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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 September 30, 2010
 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 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 
 
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if smaller reporting company)
    
    Smaller Reporting Company þ
 o þ




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##### 



MakeMusic, Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1 Condensed Financial Statements
    
    
    3Condensed Balance Sheets
September 30, 2010 and December 31, 2009
    
    
    3Condensed Statements of Operations
Three- and nine-month periods ended September 30, 2010 and 2009
    
    
    4Condensed Statements of Cash Flows
Three- and nine-month periods ended September 30, 2010 and 2009
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 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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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements.
 MakeMusic, Inc.
 
 Condensed Balance Sheets  (In thousands of U.S. dollars, except share data)
 September 30,2010
    
    
    December 31,(Unaudited)
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,813
    
    
    $
    8,943Accounts
receivable (net of allowance of $35 and $33 in 2010 and 2009, respectively)
    
    
    1,461
    
    
    
    1,277Inventories
    
    
    348
    
    
    
    386Deferred income taxes, net
    
    
    1,587
    
    
    
    1,587Prepaid expenses and other current assets
    
    
    363
    
    
    
    294Total current assets
    
    
    13,572
    
    
    
    12,487Property and equipment, net
    
    
    372
    
    
    
    533Capitalized software products, net
    
    
    2,511
    
    
    
    2,645Goodwill
    
    
    3,630
    
    
    
    3,630Long term deferred income taxes, net
    
    
    898
    
    
    
    977Other non-current assets
    
    
    3
    
    
    
    6Total assets
    
    $
    20,986
    
    
    $
    20,278Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    $
    40
    
    
    $
    61Accounts payable
    
    
    636
    
    
    
    726Accrued compensation
    
    
    1,157
    
    
    
    1,167Other accrued liabilities
    
    
    212
    
    
    
    297Post contract support
    
    
    132
    
    
    
    132Reserve for product returns
    
    
    264
    
    
    
    414Deferred revenue
    
    
    3,390
    
    
    
    2,913Total current liabilities
    
    
    5,831
    
    
    
    5,710Capital lease obligations, net of current portion
    
    
    4
    
    
    
    30Other long term liabilities
    
    
    0
    
    
    
    8Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000
Issued and outstanding shares  4,885,003 and 4,756,891
in 2010 and 2009, respectively
    
    
    49
    
    
    
    48Additional paid-in capital
    
    
    66,524
    
    
    
    65,980Accumulated deficit
    
    
    (51,422
    )
    
    
    (51,498
    )Total shareholders equity
    
    
    15,151
    
    
    
    14,530Total liabilities and shareholders equity
    
    $
    20,986
    
    
    $
    20,278
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MakeMusic, Inc.
 
 Condensed Statements of Operations  (In thousands of U.S. dollars, except share and per share data)
 3 Months
    
    
    9 MonthsEnded September 30,
    
    
    Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Notation revenue
    
    $
    2,704
    
    
    $
    2,822
    
    
    $
    7,734
    
    
    $
    7,831SmartMusic revenue
    
    
    1,825
    
    
    
    1,524
    
    
    
    4,572
    
    
    
    3,830NET REVENUE
    
    
    4,529
    
    
    
    4,346
    
    
    
    12,306
    
    
    
    11,661COST OF REVENUES
    
    
    778
    
    
    
    729
    
    
    
    2,000
    
    
    
    1,760GROSS PROFIT
    
    
    3,751
    
    
    
    3,617
    
    
    
    10,306
    
    
    
    9,90183
    %
    
    
    83
    %
    
    
    84
    %
    
    
    85
    %OPERATING EXPENSES:Development expenses
    
    
    1,336
    
    
    
    1,220
    
    
    
    4,060
    
    
    
    3,728Selling and marketing expenses
    
    
    1,225
    
    
    
    1,024
    
    
    
    3,459
    
    
    
    3,174General and administrative expenses
    
    
    769
    
    
    
    814
    
    
    
    2,685
    
    
    
    2,706Total operating expenses
    
    
    3,330
    
    
    
    3,058
    
    
    
    10,204
    
    
    
    9,608INCOME FROM OPERATIONS
    
    
    421
    
    
    
    559
    
    
    
    102
    
    
    
    293Other, net
    
    
    16
    
    
    
    23
    
    
    
    56
    
    
    
    55Net income before income tax
    
    
    437
    
    
    
    582
    
    
    
    158
    
    
    
    348Income tax expense
    
    
    196
    
    
    
    3
    
    
    
    82
    
    
    
    5Net Income
    
    $
    241
    
    
    $
    579
    
    
    $
    76
    
    
    $
    343Loss per common share:Basic
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.02
    
    
    $
    0.07Diluted
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.02
    
    
    $
    0.07Weighted average common
shares outstanding:Basic
    
    
    4,867,663
    
    
    
    4,698,562
    
    
    
    4,818,383
    
    
    
    4,668,497Diluted
    
    
    4,974,772
    
    
    
    4,794,315
    
    
    
    4,923,507
    
    
    
    4,766,535
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MakeMusic, Inc.
 
 Condensed Statements of Cash Flows  (In thousands of U.S. dollars)
 9 MonthsEnded September 30,2010
    
    
    2009Cash flows from operating activitiesNet income
    
    $
    76
    
    
    $
    343Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of capitalized development costs
    
    
    758
    
    
    
    702Gain on disposal on assets
    
    
    (1
    )
    
    
    (7
    )Deferred income taxes, net
    
    
    79
    
    
    
    Share based compensation
    
    
    325
    
    
    
    242Net changes in operating assets and liabilities:Accounts receivable
    
    
    (184
    )
    
    
    120Inventories
    
    
    38
    
    
    
    (106
    )Prepaid expenses and other current assets
    
    
    (69
    )
    
    
    (45
    )Accounts payable
    
    
    (90
    )
    
    
    166Accrued liabilities and product returns
    
    
    (202
    )
    
    
    (108
    )Deferred revenue
    
    
    477
    
    
    
    225Net cash provided by operating activities
    
    
    1,207
    
    
    
    1,532Cash flows from investing activitiesPurchases of property and equipment
    
    
    (93
    )
    
    
    (196
    )Proceeds from disposal of assets
    
    
    1
    
    
    
    9Capitalized development
    
    
    (367
    )
    
    
    (448
    )Net cash used in investing activities
    
    
    (459
    )
    
    
    (635
    )Cash flows from financing activitiesPayments on capital leases
    
    
    (45
    )
    
    
    (45
    )Proceeds from exercise of options
    
    
    167
    
    
    
    86Net cash provided by financing activities
    
    
    122
    
    
    
    41Net increase in cash and cash equivalents
    
    
    870
    
    
    
    938Cash and cash equivalents, beginning of period
    
    
    8,943
    
    
    
    6,592Cash and cash equivalents, end of period
    
    $
    9,813
    
    
    $
    7,530
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MakeMusic,
Inc.
 
 Notes to Condensed Financial Statements
 Note 1

    
    Accounting Policies.The information
furnished in this Form 10-Q 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 and nine months ended September 30, 2010 are not
necessarily indicative of the operating results to be expected for
the full fiscal year. We have condensed or omitted certain
information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the Unites States of America,
pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC).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. Unless otherwise specified, as used in this report, the
terms we, us, our, MakeMusic and the Company refer to
MakeMusic, Inc., a Minnesota corporation.
 Note 2

    
    Net Income Per Share.Net income per share was calculated by
dividing the net income 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-month and nine-month periods ended September 30, 2010 and
2009:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009Weighted-average common shares outstanding
    
    
    4,867,663
    
    
    
    4,698,562
    
    
    
    4,818,383
    
    
    
    4,668,497Dilutive effect of stock options and warrants
    
    
    107,109
    
    
    
    95,753
    
    
    
    105,124
    
    
    
    98,038Equivalent average common shares outstanding
 diluted
    
    
    4,974,772
    
    
    
    4,794,315
    
    
    
    4,923,507
    
    
    
    4,766,535
 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.
 As of December 31, 2009, we had U.S. net operating loss (NOL)
carry-forwards of approximately $17,825,000, Minnesota net
operating loss carry-forwards of $6,348,000, and research and
development tax credits of $1,069,000. 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. Due to uncertainties
related to our ability to utilize the balance of our
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deferred tax assets, as of September 30, 2010 we have maintained a valuation allowance of
$5,690,000. As of September 30, 2009, a valuation allowance offset all of our deferred tax
assets.
 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.
Should the remaining $5,690,000 valuation allowance be reversed in the future, a liability
of $3,009,000 would have to be established for uncertain tax positions.
 We recorded an income tax expense of $196,000 and $82,000, respectively, for the three and
nine-month periods ended September 30, 2010. We did not record an expense for income taxes
for the comparable periods in 2009.
 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.As of September 30, 2010 and September 30, 2009, there are no open positions for which the
unrecognized tax benefits will significantly increase or decrease during the next twelve
months. Tax years still open for examination by Federal and major state agencies as of
September 30, 2010 are 2005-2009.
 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, 2009 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 September 30, 2010 and 2009, we
recognized $108,000 and $57,000, respectively, and for the nine months ended September 30,
2010 and 2009, we recognized $325,000 and $190,000, respectively, of expense related to
stock based compensation.Stock OptionsWe 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.
 September 30,
    
    
    Sepetmber 30,2010
    
    
    2009Black-Scholes Model:Risk-free interest rate
    
    
    1.98
    %
    
    
    1.3
    %Expected life, in years
    
    
    4.4
    
    
    
    4.2Expected volatility
    
    
    79.30
    %
    
    
    76.6
    %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
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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.Equity Award ActivityThe following table represents stock option and restricted stock activity under the 2003
Plan for the nine months ended September 30, 2010:
 Weighted Average
    
    
    Weighted AverageShares Reserved
    
    
    2003 Plan
    
    
    
    
    
    
    Option Exercise
    
    
    Remaining Contractfor Future Grant
    
    
    Restricted Shares
    
    
    Plan Option Shares
    
    
    Price
    
    
    LifeAt December 31, 2009
    
    
    586,047
    
    
    
    24,116
    
    
    
    445,755
    
    
    $
    5.09Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (234,433
    )
    
    
    55,933
    
    
    
    178,500
    
    
    $
    4.60Expired
    
    
    1,250
    
    
    
    
    
    
    
    (1,250
    )
    
    $
    2.35Cancelled
    
    
    500
    
    
    
    
    
    
    
    (500
    )
    
    $
    2.35Exercised
    
    
    
    
    
    
    
    
    
    
    (72,179
    )
    
    $
    2.31At September 30, 2010
    
    
    353,364
    
    
    
    80,049
    
    
    
    550,326
    
    
    $
    5.30
    
    
    3.7 YearsOutstanding
Exercisable at
September 30, 2010
    
    
    
    
    
    
    
    
    
    
    252,951
    
    
    $
    5.92
    
    
    2.0 Years
 At September 30, 2010 the aggregate intrinsic value of options outstanding was
$514,000, and the aggregate intrinsic value of options exercisable was $163,000.
 At September 30, 2010, there was $375,000 of unrecognized compensation cost related to
nonvested share-based option payments which is expected to be recognized over a
weighted-average period of 2.0 years. At September 30, 2010, there was $158,000 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 costs included in each of the reportable segments operating results include the direct
costs of the products sold to customers and operating expenses managed by each of the
reportable segments.The remaining activities are included in Other. These are unallocated expenses which
include costs related to selling and corporate functions, including 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. As a result, reportable segment results of
operations are not representative of the operating profit of the products in these
reportable segments.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 condensed results of operations by reportable segment:
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For the 3 Months Ended September 30, 2010
    
    
    For the 9 Months Ended September 30, 2010Notation
    
    
    SmartMusic
    
    
    Other
    
    
    Total
    
    
    Notation
    
    
    SmartMusic
    
    
    Other
    
    
    TotalNET REVENUE
    
    $
    2,704
    
    
    $
    1,825
    
    
    $
    0
    
    
    $
    4,529
    
    
    $
    7,734
    
    
    $
    4,572
    
    
    $
    0
    
    
    $
    12,306COST OF REVENUES
    
    
    197
    
    
    
    581
    
    
    
    0
    
    
    
    778
    
    
    
    621
    
    
    
    1,379
    
    
    
    0
    
    
    
    2,000GROSS PROFIT
    
    
    2,507
    
    
    
    1,244
    
    
    
    0
    
    
    
    3,751
    
    
    
    7,113
    
    
    
    3,193
    
    
    
    0
    
    
    
    10,306Percentage of Net Revenue
    
    
    93
    %
    
    
    68
    %
    
    
    0
    %
    
    
    83
    %
    
    
    92
    %
    
    
    70
    %
    
    
    0
    %
    
    
    84
    %OPERATING EXPENSES:Development expenses
    
    
    610
    
    
    
    481
    
    
    
    245
    
    
    
    1,336
    
    
    
    1,766
    
    
    
    1,531
    
    
    
    763
    
    
    
    4,060Selling and marketing expenses
    
    
    481
    
    
    
    437
    
    
    
    307
    
    
    
    1,225
    
    
    
    1,408
    
    
    
    1,263
    
    
    
    788
    
    
    
    3,459General and administrative
expenses
    
    
    16
    
    
    
    23
    
    
    
    730
    
    
    
    769
    
    
    
    62
    
    
    
    49
    
    
    
    2,574
    
    
    
    2,685Total Operating Expenses
    
    
    1,107
    
    
    
    941
    
    
    
    1,282
    
    
    
    3,330
    
    
    
    3,236
    
    
    
    2,843
    
    
    
    4,125
    
    
    
    10,204Income/(Loss) from Operations
    
    $
    1,400
    
    
    $
    303
    
    
    
    ($1,282
    )
    
    $
    421
    
    
    $
    3,877
    
    
    $
    350
    
    
    
    ($4,125
    )
    
    $
    102
 For the 3 Months Ended September 30, 2009
    
    
    For the 9 Months Ended September 30, 2009Notation
    
    
    SmartMusic
    
    
    Other
    
    
    Total
    
    
    Notation
    
    
    SmartMusic
    
    
    Other
    
    
    TotalNET REVENUE
    
    $
    2,822
    
    
    $
    1,524
    
    
    $
    0
    
    
    $
    4,346
    
    
    $
    7,831
    
    
    $
    3,830
    
    
    $
    0
    
    
    $
    11,661COST OF REVENUES
    
    
    243
    
    
    
    486
    
    
    
    0
    
    
    
    729
    
    
    
    620
    
    
    
    1,140
    
    
    
    0
    
    
    
    1,760GROSS PROFIT
    
    
    2,579
    
    
    
    1,038
    
    
    
    0
    
    
    
    3,617
    
    
    
    7,211
    
    
    
    2,690
    
    
    
    0
    
    
    
    9,901Percentage of Net Revenue
    
    
    91
    %
    
    
    68
    %
    
    
    0
    %
    
    
    83
    %
    
    
    92
    %
    
    
    70
    %
    
    
    0
    %
    
    
    85
    %OPERATING EXPENSES:Development expenses
    
    
    444
    
    
    
    466
    
    
    
    310
    
    
    
    1,220
    
    
    
    1,419
    
    
    
    1,389
    
    
    
    920
    
    
    
    3,728Selling and marketing expenses
    
    
    457
    
    
    
    438
    
    
    
    129
    
    
    
    1,024
    
    
    
    1,394
    
    
    
    1,244
    
    
    
    536
    
    
    
    3,174General and administrative
expenses
    
    
    14
    
    
    
    22
    
    
    
    778
    
    
    
    814
    
    
    
    60
    
    
    
    47
    
    
    
    2,599
    
    
    
    2,706Total Operating Expenses
    
    
    915
    
    
    
    926
    
    
    
    1,217
    
    
    
    3,058
    
    
    
    2,873
    
    
    
    2,680
    
    
    
    4,055
    
    
    
    9,608Income/(Loss) from Operations
    
    $
    1,664
    
    
    $
    112
    
    
    
    ($1,217
    )
    
    $
    559
    
    
    $
    4,338
    
    
    $
    10
    
    
    
    ($4,055
    )
    
    $
    293
 Note 6
    
    Goodwill.In 2009, as a result of the reorganization of its internal reporting structure,
MakeMusic has two reporting units. Accordingly, effective January 1, 2009, MakeMusic
assigned all goodwill ($3.63 million) to the Notation reporting unit.
 9




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##### Table of Contents



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.
 ® ®
    
  10




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##### Table of Contents



Sept-09
    
    Dec-09
    
    Mar-10
    
    June-10
    
    Sept-10Total Subscriptions
    
    
    122,577
    
    
    
    133,782
    
    
    
    139,363
    
    
    
    143,095
    
    
    
    158,574Educator Accounts
    
    
    9,003
    
    
    
    9,269
    
    
    
    9,368
    
    
    
    9,073
    
    
    
    9,312Educators who have issued assignments*
    
    
    1,178
    
    
    
    1,857
    
    
    
    2,340
    
    
    
    2,379
    
    
    
    1,085Gradebook Teachers *
    
    
    453
    
    
    
    886
    
    
    
    1,156
    
    
    
    1,172
    
    
    
    415Site Agreements
    
    
    236
    
    
    
    322
    
    
    
    356
    
    
    
    372
    
    
    
    466Site Agreement Educator Subscriptions
    
    
    1,762
    
    
    
    2,181
    
    
    
    2,458
    
    
    
    2,532
    
    
    
    3,403
 
 *
    
    Annual statistics that restart on July 1 of each year reflecting the start of the school-year
cycle    QuarterlyBeginning
    
    
    
    
    
    Renewed
    
    
    
    
    
    
    
    
    
    Quarter End
    
    Net NewQuarter End Date
    
    Subscriptions
    
    New Subscriptions
    
    Subscriptions
    
    Renewal Rate
    
    Subscriptions Ended
    
    Subscriptions
    
    Subscriptions9/30/2009
    
    
    
    111,059
    
    
    
    24,456
    
    
    
    29,585
    
    
    
    70
    %
    
    
    42,523
    
    
    
    122,577
    
    
    
    11,51812/31/2009
    
    
    
    122,577
    
    
    
    20,122
    
    
    
    26,402
    
    
    
    75
    %
    
    
    35,319
    
    
    
    133,782
    
    
    
    11,2053/31/2010
    
    
    
    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
    
    
    
    15,479
   11




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition
and Results of Operations
 12




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##### Table of Contents



Results of Operations
 Comparison of the three- and nine-month periods ended September 30, 2010 to the three- and
nine-month periods ended September 30, 2009
 Net Revenue ($ in thousands)3 Months Ended September 30,
    
    
    9 Months Ended September 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    2,704
    
    
    $
    2,822
    
    
    $
    (118
    )
    
    
    -4
    %
    
    $
    7,734
    
    
    $
    7,831
    
    
    $
    (97
    )
    
    
    -1
    %SmartMusic
    
    
    1,825
    
    
    
    1,524
    
    
    
    301
    
    
    
    20
    %
    
    
    4,572
    
    
    
    3,830
    
    
    
    742
    
    
    
    19
    %Total
    
    $
    4,529
    
    
    $
    4,346
    
    
    $
    183
    
    
    
    4
    %
    
    $
    12,306
    
    
    $
    11,661
    
    
    $
    645
    
    
    
    6
    %
       13




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##### Table of Contents



Gross Profit ($ in thousands)3 Months Ended September 30,
    
    
    9 Months Ended September 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    2,507
    
    
    $
    2,579
    
    
    
    ($72
    )
    
    
    -3
    %
    
    $
    7,113
    
    
    $
    7,211
    
    
    
    ($98
    )
    
    
    -1
    %SmartMusic
    
    
    1,244
    
    
    
    1,038
    
    
    
    206
    
    
    
    20
    %
    
    
    3,193
    
    
    
    2,690
    
    
    
    503
    
    
    
    19
    %Total
    
    $
    3,751
    
    
    $
    3,617
    
    
    $
    134
    
    
    
    4
    %
    
    $
    10,306
    
    
    $
    9,901
    
    
    $
    405
    
    
    
    4
    %
  Development expense ($ in thousands)3 Months Ended September 30,
    
    
    9 Months Ended September 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    610
    
    
    $
    444
    
    
    $
    166
    
    
    
    37
    %
    
    $
    1,766
    
    
    $
    1,419
    
    
    $
    347
    
    
    
    24
    %SmartMusic
    
    
    481
    
    
    
    466
    
    
    
    15
    
    
    
    3
    %
    
    
    1,531
    
    
    
    1,389
    
    
    
    142
    
    
    
    10
    %Other
    
    
    245
    
    
    
    310
    
    
    
    (65
    )
    
    
    -21
    %
    
    
    763
    
    
    
    920
    
    
    
    (157
    )
    
    
    -17
    %Total
    
    $
    1,336
    
    
    $
    1,220
    
    
    $
    116
    
    
    
    10
    %
    
    $
    4,060
    
    
    $
    3,728
    
    
    $
    332
    
    
    
    9
    %
  14




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##### Table of Contents



Selling and marketing expense ($ in thousands)
 3 Months Ended September 30,
    
    
    9 Months Ended September 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    481
    
    
    $
    457
    
    
    $
    24
    
    
    
    5
    %
    
    $
    1,408
    
    
    $
    1,394
    
    
    $
    14
    
    
    
    1
    %SmartMusic
    
    
    437
    
    
    
    438
    
    
    
    (1
    )
    
    
    0
    %
    
    
    1,263
    
    
    
    1,244
    
    
    
    19
    
    
    
    2
    %Other
    
    
    307
    
    
    
    129
    
    
    
    178
    
    
    
    138
    %
    
    
    788
    
    
    
    536
    
    
    
    252
    
    
    
    47
    %Total
    
    $
    1,225
    
    
    $
    1,024
    
    
    $
    201
    
    
    
    20
    %
    
    $
    3,459
    
    
    $
    3,174
    
    
    $
    285
    
    
    
    9
    %
  General and administrative expense ($ in thousands)
 3 Months Ended September 30,
    
    
    9 Months Ended September 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    16
    
    
    $
    14
    
    
    $
    2
    
    
    
    14
    %
    
    $
    62
    
    
    $
    60
    
    
    $
    2
    
    
    
    3
    %SmartMusic
    
    
    23
    
    
    
    22
    
    
    
    1
    
    
    
    5
    %
    
    
    49
    
    
    
    47
    
    
    
    2
    
    
    
    4
    %Other
    
    
    730
    
    
    
    778
    
    
    
    (48
    )
    
    
    -6
    %
    
    
    2,574
    
    
    
    2,599
    
    
    
    (25
    )
    
    
    -1
    %Total
    
    $
    769
    
    
    $
    814
    
    
    
    ($45
    )
    
    
    -6
    %
    
    $
    2,685
    
    
    $
    2,706
    
    
    
    ($21
    )
    
    
    -1
    %
  Income (loss) from operations ($ in thousands)
 3 Months Ended September 30,
    
    
    9 Months Ended September 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    1,400
    
    
    $
    1,664
    
    
    
    ($264
    )
    
    
    -16
    %
    
    $
    3,877
    
    
    $
    4,338
    
    
    
    ($461
    )
    
    
    -11
    %SmartMusic
    
    
    303
    
    
    
    112
    
    
    
    191
    
    
    
    171
    %
    
    
    350
    
    
    
    10
    
    
    
    340
    
    
    
    3400
    %Other
    
    
    (1,282
    )
    
    
    (1,217
    )
    
    
    (65
    )
    
    
    -5
    %
    
    
    (4,125
    )
    
    
    (4,055
    )
    
    
    (70
    )
    
    
    -2
    %Total
    
    $
    421
    
    
    $
    559
    
    
    
    ($138
    )
    
    
    -25
    %
    
    $
    102
    
    
    $
    293
    
    
    
    ($191
    )
    
    
    -65
    %
  15




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##### Table of Contents



Net Income
  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 regarding our target business
model and future subscription growth for SmartMusic; our plans relating to marketing and sales
efforts; our belief that updates to the SmartMusic and Gradebook interface will result in
subscription growth, an increase to the number of Gradebook teachers and higher retention rates;
our expectation that amortization will increase; our intent to release new SmartMusic titles in the
fourth quarter of 2010; 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; 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
 On September 14, 2010, a complaint was filed against us by Uniloc USA, Inc. and Uniloc
Singapore Private Limited (collectively Uniloc) in the United States District Court
for the Eastern District of Texas. The complaint alleges infringement of Unilocs patent
for securely registering software and other digital media to prevent illicit copying and
software piracy and seeks a permanent injunction. In addition, Uniloc is seeking
compensatory damages in an unspecified amount, and interest, costs and expenses
associated with the litigation. We are one of approximately 60 companies that have been
similarly sued by Uniloc. Further, the United States Patent and Trademark Office
recently issued an initial rejection all of the claims of the Uniloc patent at issue in
the litigation. Management believes that the claims involved in the suit are without
merit and does not expect the litigation to have a material adverse effect on our
business, financial condition, or results of operations. We will, however, incur costs
and diversion of management resources in defending the infringement claim. Moreover,
because litigation is inherently uncertain, we cannot guarantee that the outcome of this
litigation will be favorable to us or that material damages will not be awarded against
us.
 
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 There were no sales of unregistered equity securities during the quarter ended
September 30, 2010.
 
 Item 3.
    
    Defaults Upon Senior Securities
 None.
 
 Item 4.
    
    (Removed and Reserved)
 
 Item 5.
    
    Other Information
 None.
 
 Item 6.
    
    Exhibits
 See the attached exhibit index.
 18




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##### Table of Contents



SIGNATURES
  Date: November 5, 2010
    MAKEMUSIC, INC.By:
    /s/ Ronald RaupRonald Raup, 
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
 The quarterly period ended September 30, 2010
 Exhibit No.
    
    Description31.1*
    
    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