##### 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 June 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
    
    (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 smaller reporting company)
 o þ




---



##### 



MakeMusic, Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1 Condensed Financial Statements
    
    
    3Condensed Balance Sheets
June 30, 2010 and December 31, 2009
    
    
    3Condensed Statements of Operations
Three- and six-month periods ended June 30, 2010 and 2009
    
    
    4Condensed Statements of Cash Flows
Three- and six-month periods ended June 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
  2




---



##### 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)
 June 30,2010
    
    
    December 31,(Unaudited)
    
    

    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,986
    
    
    $
    8,943Accounts receivable (net of allowance of $32 and $33 in
2010 and 2009, respectively)
    
    
    1,189
    
    
    
    1,277Inventories
    
    
    282
    
    
    
    386Deferred income taxes, net
    
    
    1,587
    
    
    
    1,587Prepaid expenses and other current assets
    
    
    343
    
    
    
    294Total current assets
    
    
    11,387
    
    
    
    12,487Property and equipment, net
    
    
    432
    
    
    
    533Capitalized software products, net
    
    
    2,537
    
    
    
    2,645Goodwill
    
    
    3,630
    
    
    
    3,630Long term deferred income taxes, net
    
    
    1,125
    
    
    
    977Other non-current assets
    
    
    4
    
    
    
    6Total assets
    
    $
    19,115
    
    
    $
    20,278Liabilities and Shareholders EquityCurrent liabilities:Current portion of capital lease obligations
    
    
    54
    
    
    $
    61Accounts payable
    
    
    316
    
    
    
    726Accrued compensation
    
    
    1,004
    
    
    
    1,167Other accrued liabilities
    
    
    208
    
    
    
    297Post contract support
    
    
    132
    
    
    
    132Reserve for product returns
    
    
    465
    
    
    
    414Deferred revenue
    
    
    2,191
    
    
    
    2,913Total current liabilities
    
    
    4,370
    
    
    
    5,710Capital lease obligations, net of current portion
    
    
    7
    
    
    
    30Other long term liabilities
    
    
    0
    
    
    
    8Shareholders equity:Common stock, $0.01 par value:Authorized shares  10,000,000Issued and outstanding shares 
4,857,503 and 4,756,891
in 2010 and 2009, respectively
    
    
    49
    
    
    
    48Additional paid-in capital
    
    
    66,352
    
    
    
    65,980Accumulated deficit
    
    
    (51,663
    )
    
    
    (51,498
    )Total shareholders equity
    
    
    14,738
    
    
    
    14,530Total liabilities and shareholders equity
    
    $
    19,115
    
    
    $
    20,278
  3




---



##### Table of Contents



MakeMusic, Inc.
 
 Condensed Statements of Operations  (In thousands of U.S. dollars, except share and per share data)
 3 Months
    
    
    6 MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Notation revenue
    
    $
    2,462
    
    
    $
    2,393
    
    
    $
    5,030
    
    
    $
    5,009SmartMusic revenue
    
    
    1,315
    
    
    
    1,081
    
    
    
    2,747
    
    
    
    2,306NET REVENUE
    
    
    3,777
    
    
    
    3,474
    
    
    
    7,777
    
    
    
    7,315COST OF REVENUES
    
    
    571
    
    
    
    475
    
    
    
    1,222
    
    
    
    1,031GROSS PROFIT
    
    
    3,206
    
    
    
    2,999
    
    
    
    6,555
    
    
    
    6,284OPERATING EXPENSES:Development expenses
    
    
    1,402
    
    
    
    1,229
    
    
    
    2,724
    
    
    
    2,508Selling and marketing expenses
    
    
    1,035
    
    
    
    1,019
    
    
    
    2,234
    
    
    
    2,150General and administrative expenses
    
    
    877
    
    
    
    860
    
    
    
    1,916
    
    
    
    1,892Total operating expenses
    
    
    3,314
    
    
    
    3,108
    
    
    
    6,874
    
    
    
    6,550LOSS FROM OPERATIONS
    
    
    (108
    )
    
    
    (109
    )
    
    
    (319
    )
    
    
    (266
    )Other, net
    
    
    13
    
    
    
    18
    
    
    
    40
    
    
    
    32Net loss before income tax
    
    
    (95
    )
    
    
    (91
    )
    
    
    (279
    )
    
    
    (234
    )Income tax (benefit) expense
    
    
    (47
    )
    
    
    0
    
    
    
    (114
    )
    
    
    2Net Loss
    
    $
    (48
    )
    
    $
    (91
    )
    
    $
    (165
    )
    
    $
    (236
    )Loss per common share:Basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.05
    )Weighted average
common shares outstanding:Basic and diluted
    
    
    4,818,295
    
    
    
    4,661,923
    
    
    
    4,793,334
    
    
    
    4,653,215
  4




---



##### Table of Contents



MakeMusic,
Inc.
 
 Condensed Statements of Cash Flows  (In thousands of U.S. dollars)
 6 MonthsEnded June 30,2010
    
    
    2009Cash flows from operating activitiesNet loss
    
    $
    (165
    )
    
    $
    (236
    )Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:Depreciation and amortization
    
    
    508
    
    
    
    464Deferred income taxes, net
    
    
    (148
    )
    
    
    Share based compensation
    
    
    270
    
    
    
    185Net changes in operating assets and liabilities:Accounts receivable
    
    
    88
    
    
    
    240Inventories
    
    
    104
    
    
    
    (41
    )Prepaid expenses and other current assets
    
    
    (49
    )
    
    
    (27
    )Accounts payable
    
    
    (410
    )
    
    
    (32
    )Accrued liabilities and product returns
    
    
    (209
    )
    
    
    0Deferred revenue
    
    
    (722
    )
    
    
    (534
    )Net cash (used in) provided by operating activities
    
    
    (733
    )
    
    
    19Cash flows from investing activitiesPurchases of property and equipment
    
    
    (72
    )
    
    
    (175
    )Capitalized development
    
    
    (224
    )
    
    
    (327
    )Net cash used in investing activities
    
    
    (296
    )
    
    
    (502
    )Cash flows from financing activitiesPayments on capital leases
    
    
    (30
    )
    
    
    (13
    )Proceeds from exercise of options
    
    
    102
    
    
    
    0Net cash (used in) provided by financing activities
    
    
    72
    
    
    
    (13
    )Net decrease in cash and cash equivalents
    
    
    (957
    )
    
    
    (496
    )Cash and cash equivalents, beginning of period
    
    
    8,943
    
    
    
    6,592Cash and cash equivalents, end of period
    
    $
    7,986
    
    
    $
    6,096Supplemental disclosure of cash flow informationInterest paid
    
    $
    4
    
    
    $
    5Income taxes paid
    
    
    99
    
    
    
    2
  5




---



##### Table of Contents



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 and six months ended June 30, 2010 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. 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 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 and six-month periods ended June 30, 2010 and 2009
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.As of December 31, 2009, we had U.S. net operating loss (NOL)
carry-forwards of approximately $17,824,000, Minnesota net
operating loss carry-forwards of $6,392,000, 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 deferred tax
assets, as of June 30, 2010 we have maintained a valuation
allowance of $5,690,000. As of June 30, 2009, a valuation allowance
offset all of our deferred tax assets. 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 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. We
recorded a benefit for income taxes of $50,000 and $148,000, respectively, for the three and
six-month periods ended June 30, 2010. We did not record a benefit 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
 6




---



##### Table of Contents



2007 resulted in an ownership
change under Section 382. Accordingly, our ability to use NOLs in the future may be
limited.As of June 30, 2010 and June 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 June
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 June 30, 2010 and 2009, we
recognized $109,000 and $27,000, respectively, and for the six months ended June 30, 2010
and 2009, we recognized $217,000 and $185,000, 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.
 June 30,
    
    
    June 30,2010
    
    
    2009Black-Scholes Model:Risk-free interest rate
    
    
    1.98
    %
    
    
    1.0
    %Expected life, in years
    
    
    4.4
    
    
    
    4.1Expected volatility
    
    
    79.30
    %
    
    
    75.40
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
  7




---



##### Table of Contents



Equity Award Activity
  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
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    (44,679
    )
    
    $
    2.29At June 30, 2010
    
    
    351,614
    
    
    
    80,049
    
    
    
    579,576
    
    
    $
    5.15
    
    
    3.8 YearsOutstanding
Exercisable at June
30, 2010
    
    
    
    
    
    
    
    
    
    
    269,576
    
    
    $
    5.56
    
    
    1.9 Years
 At June 30, 2010 the aggregate intrinsic value of options outstanding was $488,000, and
the aggregate intrinsic value of options exercisable was $217,000.At June 30, 2010, there was $465,000 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 June 30, 2010, there was $179,000 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.
 8




---



##### Table of Contents



For the 3 Months Ended June 30, 2010
    
    
    For the 6 Months Ended June 30, 2010Notation
    
    
    SmartMusic
    
    
    Other
    
    
    Total
    
    
    Notation
    
    
    SmartMusic
    
    
    Other
    
    
    TotalNET REVENUE
    
    $
    2,462
    
    
    $
    1,315
    
    
    $
    0
    
    
    $
    3,777
    
    
    $
    5,030
    
    
    $
    2,747
    
    
    $
    0
    
    
    $
    7,777COST OF REVENUES
    
    
    210
    
    
    
    361
    
    
    
    0
    
    
    
    571
    
    
    
    424
    
    
    
    798
    
    
    
    0
    
    
    
    1,222GROSS PROFIT
    
    
    2,252
    
    
    
    954
    
    
    
    0
    
    
    
    3,206
    
    
    
    4,606
    
    
    
    1,949
    
    
    
    0
    
    
    
    6,555Percentage of Net Revenue
    
    
    91
    %
    
    
    73
    %
    
    
    0
    %
    
    
    85
    %
    
    
    92
    %
    
    
    71
    %
    
    
    0
    %
    
    
    84
    %OPERATING EXPENSES:Development expenses
    
    
    620
    
    
    
    517
    
    
    
    265
    
    
    
    1,402
    
    
    
    1,156
    
    
    
    1,050
    
    
    
    518
    
    
    
    2,724Selling and marketing expenses
    
    
    424
    
    
    
    367
    
    
    
    244
    
    
    
    1,035
    
    
    
    927
    
    
    
    826
    
    
    
    481
    
    
    
    2,234General and administrative
expenses
    
    
    28
    
    
    
    9
    
    
    
    840
    
    
    
    877
    
    
    
    46
    
    
    
    26
    
    
    
    1,844
    
    
    
    1,916Total Operating Expenses
    
    
    1,072
    
    
    
    893
    
    
    
    1,349
    
    
    
    3,314
    
    
    
    2,129
    
    
    
    1,902
    
    
    
    2,843
    
    
    
    6,874Income/(Loss) from Operations
    
    
    1,180
    
    
    
    61
    
    
    
    (1,349
    )
    
    
    (108
    )
    
    
    2,477
    
    
    
    47
    
    
    
    (2,843
    )
    
    
    (319
    )Other Income, net
    
    
    0
    
    
    
    0
    
    
    
    60
    
    
    
    60
    
    
    
    0
    
    
    
    0
    
    
    
    154
    
    
    
    154NET INCOME/(LOSS)
    
    $
    1,180
    
    
    $
    61
    
    
    $
    (1,289
    )
    
    $
    (48
    )
    
    $
    2,477
    
    
    $
    47
    
    
    $
    (2,689
    )
    
    $
    (165
    )
 For the 3 Months Ended June 30, 2009
    
    
    For the 6 Months Ended June 30, 2009Notation
    
    
    SmartMusic
    
    
    Other
    
    
    Total
    
    
    Notation
    
    
    SmartMusic
    
    
    Other
    
    
    TotalNET REVENUE
    
    $
    2,393
    
    
    $
    1,081
    
    
    $
    0
    
    
    $
    3,474
    
    
    $
    5,009
    
    
    $
    2,306
    
    
    $
    0
    
    
    $
    7,315COST OF REVENUES
    
    
    196
    
    
    
    279
    
    
    
    0
    
    
    
    475
    
    
    
    377
    
    
    
    654
    
    
    
    0
    
    
    
    1,031GROSS PROFIT
    
    
    2,197
    
    
    
    802
    
    
    
    0
    
    
    
    2,999
    
    
    
    4,632
    
    
    
    1,652
    
    
    
    0
    
    
    
    6,284Percentage of Net Revenue
    
    
    92
    %
    
    
    74
    %
    
    
    0
    %
    
    
    86
    %
    
    
    92
    %
    
    
    72
    %
    
    
    0
    %
    
    
    86
    %OPERATING EXPENSES:Development expenses
    
    
    488
    
    
    
    441
    
    
    
    300
    
    
    
    1,229
    
    
    
    976
    
    
    
    923
    
    
    
    609
    
    
    
    2,508Selling and marketing expenses
    
    
    455
    
    
    
    350
    
    
    
    214
    
    
    
    1,019
    
    
    
    937
    
    
    
    806
    
    
    
    407
    
    
    
    2,150General and administrative
expenses
    
    
    27
    
    
    
    9
    
    
    
    824
    
    
    
    860
    
    
    
    45
    
    
    
    25
    
    
    
    1,822
    
    
    
    1,892Total Operating Expenses
    
    
    970
    
    
    
    800
    
    
    
    1,338
    
    
    
    3,108
    
    
    
    1,958
    
    
    
    1,754
    
    
    
    2,838
    
    
    
    6,550Income/(Loss) from Operations
    
    
    1,227
    
    
    
    2
    
    
    
    (1,338
    )
    
    
    (109
    )
    
    
    2,674
    
    
    
    (102
    )
    
    
    (2,838
    )
    
    
    (266
    )Other Income,net
    
    
    0
    
    
    
    0
    
    
    
    18
    
    
    
    18
    
    
    
    0
    
    
    
    0
    
    
    
    30
    
    
    
    30NET INCOME/(LOSS)
    
    $
    1,227
    
    
    $
    2
    
    
    $
    (1,320
    )
    
    $
    (91
    )
    
    $
    2,674
    
    
    $
    (102
    )
    
    $
    (2,808
    )
    
    $
    (236
    )
 9




---



##### Table of Contents



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.
 
 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




---



##### Table of Contents



June-09
    
    
    Sept-09
    
    
    Dec-09
    
    
    Mar-10
    
    
    June-10Total Subscriptions
    
    
    111,059
    
    
    
    122,577
    
    
    
    133,782
    
    
    
    139,363
    
    
    
    143,095Educator Accounts
    
    
    8,616
    
    
    
    9,003
    
    
    
    9,269
    
    
    
    9,368
    
    
    
    9,073Educators who have issued
assignments*
    
    
    1,994
    
    
    
    1,178
    
    
    
    1,857
    
    
    
    2,340
    
    
    
    2,379Gradebook Teachers *
    
    
    874
    
    
    
    453
    
    
    
    886
    
    
    
    1,156
    
    
    
    1,172Site Agreements
    
    
    203
    
    
    
    236
    
    
    
    322
    
    
    
    356
    
    
    
    372Site Agreement Educator Subscriptions
    
    
    1,633
    
    
    
    1,762
    
    
    
    2,181
    
    
    
    2,458
    
    
    
    2,532
 
 *
    
    Annual statistics that restart on July 1 of each year reflecting the start of the school-year
cycle    11




---



##### Table of Contents



QuarterlyBeginning
    
    
    
    Renewed
    
    
    
    
    
    Quarter End
    
    Net NewQuarter End Date
    
    Subscriptions
    
    New Subscriptions
    
    Subscriptions
    
    Renewal Rate
    
    Subscriptions Ended
    
    Subscriptions
    
    Subscriptions3/31/2009
    
    106,584
    
    10,609
    
    12,241
    
    64%
    
    19,116
    
    110,318
    
    3,7346/30/2009
    
    110,318
    
    5,256
    
    11,350
    
    72%
    
    15,865
    
    111,059
    
    7419/30/2009
    
    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
    
    3,732
   Managements Discussion and Analysis of Financial Condition
and Results of Operations
 12




---



##### Table of Contents



Results of Operations
 Comparison of the three- and six-month periods ended June 30, 2010 to the three- and six-month
periods ended June 30, 2009
 Net Revenue ($ in thousands)
 3 Months Ended June 30,
    
    
    6 Months Ended June 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    2,462
    
    
    $
    2,393
    
    
    $
    69
    
    
    
    3
    %
    
    $
    5,030
    
    
    $
    5,009
    
    
    $
    21
    
    
    
    0
    %SmartMusic
    
    
    1,315
    
    
    
    1,081
    
    
    
    234
    
    
    
    22
    %
    
    
    2,747
    
    
    
    2,306
    
    
    
    441
    
    
    
    19
    %Total
    
    $
    3,777
    
    
    $
    3,474
    
    
    $
    303
    
    
    
    9
    %
    
    $
    7,777
    
    
    $
    7,315
    
    
    $
    462
    
    
    
    6
    %
       13




---



##### Table of Contents



Gross Profit ($ in thousands)
 3 Months Ended June 30,
    
    
    6 Months Ended June 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    2,252
    
    
    $
    2,197
    
    
    $
    55
    
    
    
    3
    %
    
    $
    4,606
    
    
    $
    4,632
    
    
    
    ($26
    )
    
    
    -1
    %SmartMusic
    
    
    954
    
    
    
    802
    
    
    
    152
    
    
    
    19
    %
    
    
    1,949
    
    
    
    1,652
    
    
    
    297
    
    
    
    18
    %Total
    
    $
    3,206
    
    
    $
    2,999
    
    
    $
    207
    
    
    
    7
    %
    
    $
    6,555
    
    
    $
    6,284
    
    
    $
    271
    
    
    
    4
    %
  Development expense ($ in thousands)
 3 Months Ended June 30,
    
    
    6 Months Ended June 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    620
    
    
    $
    488
    
    
    $
    132
    
    
    
    27
    %
    
    $
    1,156
    
    
    $
    975
    
    
    $
    181
    
    
    
    19
    %SmartMusic
    
    
    517
    
    
    
    441
    
    
    
    76
    
    
    
    17
    %
    
    
    1,050
    
    
    
    923
    
    
    
    127
    
    
    
    14
    %Other
    
    
    265
    
    
    
    300
    
    
    
    (35
    )
    
    
    -12
    %
    
    
    518
    
    
    
    609
    
    
    
    (91
    )
    
    
    -15
    %Total
    
    $
    1,402
    
    
    $
    1,229
    
    
    $
    173
    
    
    
    14
    %
    
    $
    2,724
    
    
    $
    2,507
    
    
    $
    217
    
    
    
    9
    %
  14




---



##### Table of Contents



Selling and marketing expense ($ in thousands)
 3 Months Ended June 30,
    
    
    6 Months Ended June 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    424
    
    
    $
    455
    
    
    
    ($31
    )
    
    
    -7
    %
    
    $
    927
    
    
    $
    937
    
    
    
    ($10
    )
    
    
    -1
    %SmartMusic
    
    
    367
    
    
    
    350
    
    
    
    17
    
    
    
    5
    %
    
    
    826
    
    
    
    806
    
    
    
    20
    
    
    
    2
    %Other
    
    
    244
    
    
    
    214
    
    
    
    30
    
    
    
    14
    %
    
    
    481
    
    
    
    407
    
    
    
    74
    
    
    
    18
    %Total
    
    $
    1,035
    
    
    $
    1,019
    
    
    $
    16
    
    
    
    2
    %
    
    $
    2,234
    
    
    $
    2,150
    
    
    $
    84
    
    
    
    4
    %
  General and administrative expense ($ in thousands)
 3 Months Ended June 30,
    
    
    6 Months Ended June 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    28
    
    
    $
    27
    
    
    $
    1
    
    
    
    4
    %
    
    $
    46
    
    
    $
    45
    
    
    $
    1
    
    
    
    2
    %SmartMusic
    
    
    9
    
    
    
    9
    
    
    
    0
    
    
    
    0
    %
    
    
    26
    
    
    
    25
    
    
    
    1
    
    
    
    4
    %Other
    
    
    840
    
    
    
    824
    
    
    
    16
    
    
    
    2
    %
    
    
    1,844
    
    
    
    1,822
    
    
    
    22
    
    
    
    1
    %Total
    
    $
    877
    
    
    $
    860
    
    
    $
    17
    
    
    
    2
    %
    
    $
    1,916
    
    
    $
    1,892
    
    
    $
    24
    
    
    
    1
    %
  Income/ (Loss) from operations ($ in thousands)
 3 Months Ended June 30,
    
    
    6 Months Ended June 30,2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Incr (Decr)
    
    
    %Notation
    
    $
    1,180
    
    
    $
    1,227
    
    
    
    ($47
    )
    
    
    -4
    %
    
    $
    2,477
    
    
    $
    2,674
    
    
    
    ($197
    )
    
    
    -7
    %SmartMusic
    
    
    61
    
    
    
    2
    
    
    
    59
    
    
    
    2950
    %
    
    
    47
    
    
    
    (102
    )
    
    
    149
    
    
    
    -146
    %Other
    
    
    (1,349
    )
    
    
    (1,338
    )
    
    
    (11
    )
    
    
    1
    %
    
    
    (2,843
    )
    
    
    (2,838
    )
    
    
    (5
    )
    
    
    0
    %Total
    
    
    ($108
    )
    
    
    ($109
    )
    
    $
    1
    
    
    
    -1
    %
    
    
    ($319
    )
    
    
    ($266
    )
    
    
    ($53
    )
    
    
    20
    %
  15




---



##### Table of Contents



Net Loss
  Liquidity and Capital Resources
      16




---



##### 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 anticipated product release dates; our
expectations regarding our target business model and future subscription growth for SmartMusic; our
intent to expand SmartMusic repertoire, particularly with respect to solo literature; our plans
relating to marketing and sales efforts; our belief that updates to the SmartMusic and Gradebook
interface will result in subscription growth, higher retention rates and improved renewals; 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; 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




---



##### Table of Contents



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. (Removed and Reserved)
 
 Item 5. Other Information
  
 Item 6. Exhibits
  18




---



##### Table of Contents



SIGNATURES
  Date: August 6, 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




---



##### Table of Contents



EXHIBIT INDEX
 Form 10-Q
 The quarterly period ended June 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