UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number: 000-30063

ARTISTDIRECT, INC.

(310) 443-5360
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). o

As of March 31, 2004, the registrant had 3,502,117 shares of common stock, par value $0.01 per share, outstanding.

Documents incorporated by reference: None.

ARTISTDIRECT, INC. AND SUBSIDIARIES

INDEX

2

ARTISTdirect, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

3

ARTISTdirect, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(amounts in thousands, except for share data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

4

ARTISTdirect, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(amounts in thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

5

ARTISTdirect, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Deficiency
(amounts in thousands, except for share data)

See accompanying notes to condensed consolidated financial statements.

6

ARTISTdirect, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

7

ARTISTdirect, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003
(Unaudited)

1. BASIS OF PRESENTATION

     Organization

     ARTISTdirect, Inc. (“ADI”) was formed on October 6, 1999 upon its merger with ARTISTdirect, LLC (the “Capital Reorganization”). The Capital Reorganization was only a change in the form of ownership of ADI. ARTISTdirect, LLC was organized as a California limited liability company and commenced operations on August 8, 1996. ARTISTdirect, LLC had a 99% ownership interest in ARTISTdirect Agency LLC, Kneeling Elephant Records, LLC and ARTISTdirect New Media, LLC (the “Affiliated Companies”) and has consolidated their results since inception.

     On May 31, 2001, the Company, through its wholly-owned subsidiary, ARTISTdirect Recordings, Inc., entered into an agreement to acquire a 50% equity interest in a co-venture with Frederick W. (Ted) Field to form a new record label, ARTISTdirect Records, LLC (“ARTISTdirect Records”). This transaction became effective as of June 29, 2001. In April 2002, ADI’s ownership position in ARTISTdirect Records decreased to 45% as a result of a sale of a 5% interest to BMG. However, ADI’s ownership position increased to 65% during 2002, as a result of ADI’s agreement to accelerate its funding commitment to ARTISTdirect Records in 2002.

     Unless the context indicates otherwise, ARTISTdirect, Inc. and its subsidiaries are referred to herein as the “Company”.

     Business Activities

     The Company is a music entertainment company, headquartered in Los Angeles, California, that combines an on-line music network and a record label to provide an integrated offering for music fans, artists and marketing partners. The ARTISTdirect Network (www.artistdirect.com) is a network of Web sites offering multi-media content, music news and information, community around shared music interests, music-related specialty commerce and digital music services. Through the Company’s subsidiary, ARTISTdirect Records, the Company develops new musical artists and produces and distributes their recordings as an independent label utilizing both traditional channels and emerging Internet distribution channels.

     Principles of Consolidation

     The accompanying financial statements include the consolidated accounts of ADI and its subsidiaries in which it has controlling interests. All significant intercompany accounts and transactions have been eliminated for all periods presented. ADI has recorded 100% of the losses attributable to ARTISTdirect Records from May 31, 2001 through April 30, 2002 based on ADI’s commitment to fund 100% of ARTISTdirect’s operations during that time. From May 1, 2002 through December 31, 2002, ADI recorded approximately 83% of the losses of ARTISTdirect Records as a result of BMG’s equity purchase and from an assumption of a portion of ADI’s funding commitment to the record label. For the year ended December 31, 2003, ADI recorded approximately 73% of the losses of ARTISTdirect Records. However, given that ADI did not have voting or operational control, even with its majority ownership position in ARTISTdirect Records, through December 31, 2003, ADI accounted for this investment under the equity method of accounting as income (loss) from equity investments in the consolidated statements of operations.

     In February 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities. ADI adopted FIN 46 as of December 31, 2003. As a result of the adoption of FIN 46, the balance sheet of ARTISTdirect Records was consolidated as of December 31, 2003, and the operations of ARTISTdirect Records are being consolidated from January 1, 2004.

     As a result of the consolidation of the balance sheet of ARTISTdirect Records as of December 31, 2003, the Company’s statements of operations and cash flows for the three months ended March 31, 2004 are not directly comparable to its statements of operations and cash flows for the three months ended March 31, 2003.

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     The following is the adjustment resulting from the change to consolidation from equity accounting for ARTISTdirect Records, LLC effective December 31, 2003:

     The Company also recorded a cumulative effect of consolidation of ARTISTdirect Records, LLC of $5.255 million at December 31, 2003. This adjustment represents an increase in loans payable of $5.255 million at December 31, 2003, to reflect losses previously allocated to minority members (primarily BMG) of ARTISTdirect Records, LLC.

     Going Concern

     The Company has incurred losses and negative cash flows from operations in every fiscal period since inception and had an accumulated deficit of $222.7 million as of December 31, 2003 and $223.4 million as of March 31, 2004. For the three months ended March 31, 2004, the Company incurred a net loss of $712,000 and negative operating cash flows of $2.3 million. For the year ended December 31, 2003, the Company incurred a net loss of $21.7 million and negative operating cash flows of $5.4 million. As of March 31, 2004, the Company had a net working capital deficiency of $8.2 million and a stockholders’ deficiency of $17.7 million. As of December 31, 2003, the Company had a net working capital deficiency of $9.5 million and a stockholders’ deficiency of $16.9 million. Additionally, ADI has been funding substantially all of the operations of ARTISTdirect Records. ADI’s operations to date and loans to ARTISTdirect Records have been funded by the sale of its preferred and common stock. Management expects the Company’s operating losses to continue for the foreseeable future. The Company does not currently anticipate that its available cash resources will be sufficient to meet anticipated capital during the remainder of 2004 without additional capital. The Company restructured its operations, laid off most of its staff and reduced operating costs during 2003, and is attempting to mitigate its funding obligation and raise additional funding through various means. However, there can be no assurances that the Company will be successful in this regard. If sufficient capital is not available, then the Company may not be able to fund its operations or its remaining funding commitment to ARTISTdirect Records. Failure to raise additional capital could seriously harm the business of ARTISTdirect Records and impair the value of the Company’s investment in ARTISTdirect Records. To the extent that the Company is unable to successfully restructure its funding obligation and/or obtain the capital necessary to fund its future cash requirements on a timely basis and under acceptable terms and conditions, the Company will not have sufficient cash resources to maintain operations, and may consider a formal or informal restructuring or reorganization. As a result of the conditions described above, the Company’s auditors have included an explanatory paragraph in their opinion indicating that there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Interim Financial Information

     The unaudited interim financial statements of the Company included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

     In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company at March 31, 2004, the results of operations for the three months ended March 31, 2004 and 2003, and the cash flows for the three months ended March 31,

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2004 and 2003. The results for the three months ended March 31, 2004 are not necessarily indicative of the expected results for the full year or any future period. The balance sheet as of December 31, 2003 is derived from the Company’s audited financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission.

Estimates

     In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Some of the more significant estimates are allowance for sales return and inventory obsolescence, allowances for bad debts, impairment of long-lived assets and goodwill, stock-based compensation and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.

Loss Per Common Share

     The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” and Securities and Exchange Commission Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

     The calculation of diluted loss per share excludes approximately 1,100,000 and 780,000 of potential common shares for the three months ended March 31, 2004 and 2003, respectively, since the effect would be anti-dilutive.

Stock-Based Compensation

     The Company accounts for stock-based employee compensation in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation”, and complies with the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation expense is recorded based on the difference, if any, between the fair value of the Company’s stock and the exercise price on the measurement date. The Company accounts for stock issued to non-employees in accordance with SFAS No. 123, which requires entities to recognize as expense over the service period the fair value of all stock-based awards on the date of grant and EITF 96-18, “Accounting for Equity Investments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, which addresses the measurement date and recognition approach for such transactions.

     Stock-based compensation included in cost of revenue represents the amortization of non-cash compensation expense related to vendor warrants and stock options granted to artists and their advisors in connection with entering into contractual commitments to operate their online commerce activities. The Company records the fair value of options and warrants granted to non-employees as compensation expense over the period of service. The Company determines the fair value of these options and warrants based on the Black-Scholes option-pricing model.

     Stock-based compensation included in operating expenses represents the amortization of non-cash compensation expense related to equity instruments granted to employees, directors, professional firms, artists and artist advisors. Compensation for equity grants to non-employees is recorded in the same manner as described above. The Company records stock compensation for employee option grants equal to the excess of the fair value of its common stock over the exercise price on the grant date. The Company records the compensation over the vesting period.

     Pro forma information regarding net loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of such statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model.

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     For purpose of pro forma disclosures, the estimated fair value of the options is amortized to operations over the vesting period of the options or the expected period of benefit. The Company’s pro forma information is as follows:

2. iMUSIC

     During 2002, the Company’s wholly-owned subsidiary, ARTISTdirect Digital, Inc., began operating a record label under the brand name iMusic. Operations consist primarily of the sale of compact discs by artists signed to the iMusic record label. iMusic’s concept was to focus on the signing of established artists with a proven sales base and an ability to generally make records less expensively than developing artists. In addition, the Company expected that substantially less would be spent on marketing and promotion of these releases than on those of new artists. During the three months ended June 30, 2003, management of the Company decided to scale back the activity of its iMusic label in order to conserve capital. During the three months ended September 30, 2003, the Company executed an agreement with GC Music, pursuant to which the Company assigned its rights and obligations to six unreleased artists in exchange for a cash payment of $100,000 as a reduction to prior advances related to the six artists and a profit interest in the projects. The Company retains the distribution rights to the albums previously released under the original terms of its distribution agreements with its other signed artists. The Company does not plan to sign any additional artists or release any additional albums domestically or internationally under the iMusic label and expects very minimal sales activity in the future.

3. INVESTMENT IN ARTISTDIRECT RECORDS, LLC

     In May 2001, ADI entered into an agreement with Frederick W. (Ted) Field to become Chairman and Chief Executive Officer of ADI and through its wholly-owned subsidiary, ARTISTdirect Recordings, Inc., to form a new record label, ARTISTdirect Records, LLC (“ARTISTdirect Records”), in partnership with ADI. On June 29, 2001, ADI’s stockholders approved the employment of Mr. Field and the formation of the ARTISTdirect Records record label. ARTISTdirect Records was formed as a 50/50 co-venture between ADI and Mr. Field. Mr. Field is the Chief Executive Officer of ARTISTdirect Records. The primary business activity of ARTISTdirect Records is the sale of compact discs by artists signed to the record label.

     ADI initially committed to fund a total of $50 million to ARTISTdirect Records over five years at the rate of $15.0 million per year, subject to a limit of $33 million in any three year period. Any funding in excess of these amounts required the approval of ADI’s Board of Directors. ADI has funded $33.0 million through March 31, 2004.

     In November 2001, ARTISTdirect Records agreed in principle to enter into a preliminary North America distribution agreement and worldwide license agreement with BMG Music, a wholly-owned partnership of Bertelsmann Music Group, Inc., the global music division of Bertelsmann AG (“BMG”). Under the terms of the agreement, BMG agreed to distribute the label’s releases in North America, and BMG licensed ARTISTdirect Records’ repertoire in territories throughout the world. In April 2002, the agreements with BMG were finalized, including BMG’s purchase of 5% of the equity of ARTISTdirect Records from ADI. As part of this transaction, BMG agreed to advance certain monies against net sales proceeds under the agreements and also assumed $5.0 million of ADI’s funding commitment to ARTISTdirect Records. As a result of the BMG equity purchase, ADI’s funding commitment was reduced to $45 million. In December 2002, BMG exercised its option to extend the term of the distribution and license agreement until September 2004.

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     Under the distribution and license agreements, BMG made non-returnable advances to ARTISTdirect Records of $2.5 million in 2001, $2.5 million in 2002 and $5.0 million in 2003 that are recoupable from net sales proceeds from ARTISTdirect Records’ artist repertoire. The loan advances bear interest at a rate of LIBOR plus 4%, and the principal and interest are not repayable until December 31, 2015, or upon such time as ARTISTdirect Records achieves certain defined levels of excess cash flow and available cash. As of March 31, 2004 and December 31, 2003, the unrecouped balance related to distribution advances from BMG was $8.6 million and $8.7 million, respectively.

     In August 2002, ADI’s Board of Directors approved an agreement (the “Accelerated Funding Agreement”) to accelerate up to $10 million of its funding commitment to ARTISTdirect Records. This funding was in addition to the $15 million that ADI was obligated to advance to ARTISTdirect Records in 2002 as part of the initial $50 million funding commitment. During 2002, ADI funded its $15 million commitment plus the additional $10 million bridge loan for total advances to the record label of $25.0 million in 2002 and $30.25 million from the inception of the record label through December 31, 2002. The $10 million of accelerated funding was credited toward the satisfaction of ADI’s overall funding commitment and funding obligation for 2003, resulting in a remaining funding commitment of $2.75 million for 2003 and $12.0 million for 2004. ADI advanced the $2.75 million during 2003. ADI’s commitment to fund ARTISTdirect Records is subject to a guaranty for the benefit of BMG. Should ADI fail to meet its commitment, BMG may choose to enforce the guaranty or provide substitute financing that could result in dilution of ADI’s interest in ARTISTdirect Records.

     As consideration for entering into the Accelerated Funding Agreement, ADI received an additional 20% interest in ARTISTdirect Records from Radar Records Holdings, L.L.C. (“RRH”), the entity through which Mr. Field owns his interest in ARTISTdirect Records, which resulted in an increase in ADI’s ownership share of ARTISTdirect Records from 45% to 65% and a decrease in Mr. Field’s ownership share from 50% to 30%. The Accelerated Funding Agreement also provides that any dilution from the issuance of equity interests in ARTISTdirect Records that would have been borne solely by ADI will be borne both by RRH and ADI pro rata with their then respective ownership interests. Furthermore, the Accelerated Funding Agreement provides for RRH to guarantee a 25% minimum annual compounded return to be realized from ADI’s advances and equity interests in ARTISTdirect Records. Due to the uncertainty with respect to the realization of such rate of return, ADI has not recorded any amounts related to the 25% minimum annual compounded return in its consolidated financial statements.

     Because ADI did not have voting or operating control of ARTISTdirect Records, even with its majority ownership position, through December 31, 2003 it did not consolidate the results of ARTISTdirect Records; ADI recorded its share of losses based on the equity method of accounting as loss from equity investments in its consolidated statements of operations. Prior to the completion of BMG’s purchase of a 5% interest in ARTISTdirect Records in April 2002 and BMG’s assumption of 10% of ADI’s total funding commitment, ADI had committed to fund 100% of the operations of ARTISTdirect Records and had recorded 100% of the losses attributable to that venture from the inception of ARTISTdirect Records to April 30, 2002. From May 1, 2002 through December 31, 2003, ADI has recorded only its proportionate share, on the basis of remaining relative funding commitments, of any losses of ARTISTdirect Records. ADI has funded a total of $33.0 million of its funding commitment. ADI recognized $4.6 million of equity loss from ARTISTdirect Records for the three months ended March 31, 2003.

     In February 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities. The Company adopted FIN 46 effective December 31, 2003. As a result of the adoption of FIN 46, the balance sheet of ARTISTdirect Records was consolidated as of December 31, 2003, and the operations of ARTISTdirect Records are being consolidated from January 1, 2004.

     The carrying amount of ADI’s investment in ARTISTdirect Records at December 31, 2002 represents the difference between ADI’s investment and advances and ADI’s share of losses from ARTISTdirect Records. Through December 31, 2003, ADI continued to record the losses of ARTISTdirect Records. ADI recorded its loan advances to ARTISTdirect Records as additional equity investments. As of December 31, 2002, ADI’s share of losses exceeded the amount of ADI’s investment and advances at that date, resulting in a credit balance of approximately $7.7 million, which was classified as a liability on ADI’s consolidated balance sheet at December 31, 2002. As of December 31, 2003, the Company consolidated the balance sheet of ARTISTdirect Records.

     ADI had no recorded investment in its loans to ARTISTdirect Records, as the carrying amount of the loans had been reduced to zero as a result of ADI recording its share of losses of ARTISTdirect Records during the years ended December 31, 2001, 2002 and 2003. ADI does not record interest income on the loans to ARTISTdirect Records.

     The loan advances provided to ARTISTdirect Records by ADI and BMG bear interest at a rate of LIBOR plus four percent and the principal and interest are not repayable until December 31, 2015 or upon such time as ARTISTdirect Records achieves certain defined levels of excess cash flow and available cash. As of March 31, 2004 and December 31, 2003, ARTISTdirect Records had loans payable to ADI of $33.0 million, which has been eliminated in consolidation, and to BMG of $4.75 million. In addition, as of March

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31, 2004 and December 31, 2003, ARTISTdirect Records had accrued interest payable to ADI of $3.5 million and $3.0 million, respectively, and to BMG of $514,000 and $447,000, respectively. During the three months ended March 31, 2004 and the year ended December 31, 2003, Mr. Field loaned $1.89 million and $898,000, respectively, to ARTISTdirect Records.

     The loans from Mr. Field have been classified as bridge notes payable in the consolidated balance sheets at March 31, 2004 and December 31, 2003.

     As of March 31, 2004, ARTISTdirect Records did not have sufficient working capital resources to conduct operations. During the three months ended September 30, 2003, ARTISTdirect Records significantly reduced its overhead costs and operating activities and laid off the majority of its staff while it continued to restructure its operations and seek additional capital.

     ADI does not have the resources to meet its remaining $12.0 million funding commitment to ARTISTdirect Records for 2004. ARTISTdirect Records requires additional capital in order to continue operations, and therefore ADI is continuing to pursue alternatives to raise additional capital for both itself and for ARTISTdirect Records. However, there can be no assurance that additional capital can be obtained by either ADI or by ARTISTdirect Records on reasonable terms or at all. If additional funds are raised through the issuance of equity securities of either ADI or ARTISTdirect Records, the percentage ownership of ADI’s current stockholders in ADI and/or the ADI’s ownership of ARTISTdirect Records would be reduced. Failure to raise additional capital could seriously harm the business of ARTISTdirect Records and impair the value of ADI’s investment in ARTISTdirect Records. In such event, ARTISTdirect Records may seek to divest all or certain of its assets or ADI may seek to divest all or a part of its ownership of ARTISTdirect Records, in order to raise the capital necessary to sustain business operations of ADI and/or ARTISTdirect Records. Should this fail, ARTISTdirect Records may consider a formal or informal restructuring or reorganization, potentially resulting in a total loss of ADI’s investment in ARTISTdirect Records.

4. BRIDGE NOTES PAYABLE

     As of December 31, 2003, ARTISTdirect Records had received $898,000 of loans from Ted Field and $1.150 million of loans from outside investors (including $100,000 from Jonathan V. Diamond, the Company’s President and Chief Executive Officer). During the three months ended March 31, 2004, ARTISTdirect Records received an additional $1.89 million of loans from Mr. Field, bringing Mr. Field’s advances to a total of $2.788 million at March 31, 2004. The loans were obtained through the issuance of convertible promissory notes (the “Bridge Notes”). The Bridge Notes accrue interest at 8% per annum, are due two years from the date of issuance, and will be converted into new equity of ARTISTdirect Records as part of its next equity financing.

     The $1.150 million of loans from outside investors has been presented as bridge notes payable in the consolidated balance sheet at March 31, 2004 and December 31, 2003.

     The holders of the Bridge Notes also received warrants with a term of five years to purchase additional equity of ARTISTdirect Records at $0.01 per unit equivalent to the number of units of new equity into which their Bridge Notes are ultimately converted. The relative fair value of the warrants issued was $1.969 million (one-half of the amount funded by the investors in the Bridge Notes), which was recorded as a reduction to the carrying amount of the Bridge Notes and a credit to minority interest, and is being charged to operations as amortization of Bridge Note warrants over the specified term of the Bridge Notes.

     In addition, since the Bridge Notes are convertible into equity based on their face amount, this results in a beneficial conversion feature with a relative fair value of $1.969 million. Since the commitment date for the beneficial conversion feature is contingent upon the completion of ARTISTdirect Record’s next equity financing, the fair value of the beneficial conversion feature will be charged to operations over the remaining life of the Bridge Notes at that time.

     During the three months ended March 31, 2004, ARTISTdirect Records recognized $178,000 as interest expense with respect to the amortization of the fair value of the warrants. Additional interest expense of $1.6 million will be recognized ratably in 2004, 2005 and 2006 over the remaining term of the Bridge Notes. As of March 31, 2004, the carrying amount of the Bridge Notes, including accrued interest of $127,000, was $2.476 million. As of December 31, 2003, the carrying amount of the Bridge Notes, including accrued interest of $67,000, was $1.294 million.

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     A reconciliation of bridge notes payable issued by ARTISTdirect Records during 2004 and 2003 to amounts presented in the consolidated balance sheets at March 31, 2004 and December 31, 2003 is presented below. During the three months ended March 31, 2004 and the year ended December 31, 2003, ARTISTdirect Records recorded costs with respect to such bridge notes as summarized below.

5. ARTIST ADVANCES

     As of December 31, 2003, ARTISTdirect Records had signed recording agreements with six artists and had advanced a total of $1.238 million through such date with respect to these artists. The amount of these advances is recoupable against royalties to be earned by the artists based on sales. However, given that most of the artists signed by ARTISTdirect Records have no previous track record, the advances have been expensed as incurred. As of December 31, 2003, ARTISTdirect Records was contractually committed to additional minimum artist advances in 2004 for three of the six artists of approximately $1.5 million.

     During the three months ended March 31, 2004, ARTISTdirect Records cancelled its contract with one of the three artists, reducing its contractual obligation by $450,000, and advanced approximately $237,000 pursuant to its contractual commitments. Accordingly, at March 31, 2004, ARTISTdirect Records was contractually committed to additional minimum artist advances for the remainder of 2004 for two artists of approximately $913,000.

6. EQUITY-BASED TRANSACTIONS

     Effective January 1, 2004, the Company entered into a one-year consulting agreement with Keith Yokomoto, the Company’s former President and Chief Operating Officer, and currently a Director