##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2006
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from               to
 Commission File Number: 0-29583
 Loudeye Corp.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    91-1908833
(I.R.S. Employer Identification No.)
 
 
 þ o
  Large Accelerated Filer
o
    
    Accelerated Filer
þ
    
    Non-Accelerated Filer o
 o þ
  Common
    
    132,591,381(Class)
    
    (Outstanding at May 1, 2006)




---



##### 



Loudeye Corp.
 Form 10-Q Quarterly Report
As of and for the Quarter Ended March 31, 2006
 TABLE OF CONTENTS
 PagePART I. Financial InformationItem 1. Financial Statements.
    
    
    3Unaudited Condensed Consolidated Balance Sheets
    
    
    3Unaudited Condensed Consolidated Statements of Operations
    
    
    4Unaudited Condensed Consolidated Statement of Stockholders Equity
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    41Item 4. Controls and Procedures.
    
    
    41PART II. Other InformationItem 1. Legal Proceedings.
    
    
    42Item 1A. Risk Factors.
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    59Item 3. Defaults Upon Senior Securities.
    
    
    60Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    60Item 5. Other Information.
    
    
    60Item 6. Exhibits.
    
    
    60EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION.
 
 Item 1. Financial Statements.
  
  March 31,
    
    
    December 31,2006
    
    
    2005(in thousands, except pershare amounts)ASSETSCash and cash equivalents
    
    $
    13,742
    
    
    $
    6,932Marketable securities
    
    
    605
    
    
    
    2,113Accounts receivable, net of allowances of $356 and $292 respectively
    
    
    4,786
    
    
    
    5,132Prepaid expenses and other current assets
    
    
    2,185
    
    
    
    1,212Restricted cash
    
    
    1,335
    
    
    
    1,810Current assets of discontinued operations
    
    
    40
    
    
    
    5Total current assets
    
    
    22,693
    
    
    
    17,204Property and equipment, net
    
    
    4,153
    
    
    
    4,686Goodwill
    
    
    44,701
    
    
    
    44,213Intangible assets, net
    
    
    2,995
    
    
    
    3,116Other assets, net
    
    
    500
    
    
    
    189Total assets
    
    $
    75,042
    
    
    $
    69,408LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    5,621
    
    
    $
    3,701Accrued compensation and benefits
    
    
    785
    
    
    
    825Accrued and other liabilities
    
    
    6,961
    
    
    
    6,531Deposits and deferred revenue
    
    
    5,635
    
    
    
    6,061Current portion of long-term debt
    
    
    750
    
    
    
    1,000Current liabilities of discontinued operations
    
    
    959
    
    
    
    981Total current liabilities
    
    
    20,711
    
    
    
    19,099Deposits and deferred revenue, net of current portion
    
    
    488
    
    
    
    350Common stock payable related to acquisition
    
    
    321
    
    
    
    321Total liabilities
    
    
    21,520
    
    
    
    19,770Commitments and contingenciesSTOCKHOLDERS EQUITYPreferred stock, $0.001 par value, 5,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, warrants and additional paid-in capital; for common stock
$0.001 par value, 250,000 shares authorized; 132,576 shares issued and
outstanding in 2006, 115,368 issued and outstanding in 2005
    
    
    303,249
    
    
    
    296,020Deferred stock compensation
    
    
    
    
    
    
    (888
    )Accumulated deficit
    
    
    (247,286
    )
    
    
    (242,645
    )Accumulated other comprehensive loss
    
    
    (2,441
    )
    
    
    (2,849
    )Total stockholders equity
    
    
    53,522
    
    
    
    49,638Total liabilities and stockholders equity
    
    $
    75,042
    
    
    $
    69,408
  3




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005REVENUE
    
    $
    8,400
    
    
    $
    5,170COST OF REVENUE (1)
    
    
    6,412
    
    
    
    5,466Gross profit (loss)
    
    
    1,988
    
    
    
    (296
    )OPERATING EXPENSES:Sales and marketing (1)
    
    
    1,396
    
    
    
    1,804Research and development (1)
    
    
    1,976
    
    
    
    1,595General and administrative (1)
    
    
    2,974
    
    
    
    3,497Amortization of intangibles
    
    
    63
    
    
    
    58Stock-based compensation (1)
    
    
    323
    
    
    
    54Special charges (credits)  other
    
    
    
    
    
    
    (43
    )Total operating expenses
    
    
    6,732
    
    
    
    6,965LOSS FROM OPERATIONS
    
    
    (4,744
    )
    
    
    (7,261
    )OTHER INCOME (EXPENSE):Interest income
    
    
    89
    
    
    
    208Interest expense
    
    
    (18
    )
    
    
    (74
    )Other income, net
    
    
    32
    
    
    
    160Total other income
    
    
    103
    
    
    
    294Loss from continuing operations
    
    
    (4,641
    )
    
    
    (6,967
    )Loss from discontinued operations
    
    
    
    
    
    
    (485
    )NET LOSS
    
    $
    (4,641
    )
    
    $
    (7,452
    )LOSS PER SHARE  BASIC AND DILUTED:From continuing operations
    
    $
    (0.04
    )
    
    $
    (0.07
    )From discontinued operations
    
    
    
    
    
    
    Net loss per share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.07
    )Weighted average shares outstanding  basic and diluted
    
    
    120,001
    
    
    
    101,718
 
 (1)
    
    Stock-based compensation, consisting of the fair value of equity instruments issued for
services rendered, is attributable as follows: Three Months EndedMarch 31,2006
    
    2005Cost of revenue
    
    $
    14
    
    
    $
    35Sales and marketing
    
    
    51
    
    
    
    4Research and development
    
    
    37
    
    
    
    6General and administrative
    
    
    235
    
    
    
    44
  4




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##### Table of Contents



Common Stock,Warrants and
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional Paid-in
    
    
    Deferred
    
    
    
    
    
    
    Other
    
    
    TotalCapital
    
    
    Stock-based
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Compensation
    
    
    Deficit
    
    
    Loss
    
    
    Equity(in thousands)BALANCES, December 31, 2005
    
    
    115,368
    
    
    $
    296,020
    
    
    $
    (888
    )
    
    $
    (242,645
    )
    
    $
    (2,849
    )
    
    $
    49,638Stock option exercises
    
    
    708
    
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198Private equity transaction, net
    
    
    16,500
    
    
    
    7,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,582Vesting of restricted stock
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Implementation of FAS 123(R)
    
    
    
    
    
    
    (888
    )
    
    
    888
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    296Comprehensive loss:Unrealized gain on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398
    
    
    
    398Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,641
    )
    
    
    
    
    
    
    (4,641
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,233
    )BALANCES, March 31, 2006
    
    
    132,576
    
    
    $
    303,249
    
    
    $
    
    
    
    $
    (247,286
    )
    
    $
    (2,441
    )
    
    $
    53,522
  5




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005(in thousands)OPERATING ACTIVITIESNet loss
    
    $
    (4,641
    )
    
    $
    (7,452
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss from discontinued operations
    
    
    
    
    
    
    485Depreciation and amortization
    
    
    973
    
    
    
    726Special charges (credits) and other non cash items
    
    
    (17
    )
    
    
    (10
    )Stock-based compensation
    
    
    337
    
    
    
    89Loss on disposal of equipment
    
    
    1
    
    
    
    90Foreign currency transaction loss (gain)
    
    
    19
    
    
    
    (207
    )Operating cash flows from discontinued operations
    
    
    (22
    )
    
    
    (299
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    306
    
    
    
    361Prepaid expenses and other assets
    
    
    (1,313
    )
    
    
    (544
    )Accounts payable
    
    
    1,006
    
    
    
    (581
    )Accrued compensation and benefits and accrued and other liabilities
    
    
    1,435
    
    
    
    1,291Accrued special charges
    
    
    
    
    
    
    (360
    )Deposits and deferred revenue
    
    
    (225
    )
    
    
    954Net cash used in operating activities
    
    
    (2,141
    )
    
    
    (5,457
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (252
    )
    
    
    (361
    )Purchases of intangibles
    
    
    (26
    )
    
    
    (17
    )Payments of accrued acquisition consideration
    
    
    
    
    
    
    (2,524
    )Release of restricted cash
    
    
    475
    
    
    
    1,388Purchases of marketable securities
    
    
    
    
    
    
    (575
    )Sales of marketable securities
    
    
    1,500
    
    
    
    450Investing cash flows from discontinued operations
    
    
    
    
    
    
    (19
    )Net cash provided by (used in) investing activities
    
    
    1,697
    
    
    
    (1,658
    )FINANCING ACTIVITIESProceeds from sale of stock and exercise of stock options
    
    
    198
    
    
    
    639Proceeds from private equity financing, net
    
    
    7,582
    
    
    
    Principal payments on debt, line of credit and capital lease obligations
    
    
    (250
    )
    
    
    (292
    )Net cash provided by financing activities
    
    
    7,530
    
    
    
    347Effect of foreign currency translation on cash
    
    
    (276
    )
    
    
    (196
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,810
    
    
    
    (6,964
    )Cash and cash equivalents, beginning of period
    
    
    6,932
    
    
    
    28,978Cash and cash equivalents, end of period
    
    $
    13,742
    
    
    $
    22,014
  6




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##### Table of Contents



LOUDEYE CORP. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2006
 1. Description of Business and Risks
 Business
   Risks
   7




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##### Table of Contents



2. Summary of Significant Accounting Policies
 Accounting Principles
  Basis of Consolidation
  Estimates and Assumptions
   Unaudited Interim Financial Information
   Cash, Cash Equivalents and Marketable Securities
   8




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##### Table of Contents



March 31,
    
    
    December 31,2006
    
    
    2005Cash and cash equivalents:Cash
    
    $
    6,366
    
    
    $
    4,616Money market mutual funds
    
    
    7,376
    
    
    
    2,316Total cash and cash equivalents
    
    
    13,742
    
    
    
    6,932Marketable securities:Corporate notes & bonds
    
    
    605
    
    
    
    2,113Total marketable securities
    
    
    605
    
    
    
    2,113Total cash, cash equivalents and marketable securities
    
    $
    14,347
    
    
    $
    9,045
  Restricted Cash
  Accounts Receivable
  Goodwill
  Impairment of Long-Lived Assets
 9




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##### Table of Contents



Fair Value of Financial Instruments and Concentrations of Credit Risk
    10




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Revenue Recognition
    Determining Separate Elements and Allocating Value to Those Elements.
   Digital media store services revenue.
 
 
 
  11




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##### Table of Contents




 
 
 
   Encoding services revenue.
 
 
 
 12




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##### Table of Contents




 Samples services revenue.
 Hosting and Internet radio services revenue.
   Software license revenue.
 13




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##### Table of Contents



Research and Development Costs
  Stock-Based Compensation
      14




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##### Table of Contents



Three months endedMarch 31, 2005Net loss, as reported
    
    $
    (7,452
    )Add: stock-based employee compensation
expense under APB 25 included in reported
net loss
    
    
    21Deduct: total stock-based employee
compensation expense determined under
fair value method for all awards
    
    
    (703
    )Pro forma net loss
    
    $
    (8,134
    )Basic and diluted net loss per share, as reported
    
    $
    (0.07
    )Pro forma basic and diluted net loss per share
    
    $
    (0.08
    )
   2006
    
    2005Risk-free interest rates
    
    
    4.8
    %
    
    
    2.33-5.71
    %Expected lives
    
    2.0 years
    
    2.5 yearsExpected dividend yields
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    90
    %
    
    
    120
    %
   15




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##### Table of Contents



Comprehensive Loss
  Foreign Currencies
  Segments
  Recent Accounting Pronouncements
   3. Discontinued Operations
 16




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##### Table of Contents



Overpeer, Inc.
    Impairment.
 Severance
 Overpeer Lease
 Savvis Communications Corp. Litigation
 17




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##### Table of Contents



U.S.-Based Operating Assets
   For the three months ended March 31,2006
    
    2005Revenue
    
    $5.8 million
    
    $3.9 millionNet loss
    
    $4.0 million
    
    $5.1 millionBasic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.05
    )
 4. Special Charges (Credits)
  5. Net Loss Per Share
  Three months endedMarch 31,2006
    
    
    2005Options outstanding under Loudeye stock option plans
    
    
    11,888
    
    
    
    13,593Restricted stock outstanding under Loudeye stock option
plans
    
    
    1,225
    
    
    
    OD2 options assumed
    
    
    217
    
    
    
    1,540Warrants outstanding
    
    
    18,237
    
    
    
    5,952Shares excluded
    
    
    31,567
    
    
    
    21,085
 6. Long-Term Debt
  
 18




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##### Table of Contents




    7. Contingencies
 Royalty Obligations.
 Nasdaq Listing Compliance
  19




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##### Table of Contents



Legal Proceedings
 Settlement of Altnet Litigation Matter.
  Savvis Communications Corp
 IPO Class Action.
  
    
    issuer defendants and related individual defendants will be released from the litigation
without any liability other than certain expenses incurred to date in connection with the
litigation;
 20




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##### Table of Contents




    
    issuer defendants insurers will guarantee $1.0 billion in recoveries by plaintiff class members;
    
    issuer defendants will assign certain claims against underwriter defendants to the plaintiff class members; and
    
    issuer defendants will have the opportunity to recover certain litigation-related
expenses if plaintiffs recover more than $5.0 billion from underwriter defendants.
  SPEDIDAM 
 Other
 8. Stockholders Equity
 February 2006 private placement transaction
   Stock Option Plans
  21




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##### Table of Contents



WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Exercise
    
    
    Contractual
    
    
    Value(in thousands)
    
    
    Price
    
    
    Term
    
    
    (in thousands)Outstanding, December 31, 2005
    
    
    12,319
    
    
    $
    1.12Granted
    
    
    2,603
    
    
    $
    0.51Exercised
    
    
    (708
    )
    
    $
    0.28Forfeited
    
    
    (1,271
    )
    
    $
    1.25Cancelled
    
    
    (1,055
    )
    
    $
    1.45Outstanding, March 31, 2006
    
    
    11,888
    
    
    $
    0.99
    
    
    
    8.7
    
    
    $
    118Vested or expected to vest at March 31, 2006
    
    
    6,800
    
    
    $
    1.12
    
    
    
    8.5
    
    
    $
    62Exercisable at March 31, 2006
    
    
    3,132
    
    
    $
    1.35
    
    
    
    7.5
    
    
    $
    59
  WeightedAverageGrant DateOptions
    
    
    Fair Value(in thousands)
    
    
    Per ShareUnvested at December 31, 2005
    
    
    8,243
    
    
    $
    0.68Granted
    
    
    2,603
    
    
    $
    0.25Vested
    
    
    (820
    )
    
    $
    0.85Forfeited
    
    
    (1,271
    )
    
    $
    0.79Unvested at March 31, 2006
    
    
    8,755
    
    
    $
    0.52
  Restricted Stock Awards
 22




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##### Table of Contents



9. Segment Information
   Three Months EndedMarch 31,2006
    
    
    2005Revenue by Geographic Areas:United States
    
    $
    2,580
    
    
    $
    1,298Other countries, principally Europe
    
    
    5,820
    
    
    
    3,872Total revenue
    
    $
    8,400
    
    
    $
    5,170
  At
    
    
    AtMarch 31,
    
    
    December 31,2006
    
    
    2005Long-lived Assets:United States
    
    $
    4,289
    
    
    $
    4,792United Kingdom
    
    
    2,827
    
    
    
    2,990Other countries, principally Europe
    
    
    32
    
    
    
    20Total long-lived assets
    
    $
    7,148
    
    
    $
    7,802
  Three Months EndedMarch 31,2006
    
    
    2005Revenue:Digital media servicesDigital media store services
    
    $
    6,374
    
    
    $
    3,967Encoding services
    
    
    1,487
    
    
    
    545Samples services
    
    
    339
    
    
    
    301Hosting and Internet radio services
    
    
    200
    
    
    
    357Total revenue
    
    $
    8,400
    
    
    $
    5,170
 10. Subsequent Events
  23




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
    
    Muze assumed Loudeyes web and mobile digital music commerce services, operating on
Loudeyes U.S.-based platform. Live customers of the service were O2 Germany, ATT Wireless
mMode MusicStore (now Cingular Wireless mMode Music) and BurnLounge. Loudeye also assigned
its rights under digital download license agreements with the four major record labels, as
required for the live services now operated by Muze.
    
    Loudeye sold its encoding services operations, including encoding services for EMI
Music. Loudeye previously announced that encoding services for EMI Music were being
transitioned by EMI to a new service provider during the second quarter of 2006. Loudeye
also transferred U.S. Patent No. 6,873,877 relating to a distributed production system for
digitally encoding information to Muze, while Loudeye retained a non-exclusive license to
this patent.
    
    Loudeye sold its music sound samples services and all associated liabilities. Transfer
of the samples service operations was completed through sale of all outstanding shares of
capital stock of Loudeye Sample Services, Inc., a wholly owned subsidiary of Loudeye.
    
    Loudeye sold its hosting and Internet radio services.
      
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  24




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Overview
  
  
  
  
  
  
 
 Loudeye Background
  25




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Digital media store services.
   
 
 
 
 
 
 
 26




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##### Table of Contents




    
    the dominance of Apple Computers iTunes service in certain markets driven in part by
sales of the market-share leading iPod portable music devices;
    
    a trend towards increasing wholesale cost of music content and the apparent willingness
of certain music services to set a retail price to consumers that may be under the wholesale
cost of music content; and
    
    a trend towards a requirement for substantial cash advances to content owners, in
particular the four major music labels, in order to obtain some content distribution rights,
such as use for music subscription services.
     27




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##### Table of Contents



Digital media content services.
 Encoding services
 Music sample services.
 Hosting and Internet radio services.
 Discontinued Operations .
   28




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Critical Accounting Policies and Estimates
   29




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##### Table of Contents



Stock-Based Compensation Expense.
    Recent Accounting Pronouncements
   Consolidated Results of Operations
   Comparison of First Quarter 2006 Operating Results to Fourth Quarter 2005
  30




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
     31




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##### Table of Contents



Comparison of Three Month Periods Ended March 31, 2006 and March 31, 2005
  Three Months EndedMarch 31,
    
    
    Variance2006
    
    
    2005
    
    
    $
    
    
    %RevenueDigital media store services
    
    $
    6,374
    
    
    $
    3,967
    
    
    $
    2,407
    
    
    
    61
    %Encoding services
    
    
    1,487
    
    
    
    545
    
    
    
    942
    
    
    
    173
    %Samples services
    
    
    339
    
    
    
    301
    
    
    
    38
    
    
    
    13
    %Hosting and Internet radio services
    
    
    200
    
    
    
    357
    
    
    
    (157
    )
    
    
    (44
    )%Total revenue
    
    
    8,400
    
    
    
    5,170
    
    
    
    3,230
    
    
    
    62
    %Cost of revenue
    
    
    6,412
    
    
    
    5,466
    
    
    
    946
    
    
    
    17
    %Gross profit (loss)
    
    
    1,988
    
    
    
    (296
    )
    
    
    2,284
    
    
    
    (772
    )%Operating expensesSales and marketing
    
    
    1,396
    
    
    
    1,804
    
    
    
    (408
    )
    
    
    (23
    )%Research and development
    
    
    1,976
    
    
    
    1,595
    
    
    
    381
    
    
    
    24
    %General and administrative
    
    
    2,974
    
    
    
    3,497
    
    
    
    (523
    )
    
    
    (15
    )%Amortization of intangibles
    
    
    63
    
    
    
    58
    
    
    
    5
    
    
    
    9
    %Stock-based compensation
    
    
    323
    
    
    
    54
    
    
    
    269
    
    
    
    498
    %Special charges (credits)  other
    
    
    
    
    
    
    (43
    )
    
    
    43
    
    
    
    (100
    )%Total operating expenses
    
    
    6,732
    
    
    
    6,965
    
    
    
    (233
    )
    
    
    (3
    )%Interest income
    
    
    89
    
    
    
    208
    
    
    
    (119
    )
    
    
    (57
    )%Interest expense
    
    
    (18
    )
    
    
    (74
    )
    
    
    56
    
    
    
    (76
    )%Other income, net
    
    
    32
    
    
    
    160
    
    
    
    (128
    )
    
    
    (80
    )%Loss from continuing operations
    
    
    (4,641
    )
    
    
    (6,967
    )
    
    
    2,326
    
    
    
    (33
    )%Loss from discontinued operations
    
    
    
    
    
    
    (485
    )
    
    
    485
    
    
    
    (100
    )%Net loss
    
    $
    (4,641
    )
    
    $
    (7,452
    )
    
    $
    2,811
    
    
    
    (38
    )%
 Comparison of Three Month Periods Ended March 31, 2006 and March 31, 2005
 Revenue.
  Digital media store services revenue.
  32




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
    
    Platform service fees are generally recognized as revenue over the term of the
customer contract and represent charges in connection with enabling the service and
maintaining its overall functionality during the term of the customer contract, which
is generally one to three years. We charge platform fees to our customers in a variety
of manners, including initial set-up fees, monthly only fees, or a combination of
initial set-up and monthly fees.
    
    We also share in the proceeds of consumer transactions such as digital
downloads. Revenue from downloads is recognized at the time the content is delivered,
digitally, to the consumer.
    
    A majority of our transactional revenue is generated through the sale of
prepaid credit packages which entitle a consumer to access a specified number of
digital music downloads or streams for a fixed price during a fixed time period.
Prepaid credit packages are also bundled with other end consumer offerings sponsored by
our customers. Revenue from prepaid credit packages and bundle promotions is deferred
until the credits or promotional offers are utilized or expire. Our margin on the sale
of prepaid credit packages fluctuates depending upon a number of factors, including the
type of service for which the consumer redeems the credits (full downloads or streams),
the royalty rate for the download purchased and breakage.
    
    Revenue from prepaid music credit packages is deferred and then recognized as
tracks are downloaded by the consumer or as credits expire, whichever occurs earlier.
 Encoding revenue.
 Samples services revenue.
 Hosting and Internet radio services revenue.
 Deposits and deferred revenue.
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Cost of revenue.
    Sales and marketing.
 Research and development.
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General and administrative.
  Amortization of intangibles.
 Stock-Based Compensation Expense.
   35




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Special charges (credits).
 Interest income.
 Interest expense.
 Other income, net.
 Income taxes.
 Liquidity and Capital Resources
      36




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
    
    Focus our European service offerings on our key markets and customers;
    
    Seek to replace revenue from our anticipated loss of encoding services revenue generated
from encoding the EMI Music catalog;
    
    Continue efforts to develop our mobile music services
offerings;
    
    Increase or decrease research and development spending;
    
    Increase or decrease sales and marketing activities; and
    
    Improve our operational and financial systems.
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Contractual
Obligations
  Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsContractual ObligationsDebt
    
    $
    750
    
    
    $
    750
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases (1)
    
    
    2,356
    
    
    
    1,299
    
    
    
    945
    
    
    
    112
    
    
    
    Bandwidth and co-location purchase obligations (2)
    
    
    473
    
    
    
    473
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    3,579
    
    
    $
    2,522
    
    
    $
    945
    
    
    $
    112
    
    
    $
    
 
 (1)
    
    Our future minimum rental commitments under noncancellable leases comprise the majority of
the operating lease obligations presented above. We expect to fund these commitments with
existing cash and cash flows from operations.(2)
    
    Many of the contracts underlying these obligations contain renewal provisions, generally for
a period of one year. In addition, amounts payable under these contracts may vary based on the
volume of data transferred. The amounts in the table represent the base fee amount. We also
have contracts for bandwidth and collocation services that run on a month-to-month basis and
for which there are no unconditional obligations. Monthly amounts due under the month-to-month
contracts are not material and have been excluded from the table above.  
    
    Deposits and deferred revenue of $6.1 million, net of related receivables, has been
excluded from the table above as the liabilities will not be settled in cash.
    
    The expected issuance of up to approximately 217,000 additional shares of Loudeye common
stock, representing shares to be issued to OD2 option holders issuable upon exercise of OD2
options assumed by Loudeye in connection with the OD2 acquisition in June 2004. The
associated common stock payable of $321,000 has been excluded as the related liability will
not be settled in cash.
    
    Purchase commitments represent obligations under agreements which are not unilaterally
cancelable by us, are legally enforceable, and specifically fixed or minimum quantities of
goods or services at fixed or minimum prices. We generally require purchase orders for
vendor and third party spending. There were no other known contracts or purchase orders
exceeding $100,000 in the aggregate.
    
    The impact of our April 30, 2006 sale of our U.S.-based
operating assets has been excluded from the table above,
including the following:
 
    
    Loudeye and the acquirer entered into a sublease arrangement for Loudeyes
facility in Seattle. The acquirer will reimburse us for 50% of the rent expense for
the Seattle facility and the acquirer will generally reimburse Loudeye for facility
related expenses on an as-used basis. In May 2006, Loudeye delivered notice to the
Landlord that it is terminating the lease for its Seattle facility effective December 31, 2006.
    
    Repayment in full of the outstanding balance of the SVB term loan in the amount
of approximately $671,000 out of gross proceeds received in the sale transaction.
    
    Termination or assignment of contractual obligations for bandwidth totaling
approximately $75,000.
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
    
    We have continuing payment obligations under existing arrangements with certain licensors
of copyrighted materials that will require payments for content fees and royalties on music
delivered to end consumers. As of March 31, 2006, approximately $5.4 million of these
amounts are included in accrued and other liabilities in the accompanying unaudited
condensed consolidated balance sheets. Content fees and royalties on music are due to our
partners based on net revenue and online music distribution volumes. As online service
volumes fluctuate, our payment obligations for content fees and royalties fluctuate
proportionally.
    
    Loudeye has entered into various agreements that allow for incorporation of licensed or
copyrighted material into its services. Under these agreements, Loudeye is required to make
royalty payments to the recorded music companies (record labels), publishers and various
other rights holders. Some of these agreements require quarterly or annual minimum payments
which are or are not recoupable based upon actual usage, based on the terms of the
agreement. Other royalty agreements require royalty payments based upon a percentage of
revenue earned from the licensed service. Royalty costs incurred under these agreements are
recognized over the periods that the related revenue is recognized and are included in cost
of revenue. As of the date of this filing, obligations under these agreements total
$824,000 and are payable in various quarterly installments through March 2007. Advances
made under the terms of these agreements are recoupable against future royalty costs
incurred.
    
    We may enter into future transactions where we acquire complementary businesses. Such
acquisitions may require the use of our capital resources.
  Off-Balance Sheet Arrangements
 Indemnification Obligations.
   Other. 
 Legal Proceedings
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Interest Rate Risk.
   Foreign Currency Exchange Risk. 
   
 Item 4. Controls and Procedures.
 Disclosure Controls and Procedures
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Changes in Disclosure Controls and Procedures
  
 PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
   Risks Related to Our Business
 We have a history of losses, negative cash flows on a quarterly and annual basis and we may
experience greater losses from operations than we currently anticipate.
  We may need to raise additional capital to reach profitability.
  Our quarterly and annual financial results will continue to fluctuate making it difficult to
forecast our operating results.
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
    
    Market acceptance of our services;
    
    Variability in demand for our digital media services;
    
    Competition from other companies entering our markets;
    
    Our customers commitment to adequately market and promote their digital media stores;
    
    Ability of our customers and us to procure necessary intellectual property rights for digital media content;
    
    Willingness of our customers to enter into longer-term volume or recurring revenue digital media services
agreements and purchase orders in light of the economic and legal uncertainties related to their business
models;
    
    Fluctuating wholesale costs for digital media content, especially from major record labels;
    
    Willingness of competitive consumer digital media services to maintain a consumer retail price below the
wholesale cost of the content in an effort to gain market share or for other competitive reasons;
    
    Charges related to restructuring of our business, including personnel reductions and excess facilities; and
    
    Governmental regulations affecting use of the Internet, including regulations concerning intellectual
property rights and security measures.
  We have restructured our business to focus on our OD2 digital media store services operated
out of Europe. Even after giving effect to this restructuring, we may not have sufficient cash to
execute on our present operating plan.
  We depend on a limited number of customers for a significant percentage of our digital media
store services revenue. These customers may be able to terminate their service contracts with us on
short notice, with or without cause. Accordingly, the loss of, or delay in payment from, one or a
small number of customers could materially and adversely impact our revenue, results of operations
and cash flows.
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If we are unsuccessful in developing our mobile music store service offerings, we may fail to
meet expectations of our business plan and our results of operations could be materially and
adversely affected.
 2
   Increases in wholesale rates for digital music content may negatively impact gross margins
which could harm our business.
  Our efforts to institute variable pricing rates for digital content may result in loss of end
consumers or a reduction in transactional revenue, which could harm our business, reputation and
results of operations.
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Our unlimited, monthly streaming music subscription service carries unique business risks.
  Success of our digital music store services depends in part on our customers commitment to
marketing the services we provide for them.
  Our music content licenses are generally for limited terms and limited territories. If we are
unable to reach agreement with recorded music companies, especially with the four major recorded
music companies, to renew existing licenses or to grant us expanded license rights, portions of our
services could be interrupted and our business and results of operations could be harmed.
    Our music content licenses generally require prior approval for us to distribute content to
our customers. If approval is delayed or withheld, portions of our services could be interrupted
and our business and results of operations could be harmed.
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Recorded music companies or our customers may desire to have a direct license relationship.
This trend may lengthen our sales cycle and may result in us reporting certain music store services
revenue on a net basis rather than on a gross basis.
  Our music content licenses could result in operational complexity that may divert resources or
make our business more expensive to conduct.
   We make estimates of music publishing and performance rates; a determination of higher than
estimated royalty rates could negatively impact our operating results.
  We may be liable or alleged to be liable to third parties for music, software, and other
content that we encode, distribute, archive or make available to our customers.
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
    
    If the performance of our services is not properly licensed by the content owners or their representatives such
as the recorded music companies, music publishers and performing rights organizations;
    
    If the content or the performance of our services violates third party copyright, trademark, or other
intellectual property rights;
    
    If our customers violate the intellectual property rights of others by providing content to us or by having us
perform digital media services;
    
    If the manner of delivery of content is alleged to violate terms of use of third party delivery systems, such
as peer-to-peer networks; or
    
    If content that we encode or otherwise handle for our customers is deemed obscene, indecent, or defamatory.
     Competition may decrease our market share, revenue, and gross margin.
  
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If we do not continue to add customers for our services, our revenue and business will be
harmed.
  Our business will suffer if we do not anticipate and meet specific customer requirements or
respond to technological change.
  
    
    Our technology or systems may become obsolete upon the introduction of alternative technologies;
    
    We may not have sufficient resources to develop or acquire new technologies or the ability to introduce
new services capable of competing with future technologies or service offerings; and
    
    The price of our services is likely to decline as rapidly as the cost of any competitive alternatives.
  Paid digital media content services face competition from free peer-to-peer services.
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MGM Studios, Inc. v. Grokster, Ltd.,
  Average selling prices of our services may decrease, which may negatively impact our gross
margins.
  Our music store services operating results fluctuate on a seasonal and quarterly basis.
  A decline in current levels of consumer spending could reduce our music store service revenue.
  Efforts by record labels to shore up declining sales of CDs may impact sales of digital
content.
  Our success is dependent on the performance of our CEO and the cooperation, performance and
retention of our executive officers and key employees.
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We cannot be certain that we will be able to protect our intellectual property.
  We may be subject to intellectual property infringement claims which are costly to defend and
could limit our ability to use certain technologies in the future.
     We must enhance our existing digital media services and develop and introduce new services in
a timely manner to remain competitive in that segment. Any failure to do so in a timely manner will
cause our results of operations to suffer.
  
    
    Identify and respond to emerging technological trends in the market;
    
    Enhance our services by adding innovative features that differentiate our digital media
services from those of our competitors;
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
    
    Develop, acquire and license leading technologies;
    
    Bring digital media services to market and scale our business and operations on a timely
basis at competitive prices; and
    
    Respond effectively to new technological changes or new service announcements by others.
  Delays in technology enhancements, such as completion of mobile services for our OD2 platform,
could result in customer terminations which could cause our results of operations to suffer.
  The success of our digital media store services depends, in part, on interoperability with our
customers music playback hardware.
  The technology underlying our services is complex and may contain unknown defects that could
harm our reputation, result in liability or decrease market acceptance of our services.
  
    
    Damage our reputation;
    
    Cause our customers to initiate liability suits against us;
    
    Increase our service development resources;
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
    
    Cause us to lose revenue; and
    
    Delay market acceptance of our digital media services.
  More consumers are utilizing non-PC devices to access digital content, and we may not be
successful in developing versions of our services that will gain widespread adoption by users of
such devices.
   We provide guarantees to some of our customers under service level agreements and could be
liable for service credits for failure to meet specified performance metrics.
  Our network is subject to security and stability risks that could harm our business and
reputation and expose us to litigation or liability.
    Our services are complex and are deployed in complex environments and therefore may have
errors or defects that could seriously harm our business.
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We are dependent on third parties to supply key music content. Delays or failures of these
companies to provide content as requested could harm our business.
  Our transmission capacity is not entirely in our control, as we rely in part on transmission
capacity provided by third parties. Insufficient transmission capacity could result in delays or
interruptions in our services and loss of revenue.
  We
may seek to enforce indemnification obligations against third parties
and there can be no assurance such third parties would have
sufficient resources to satisfy any claims for indemnification.
  Our operations could be harmed by factors including political instability, natural disasters,
fluctuations in currency exchange rates and changes in regulations that govern international
transactions.
  
    
    Foreign currency exchange rate fluctuations;
    
    Changes in tariff regulations;
    
    Political instability, war, terrorism and other political risks;
    
    Establishing and maintaining relationships with local distributors and dealers;
    
    Lengthy accounts receivable payment cycles;
    
    Import and export licensing requirements;
    
    Compliance with a variety of foreign laws and regulations, including unexpected
changes in taxation and regulatory requirements;
    
    Greater difficulty in safeguarding intellectual property than in the U.S.;
    
    Challenges caused by distance, language and cultural differences;
    
    Potentially adverse tax consequences;
    
    Difficulty in staffing and managing geographically diverse operations; and
    
    Higher costs associated with doing business internationally.
  We are subject to exchange rate risk in connection with our international operations.
   We may need to make additional future acquisitions to remain competitive. The process of
identifying, acquiring and integrating these future acquisitions may have a material adverse effect
on our operating results.
  
    
    The difficulties of assimilating the operations and personnel of the acquired companies and realizing anticipated operational
and cost efficiencies without disruption to the ongoing business;
    
    Impairment of relationships with employees, affiliates, advertisers and content providers of our business and acquired
businesses;
    
    The loss of key management and the difficulties in retaining key management or employees of acquired companies;
    
    Operational difficulties, including the need to attract and retain qualified personnel and the need to attract customers;
    
    The cost and challenges of integrating IT and financial systems;
    
    Diversion of managements attention from other business concerns and the potential disruption of our ongoing business;
    
    The need to incorporate successfully the acquired or shared technology or content and rights into our services, including
maintaining customer satisfaction while migrating to a single development platform; and
    
    The difficulties of maintaining uniform standards, systems, controls, procedures and policies.
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Risks Related to Our Industry
 We must provide digital rights management solutions that are acceptable to both content
providers and consumers.
  Our industry is experiencing consolidation that may intensify competition.
  
    
    Competitors could acquire or enter into relationships with
companies with which we have strategic relationships and
discontinue our relationship, resulting in the loss of distribution
opportunities for our services or the loss of certain enhancements
or value-added features to our services;
    
    Competitors could obtain exclusive access to desirable multimedia
content and prevent that content from being available in certain
formats or markets, thus impairing our content selection and our
ability to attract customers;
    
    Suppliers of important or emerging technologies could be acquired
by a competitor or other company which could prevent us from being
able to utilize such technologies in our offerings, and
disadvantage our offerings relative to those of competitors;
    
    A competitor could be acquired by a party with significant
resources and experience that could increase the ability of the
competitor to compete with our services; and
    
    Other companies with related interests could combine to form new,
formidable competition, which could preclude us from obtaining
access to certain markets or content, or which could significantly
change the market for our services.
  Our business could be harmed by a lack of availability of popular content, or enough content.
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The growth of our business depends on the increased use of the Internet and wireless networks
for communications, electronic commerce and advertising.
   If broadband technologies do not become widely available or widely adopted, our online media
distribution services may not achieve broad market acceptance, and our business may be harmed.
  Government regulation could adversely affect our business.
  We may be subject to market risk and legal liability in connection with the data collection
capabilities of our services.
  Risks Related to Our Common Stock
 Our future capital-raising activities could involve the issuance of equity securities, which
would dilute your investment and could result in a decline in the trading price of our common
stock.
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Some provisions of our amended and restated certificate of incorporation and amended bylaws
and of Delaware law may deter takeover attempts, which may limit the opportunity of our
stockholders to sell their shares at a favorable price.
      Securities analysts may not continue to cover our common stock or may issue negative reports,
and this may have a negative impact on our common stocks market price.
  Market fluctuations and volatility could cause the trading price of our common stock to
decline and limit our ability to raise capital.
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
    
    Our anticipated or actual operating results;
    
    Developments concerning our technologies and market offerings;
    
    Technological innovations or setbacks by us or our competitors;
    
    Conditions in the digital media and Internet markets;
    
    Announcements of merger or acquisition transactions; and
    
    Other events or factors and general economic and market conditions.
  Future sales of our common stock, or the perception that future sales could occur, may
adversely affect our common stock price.
    Our common stock could be delisted from the Nasdaq Capital Market if our stock price continues
to trade below $1.00 per share.
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We expect to implement a reverse stock split in order to regain compliance with Nasdaq
listing requirements. If our stock price drops following a reverse stock split, we may owe amounts
to investors in our February 2006 private placement transaction, which we may elect to satisfy by
issuing additional shares of our common stock.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 February 2006 private placement transaction
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Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
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SIGNATURES
  LOUDEYE CORP.BY:
    
    /s/ MICHAEL A. BROCHUMichael A. BrochuPresident and Chief Executive Officer(Principal Executive Officer)BY:
    
    /s/ CHRIS J. POLLAKChris J. PollakChief Financial Officer(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit Description
    
    Form
    
    Date
    
    Number
    
    Herewith10.1
    
    Subscription Agreement, dated
February 20, 2006, by and among
Loudeye and the investors named
therein
    
    8-K
    
    02/21/06
    
    
    10.110.2
    
    Form of Common Stock Purchase Warrant
    
    8-K
    
    02/21/06
    
    
    10.231.1
    
    Certification of Michael A. Brochu,
President and Chief Executive
Officer of Loudeye Corp., Pursuant
to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of Chris J. Pollak,
Chief Financial Officer of Loudeye
Corp., Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of Michael A. Brochu,
President and Chief Executive
Officer of Loudeye Corp., Pursuant
to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X32.2
    
    Certification of Chris J. Pollak,
Chief Financial Officer of Loudeye
Corp., Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X
 62