##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 For the transition period from  To
 Commission file number 0-26192
 MakeMusic, Inc.
 (Exact Name of Small Business Issuer as Specified in its Charter)
 Minnesota
    
    41-1716250(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 (Address of Principal Executive Offices)
 (Issuers Telephone Number, Including Area Code)
 (Former Name, Former Address and Former Fiscal Year,
   þ o
  o þ
   o þ




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##### 



MakeMusic, Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1
    
    Condensed Financial Statements
    
    
    3Condensed Balance Sheets
March 31, 2007 and December 31, 2006
    
    
    3Condensed Statement of Operations
Three-month periods ended March 31, 2007 and 2006
    
    
    4Condensed Statements of Cash Flows
Three-month periods ended March 31, 2007 and 2006
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    10Item 3
    
    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
    
    
    17Form of Incentive Stock Option AgreementForm of Nonqualified Stock Option Agreement302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements.
 MakeMusic, Inc.
 
 Condensed Balance Sheets  (In thousands of U.S. dollars)
 March 31,2007
    
    
    December 31,(Unaudited)
    
    


2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,223
    
    
    $
    3,130Accounts receivable (net of allowance of
$153 and $149 in
2007 and 2006, respectively)
    
    
    1,454
    
    
    
    1,664Inventories
    
    
    318
    
    
    
    347Prepaid expenses and other current assets
    
    
    142
    
    
    
    199Total current assets
    
    
    5,137
    
    
    
    5,340Property and equipment, net
    
    
    659
    
    
    
    663Capitalized software products, net
    
    
    1,050
    
    
    
    954Goodwill, net
    
    
    3,630
    
    
    
    3,630Other non-current assets
    
    
    32
    
    
    
    39Total assets
    
    
    10,508
    
    
    
    10,626Liabilities and shareholders equityCurrent liabilities:Current portion of capital lease obligations
    
    
    10
    
    
    
    10Accounts payable
    
    
    151
    
    
    
    507Accrued compensation
    
    
    814
    
    
    
    1,066Other accrued liabilities
    
    
    297
    
    
    
    254Post contract support
    
    
    181
    
    
    
    181Reserve for product returns
    
    
    524
    
    
    
    429Current portion of deferred rent
    
    
    24
    
    
    
    25Deferred revenue
    
    
    1,259
    
    
    
    1,199Total current liabilities
    
    
    3,260
    
    
    
    3,671Capital lease obligations, net of current portion
    
    
    13
    
    
    
    15Deferred rent, net of current portion
    
    
    91
    
    
    
    96Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000Issued and outstanding shares
 4,072,647 and 3,971,229
in 2007 and 2006, respectively
    
    
    41
    
    
    
    40Additional paid-in capital
    
    
    63,359
    
    
    
    62,896Accumulated deficit
    
    
    (56,256
    )
    
    
    (56,092
    )Total shareholders equity
    
    
    7,144
    
    
    
    6,844Total liabilities and shareholders equity
    
    $
    10,508
    
    
    $
    10,626
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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 31,2007
    
    2006Notation Revenue
    
    
    2,553
    
    
    
    2,507Smart Music Revenue
    
    
    588
    
    
    
    470Other Revenue
    
    
    130
    
    
    
    111NET REVENUE
    
    
    3,271
    
    
    
    3,088COST OF REVENUES
    
    
    397
    
    
    
    418GROSS PROFIT
    
    
    2,874
    
    
    
    2,670OPERATING EXPENSES:Development expenses
    
    
    978
    
    
    
    888Selling and marketing expenses
    
    
    1,090
    
    
    
    1,180General and administrative expenses
    
    
    1,001
    
    
    
    925Total operating expenses
    
    
    3,069
    
    
    
    2,993LOSS FROM OPERATIONS
    
    
    (195
    )
    
    
    (323
    )Interest Income
    
    
    33
    
    
    
    19Interest Expense
    
    
    (1
    )
    
    
    Other income (expense), net
    
    
    (1
    )
    
    
    1Net loss before income tax
    
    
    (164
    )
    
    
    (303
    )Income tax
    
    
    0
    
    
    
    6Net loss
    
    
    (164
    )
    
    
    (309
    )Loss per common share:Basic
    
    
    (0.04
    )
    
    
    (0.08
    )Diluted
    
    
    (0.04
    )
    
    
    (0.08
    )Weighted average common shares outstanding:Basic
    
    
    4,040,150
    
    
    
    3,888,106Diluted
    
    
    4,040,150
    
    
    
    3,888,106
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MakeMusic, Inc.
 
 Condensed Statements of Cash Flows  (In thousands of U.S. dollars)
 3 MonthsEnded March 31,2007
    
    2006Operating activitiesNet loss
    
    
    (164
    )
    
    
    (309
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property, equipment and capitalized
software
    
    
    104
    
    
    
    79Issuance of options and warrants for services
    
    
    104
    
    
    
    93Net change in assets and liabilities:Accounts receivable
    
    
    210
    
    
    
    (148
    )Inventories
    
    
    29
    
    
    
    47Prepaid expenses and other current assets
    
    
    63
    
    
    
    11Accounts payable
    
    
    (356
    )
    
    
    (251
    )Accrued liabilities and product returns
    
    
    (120
    )
    
    
    80Deferred revenue
    
    
    61
    
    
    
    65Net cash used in operating activities
    
    
    (69
    )
    
    
    (333
    )Net cash used in investing activitiesPurchases of property & equipment
    
    
    (68
    )
    
    
    (292
    )Capitalized development and other intangibles
    
    
    (126
    )
    
    
    (59
    )Net cash used in investing activities
    
    
    (194
    )
    
    
    (351
    )Net cash provided by financing activitiesProceeds from stock options & warrants exercised
    
    
    358
    
    
    
    120Payments on long-term debt and capital leases
    
    
    (2
    )
    
    
    (2
    )Net cash provided by financing activities
    
    
    356
    
    
    
    118Net increase (decrease) in cash and cash equivalents
    
    
    93
    
    
    
    (566
    )Cash and cash equivalents, beginning of period
    
    
    3,130
    
    
    
    2,952Cash and cash equivalents, end of period
    
    
    3,223
    
    
    
    2,386Supplemental disclosure of cash flow informationInterest paid
    
    
    1
    
    
    
    0Income taxes paid
    
    
    0
    
    
    
    6
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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, 2007
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.Certain amounts as presented in the 2006 financial statements, as previously reported,
have been reclassified to conform to the 2007 presentation, with no effect on net loss or
net loss per share.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, 2007 and 2006 in accordance with FASB Statement 128 (SFAS 128), Earnings per
Share:
 Three MonthsEnded March 31,2007
    
    2006Weighted-average common shares outstanding
    
    
    4,040,150
    
    
    
    3,888,106Dilutive effect of stock options and
warrants
    
    
    0
    
    
    
    0Equivalent average common shares
outstanding  diluted
    
    
    4,050,150
    
    
    
    3,888,106
 The effect of options and warrants are excluded for the three month periods ended March
31, 2007 and 2006 because the effect is anti-dilutive.Note 3
    
    Income Tax Expense. We did not record a provision for income tax in the three months ended
March 31, 2007 and 2006 as the provision was offset by a reduction in the deferred tax asset
valuation allowance. The only income tax expense recorded in the three months ended March 31,
2007 and 2006 was for minimum state and federal income tax payments. 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 2007 and 2006.During the quarter 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 are 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. We have completed our review of
uncertain tax positions and have 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, 2007, the company has
recognized no liability related to interest or
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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.The following table summarizes the effect on our deferred tax asset for uncertain tax
positions which the company has taken:
 January 1,
    
    
    FIN 48
    
    
    March 31,2007
    
    
    Reserve
    
    
    2007(In thousands)Deferred tax assets:Beginning Balance January 1, 2007 Deferred Tax Asset
    
    $
    9,066
    
    
    
    ($2,962
    )
    
    $
    6,104Valuation allowance for deferred tax assets
    
    
    ($9,066
    )
    
    $
    2,962
    
    
    
    ($6,104
    )Ending balance March 31st, 2007 Deferred Tax Asset
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 As of 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, 2007
are 2003-2006.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, 2006 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, 2007 and 2006, we recognized $102,000 and $89,000
respectively of expense related to stock based compensation.
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Stock Options
  March 31,
    
    March 31,2007
    
    2006Black-Scholes Model:Risk-free interest rate
    
    
    3.8
    %
    
    
    3.2
    %Expected life, in years
    
    
    3.3
    
    
    
    3.8Expected volatility
    
    
    87.20
    %
    
    
    87.73
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Binomial Model:Risk-free interest rate
    
    
    2.14
    %
    
    
    3.63
    %Expected life, in years
    
    
    4.0
    
    
    
    6.02
    %Expected volatility
    
    
    123.48
    %
    
    
    136.33
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
   Shares
    
    
    
    
    
    
    WeightedReserved for
    
    
    
    
    
    
    AverageGrant
    
    
    Plan Options
    
    
    Exercise PriceOutstanding at December 31, 2006
    
    
    208,819
    
    
    
    671,495
    
    
    $
    3.81Granted
    
    
    (231,333
    )
    
    
    231,333
    
    
    $
    5.97Expired
    
    
    
    
    
    
    (4,000
    )
    
    $
    25.00Cancelled
    
    
    112,505
    
    
    
    (112,505
    )
    
    $
    4.15Exercised
    
    
    
    
    
    
    (101,417
    )
    
    $
    3.54Outstanding at March 31, 2007
    
    
    89,991
    
    
    
    684,906
    
    
    $
    4.40Outstanding Exercisable at March 31, 2007
    
    
    
    
    
    
    248,053
    
    
    $
    4.59
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Note 5
    
    Material Contingencies.NoneNote 6
    
    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
effective date of this pronouncement is for all full fiscal and interim periods beginning
after November 15, 2007. We are currently evaluating the impact of adopting FASB Statement
157 on our financial statements.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. Early adoption is permitted as of the beginning of the
fiscal year that begins on or before November 15, 2007 provided the company has also elected
to apply the provisions of FASB Statement No. 157, Fair Value Measurements. We are currently
evaluating the impact of adopting FASB Statement 159 on our financial statements.
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Item 2. Managements Discussion and Analysis or Plan of Operation.
 Executive Overview
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Results of Operations
  3 Months Ended March 31,%2007
    
    
    2006
    
    
    Incr (Decr)
    
    
    change(In $ thousands)
    
    
    (In $ thousands)Notation revenue
    
    $
    2,553
    
    
    $
    2,507
    
    
    $
    46
    
    
    
    2
    %SmartMusic revenue
    
    
    588
    
    
    
    470
    
    
    
    118
    
    
    
    25
    %Other revenue
    
    
    130
    
    
    
    111
    
    
    
    19
    
    
    
    17
    %Net revenue
    
    
    3,271
    
    
    
    3,088
    
    
    
    183
    
    
    
    6
    %Cost of revenues
    
    
    397
    
    
    
    418
    
    
    
    (21
    )
    
    
    -5
    %Gross profit
    
    
    2,874
    
    
    
    2,670
    
    
    
    204
    
    
    
    8
    %Percentage of net sales
    
    
    88
    %
    
    
    86
    %Development expenses
    
    
    978
    
    
    
    888
    
    
    
    90
    
    
    
    10
    %Selling and marketing expense
    
    
    1,090
    
    
    
    1,180
    
    
    
    (90
    )
    
    
    -8
    %General and administrative expense
    
    
    1,001
    
    
    
    925
    
    
    
    76
    
    
    
    8
    %Total operating expense
    
    
    3,069
    
    
    
    2,993
    
    
    
    76
    
    
    
    3
    %Operating loss
    
    
    (195
    )
    
    
    (323
    )
    
    
    128
    
    
    
    40
    %Other income (expense)
    
    
    31
    
    
    
    20
    
    
    
    10
    
    
    
    48
    %Net loss before taxes
    
    
    (164
    )
    
    
    (303
    )
    
    
    138
    
    
    
    46
    %Income tax provision
    
    
    0
    
    
    
    (6
    )
    
    
    7
    
    
    
    -100
    %Net loss
    
    
    ($164
    )
    
    
    ($309
    )
    
    $
    145
    
    
    
    47
    %
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For the three-month period ended March 31, 2007 compared to the three-month periods ended March 31,
2006.
 Net Revenues.
    Gross Profit.
 Development Expenses.
 Sales and Marketing Expenses.
 12




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General and Administrative Expenses.
 Net Loss from Operations
 Net Loss
 Liquidity and Capital Resources .
     13




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Item 3. 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 expectation that our existing product platforms
and strategic partnerships will create manageable growth opportunities; that Finale and SmartMusic
will facilitate the continued improvement of our market share in the industry; managements
intentions with respect to tracking teachers using SmartMusic and Impact; our expectation that
amortization will increase as we add additional products and repertoire to SmartMusic; our plans to
enter new geographic markets and develop new products; and our expectation that development costs
and sales and marketing expenses may increase in connecting with the promotion of new products.
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 our possible need for and ability to obtain additional
capital; the market acceptance of Finale, SmartMusic, SmartMusic Impact and other products; our
ability to successfully track teachers using our products;, our ability to successfully identify,
establish and maintain new strategic relationships that will allow us to enter new geographic
markets; our  dependence upon new product development effort; our dependence on releasing
annual Finale upgrades; the maintenance of strategic relationships; the success of MakeMusics
SmartMusic subscription business; maintaining license agreements with a limited number of
publishers; the limited and fluctuating sales of certain of our products; the intense competition
MakeMusic faces; the rapid technological changes and obsolescence in software industry; MakeMusics
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 MakeMusics reports to the
Securities and Exchange Commission (including its 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. MakeMusic undertakes no obligation 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
 Board of Directors Compensation Plan.
 Stock Option Plans.
 
 Item 6. Exhibits.
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SIGNATURES
  Date: May 3, 2007
    
    MAKEMUSIC, INC.By:
    
    /s/ John W. PaulsonJohn W. Paulson, Chief Executive Officer
(Principal Executive Officer)And:
    
    /s/ Karen L. VanDerBoschKaren L.VanDerBosch, Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
 Form 10-QSB
 Three months ended March 31, 2007
 Exhibit No.
    
    Description3.1
    
    Bylaws as amended  incorporated by reference to Exhibit 3.1 to the
Registrants Current Report on Form 8-K filed April 19, 2007.10.1
    
    Employment agreement of Ronald B. Raup dated February 26, 2007 -
incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed March 1, 2007.10.2
    
    Board Compensation Plan effective February 15, 2007  incorporated
by reference to Exhibit 10.18 to the Registrants Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2006.10.3*
    
    Form of Incentive Stock Option Agreement under the MakeMusic 2003
Equity Incentive Plan10.4*
    
    Form of Nonqualified Stock Option Agreement under the MakeMusic 2003
Equity Incentive Plan31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. 17