##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 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, 2011
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 0-26192
(Commission File Number)
 MAKEMUSIC, INC.
  Minnesota
    
    41-1716250(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 
 
   
   
  þ o
 o 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, 2011 and December 31, 2010
    
    
    3Condensed Statements of Operations
Three-month periods ended March 31, 2011 and 2010
    
    
    4Condensed Statements of Cash Flows
Three-month periods ended March 31, 2011 and 2010
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    9Item 4 Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    18Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3 Defaults Upon Senior Securities
    
    
    18Item 4 (Removed and Reserved)
    
    
    18Item 5 Other Information
    
    
    18Item 6 Exhibits
    
    
    18Signatures
    
    
    19Exhibit Index
    
    
    20EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



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,
    
    
    December 31,2011
    
    
    2010(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,079
    
    
    $
    11,532Accounts receivable (net of allowance of $15 and $20 in
2011 and 2010, respectively)
    
    
    1,340
    
    
    
    1,238Inventories
    
    
    164
    
    
    
    201Deferred income taxes, net
    
    
    2,786
    
    
    
    2,786Prepaid expenses and other current assets
    
    
    427
    
    
    
    252Total current assets
    
    
    14,796
    
    
    
    16,009Property and equipment, net
    
    
    308
    
    
    
    342Capitalized software products, net
    
    
    2,367
    
    
    
    2,424Goodwill
    
    
    3,630
    
    
    
    3,630Long term deferred income taxes, net
    
    
    388
    
    
    
    214Other non-current assets
    
    
    2
    
    
    
    2Total assets
    
    $
    21,491
    
    
    $
    22,621Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    $
    11
    
    
    $
    25Accounts payable
    
    
    380
    
    
    
    489Accrued compensation
    
    
    863
    
    
    
    1,372Other accrued expenses
    
    
    433
    
    
    
    307Post contract support
    
    
    150
    
    
    
    150Reserve for product returns
    
    
    480
    
    
    
    380Current portion of deferred revenue
    
    
    3,227
    
    
    
    3,603Total current liabilities
    
    
    5,544
    
    
    
    6,326Capital lease obligations, net of current portion
    
    
    3
    
    
    
    4Deferred revenue, net of current portion
    
    
    90
    
    
    
    96Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000Issued and outstanding shares  4,852,572 and 4,895,983
in 2011 and 2010, respectively
    
    
    49
    
    
    
    49Additional paid-in capital
    
    
    66,471
    
    
    
    66,632Accumulated deficit
    
    
    (50,666
    )
    
    
    (50,486
    )Total shareholders equity
    
    
    15,854
    
    
    
    16,195Total liabilities and shareholders equity
    
    $
    21,491
    
    
    $
    22,621
  3




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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 31,2011
    
    
    2010Notation revenue
    
    $
    2,334
    
    
    $
    2,568SmartMusic revenue
    
    
    1,660
    
    
    
    1,432NET REVENUE
    
    
    3,994
    
    
    
    4,000COST OF REVENUES
    
    
    594
    
    
    
    651GROSS PROFIT
    
    
    3,400
    
    
    
    3,349OPERATING EXPENSES:Development expenses
    
    
    1,215
    
    
    
    1,322Selling and marketing expenses
    
    
    1,233
    
    
    
    1,199General and administrative expenses
    
    
    1,108
    
    
    
    1,038Patent litigation accrual
    
    
    225
    
    
    
    0Total operating expenses
    
    
    3,781
    
    
    
    3,559LOSS FROM OPERATIONS
    
    
    (381
    )
    
    
    (210
    )Interest, net
    
    
    27
    
    
    
    26Net loss before income tax
    
    
    (354
    )
    
    
    (184
    )Income tax benefit
    
    
    (174
    )
    
    
    (67
    )Net loss
    
    $
    (180
    )
    
    $
    (117
    )Loss per common share:Basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.02
    )Weighted average common shares outstanding:Basic and diluted
    
    
    4,885,616
    
    
    
    4,768,095
  4




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MakeMusic, Inc.
 
 Condensed Statements of Cash Flows
 (In thousands of U.S. dollars)
  3 MonthsEnded March 31,2011
    
    
    2010Cash flows from operating activitiesNet loss
    
    $
    (180
    )
    
    $
    (117
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation and amortization
    
    
    277
    
    
    
    256Deferred income taxes, net
    
    
    (174
    )
    
    
    (98
    )Share based compensation
    
    
    133
    
    
    
    160Net changes in operating assets and liabilities:Accounts receivable
    
    
    (102
    )
    
    
    (98
    )Inventories
    
    
    37
    
    
    
    99Prepaid expenses and other current assets
    
    
    (175
    )
    
    
    (107
    )Accounts payable
    
    
    (109
    )
    
    
    (282
    )Accrued expenses and product returns
    
    
    (268
    )
    
    
    (310
    )Deferred revenue
    
    
    (382
    )
    
    
    (188
    )Net cash used by operating activities
    
    
    (943
    )
    
    
    (685
    )Cash flows from investing activitiesPurchases of property and equipment
    
    
    (44
    )
    
    
    (68
    )Capitalized development and other intangibles
    
    
    (142
    )
    
    
    (105
    )Net cash used in investing activities
    
    
    (186
    )
    
    
    (173
    )Cash flows from financing activitiesProceeds from stock options exercised
    
    
    0
    
    
    
    6Payments on redemption of stock options
    
    
    (18
    )
    
    
    0Repurchase of common stock
    
    
    (291
    )
    
    
    0Payments on capital leases
    
    
    (15
    )
    
    
    (15
    )Net cash used in financing activities
    
    
    (324
    )
    
    
    (9
    )Net decrease in cash and cash equivalents
    
    
    (1,453
    )
    
    
    (867
    )Cash and cash equivalents, beginning of period
    
    
    11,532
    
    
    
    8,943Cash and cash equivalents, end of period
    
    $
    10,079
    
    
    $
    8,076Supplemental disclosure of cash flow informationInterest paid
    
    $
    1
    
    
    $
    2Income taxes paid
    
    
    116
    
    
    
    97
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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, 2011 are not necessarily
indicative of the operating results to be expected for the full
fiscal year. In preparing the accompanying financial statements,
management has evaluated subsequent events and has determined no
events have occurred that require disclosure. The Company believes
that although the disclosures contained herein are adequate to
prevent the information presented from being misleading, these
statements should be read in conjunction with the Companys most
recent Form 10-K.Accounting
Pronouncements. In September 2009, the FASB issued ASU No.
2009-13, Revenue Recognition (ASC 605): Multiple-Deliverable
Revenue Arrangements  a consensus of the FASB Emerging Issues
Task Force, which addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for
products or services separately rather than as a combined unit and
requires expanded revenue recognition policy disclosures. This
amendment addresses how to separate deliverables and how to measure
and allocate arrangement consideration to one or more units of
accounting. As noted above, our adoption of ASU No. 2009-13,
effective January 1, 2011, had no impact on our consolidated
financial condition or results of operations.
 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 effect of options and warrants are excluded
for the three-month periods ended March 31, 2011 and 2010 because
the effect is anti-dilutive.
 Note 3
    
    Income Tax Expense.We account for income taxes using the asset
and liability method. We estimate our income taxes in each of the
jurisdictions in which we operate and account for income taxes
payable as part of the preparation of our financial statements.
This process involves estimating our actual current tax expense as
well as assessing temporary differences resulting from differing
treatment of items, such as depreciation and amortization, for
financial and tax reporting purposes. These differences result in
deferred tax assets and liabilities, which are included in our
balance sheet to the extent deemed realizable. We assess the
likelihood that, and the extent to which, our deferred tax assets
will be realized and establish a valuation allowance to reduce
deferred tax assets to an amount for which realization is more
likely than not. If we increase or decrease a valuation allowance
in a given period, then we must increase or decrease the tax
provision in our statements of income.
 We recognize the financial statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the position following an
audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized
in the financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
 As of March 31, 2011 and March 31, 2010, 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, 2011 are 2006-2010.
 As of December 31, 2010, we had U.S. net operating loss carry-forwards of approximately
$15,771,000, Minnesota net operating loss carry-forwards of $5,946,000, and research and
development tax credits of $1,164,000 and Minnesota research and development tax credits of
$490,000. The losses and tax credits are carried forward for federal and state corporate
income taxes and may be used to reduce future taxes.
 Significant management judgment is required in determining any valuation allowance recorded
against our net deferred tax assets. Prior to the fourth quarter of 2009, we remained
uncertain on how economic conditions would impact our back to school selling cycle and
annual financial results. Based upon our strong performance in the fourth quarter of 2009,
our operating results in recent years and an assessment of our expected future results of
operations, we determined in 2009 that it had become more likely than not that we would
realize a portion of our net deferred tax assets. As a result, during the fourth quarter of
2009, we reduced our valuation allowance by $2,564,000, representing the approximate
estimated tax on three years of forecasted net income. During 2010, we maintained our policy
established in the fourth quarter of
 6




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##### Table of Contents



2009 of recording a deferred tax asset representing tax on three years of forecasted income. We
continue to believe that this policy is prudent, as the likelihood of technological and
industry developments limit our ability to forecast income beyond three years. Due to
uncertainties related to our ability to utilize the balance of our deferred tax assets, as
of March 31, 2011 we have maintained a valuation allowance of $5,690,000. The additional
future potential decrease of the valuation allowance is dependent on our future ability to
realize the deferred tax assets that are affected by our future profitability. Should the
remaining $5,690,000 valuation allowance be reversed in the future, a liability of
$3,175,000 would have to be established for uncertain tax positions.
 We recorded a benefit for income taxes of $174,000 for the three months ended March 31,
2011 and a benefit for income taxes of $67,000 for the three months ended March 31, 2010.
The effective tax rate for the current-year period was 49% and was impacted by a $35,000
refundable Minnesota R&D tax credit.
 In addition, future utilization of NOL carry-forwards is subject to certain limitations
under Section 382 of the Internal Revenue Code. This section generally relates to a 50
percent change in ownership of a company over a three-year period. The acquisition of
additional shares by a greater than 5% shareholder in January 2007 resulted in an ownership
change under Section 382. Accordingly, our ability to use NOLs in the future may be
limited.
 Note 4
    
    Stock-Based Compensation.The MakeMusic, Inc. 2003 Equity Incentive Plan (the 2003 Plan),
as amended, reserves a total of 1,500,000 shares of our common stock for issuance under stock
options, restricted stock, performance awards and stock appreciation rights. The 2003 Plan is
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 on Form 10-K for the fiscal year
ended December 31, 2010 for additional information related to our stock-based compensation
plans.
 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, 2011 and 2010, we
recognized $70,000 and $108,000, respectively, of expense related to stock based
compensation.Stock Options
 We use the Black-Scholes option pricing model to estimate the fair value of stock-based
awards with the weighted average assumptions noted in the following table.
 March 31,
    
    March 31,2011
    
    2010Black-Scholes Model:Risk-free interest rate
    
    
    0.80
    %
    
    
    1.98
    %Expected life, in years
    
    
    2.6
    
    
    
    4.4Expected volatility
    
    
    73.76
    %
    
    
    79.30
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
 Expected volatility is based on the historical volatility of our share price in the period
prior to option grant equivalent to the expected life of the options. The expected term is
based on managements estimate of when the option will be exercised which is generally
consistent with the vesting period. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant.
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Equity Award Activity
 The following table represents stock option and restricted stock activity under the 2003
Plan for the three months ended March 31, 2011:
 Weighted
    
    
    WeightedShares
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    AverageReserved
    
    
    
    
    
    
    
    
    
    
    Option
    
    
    Remainingfor Future
    
    
    2003 Plan
    
    
    Plan Option
    
    
    Exercise
    
    
    ContractGrant
    
    
    Restricted Shares
    
    
    Shares
    
    
    Price
    
    
    LifeAt December 31, 2010
    
    
    361,103
    
    
    
    80,049
    
    
    
    504,536
    
    
    $
    5.51Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (58,714
    )
    
    
    15,381
    
    
    
    43,333
    
    
    $
    5.01Expired
    
    
    101,664
    
    
    
    
    
    
    
    (101,664
    )
    
    $
    6.00Cancelled
    
    
    15,920
    
    
    
    
    
    
    
    (15,920
    )
    
    $
    4.22Exercised
    
    
    
    
    
    
    
    
    
    
    (14,882
    )
    
    $
    4.39At March 31, 2011
    
    
    419,973
    
    
    
    95,430
    
    
    
    415,403
    
    
    $
    5.42
    
    
    4.3 YearsOutstanding
Exercisable at
March 31, 2011
    
    
    
    
    
    
    
    
    
    
    191,153
    
    
    $
    5.97
    
    
    3.2 Years
 At March 31, 2011 the aggregate intrinsic value of options outstanding was $148,000,
and the aggregate intrinsic value of options exercisable was $88,000.
 At March 31, 2011 there was $310,000 of unrecognized compensation cost related to nonvested
share-based option payments which is expected to be recognized over a weighted-average
period of 1.6 years. At March 31, 2011 there was $53,000 of unrecognized compensation cost
related to the issuance of restricted stock which is expected to be recognized over a
weighted-average period of 2.0 years.
 Note 5
    
    Segment Reporting.
 MakeMusic reports results of operations by two unique reportable segments, Notation and
SmartMusic.
 The Notation segment includes the design, development and sales and marketing of music
notation software in the Finale family of products.
 The SmartMusic segment includes the design, development, amortization of capitalized song
title development and sales and marketing of the subscription-based SmartMusic product line
and related accessories.
 The remaining activities are included in Other. These are unallocated expenses which
include costs related to general and administrative and business systems functions that are
not directly attributable to a particular segment. Unallocated expenses are reported in the
reconciliation of the segment totals to consolidated totals as Other items.
 Segment assets or other balance sheet information are not prepared or presented to
management. Therefore, information relating to segment assets is not presented.
 The following table presents results of operations by reportable segment:
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For the 3 Months Ended March 31, 2011
    
    
    For the 3 Months Ended March 31, 2010(In thousands)
    
    
    (In thousands)Notation
    
    
    SmartMusic
    
    
    Other
    
    
    Total
    
    
    Notation
    
    
    SmartMusic
    
    
    Other
    
    
    TotalNET REVENUE
    
    $
    2,334
    
    
    $
    1,660
    
    
    $
    0
    
    
    $
    3,994
    
    
    $
    2,568
    
    
    $
    1,432
    
    
    $
    0
    
    
    $
    4,000COST OF REVENUES
    
    
    148
    
    
    
    446
    
    
    
    0
    
    
    
    594
    
    
    
    214
    
    
    
    437
    
    
    
    0
    
    
    
    651GROSS PROFIT
    
    
    2,186
    
    
    
    1,214
    
    
    
    0
    
    
    
    3,400
    
    
    
    2,354
    
    
    
    995
    
    
    
    0
    
    
    
    3,349Percentage of Net Revenue
    
    
    94
    %
    
    
    73
    %
    
    
    0
    %
    
    
    85
    %
    
    
    92
    %
    
    
    69
    %
    
    
    0
    %
    
    
    84
    %OPERATING EXPENSES:Development expenses
    
    
    517
    
    
    
    426
    
    
    
    272
    
    
    
    1,215
    
    
    
    536
    
    
    
    533
    
    
    
    253
    
    
    
    1,322Selling and marketing expenses
    
    
    386
    
    
    
    614
    
    
    
    233
    
    
    
    1,233
    
    
    
    503
    
    
    
    459
    
    
    
    237
    
    
    
    1,199General and administrative
expenses
    
    
    19
    
    
    
    19
    
    
    
    1,070
    
    
    
    1,108
    
    
    
    18
    
    
    
    17
    
    
    
    1,003
    
    
    
    1,038Patent litigation accrual
    
    
    0
    
    
    
    0
    
    
    
    225
    
    
    
    225
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total Operating Expenses
    
    
    922
    
    
    
    1,059
    
    
    
    1,800
    
    
    
    3,781
    
    
    
    1,057
    
    
    
    1,009
    
    
    
    1,493
    
    
    
    3,559Income/(Loss) from Operations
    
    
    1,264
    
    
    
    155
    
    
    
    (1,800
    )
    
    
    (381
    )
    
    
    1,297
    
    
    
    (14
    )
    
    
    (1,493
    )
    
    
    (210
    )Other Income/(Expense)
    
    
    0
    
    
    
    0
    
    
    
    201
    
    
    
    201
    
    
    
    0
    
    
    
    0
    
    
    
    93
    
    
    
    93NET INCOME/(LOSS)
    
    $
    1,264
    
    
    $
    155
    
    
    $
    (1,599
    )
    
    $
    (180
    )
    
    $
    1,297
    
    
    $
    (14
    )
    
    $
    (1,400
    )
    
    $
    (117
    )
 Note 6
    
    Goodwill.
 Goodwill represents the cost in excess of fair value of the tangible and identified
intangible assets of businesses acquired. In accordance with ASC 350, Intangibles 
Goodwill and Other, (formerly SFAS 142) goodwill is not amortized but rather is reviewed for
impairment annually in the fourth quarter of MakeMusics fiscal year, or more often if
indicators of impairment exist.
 
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 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.
 ® ®
  9




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Mar-10
    
    Jun-10
    
    Sep-10
    
    Dec-10
    
    Mar-11Total Subscriptions
    
    
    139,363
    
    
    
    143,095
    
    
    
    158,574
    
    
    
    162,189
    
    
    
    164,836Educator Accounts
    
    
    9,368
    
    
    
    9,073
    
    
    
    9,312
    
    
    
    9,402
    
    
    
    9,727Educators who have issued
assignments*
    
    
    2,340
    
    
    
    2,379
    
    
    
    1,085
    
    
    
    2,040
    
    
    
    2,680Gradebook Teachers *
    
    
    1,156
    
    
    
    1,172
    
    
    
    415
    
    
    
    1,019
    
    
    
    1,416Site Agreements
    
    
    356
    
    
    
    372
    
    
    
    466
    
    
    
    485
    
    
    
    506Site Agreement Educator Subscriptions
    
    
    2,458
    
    
    
    2,532
    
    
    
    3,403
    
    
    
    3,343
    
    
    
    3,537
 
 *
    
    Annual statistics that restart on July 1 of each year reflecting the start of the school-year cycle      QuarterlyQuarter
    
    Beginning
    
    New
    
    Renewed
    
    Renewal
    
    Subscriptions
    
    Quarter End
    
    Net NewEnd Date
    
    Subscriptions
    
    Subscriptions
    
    Subscriptions
    
    Rate
    
    Ended
    
    Subscriptions
    
    Subscriptions3/31/2010
    
    
    133,782
    
    
    
    11,590
    
    
    
    15,330
    
    
    
    72
    %
    
    
    21,339
    
    
    
    139,363
    
    
    
    5,5816/30/2010
    
    
    139,363
    
    
    
    5,391
    
    
    
    14,069
    
    
    
    89
    %
    
    
    15,728
    
    
    
    143,095
    
    
    
    3,7329/30/2010
    
    
    143,095
    
    
    
    23,826
    
    
    
    47,383
    
    
    
    85
    %
    
    
    55,730
    
    
    
    158,574
    
    
    
    15,47912/31/2010
    
    
    158,574
    
    
    
    20,453
    
    
    
    29,065
    
    
    
    63
    %
    
    
    45,903
    
    
    
    162,189
    
    
    
    3,6153/31/2011
    
    
    162,189
    
    
    
    13,322
    
    
    
    14,579
    
    
    
    58
    %
    
    
    25,254
    
    
    
    164,836
    
    
    
    2,647
  QuarterlyQuarter
    
    Beginning
    
    New
    
    Renewed
    
    Renewal
    
    Subscriptions
    
    Quarter End
    
    Net NewEnd Date
    
    Subscriptions
    
    Subscriptions
    
    Subscriptions
    
    Rate
    
    Ended
    
    Subscriptions
    
    Subscriptions3/31/2010
    
    
    11,667
    
    
    
    728
    
    
    
    2,087
    
    
    
    80
    %
    
    
    2,606
    
    
    
    11,876
    
    
    
    2096/30/2010
    
    
    11,876
    
    
    
    500
    
    
    
    1,837
    
    
    
    72
    %
    
    
    2,561
    
    
    
    11,652
    
    
    
    (224
    )9/30/2010
    
    
    11,652
    
    
    
    1,434
    
    
    
    3,440
    
    
    
    87
    %
    
    
    3,932
    
    
    
    12,594
    
    
    
    94212/31/2010
    
    
    12,594
    
    
    
    873
    
    
    
    2,192
    
    
    
    66
    %
    
    
    3,299
    
    
    
    12,360
    
    
    
    (234
    )3/31/2011
    
    
    12,360
    
    
    
    741
    
    
    
    2,026
    
    
    
    77
    %
    
    
    2,618
    
    
    
    12,509
    
    
    
    149
  11




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12




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##### Table of Contents



Results of Operations
 Comparison of the three-month period ended March 31, 2011 to the three-month period ended March 31,
2010
 Net Revenue
 3 Months Ended March 31,($ in thousands)2011
    
    
    2010
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    2,334
    
    
    $
    2,568
    
    
    $
    (234
    )
    
    
    -9
    %SmartMusic
    
    
    1,660
    
    
    
    1,432
    
    
    
    228
    
    
    
    16
    %Total
    
    $
    3,994
    
    
    $
    4,000
    
    
    $
    (6
    )
    
    
    0
    %
       13




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##### Table of Contents



Gross Profit
 3 Months Ended March 31,($ in thousands)2011
    
    
    2010
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    2,186
    
    
    $
    2,354
    
    
    $
    (168
    )
    
    
    -7
    %SmartMusic
    
    
    1,214
    
    
    
    995
    
    
    
    219
    
    
    
    22
    %Total
    
    $
    3,400
    
    
    $
    3,349
    
    
    $
    51
    
    
    
    2
    %
   Development expense
 3 Months Ended March 31,($ in thousands)2011
    
    
    2010
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    517
    
    
    $
    536
    
    
    $
    (19
    )
    
    
    -4
    %SmartMusic
    
    
    426
    
    
    
    533
    
    
    
    (107
    )
    
    
    -20
    %Other
    
    
    272
    
    
    
    253
    
    
    
    19
    
    
    
    8
    %Total
    
    $
    1,215
    
    
    $
    1,322
    
    
    $
    (107
    )
    
    
    -8
    %
  Selling and marketing expense
 3 Months Ended March 31,($ in thousands)2011
    
    
    2010
    
    
    Incr
    
    
    % ChangeNotation
    
    $
    386
    
    
    $
    503
    
    
    $
    (117
    )
    
    
    -23
    %SmartMusic
    
    
    614
    
    
    
    459
    
    
    
    155
    
    
    
    34
    %Other
    
    
    233
    
    
    
    237
    
    
    
    (4
    )
    
    
    -2
    %Total
    
    $
    1,233
    
    
    $
    1,199
    
    
    $
    34
    
    
    
    3
    %
  14




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##### Table of Contents



General and administrative expense
 3 Months Ended March 31,($ in thousands)2011
    
    
    2010
    
    
    Incr (Decr)
    
    
    % ChangeNotation
    
    $
    19
    
    
    $
    18
    
    
    $
    1
    
    
    
    6
    %SmartMusic
    
    
    19
    
    
    
    17
    
    
    
    2
    
    
    
    12
    %Other
    
    
    1,070
    
    
    
    1,003
    
    
    
    67
    
    
    
    7
    %Total
    
    $
    1,108
    
    
    $
    1,038
    
    
    $
    70
    
    
    
    7
    %
  Patent litigation accrual
  Loss from operations
 3 Months Ended March 31,($ in thousands)2011
    
    
    2010
    
    
    Incr (Decr)
    
    
    % ChangeNotation
    
    $
    1,264
    
    
    $
    1,297
    
    
    $
    (33
    )
    
    
    -3
    %SmartMusic
    
    
    155
    
    
    
    (14
    )
    
    
    169
    
    
    
    1,207
    %Other
    
    
    (1,800
    )
    
    
    (1,493
    )
    
    
    (307
    )
    
    
    -21
    %Total
    
    $
    (381
    )
    
    $
    (210
    )
    
    $
    (171
    )
    
    
    -81
    %
   Net Loss
  15




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Liquidity and capital resources
      16




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##### Table of Contents



Item 4.
    
    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 expectations relating to the synergies that
exist between our two product lines, future operating results, cash flows from operations and
revenue growth from new SmartMusic subscriptions; our expectations, including release dates,
regarding our future product offerings; our expectations regarding recruiting and hiring a Chief
Executive Officer and a Chief Technology Officer; our intent to expand our notation platform; our
expectations regarding our target business model, future subscription growth for SmartMusic and our
ability to leverage the SmartMusic platform; our intent to expand SmartMusic repertoire; our plans
relating to marketing and sales efforts, including staff increases; our belief that updates to the
SmartMusic and Gradebook interface will result in subscription growth and higher retention rates;
our expectation that amortization will increase; our beliefs relating to adequacy of capital
resources; and our beliefs relating to the sufficiency of managements contingency plans.
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 Gradebook and other products; the success of our direct sales
efforts; the success of our initiatives to improve the user interface of our products; the
maintenance of strategic partnerships and customer relationships; our ability to license titles
from music publishers; the effectiveness of, and our ability to implement, our target business
model; our ability to execute strategic development plans with respect to our notation and
SmartMusic segments; our ability to attract and integrate qualified officers; 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 (including
changes to discretionary spending by schools and students); and those factors described from time
to time in our reports to the Securities and Exchange Commission (including our Annual Report on
Form 10-K). 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
 17




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
   
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
  Issuer Purchases of Equity Securities
 Total Number of Shares
    
    
    Maximum Dollar ValueTotal Number
    
    
    Average
    
    
    Purchased as Part of
    
    
    of Shares that May Yetof Shares
    
    
    Price Paid
    
    
    Publicly Announced
    
    
    Be Purchased Under thePeriod
    
    Purchased(a)
    
    
    per Share
    
    
    Plans or Programs
    
    
    Plans or ProgramsJan. 1 through Jan. 31, 2011
    
    
    60,000
    
    
    $
    4.85
    
    
    
    60,000
    
    
    $
    9,709,000Feb. 1 through Feb. 28, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,709,000Mar. 1 through Mar. 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,709,000Total
    
    
    60,000
    
    
    $
    4.85
    
    
    
    60,000
    
    
    $
    9,709,000
 
 (a)
    
    On November 10, 2010 we announced our Boards approval of a Stock Repurchase
Program, which authorizes the repurchase up to $10 million of our common stock over a
two-year period through open market transactions (including through 10b5-1 plans) or
private transactions at the discretion of management. The Stock Repurchase Program has
been discontinued effective May 6, 2011. 
 Item 3.
    
    Defaults Upon Senior Securities
 None.
 
 Item 4.
    
    (Removed and Reserved)
 
 Item 5.
    
    Other Information
 None.
 
 Item 6.
    
    Exhibits
  18




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SIGNATURES
  Date: May 6, 2011
    
    MAKEMUSIC, INC.By: /s/ Jeffrey A. KochJeffrey A. Koch, Interim Chief Executive Officer(Principal Executive Officer)And: /s/ Karen L. VanDerBoschKaren L. VanDerBosch, Chief Financial Officer(Principal Financial Officer)
 19




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##### Table of Contents



EXHIBIT INDEX
 Form 10-Q
 Three months ended March 31, 2011
 Exhibit No.
    
    Description10.1
    
    
    Lease Agreement dated March 1, 2005 by and between First Industrial,
L.P. and MakeMusic, Inc.  incorporated by reference to Exhibit
10.1 to the Registrants Form 10-QSB for the quarter ended March 31,
200510.2
    
    
    First Amendment to Lease Agreement dated March 7, 2011 by and
between Eden Prairie Associates LLC and MakeMusic, Inc. 
incorporated by reference to Exhibit 10.2 to the Registrants Form
8-K filed March 11, 2011.31.1*
    
    
    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. 20