including games, music and video.

• Availability of Mobile Phones with Multimedia Capabilities. Annual mobile phone sales are expected to grow from 520 million units in 2003 to over one billion units in 2009, according to publicly available research conducted by Gartner Inc. In recent years, the mobile phone has evolved from a voice-only device to a personal data and voice communications device that enables access to wireless content and data services. Mobile phone manufacturers are competing for consumers by designing next-generation mobile phones with enhanced features including built-in digital cameras, color screens, music and data connectivity. Manufacturers are also embedding application environments such as BREW, Java, Symbian, iPhone and Android into mobile phones to enable multimedia applications, including gaming. We believe the availability of these next-generation mobile phones is driving demand for wireless subscription applications taking advantage of these advanced multimedia capabilities. According to data released by NPD Group, 23% of all mobile phones sold in the United States in the 4 th quarter of 2008, were Smartphones compared to 12% in the fourth quarter of 2007.

Off Portal Direct to Consumer Market Dynamics. Prior to November 2004, all U.S. carriers maintained a “walled garden” approach that prevented any direct to consumer off portal sites from succeeding, while in Europe and Asia, a large percentage of mobile subscription revenue came from off deck direct to consumer portals. Witnessing the huge success of direct to consumer portals in those geographies, specific U.S. carriers opened the walled garden in late 2004 and early 2005. By allowing premium SMS billing to direct-to-consumer off portal sites, the carriers opened up a potential multi-billion dollar industry opportunity.

• Demand for Wireless Entertainment. Wireless carriers and other off-deck content providers are increasingly launching and promoting wireless subscription applications to differentiate their services and increase average revenue per user. The delivery of games, ringtones, images and other subscription content to subscribers enables wireless carriers to leverage both the increasing installed base of next-generation mobile phones and their investment in high-bandwidth wireless networks. Consumers are downloading and paying for wireless subscription content offered by the carriers and off-deck providers. According to eMarketer, the mobile content market is expected to grow from $1.5 billion in revenue in 2007 to $37.5 billion by 2010, representing a compound annual growth rate of 62%.

• Growth in Our Core Market – North America. According to IDC, the wireless messaging market is forecast to grow from 54.6 billion messages in 2004 to 387.9 billion messages exchanged in 2009, and Juniper Research expects the North American user base to increase steadily with a compounded growth rate of around 28%, which is roughly twice that of Europe. Even though Asia and Europe are expected to remain the largest market for mobile entertainment, the North American market will represent the highest growth potential. According to Juniper Research, North America will represent a total of 12% of the mobile subscription industry in 2006 and growing to 19% in 2009.

Mobile Subscription and Internet Media Competitive Landscape

The development, distribution and sale of wireless subscription applications is a highly competitive business. In this market, we compete primarily on the basis of marketing acquisition costs, brand strength, and carrier and distribution breadth. We are also subject to intense competition in the online advertising and Internet media market. Within these markets, we compete on the basis of employing traditional direct marketing disciplines, such as continuously analyzing marketing results and measuring advertising cost effectiveness, and applying it to the online marketing world.

The wireless subscription and online marketing markets are highly competitive and characterized by frequent product introductions, evolving platforms and new technologies. As demand for these services continues to increase, we expect new competitors to enter the market and existing competitors to allocate more resources to develop and market to customers. As a result, we expect competition to intensify.

The current and potential competition in the markets in which we operate includes major media companies, traditional publishing companies, wireless carriers, wireless software providers, Internet affiliate and network companies. Larger, more established companies are increasingly focused on developing and distributing products and services that directly compete with us.

Currently some of our competitors in the mobile subscription market are Buongiorno, Playphone, Dada Mobile, Acotel, Glu Mobile, Cellfish (Lagadere), Jamster (Fox), Hands on Mobile and Thumbplay.

In the online advertising and network market, competitors include Azoogle, Value Click, Miva, Kowabunga! (Think Partnership), Right Media, Aptimus, iCrossing, 360i, Omnicom, iProspect, Publicis(Formerly Digitas), and, Blue Lithium. We believe that our extensive experience in Internet marketing, our existing subscriber base and our range of products and services enable us to compete effectively against all current and potential new entrants.

Distribution Channels

We currently distribute the majority of our subscription products and services directly to consumers, or “offdeck,” which is independent of the carriers, primarily through the Internet. We bill and collect revenues for our products and services through third-party aggregators who are connected to the majority of U.S. wireless carriers and their customers. We have agreements through multiple aggregators who have direct access to U.S. carriers for billing. Our customers download products or subscribe to services on their mobile phones and are billed monthly through their wireless carrier. Both the carriers and the aggregators retain fees for their services before amounts are remitted to us. Our aggregator agreements are not exclusive and generally have a limited term of one or two years, with evergreen or automatic renewal provisions upon expiration of the initial term. The agreements generally do not obligate the carriers or aggregators to market or distribute any of our products and services. In addition, any party can terminate these agreements early and, in some instances, without cause.

We have agreements to distribute our subscription products in North America through a number of aggregators who have access to the majority of U.S. and Canadian based wireless carriers, whose networks serve approximately 215 million subscribers. These wireless carriers include Cingular / AT&T Wireless, Nextel, Sprint PCS, T-Mobile, Verizon Wireless and Alltel. In addition to agreements with aggregators, we also have an agreement in place with AT&T Wireless to distribute and bill for our products directly to subscribers on their network.

For the year ended December 31, 2008, we billed approximately 13% of our revenue through aggregation services provided by one Aggregator with no more than 8% billed through a second Aggregator. For the year ended December 31, 2007, we billed approximately 87 % of our revenue through aggregation services provided by one Aggregator with no more than 1% of our revenue billed through a second Aggregator.

Technology Platform

Our web properties utilize proprietary technologies to generate real-time response-based marketing results for our advertising clients. Our proprietary technology continually analyzes marketing results to gauge whether campaigns are generating adequate results for the client, whether the media is being utilized cost-efficiently, and to determine whether new and different copy is yielding better overall results. We also employ other proprietary tools which allow us to monitor and analyze, in real time, our marketing and media costs associated with various campaigns. The technology measures, in real time, effective buys on a per campaign basis which allows us to adjust marketing efforts immediately towards the most effective campaigns and mediums. These tools allow us to be more efficient and effective in our media buys. We believe we have a low cost per acquisition rate, due in large part due to these technologies.

Employees

As of December 31, 2008, New Motion has 206 employees and full-time consultants in the United States and Canada. We have never had a work stoppage and none of our employees are represented by a labor organization or under any collective bargaining arrangements. We consider our employee relations to be good.

Government Regulation

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 our marketing practices. Also, since our products and services are accessible on mobile phones and the Internet, we are exposed to legal and regulatory developments affecting the Internet and telecommunications services in general.

There is substantial uncertainty as to the applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, defamation, obscenity and privacy. The vast majority of these laws were adopted prior to the advent of the Internet and, as a result, did not contemplate the unique issues of the Internet. In addition, there have been various regulations and court cases relating to companies’ online business activities, including in the areas of data protection, trademark, copyright, fraud, indecency, obscenity and defamation. Future developments in the law might decrease the growth of the Internet, impose taxes or other costly technical requirements, create uncertainty in the market or in some other manner have an adverse effect on the Internet. These developments could, in turn, have a material adverse effect on our business, prospects, financial condition and results of operations.

Due to the increasing popularity and use of the Internet, a number of laws and regulations have been adopted at the international, federal, state and local levels with respect to the Internet. Many of these laws cover issues such as privacy, freedom of expression, pricing, online products and services, taxation, advertising, intellectual property, information security and the convergence of traditional telecommunications services with Internet communications. Moreover, a number of laws and regulations have been proposed and are currently being considered by Federal, State, Local and foreign legislatures with respect to these issues. The nature of any new laws and regulations and the manner in which existing and new laws and regulations may be interpreted and enforced cannot be fully determined.


We provide many of our services through carriers’ networks. These networks are subject to regulation by the U.S. Federal Communications Commission (“FCC”), state public utility commissions and foreign governmental authorities. However, in the Company’s capacity of providing services via the Internet, it is generally not subject to direct regulation by the FCC.

Federal legislation was signed into law, effective January 1, 2004, substantially pre-empting existing and pending state email marketing legislation. The CAN-SPAM Act of 2003 (“CAN-SPAM”) requires that certain “opt-out” procedures, including, but not limited to, a functioning return e-mail address, be included in commercial e-mail marketing. CAN-SPAM prohibits the sending of e-mail containing false, deceptive or misleading subject lines, routing information, headers and/or return address information; however, CAN-SPAM does not permit consumers to file suit against e-mail marketers for violations of CAN-SPAM. We believe that this may benefit us, as individuals will be more limited in their ability to file frivolous suits against us. If any subsequent federal regulations are enacted, including, but not limited to, those implementing regulations promulgated by the FCC that limit our ability to market our products and services, such regulations could potentially have a material adverse impact in our future fiscal period net revenue growth, and, therefore, our profitability and cash flows could be adversely affected.

In contrast to CAN-SPAM, most state deceptive marketing statutes contain private rights of action. Such private right of action lawsuits may have an adverse impact in future fiscal period net revenue growth, as individuals may be more inclined to file frivolous state deceptive marketing suits against us.

In August 2004, under its rule-making authority, the FCC adopted rules prohibiting sending of unsolicited commercial e-mails to wireless phones and pagers. To assist in compliance with the rules, the FCC published on February 7, 2005 a list of mail domain names associated with wireless devices. Senders were given thirty (30) days to come into compliance. Thereafter, it became illegal to send unsolicited commercial e-mail to a domain address on the list unless the subscriber gave prior express authorization. The effect of these rules is to create a ‘double opt-in’ requirement for each sender of mail (advertiser and publisher). The practical consequence of these requirements on senders of commercial e-mail is that conducting compliant campaigns will necessitate the suppression of the domains listed in the FCC's list of wireless domains. Additionally, since domain suppression is now required as a practical matter by law, any campaigns that have domain suppression lists will have those lists included with the regular e-mail suppression lists. Our publishers will be required to suppress the domain lists associated with each campaign in the same manner that they already suppress the e-mail address lists. Although these regulations do not have a material adverse impact on our current operations, there can be no assurance that they will not have a material adverse impact on our future operations.

Under its rule-making authority, in May 2005, the Department of Justice adopted rules that amend the record keeping and inspection requirements for producers of sexually explicit performances. Codified in 18 U.S.C. 2257 of the federal criminal code, Section 2257, as amended, went into effect on June 23, 2005 and requires a class referred to as “secondary producers” to comply with the record keeping and inspection requirements that apply to primary producers. On June 16, 2005, The Free Speech Coalition, Inc. brought an action challenging, among other things, the extent to which webmasters and/or web sites fall under the definition of secondary producers under the new Section 2257 regulations. In a ruling issued December 28, 2005, the U.S. District Court rejected the establishment of a class of secondary producers that would have to comply with the recordkeeping and inspection requirements of Section 2257 and reaffirmed the decision in Sundance Associates v. Reno, which held that primary producers would be limited to those persons involved in the “hiring, contracting for, managing, or otherwise arranging for the participating of the depicted performer.” Secondary producers will likely still have to comply with the labeling requirements of Section 2257, which require that secondary producers obtain from the primary producer a letter or other correspondence indicating who the custodian of records is, where such records are kept and the date of production of the material. The ruling in this proceeding is limited to current or future members of The Free Speech Coalition, Inc. There is the risk that the definition of secondary producers may be reinstated and/or more broadly interpreted in the future. At this juncture, Section 2257 has had no material effect on our net revenue growth, profitability and cash flows.

The states of Michigan and Utah have passed Child Protection Registry laws that bar the transmission of commercial e-mail to registered state residents under the age of eighteen (collectively, the “Statutes”). The Statutes contain provisions for fines and jail time for violators, and create a private right of action for aggrieved parties. Under the Statutes, state residents may register any e-mail address, fax number, wireless contact information or instant message identifier assigned to the account of a minor or one to which a minor has access. Unlike other e-mail marketing statutes, there are no opt-in or pre-existing business relationship exceptions. The Statutes provide that once an address of a state resident is on the registry for thirty (30) days, commercial emailers are prohibited from sending to that address anything containing an advertisement, or even a link to an advertisement, for a product or service that a minor is legally prohibited from accessing. Such products and/or services include, but are not limited to, alcohol, tobacco, gambling, firearms, automotive, financial, prescription drug and adult material. This prohibition remains in force even if the e-mail or other communication is otherwise solicited. The Free Speech Coalition, Inc. has brought an action that challenges certain aspects of the Utah Child Protection Registry law; no decision on this proceeding has yet been rendered. We await the results of this action. To the extent we market these types of products and/or services; we have blocked sending such e-mail to Michigan and Utah residents. State action was initiated in 2005 and early 2006 in the respective legislative bodies in the states of Illinois, Connecticut, Georgia, Hawaii, Iowa and Wisconsin in order to pursue the enactment of legislation similar to the Statutes that will create state-level e-mail registries for minors. None of the proposed legislation has been enacted as of yet. We await the results of the respective legislative processes associated with these proposed child email registry laws. Depending on the outcome, and to the extent we market these types of products and/or services, we may have to block sending such e-mail to Illinois, Connecticut, Georgia, Hawaii and/or Iowa.

Federal legislation was signed into law, effective December 1, 2006, that makes changes to the Federal Rules of Civil Procedure (“Rules”) affecting the storing, retention and production of electronically stored information (“ESI”) in connection with discovery pursuant to litigation. As a result of the changes to the Rules, attorneys will be required to advise their adversaries, during litigation, of the details of their clients’ ESI retention and management systems and, in many instances, produce ESI including, but not limited to, e-mails. As a result of these changes to the Rules, companies should: (i) identify the various forms of ESI generated in the course of business, and where such ESI is stored; (ii) implement systems and technology capable of storing and retrieving such ESI, as necessary; and (iii) adopt a clear ESI document retention program and adhere to same at all times. The requirements imposed by the changes to the Rules as detailed above could require us to change our ESI-related programs at some additional cost. In addition, any subsequent litigation could result in substantially higher costs as a result of the need to produce greater quantities of ESI, which could have a material adverse impact on profitability and cash flows.

Legislation has been passed in a number of states that are intended to regulate “spyware” and, to a limited extent, the use of “cookies.” Of particular significance is the Revised Utah Spyware Control Act (the “Utah Act”) that bars a person or company from using a context-based trigger mechanism to display an advertisement that partially or wholly covers paid advertising or other content on a website in a way that interferes with the user's ability to view the website. The Utah Act also requires purveyors of pop-up advertising to ask whether a user is a resident of the state of Utah before downloading spyware software onto the user's computer and further allows a trademark owner to sue any person or company who displays a pop-up advertisement in violation of a specific trademark protection which is set forth in the Utah Act. The State of Alaska has enacted similar legislation that bars the same means of delivering advertisements as the Utah Act, and requires similar verification of residency prior to downloading spyware or “adware” software onto the user's computer. In practice, we do not provide or use spyware in our marketing, but if more restrictive legislation is adopted, we may be required to develop new technology and/or methods to provide our services or discontinue services in some jurisdictions altogether. Additionally, there is a risk that state courts will broadly interpret the term spyware to include legitimate ad-serving software and/or cookie technology that we currently provide or use.

At the federal level, competing bills are pending which are also intended to regulate spyware and, to a limited extent, the use of cookies. Spyware has not been precisely defined in existing and pending legislation, but is generally considered to include software which is installed on consumers’ computers and designed to track consumers’ activities and collect and possibly disseminate information, including personally identifiable information, about those consumers without their knowledge and consent. As stated above, Atrinsic does not provide or use spyware in its marketing practices, but there is the risk that the definition of spyware may be broadly interpreted to include legitimate ad-serving software and/or cookie technology that is currently provided or used by us. Anti-spyware legislation has (1) generally included a limited exemption for the use of cookies; and (2) focused on providing consumers with notification and the option to accept or decline the installation of spyware software. However, there can be no assurance that future legislation will not incorporate more burdensome standards by which the use of cookies will not be exempted and software downloading onto consumers’ computers will not be more strictly enforced. If more restrictive legislation is adopted, we may be required to develop new technology and/or methods to provide our services or discontinue services in some jurisdictions altogether.

CEO BACKGROUND

CURRENT DIRECTORS/DIRECTOR NOMINEES

The following table sets forth the name, age and position of each of our current directors, as well as the director nominees for election to our Board of Directors as of April 15, 2009.

Name



Age



Position
Burton Katz (1)

37

Chief Executive Officer and Director
Raymond Musci

49

Executive Vice President, Corporate Development and Director
Robert Ellin

42

Director
Lawrence Burstein

66

Director
Jerome Chazen

82

Chairman of the Board
Mark Dyne

47

Director
Jeffrey Schwartz (2)

43

Director

MANAGEMENT DISCUSSION FROM LATEST 10K

Cautionary Statement

The following discussion and analysis should be read together with the Consolidated Financial Statements of New Motion, Inc. and the “Notes to Consolidated Financial Statements” included elsewhere in this report. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of New Motion, Inc. for the fiscal years ended December 31, 2008 and 2007. 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.

Executive Overview

New Motion, Inc., doing business as Atrinsic, is one of the leading digital advertising and marketing services company in the United States. Atrinsic is organized as a single segment with two principal offerings: (1) Transactional services - offering full service online marketing and distribution services which are targeted and measurable online campaigns and programs for marketing partners, corporate advertisers, or their agencies, generating qualified customer leads, online responses and activities, or increased brand recognition, and (2) Subscription services - offering our portfolio of subscription based content applications direct to users working with wireless carriers and other distributors.

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

New Motion, Inc. is operating under the trade name of Atrinsic and is in the process of formally changing its name. Our goal is to optimize revenues from each of our qualified leads, regardless of the nature of the services we provide to such parties. Over an extended period of time our ability to generate incremental revenues relies on our ability to increase the size and scope of our media, our ability to target campaigns, and our ability to convert qualified leads into appropriate revenue generating opportunities.

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

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

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

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

STRATEGIC INITIATIVES

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

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

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

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

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

Revenues increased approximately by $76.9 million, or 208%, to $113.9 million for the year ended December 31, 2008, compared to $37.0 million for the year ended December 31, 2007. Subscription based revenue increased by approximately $7.2 million, or 20%, to $44.2 million for the year ended December 31, 2008, compared to $37.0 million for the year ended December 31, 2007. The increase in subscription service revenue was principally attributable to an increase in the average number of billable subscribers added during the period and our purchase of Ringtone.com, coupled with our efforts to improve subscriber retention. Although we ended 2008 with approximately 501,000 subscribers as compared to approximately 840,000 subscribers at the end of 2007, during 2008 the average number of monthly billable subscribers was higher than in 2007 and the number of subscribers increased disproportionally at the end of 2007. The number of subscribers is largely, but not precisely, correlated to the periodic reported revenues as a result of inter-period volatility and the circumstance that subscribers are billed on a monthly basis.

Cost of Media increased by $45.5 million to $74.5 million in 2008 from $29 million in 2007. For 2008, Cost of Media – 3 rd party includes media purchased for monetization of both transactional and subscription revenues. The increase was principally attributed to the media necessary to source the revenue acquired with the acquisition of Traffix, Inc. which took place February 4, 2008.

Product and Distribution

Product and distribution increased by $6.6 million to $9.7 million for the year ended December 31, 2008 compared to $3.1 million for the year ended December 31, 2007. The increase was principally attributed to the acquisition of Traffix, Inc. which took place February 4, 2008. Product and distribution expenses are costs necessary to develop and maintain proprietary content, support and maintain our websites and user data, technology platforms which drives both transactional and subscription based revenue. Included in product and distribution cost is stock compensation expense of $6,593 and $288,443 for 2008 and 2007 respectively.

Selling and marketing

Selling and marketing expense increased by $8.4 million to $9.9 million in 2008 as compared to $1.5 million for the year ended December 31, 2007. The increase is primarily due to an increase in fixed and variable labor, principally attributed to the acquisition of Traffix, Inc. which took place February 4, 2008. In addition, the company incurred approximately $2.2 million of bad debt expense in 2008 and none in 2007.

General, Administrative and Other Operating

General and administrative expenses increased by approximately $8.7 million to $16.1 million for the year ended December 31, 2008 compared to $7.4 million for the year ended December, 31, 2007. The increase is primarily due to an increase in labor and related costs necessary to support core operations, professional and consulting fees, facilities and related costs principally attributable to the growth the company experienced as of result of the acquisition of Traffix, Inc. Management has taken action to achieve approximately $4.0 million of efficiencies resulting from the acquisition of Traffix, however the Company continues to make appropriate and modest investments in labor, facilities, technology infrastructure, and utilization of third party professional service providers to support its continued growth, business development and corporate governance initiatives. Included in general and administrative expense is stock compensation expense of $1.3 million and $828,045 for 2008 and 2007 respectively.

Depreciation and amortization

Depreciation and amortization expense increased $4.5 million to $5.9 million for the year ended December 31, 2008 compared to $1.3 million for the year ended December 31, 2007 principally as the result of the amortization of intangible assets and depreciation of fixed assets acquired in connection with the acquisition of the Traffix, Inc. and Ringtone.com.

Impairment of Goodwill

In connection with its annual goodwill impairment testing for the year ended December 31, 2008, the Company determined there was impairment and recorded a non-cash charge of $114.8 million. The goodwill impairment, the majority of which is not deductible for income tax purposes, is primarily due to our declining market price and reduced valuation multiples. Such negative factors are reflected in our stock price and market capitalization.

Income (Loss) from Operations

Operating loss increased to approximately $117.0 million for the year ended December 31, 2008, compared to an operating loss of $5.5 million for the year ended December 31, 2007. This increase was principally attributable to the $114.8 million charge for the impairment of goodwill taken during the fourth quarter of 2008. Excluding the charge for impairment, the operating loss for the year ended December 31, 2008 decreased $3.2 million to ($2.3) million compared to an operating loss of ($5.5) million for the year ended December 31, 2007. Management has taken action to gain approximately $4.0 million of efficiencies resulting from the acquisition of Traffix, however the Company continues to make appropriate and modest investments in labor, facilities, technology infrastructure, and utilization of 3 rd party professional service providers to support its continued growth, business development and corporate governance initiatives.

Interest income and dividends

Interest and dividend income increased $284,000 to $748,000 for the year ended December 31, 2008, compared to $464,000 for the year ended December 31, 2007. The increase is primarily due to interest income earned on higher cash balances maintained throughout 2008, offset by lower rates, and interest and dividends earned on marketable securities.

Interest expense

Interest expense increased $125,000 to $147,000 for the year ended December 31, 2008, compared to $22,000 for the year ended December 31, 2007. The increase is primarily attributable to interest expense of $90,000 on the note payable associated with the purchase of the assets of Ringtone .com.

Other Income (Expense)

Other expense increased $141,000 to $153,000 for the year ended December 31, 2008, compared to $12,000 for the year ended December 31, 2007. The increase is primarily attributable to loss on the sale of marketable securities of $174,000.

Income Taxes

Income tax benefit for the year ended December 31, 2008 was $852,000 and reflects an effective tax rate of 0.73%, which was computed taking into consideration the non-deductible impairment charge noted above, the effects of the merger with Traffix, Inc. which occurred on February 4, 2008, and includes the result of changes in the weighted average statutory rate attributable to the addition of certain local jurisdictions resulting from the merger, and certain adjustments realized in connection with the finalization of tax returns.

Minority interest

Minority interest represents the income allocable to the non-controlling interests and net income attributable to the shareholders of the Company for its interest in MECC. Minority interest for the year ended December 31, 2008 was $24,000 compared to ($283,000) for the year ended December 31, 2007.

Net Loss

Net loss increased by $111.6 million to $115.8 million for the year ended December 31, 2008 as compared to a net loss of $4.1 million for the year ended December 31, 2007. The increase is as described above.

Liquidity and Capital Resources

The Company continually projects anticipated cash requirements, which may include share repurchases, business combinations, capital expenditures, principal and interest payments on its outstanding and future indebtedness, and working capital requirements. Funding requirements have been financed through business combinations, cash flow from operations, issuance of preferred stock, option exercises and issuance of long-term debt. As of December 31, 2008, the Company had cash and cash equivalents of approximately $20.4 million, marketable securities of approximately $4.2 million (including Auction Rated Securities of $4.0 million that was redeemed and converted to cash at par plus interest in January 2009) and a working capital balance of approximately $23.7 million. The Company generated approximately $4.4 million from operations for the year ended December 31, 2008 and expects to generate cash flows from operating activities prospectively, which, contingent on prospective operating performance, may require reductions in discretionary variable costs and other realignments to permanently reduce fixed operating costs.

In conjunction with the Company’s objective of enhancing shareholder value, the Company’s Board of Directors authorized a share repurchase program. Under this share repurchase program, the Company purchased 1,908,926 shares of the Company’s common stock for an aggregate price of approximately $4.05 million during the Fiscal 2008.

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

In connection with its investments as further described in footnote 14, the Company is obligated to fund investments totaling approximately $1.6 million in 2009. Furthermore, management anticipates the risk adjusted return is sufficiently in excess of the contributed capital obligations, as of this date. There is however, no guarantee of the anticipated returns. In addition, management has taken considerable actions to secure its interest in achieving such a return.

Significant Estimates and Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of all majority and wholly-owned subsidiaries and significant intercompany balances and transactions have been eliminated.

The equity method is used to account for investments in entities in which we have an ownership of less than 50% and have significant influence over the operating and financial policies of the affiliate. For investments in entities for which the company has a less than 50 percent ownership interest, but has certain participatory rights, the investee is consolidated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management continually evaluates its estimates and judgments including those related to allowances for doubtful accounts and the associated allowances for returns and chargebacks, useful lives of property, plant and equipment and intangible assets, fair value of stock options granted, forfeiture rate of equity based compensation grants, probable losses associated with pre-acquisition contingencies, income taxes and other contingencies. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable in the circumstances. Actual results may differ from those estimates. Macroeconomic conditions may directly, or indirectly through our business partners and vendors, impact our financial performance and available resources. Such conditions may, in turn, impact the aforementioned estimates and assumptions.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

CAUTIONARY STATEMENT

This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity and cash flows for the three and nine months ended September 30, 2009 and 2008. Except for historical information, the matters discussed in this “Management’s Discussion and Analysis” are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Actual results could differ materially from those projected in the “ forward-looking statements” as a result of, among other things, the factors described under the “Cautionary Statements and Risk Factors” included elsewhere in this report. The information contained in this Form 10-Q, as at and for the three and nine months ended September 30, 2009 and 2008, is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2008 of Atrinsic, Inc. (“we,” “our,” “us”, the “Company,” or “Atrinsic”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis” and other information contained in our Annual Report on Form 10-K.

A NOTE CONCERNING PRESENTATION

This Quarterly Report on Form 10-Q contains information concerning Atrinsic, Inc. as it pertains to the periods covered by this report - for the three and nine months ended September 30, 2009 and 2008.

Executive Overview

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

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

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

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

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

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

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

STRATEGIC INITIATIVES

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

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

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

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

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



(1)

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

Revenues decreased approximately $15.9 million or 52%, to $14.9 million for the three months ended September 30, 2009, compared to $30.8 million for the three months ended September 30, 2008.

Subscription revenue decreased by approximately $10.5 million, or 68%, to $4.9 million for the three months ended September 30, 2009, compared to $15.4 million for the three months ended September 30, 2008. The decrease in subscription service revenue was principally attributable to a decrease in the average number of billable subscribers during the period. For the three months ended September 2009 the average number of subscribers was 280,000 compared to 800,000 for the three months ended September 30, 2008. The number of subscribers is largely, but not precisely, correlated to the periodic reported revenues as a result of inter-period volatility, varied monthly billing cycles, and specific transactions including acquisition of subscriber base, the rate of refunds and other adjustments.

Transactional revenue decreased by approximately $5.5 million or 35% to $10.0 million for the three months ended September 30, 2009 compared to $15.5 million for the three months ended September 30, 2008. The decrease was primarily attributable to the reduction in discretionary advertising expenditures by our clients.

Cost of Media

Cost of Media decreased by $11.0 million or 52% to $9.9 million for the three months ended September 30, 2009 from $20.9 million for the three months ended September 30, 2008. Cost of Media – 3 rd party includes media purchased for monetization of both transactional and subscription revenues. The decrease was proportionately correlated to the decline in the related revenue.

Product and Distribution

Product and distribution expense was $3.7 million for the three months ended September 30, 2009 as compared to $2.7 million for the three months ended September 30, 2008. Product and distribution expenses are costs necessary to develop and maintain proprietary content, support and maintain our websites, user data and technology platforms which drive both our transactional and subscription based revenues. During the third quarter of 2009, the Company had major ongoing initiatives to develop its subscription based music service, e-commerce ShopIt platform and other marketing and distribution technologies. Included in product and distribution cost is stock compensation expense of $32,000 and $(26,000) for the three months ended September 30, 2009 and 2008 respectively.


Selling and Marketing

Selling and marketing expense was $2.2 million in the three months ended September 30, 2009 as compared to $2.6 million for the three months ended September 30, 2008. The Company’s bad debt expense decreased by approximately $142,000 for the three months ended September 30, 2009 compared to the three months ended September 30, 2008. Salaries and other marketing costs decreased for the three months ended September 30, 2009 in comparison to the three months ended September 30, 2008

General, Administrative and Other Operating

General and administrative expenses increased by approximately $355,000 to $3.7 million for the three months ended September 30, 2009 compared to $3.3 million for the three months ended September 30, 2008. The increase is primarily due to professional fees, Sarbanes Oxley consulting fees, legal and other compliance and governance related costs. The Company continues to make appropriate and modest investments in labor, facilities, and utilization of third party professional service providers to support growth, business development and corporate governance initiatives. Included in general and administrative expense is stock compensation expense of $226,000 and $(44,000) for the three months ended September 30, 2009 and 2008 respectively.

Depreciation and Amortization

Depreciation and amortization expense decreased $787,000 to $549,000 for the three months ended September 30, 2009 compared to $1.3 million for the three months ended September 30, 2008 principally as a result of the decrease in amortization expense due to circumstance that certain intangibles are fully amortized.

(Loss) Gain from Operations

Operating loss was approximately $5.1 million for the three months ended September 30, 2009, compared to an operating gain of $49,000 for the three months ended September 30, 2008. The Company’s revenue decreased by 52% with a corresponding decrease in operating expenses of 35%. The reduction of expenses did not keep pace with the degradation in revenue.

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

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

Interest Income and Dividends

Interest and dividend income decreased $202,000 to $5,000 for the three months ended September 30, 2009, compared to $207,000 for the three months ended September 30, 2008. The reduction is mainly due to a decrease in the balances of cash and marketable securities at September 30, 2009 compared to September 30, 2008, as well as a reduction in market rate of return on cash and cash equivalents.

Interest Expense

Interest expense was $1,000 for the three months ended September 30, 2009 compared to $83,000 for the three months ended September 30, 2008. The decrease was due to the payment of the Ringtone.com note payable in the second quarter of 2009.

Income Taxes

Income tax benefit, before noncontrolling interest and Equity in loss of investee, for the three months ended September 30, 2009 and 2008 was ($2.7) million and ($77,000) respectively and reflects an effective tax rate of 54% and 79% respectively. The Company had a loss before taxes of $5.1 million for the three months ended September 30, 2009 compared to loss before taxes of $98,000 for the three months ended September 30, 2008. The Company has not provided a valuation allowance against its tax benefits because it is more likely than not that such benefits will be utilized by the Company.

Equity in (Earnings) Loss of Investee

Equity in loss of investee was $61,000, net of taxes and represents the Company’s 36% interest in The Billing Resource, LLC (TBR). The company acquired its interest in TBR in the 4 th Quarter 2008 so there are no comparable earnings for the three months ended September 30, 2008.

Net Loss (Income) Attributable to Noncontrolling Interest

Net Loss (income) attributable to noncontrolling interest for the three months ended September 30, 2009 was $0 compared to net income of ($15,000) for the three months ended September 30, 2008. The investment in MECC was dissolved in June 2009.

Net Loss Attributable to Atrinsic, Inc.

Net loss increased by $2.4 million to $2.4 million for the three months ended September 30, 2009 as compared to a net loss of $6,000 for the three months ended September 30, 2008. This increase resulted from the factors described above.

Results of Operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

In terms of comparability, for the nine months ended September 30, 2008 total revenue and operating expenses include eight months of Traffix, Inc. activity and three months of Ringtone.com LLC activity whereas September 30, 2009 total revenue and operating expenses includes nine months of Traffix, Inc. and Ringtone.com LLC activity.


(1)

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

Revenues decreased approximately $35.6 million, or 39%, to $55.4 million for the nine months ended September 30, 2009, compared to $91.0 million for the nine months ended September 30, 2008.

Subscription revenue decreased by approximately $23.8 million, or 61%, to $15.1 million for the nine months ended September 30, 2009, compared to $38.9 million for the nine months ended September 30, 2008. The decrease in subscription service revenue was principally attributable to a decrease in the average number of billable subscribers during the period. For the nine months ended September 30, 2009 the average number of subscribers was 362,000 compared to 882,000 for the nine months ended September 30, 2008. The number of subscribers is largely, but not precisely, correlated to the periodic reported revenues as a result of inter-period volatility, varied monthly billing cycles, and specific transactions including acquisition of subscriber base, the rate of refunds and other adjustments.

Transactional revenue decreased by approximately $11.8 million or 23% to $40.3 million for the nine months ended September 30, 2009 compared to $52.1 million for the nine months ended September 30, 2008. The decrease is principally attributed to the reduction in discretionary advertising spending by our search customers.


Cost of Media

Cost of Media decreased by $25.0 million to $35.9 million for the nine months ended September 30, 2009 from $60.8 million for the nine months ended September 30, 2008. Cost of Media – 3 rd party includes media purchased for monetization of both transactional and subscription revenues. The decrease was proportionately correlated to the decline in the related revenue.

Product and Distribution

Product and distribution expense increased by $0.9 million to $8.5 million in the nine months ended September 30, 2009 as compared to $7.6 million for the nine months ended September 30, 2008. Product and distribution expenses are costs necessary to develop and maintain proprietary content, support and maintain our websites, user data and technology platforms which drive both our transactional and subscription based revenues. In 2009, the company had major ongoing initiatives to develop its subscription based music service, e-commerce ShopIt platform and other marketing and distribution technologies. Included in product and distribution cost is stock compensation expense of $138,000 and $110,000 for the nine months ended September 30, 2009 and 2008 respectively.

Selling and Marketing

Selling and marketing expense increased by $338,000 to $7.1 million in the nine months ended September 30, 2009 as compared to $6.8 million for the nine months ended September 30, 2008. The increase is primarily due to an increase in bad debt expense of $994,000 partially offset by a reduction in salaries and other marketing costs.

General, Administrative and Other Operating

General and administrative expenses decreased by approximately $1.8 million to $10.5 million for the nine months ended September 30, 2009 compared to $12.3 million for the nine months ended September 30, 2008. The decrease is primarily due to a reduction in labor and related costs, professional and consulting fees, facilities and related costs, partially offset by an increase in Sarbanes Oxley consulting fees, legal and related costs. The Company continues to make appropriate and modest investments in labor, facilities, and utilization of third party professional service providers to support its continued growth, business development and corporate governance initiatives Included in general and administrative expense is stock compensation expense of $941,000 and $900,000 for the nine months ended September 30, 2009 and 2008 respectively.

Depreciation and Amortization

Depreciation and amortization expense increased $495,000 to $3.1 million for the nine months ended September 30, 2009 compared to $2.6 million for the nine months ended September 30, 2008 principally as a result of the increase in intangible assets as a result of the acquisitions of Traffix, Inc. on February 4, 2008 and Ringtone.com LLC on September 30, 2008, and an increase in leasehold improvements for the Company’s New York City headquarters. In addition, numerous assets were fully depreciated as a result of closing the California office.

Loss from Operations

Operating loss increased to approximately $9.7 million for the nine months ended September 30, 2009, compared to an operating gain of $878,000 for the nine months ended September 30, 2008. The Company’s revenue decreased by 39%,with a corresponding decrease in operating expenses of 28%. The reduction of expenses did not keep pace with the degradation in revenue.


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

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

Interest Income and Dividends

Interest and dividend income decreased approximately $501,000 to $67,000 for the nine months ended September 30, 2009, compared to $568,000 for the nine months ended September 30, 2008. The reduction is mainly due to a decrease in the balances of cash and marketable securities at September 30, 2009 compared to September 30, 2008, as well as a reduction in the rate of return on invested capital.

Interest Expense

Interest expense was $76,000 for the nine months ended September 30, 2009 compared to $83,000 for the nine months ended September 30, 2008. The interest paid is primarily related to the note payable to Ringtone.com.

Income Taxes

Income tax (benefit) expense, before noncontrolling interest and Equity in loss of investee, for the nine months ended September 30, 2009 and 2008 was ($4.3) million and $517,000 respectively and reflects an effective tax rate of 45% and 42% respectively. The Company had a loss before taxes of $9.7 million for the nine months ended September 30, 2009 compared to income before taxes of $1.2 million for the nine months ended September 30, 2008. The Company has not provided a valuation allowance against its tax benefits because it is more likely than not that such benefits will be utilized by the Company.

Equity in Loss of Investee

Equity in loss of investee was $113,000, net of taxes for the nine months ended September 30, 2009 and represents the Company’s 36% interest in The Billing Resource, LLC. The company acquired its interest in TBR in the 4 th Quarter 2008 so there are no comparable earnings for the nine months ended September 30, 2008.

Net Loss (Income) Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest was $28,000 for the nine months ended September 30, 2009 compared to a net income of ($92,000) for the nine months ended September 30, 2008. The investment in MECC was dissolved in June 2009.

Net (Loss) Income Attributable to Atrinsic, Inc.

Net loss increased by $6.3 million to ($5.5) million for the nine months ended September 30, 2009 as compared to a net income of $793,000 for the nine months ended September 30, 2008. This increase resulted from the factors described above.

Liquidity and Capital Resources

The Company continually projects anticipated cash requirements, which may include business combinations, capital expenditures, and working capital requirements. As of September 30, 2009, the Company had cash and cash equivalents of approximately $17.6 million and working capital of approximately $14.4 million. The Company used approximately $2.3 million in cash for operations for the nine months ended September 30, 2009 and, contingent on prospective operating performance, may require reductions in discretionary variable costs and other realignments to permanently reduce fixed operating costs. The Company generated $2.3 million in investing activities, principally from proceeds from sale of ARS securities and capital repayment from The Billing Resource, offset by the investment in ShopIt. Cash used in financing activities was $2.8 million and was principally attributable to payment of the Ringtone.com note payable of $1.8 million and stock repurchases of approximately $900,000.

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


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