##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 0-26192
(Commission file number)
 MAKEMUSIC, INC.
  Minnesota
    
    41-1716250(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



MakeMusic, Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1
    
    Condensed Financial Statements
    
    
    3Condensed Balance Sheets
March 31, 2008 and December 31, 2007
    
    
    3Condensed Statement of Operations
Three-month periods ended March 31, 2008 and 2007
    
    
    4Condensed Statements of Cash Flows
Three-month periods ended March 31, 2008 and 2007
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    10Item 4T
    
    Controls and Procedures
    
    
    14PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    15Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3
    
    Defaults Upon Senior Securities
    
    
    15Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    15Item 5
    
    Other Information
    
    
    15Item 6
    
    Exhibits
    
    
    15Signatures
    
    
    16Exhibit Index
    
    
    17Executive Compensation PlanCertification of co-Chief Executive Officer Pursuant to Section 302Certification of co-Chief Executive Officer Pursuant to Section 302Certification of Chief Financial Officer Pursuant to Section 302Certification of co-Chief Executive Officer Pursuant to Section 906Certification of co-Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906
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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements.
 MakeMusic, Inc.
 
 Condensed Balance Sheets
 (In thousands of U.S. dollars, except share data)
 March 31,2008
    
    
    December 31,(Unaudited)
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,667
    
    
    $
    6,041Accounts receivable (net of allowance of
$44 and $38 in
2008 and 2007, respectively)
    
    
    1,396
    
    
    
    1,491Inventories
    
    
    325
    
    
    
    332Prepaid expenses and other current assets
    
    
    205
    
    
    
    211Total current assets
    
    
    7,593
    
    
    
    8,075Property and equipment, net
    
    
    702
    
    
    
    730Capitalized software products, net
    
    
    1,839
    
    
    
    1,418Goodwill
    
    
    3,630
    
    
    
    3,630Other non-current assets
    
    
    23
    
    
    
    29Total assets
    
    
    13,787
    
    
    
    13,882Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    
    58
    
    
    
    57Accounts payable
    
    
    386
    
    
    
    427Accrued compensation
    
    
    753
    
    
    
    1,131Other accrued liabilities
    
    
    218
    
    
    
    184Post contract support
    
    
    169
    
    
    
    169Reserve for product returns
    
    
    435
    
    
    
    365Current portion of deferred rent
    
    
    26
    
    
    
    26Deferred revenue
    
    
    1,654
    
    
    
    1,702Total current liabilities
    
    
    3,699
    
    
    
    4,061Capital lease obligations, net of current portion
    
    
    117
    
    
    
    132Deferred rent, net of current portion
    
    
    63
    
    
    
    69Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000
Issued and outstanding shares  4,634,529 and 4,517,803
in 2008 and 2007, respectively
    
    
    46
    
    
    
    45Additional paid-in capital
    
    
    65,453
    
    
    
    65,017Accumulated deficit
    
    
    (55,591
    )
    
    
    (55,442
    )Total shareholders equity
    
    
    9,908
    
    
    
    9,620Total liabilities and shareholders equity
    
    $
    13,787
    
    
    $
    13,882
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MakeMusic, Inc.
 
 Condensed Statements of Operations
 (In thousands of U.S. dollars, except share and per share data)
  3 MonthsEnded March 31,2008
    
    
    2007Notation revenue
    
    $
    2,556
    
    
    $
    2,553SmartMusic revenue
    
    
    882
    
    
    
    588Other revenue
    
    
    184
    
    
    
    130NET REVENUE
    
    
    3,622
    
    
    
    3,271COST OF REVENUES
    
    
    507
    
    
    
    397GROSS PROFIT
    
    
    3,115
    
    
    
    2,874OPERATING EXPENSES:Development expenses
    
    
    1,113
    
    
    
    978Selling and marketing expenses
    
    
    1,175
    
    
    
    1,090General and administrative expenses
    
    
    985
    
    
    
    1,001Total operating expenses
    
    
    3,273
    
    
    
    3,069LOSS FROM OPERATIONS
    
    
    (158
    )
    
    
    (195
    )Other, net
    
    
    9
    
    
    
    31Net loss before income tax
    
    
    (149
    )
    
    
    (164
    )Income tax expense
    
    
    0
    
    
    
    0Net loss
    
    $
    (149
    )
    
    $
    (164
    )Loss per common share:Basic
    
    
    (0.03
    )
    
    
    (0.04
    )Diluted
    
    
    (0.03
    )
    
    
    (0.04
    )Weighted average common shares outstanding:Basic
    
    
    4,577,458
    
    
    
    4,040,150Diluted
    
    
    4,577,458
    
    
    
    4,040,150
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MakeMusic, Inc.
 
 Condensed Statements of Cash Flows
 (In thousands of U.S.
dollars)
 3 MonthsEnded March 31,2008
    
    
    2007Cash flows from operating activitiesNet loss
    
    $
    (149
    )
    
    $
    (164
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    189
    
    
    
    104Stock based compensation
    
    
    139
    
    
    
    104Net change in assets and liabilities:Accounts receivable
    
    
    95
    
    
    
    210Inventories
    
    
    6
    
    
    
    29Prepaid expenses and other current assets
    
    
    11
    
    
    
    63Accounts payable
    
    
    (41
    )
    
    
    (356
    )Accrued liabilities and product returns
    
    
    (280
    )
    
    
    (120
    )Deferred revenue
    
    
    (48
    )
    
    
    61Net cash used in operating activities
    
    
    (78
    )
    
    
    (69
    )Cash flows from investing activitiesPurchases of property and equipment
    
    
    (70
    )
    
    
    (68
    )Capitalized development and other intangibles
    
    
    (509
    )
    
    
    (126
    )Net cash used in investing activities
    
    
    (579
    )
    
    
    (194
    )Cash flows from financing activitiesProceeds from stock options and warrants exercised
    
    
    297
    
    
    
    358Payments on long-term debt and capital leases
    
    
    (14
    )
    
    
    (2
    )Net cash provided by financing activities
    
    
    283
    
    
    
    356Net increase (decrease) in cash and cash equivalents
    
    
    (374
    )
    
    
    93Cash and cash equivalents, beginning of period
    
    
    6,041
    
    
    
    3,130Cash and cash equivalents, end of period
    
    $
    5,667
    
    
    $
    3,223Supplemental disclosure of cash flow informationInterest paid
    
    $
    4
    
    
    $
    1
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MakeMusic, Inc.
 
 Notes to Condensed Financial Statements
  Note 1
    
    Accounting Policies. The information
furnished in this report is unaudited but reflects all adjustments
that are necessary, in the opinion of management, for a fair
statement of the results for the interim period. The operating
results for three months ended March 31, 2008 are not necessarily
indicative of the operating results to be expected for the full
fiscal year. These statements should be read in conjunction with
the Companys most recent Annual Report on Form 10-KSB.Note 2
    
    Net Loss Per Share. Net loss per share was calculated by dividing
the net loss by the weighted average number of shares outstanding
during the period. The following table summarizes the shares of
stock included in calculating earnings per share for the three
months ended March 31, 2008 and 2007 in accordance with FASB
Statement 128 (SFAS 128), Earnings per Share:
 Three MonthsEnded March 31,2008
    
    2007Weighted-average common shares outstanding
    
    
    4,577,458
    
    
    
    4,040,150Dilutive effect of stock options and
warrants
    
    
    0
    
    
    
    0Equivalent average common shares
outstanding  diluted
    
    
    4,577,458
    
    
    
    4,040,150
 The effect of options and warrants are excluded for the three month periods ended March
31, 2008 and 2007 because the effect is anti-dilutive.Note 3
    
    Income Tax Expense. We did not record a benefit for income tax in the three months ended
March 31, 2008 and 2007 as the provision was offset by an increase in the deferred tax asset
valuation allowance. Due to the uncertainty regarding the realization of our Federal deferred
income tax assets and specifically the net operating loss carry-forwards, we have recorded a
valuation allowance against our deferred income tax assets for 2008 and 2007.During the first quarter of 2007 we implemented FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement 109 (FIN 48), which
clarifies the accounting for uncertainty in tax positions. This Interpretation provides
that the tax effects from an uncertain tax position can be recognized in our financial
statements, only if the position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 were effective as
of the beginning of fiscal 2007, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. In the first quarter of
2007 we completed our review of uncertain tax positions and recorded a FIN 48 reserve and
corresponding reduction in our valuation allowance of approximately $2,962,000. Due to
the reduction in our valuation allowance the adoption on FIN 48 did not have an effect on
the net loss for the quarter ending March 31, 2007 and no adjustment was made to opening
retained earnings. Interest and penalties related to any uncertain tax positions would be
accounted for as a long term liability with the corresponding expense being charged to
current period non-operating expense. As of March 31, 2008 and March 31, 2007, the
company had recognized no liability related to interest or penalties. The total amount
of unrecognized tax benefits that if recognized would affect our effective tax rate is
zero based on the fact that we currently have a full reserve against our unrecognized tax
benefits.
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As of March 31, 2008 the FIN 48 reserve and corresponding valuation allowance was
$3,133,000. There was no additional FIN 48 reserve recorded in the quarter ended March
31, 2008.As of March 31, 2008 and March 31, 2007, there are no open positions for which the
unrecognized tax benefits will significantly increase or decrease during the next twelve
months. Additionally, tax years still open for examination by Federal and major state
agencies as of March 31, 2008 are 2004-2007.Note 4
    
    Stock-Based Compensation.We currently offer a stock-based compensation plan to our
employees, directors and consultants. These plans are administered by the Compensation
Committee of the Board of Directors, which recommends to the Board persons eligible to receive
awards and the number of shares and/or options subject to each award, the terms, conditions,
performance measures, and other provisions of the award. Readers should refer to Note 5 of our
financial statements in our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2007 for additional information related to our stock based compensation plans.We account for stock-based compensation arrangements with our employees and directors in
accordance with SFAS No. 123 (revised), Share-Based Payment (SFAS No. 123R). Under the
fair value recognition provisions of SFAS No. 123R we measure stock-based compensation
cost at the grant date based on the fair value of the award and recognize the compensation
expense over the requisite service period, which is generally the vesting period. For the
three months ended March 31, 2008 and 2007, we recognized $139,000 and $102,000
respectively of expense related to stock based compensation.
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Stock Options
  March 31,
    
    March 31,2008
    
    2007Black-Scholes Model:Risk-free interest rate
    
    
    2.97
    %
    
    
    3.8
    %Expected life, in years
    
    
    3.5
    
    
    
    3.3Expected volatility
    
    
    67.17
    %
    
    
    87.20
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
   WeightedWeighted
    
    
    AverageShares
    
    
    
    
    
    
    Average
    
    
    RemainingReserved for
    
    
    Plan
    
    
    Exercise
    
    
    ContractGrant
    
    
    Options
    
    
    Price
    
    
    LifeOutstanding at December 31, 2007
    
    
    55,160
    
    
    
    712,768
    
    
    $
    4.34Granted
    
    
    (36,000
    )
    
    
    36,000
    
    
    $
    10.08Expired
    
    
    
    
    
    
    (1,560
    )
    
    $
    11.80Cancelled
    
    
    
    
    
    
    
    
    
    $
    0.00Exercised
    
    
    
    
    
    
    (6,000
    )
    
    $
    3.75Outstanding at March 31, 2008
    
    
    19,160
    
    
    
    741,208
    
    
    $
    4.61
    
    
    3.0 YearsOutstanding Exercisable at March 31, 2008
    
    
    
    
    
    
    356,849
    
    
    $
    3.97
    
    
    2.4 Years
   8




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Note 5
    
    New and Pending Accounting Pronouncements.In September 2006, FASB issued Statement 157, Fair Value Measurements. This statement
defines fair value and establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP). More precisely, this statement sets forth a standard
definition of fair value as it applies to assets or liabilities, the principal market (or
most advantageous market) for determining fair value (price), the market participants,
inputs and the application of the derived fair value to those assets and liabilities. The
company adopted FASB Statement 157 during the first quarter of 2008. There has been no
impact on the companys financial statements as a result of adoption.In February 2007, FASB issued Statement 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This statement allows all entities to choose, at specified election
dates, to measure eligible items at fair value. Under this option, an entity will report
unrealized gains and losses on items for which the fair value option has been elected in
earnings. This statement is effective as of the beginning of the first fiscal year which
begins after November 15, 2007. The company adopted FASB Statement 159 during the first
quarter of 2008. There has been no impact on the companys financial statements as a result
of adoption.In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(SFAS 141R), which replaces FASB Statement No. 141. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non- controlling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure requirements
that will enable users to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective as of the beginning of an entitys fiscal year beginning
January 1, 2009. We are currently evaluating the impact of adopting SFAS 141R on our
financial statements.
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Item 2. Managements Discussion and Analysis or Plan of Operation
 Executive Overview
  
    
    Providing integrated technology, content and web services to enhance and expand how
music is taught, learned and prepared for performance.
    
    Providing music education content developers with a technology-enriched publishing
platform that leverages their copyrighted assets while simultaneously increasing the
content and value of the SmartMusic library.
    
    Offering software solutions for engraving and electronically distributing sheet
music.
 ® ®
     
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Results of Operations
  3 Months Ended March 31,2008
    
    
    2007
    
    
    Incr (Decr)
    
    
    %($ in thousands)
    
    
    ($ in thousands)Notation revenue
    
    $
    2,556
    
    
    $
    2,553
    
    
    $
    3
    
    
    
    0
    %SmartMusic revenue
    
    
    882
    
    
    
    588
    
    
    
    294
    
    
    
    50
    %Other revenue
    
    
    184
    
    
    
    130
    
    
    
    54
    
    
    
    42
    %Net revenue
    
    
    3,622
    
    
    
    3,271
    
    
    
    351
    
    
    
    11
    %Cost of revenues
    
    
    507
    
    
    
    397
    
    
    
    110
    
    
    
    28
    %Gross profit
    
    
    3,115
    
    
    
    2,874
    
    
    
    241
    
    
    
    8
    %Percentage of net sales
    
    
    86
    %
    
    
    88
    %Development expense
    
    
    1,113
    
    
    
    978
    
    
    
    135
    
    
    
    14
    %Selling and marketing expense
    
    
    1,175
    
    
    
    1,090
    
    
    
    85
    
    
    
    8
    %General and administrative expense
    
    
    985
    
    
    
    1,001
    
    
    
    (16
    )
    
    
    (2
    )%Total operating expense
    
    
    3,273
    
    
    
    3,069
    
    
    
    204
    
    
    
    7
    %Operating loss
    
    
    (158
    )
    
    
    (195
    )
    
    
    37
    
    
    
    19
    %Other income
    
    
    9
    
    
    
    31
    
    
    
    (22
    )
    
    
    (71
    )%Net loss before taxes
    
    ($
    149
    )
    
    ($
    164
    )
    
    $
    15
    
    
    
    9
    %Income tax provision
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    %Net loss
    
    ($
    149
    )
    
    ($
    164
    )
    
    $
    15
    
    
    
    9
    %
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Comparison of the three-month period ended March 31, 2008 to the three-month period ended March 31,
2007
 Net revenue.
 ®
 
     Gross profit.
 Development expense.
 12




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Selling and marketing expense.
 General and administrative expense.
 Operating loss.
 Net loss
 Liquidity and capital resources.
     13




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Item 4T. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in internal controls
 Forward Looking and Cautionary Statements
 The preceding discussion and analysis should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report. Managements Discussion and
Analysis may contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts
of future events and can be identified by the use of terminology such as believe, estimate,
expect, intend, may, could, will, anticipate, and similar words or expressions. The
forward-looking statements in this report generally relate to: our intent to achieve significant
growth in the music education industry; our expectations relating to future cash flows; our
expectations regarding strength of operations, our customer base and industry partnerships; our
intent to focus specific marketing activities on SmartMusic and Impact; our expectations regarding
future subscription growth for SmartMusic; our expectation that amortization will increase as we
add additional products and repertoire to SmartMusic; and our belief that sales and marketing
expense will increase during 2008. Forward-looking statements cannot be guaranteed and actual
results may vary materially due to the uncertainties and risks, known and unknown, associated with
such statements. MakeMusic cautions investors that many important factors have affected, and in the
future could affect our actual results of operations and cause such results to differ materially
from those anticipated in forward-looking statements made in this release and elsewhere by
MakeMusic or on its behalf. These factors include, but are not limited to: unforeseen capital
demands; the market acceptance of Finale, SmartMusic, SmartMusic Impact and other products; the
maintenance of strategic partnerships and customer relationships; our ability to license titles
from music publishers; the success of our SmartMusic subscription business; the limited and
fluctuating sales of certain of our products; the intense competition that we face; the rapid
technological changes and obsolescence in software industry; our dependence on key personnel and
the proprietary nature of our technology; other general business and economic conditions; and those
risks described from time to time in our reports to the Securities and Exchange Commission
(including our Annual Report on Form 10-KSB ). It is not possible to foresee or identify all factors
that could cause actual results to differ from expected or historic results. As such, investors
should not consider any list of such factors to be an exhaustive statement of all of the risks,
uncertainties or potentially inaccurate assumptions that investors should take into account when
making investment decisions. Shareholders and other readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date on which they are made. We
do not intend to update publicly or revise any forward-looking statements.
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
 Amendment to Board Compensation Plan.
 Executive Compensation Plan.
 
 Item 6. Exhibits
  15




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SIGNATURES
  Date: May 9, 2008
    
    MAKEMUSIC, INC.By:
    
    /s/ John W. PaulsonJohn W. Paulson, co-Chief Executive Officer(Principal Executive Officer)And:
    
    /s/ Ronald RaupRonald Raup, co-Chief Executive Officer(Principal Executive Officer)And:
    
    /s/ Karen L. VanDerBoschKaren L.VanDerBosch, Chief Financial Officer(Principal Financial Officer)
 16




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EXHIBIT INDEX
 Form 10-Q
 Three months ended March 31, 2008
 Exhibit No.
    
    Description10.1*
    
    Executive Compensation Plan effective January 3, 200810.2
    
    Board Compensation Plan effective February 15, 2007, as amended
January 31, 2008  incorporated by reference to Exhibit 10.12 to the
Registrants Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2007.31.1*
    
    Certification of co-Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of co-Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.3*
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of co-Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of co-Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.3*
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. 17