LIQUID AUDIO INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________ TO _____________

Commission File Number 000-25977

LIQUID AUDIO, INC.
(Exact name of registrant as specified in its charter)

Delaware							77-0421089

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

800 Chesapeake Drive, Redwood City, CA							94063

(Address of principal executive offices)							(Zip Code)

(650) 549-2000

(Registrant’s telephone number, including area code)

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) had been subject to such filing requirements for the past 90 days.

Yes

As of October 31, 2002, there were 22,802,413 shares of registrant’s Common Stock outstanding.

LIQUID AUDIO, INC.

INDEX

PART I. FINANCIAL INFORMATION				1

	ITEM 1.	FINANCIAL STATEMENTS (unaudited)		1
			Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
			Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001
			Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001
			Notes to Condensed Consolidated Financial Statements
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		35
	ITEM 4.	CONTROLS AND PROCEDURES		35

PART II. OTHER INFORMATION				36

	ITEM 1. LEGAL PROCEEDINGS			36
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS			38
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			39
	ITEM 5. OTHER INFORMATION			39
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K			39

SIGNATURES				43

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIQUID AUDIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)

						September 30, 2002			December 31, 2001

Assets
Current assets:
	Cash and cash equivalents					$	81,368		$	91,594
	Accounts receivable, net						94			130
	Other current assets						2,029			1,099

		Total current assets					83,491			92,823
Restricted cash							826			826
Property and equipment, net							1,707			3,603
Other assets							72			163

				Total assets		$	86,096		$	97,415

Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable					$	1,185		$	1,107
	Accrued liabilities						3,702			3,821
	Deferred revenue						97			122
	Capital lease obligations						4			28
	Equipment loan						—			169
	Note payable to related party						367			343

			Total current liabilities				5,355			5,590

Stockholders’ equity:
	Common stock						23			23
	Additional paid-in capital						203,101			202,969
	Unearned compensation						(2	)		(43	)
	Accumulated other comprehensive loss						(66	)		(30	)
	Accumulated deficit						(122,315	)		(111,094	)

					Total stockholders’ equity		80,741			91,825

					Total liabilities and stockholders’ equity	$	86,096		$	97,415

See accompanying notes to condensed consolidated financial statements

LIQUID AUDIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,

			2002			2001			2002			2001

Net revenues:
	License		$	14		$	171		$	90		$	655
	Services			87			214			297			1,001
	Business development (related party)			—			890			—			2,304

		Total net revenues		101			1,275			387			3,960

Cost of net revenues:
	License			71			68			252			355
	Services			140			212			442			1,287
	Non-cash cost of revenue			13			69			82			250

		Total cost of net revenues		224			349			776			1,892

Gross profit (loss)				(123	)		926			(389	)		2,068

Operating expenses:
	Sales and marketing			1,018			2,360			3,203			10,077
	Non-cash sales and marketing			(7	)		13			(28	)		(50	)
	Research and development			2,434			3,733			8,371			13,694
	Non-cash research and development			(3	)		10			5			(7	)
	General and administrative			3,642			1,630			6,653			7,902
	Non-cash general and administrative			—			1			—			(15	)
	Strategic marketing—equity instruments			—			(45	)		—			607
	Restructuring			798			—			798			3,672

		Total operating expenses		7,882			7,702			19,002			35,880

Loss from operations				(8,005	)		(6,776	)		(19,391	)		(33,812	)
Other income (expense), net				319			870			1,170			3,705
Sale of intellectual property assets				7,000			—			7,000			—
Net loss in equity investment				—			(154	)		—			(1,254	)

	Net loss		$	(686	)	$	(6,060	)	$	(11,221	)	$	(31,361	)

Net loss per share:
	Basic and diluted		$	(0.03	)	$	(0.27	)	$	(0.49	)	$	(1.39	)

	Weighted average shares			22,761			22,640			22,736			22,589

See accompanying notes to condensed consolidated financial statements

LIQUID AUDIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)

				Nine Months Ended September 30,

				2002			2001

Cash flows from operating activities:
	Net loss			$	(11,221	)	$	(31,361	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			1,866			3,054
		Amortization of unearned compensation			(23	)		(76	)
		Allowance for doubtful accounts and sales returns reserve			—			1,458
		Net loss in equity investment			—			1,254
		Strategic marketing-equity instruments			—			607
		Non-cash cost of revenue			82			254
			Loss on disposal of and write-down of property and equipment

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