UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
0-26192
(Commission File Number)
MAKEMUSIC, INC.
(Exact name of registrant as specified in its charter)
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Minnesota
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41-1716250
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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7615 Golden Triangle Drive, Suite M
Eden Prairie, Minnesota 55344-3848
(Address of principal executive offices)
(952) 937-9611
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o
NO
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller Reporting Company
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(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
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No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of July 27, 2009 there were 4,697,445 shares of Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
MakeMusic, Inc.
Condensed Balance Sheets
(In thousands of U.S. dollars, except share and per share data)
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June 30,
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2009
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December 31,
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(Unaudited)
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2008
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Assets
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Current assets:
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Cash and cash equivalents
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$
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6,096
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$
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6,592
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Accounts receivable (net of allowance of $26 and $44 in
2009 and 2008, respectively)
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1,157
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1,397
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Inventories
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506
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465
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Prepaid expenses and other current assets
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320
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293
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Total current assets
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8,079
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8,747
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Property and equipment, net
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643
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673
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Capitalized software products, net
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2,702
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2,631
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Goodwill
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3,630
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3,630
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Other non-current assets
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7
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10
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Total assets
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$
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15,061
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$
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15,691
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Liabilities and Shareholders Equity
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Current liabilities:
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Current portion of capital lease obligations
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$
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58
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$
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56
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Accounts payable
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341
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373
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Accrued compensation
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1,225
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1,170
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Other accrued liabilities
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217
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272
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Post contract support
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146
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146
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Reserve for product returns
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396
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382
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Current portion of deferred rent
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31
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30
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Deferred revenue
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1,802
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2,336
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Total current liabilities
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4,216
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4,765
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Capital lease obligations, net of current portion
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61
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76
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Deferred rent, net of current portion
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24
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39
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Shareholders equity:
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Common stock, $0.01 par value:
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Authorized shares 10,000,000
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Issued and outstanding shares 4,659,645 and 4,635,529
in 2009 and 2008, respectively
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47
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46
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Additional paid-in capital
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65,900
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65,716
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Accumulated deficit
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(55,187
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)
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(54,951
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Total shareholders equity
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10,760
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10,811
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Total liabilities and shareholders equity
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$
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15,061
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$
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15,691
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See Notes to Condensed Financial Statements
3
MakeMusic, Inc.
Condensed Statements of Operations
(In thousands of U.S. dollars, except share and per share data)
(Unaudited)
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3 Months
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6 Months
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Ended June 30,
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Ended June 30,
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2009
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2008
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2009
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2008
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Notation revenue
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$
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2,293
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$
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1,625
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$
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4,820
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$
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4,182
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SmartMusic revenue
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1,051
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859
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2,207
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1,740
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Other revenue
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130
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117
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288
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301
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NET REVENUE
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3,474
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2,601
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7,315
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6,223
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COST OF REVENUES
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475
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442
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1,031
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949
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GROSS PROFIT
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2,999
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2,159
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6,284
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5,274
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OPERATING EXPENSES:
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Development expenses
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1,229
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1,171
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2,508
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2,284
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Selling and marketing expenses
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1,019
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965
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2,150
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2,140
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General and administrative expenses
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860
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855
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1,892
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1,840
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Total operating expenses
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3,108
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2,991
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6,550
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6,264
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LOSS FROM OPERATIONS
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(109
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(832
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(266
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(990
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Other, net
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18
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27
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32
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36
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Net loss before income tax
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(91
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(805
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(234
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(954
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Income tax expense
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0
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6
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2
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6
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Net loss
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$
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(91
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$
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(811
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$
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(236
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$
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(960
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Loss per common share:
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Basic and diluted
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$
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(0.02
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$
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(0.17
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$
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(0.05
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$
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(0.21
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)
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Weighted average common shares outstanding:
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Basic and diluted
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4,661,923
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4,634,529
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4,653,215
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4,605,993
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See Notes to Condensed Financial Statements
4
MakeMusic, Inc.
Condensed Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
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6 Months
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Ended June 30,
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2009
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2008
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Cash flows from operating activities
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Net loss
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$
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(236
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)
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$
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(960
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)
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Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
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Depreciation and amortization
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464
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404
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Noncash stock based compensation
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185
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231
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Net changes in assets and liabilities:
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Accounts receivable
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240
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436
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Inventories
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(41
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)
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(119
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)
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Prepaid expenses and other current assets
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(27
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)
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(76
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)
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Accounts payable
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(32
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)
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(14
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Accrued liabilities and product returns
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0
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45
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Deferred revenue
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(534
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)
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(235
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)
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Net cash provided by (used in) in operating activities
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19
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(288
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)
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Cash flows from investing activities
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Purchases of property and equipment
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(175
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)
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(279
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)
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Capitalized development and other intangibles
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(327
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)
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(997
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)
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Net cash used in investing activities
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(502
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)
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(1,276
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)
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Cash flows from financing activities
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Proceeds from stock options and warrants exercised
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0
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297
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Payments on capital leases
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(13
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)
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(28
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)
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Net cash (used in) provided by financing activities
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(13
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269
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Net decrease in cash and cash equivalents
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(496
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)
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(1,295
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)
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Cash and cash equivalents, beginning of period
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6,592
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6,041
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Cash and cash equivalents, end of period
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$
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6,096
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$
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4,746
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Supplemental disclosure of cash flow information
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Interest paid
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$
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5
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$
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7
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Income taxes paid
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2
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6
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See Notes to Condensed Financial Statements
5
MakeMusic, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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, 2009 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 through
August 11, 2009 (the financial statement issue date). 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
Companys most recent Annual Report on Form 10-K.
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, 2009 and 2008 because the effect
is anti-dilutive.
Note 3
Income Tax Expense.
We did not record a benefit for income tax in the three and six
months ended June 30, 2009 and 2008 as the provision was offset by
an increase in the deferred tax asset valuation allowance. Due to
the uncertainty regarding the realization of our federal deferred
income tax assets and specifically the net operating loss
carry-forwards, we have recorded a valuation allowance against our
deferred income tax assets for 2009 and 2008.
We have implemented Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109 (FIN
48), which clarifies the accounting for uncertainty in tax positions. FIN 48 provides that
the tax effects from an uncertain tax position can be recognized in our financial statements
only if the position is more likely than not of being sustained on audit, based on the
technical merits of the position. As of June 30, 2009 and June 30, 2008, the company had
recognized no liability related to interest or penalties on any uncertain tax positions.
The total amount of unrecognized tax benefits that, if recognized, would affect our
effective tax rate is zero, because we currently have a full reserve against our
unrecognized tax benefits.
As of June 30, 2009 the FIN 48 reserve included within the deferred tax valuation allowance
was $3,142,000. There was no additional FIN 48 reserve recorded in the six months ended June
30, 2009.
As of June 30, 2009 and June 30, 2008, 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 June 30, 2009 are 2004-2008.
Note 4
Stock-Based Compensation.
The MakeMusic, Inc. 2003 Equity Incentive Plan, as amended (the
2003 Plan), 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 in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008 for additional information
related to our stock-based compensation plans.
We account for stock-based compensation arrangements with our employees and directors in
accordance with SFAS No. 123 (revised), Share-Based Payment (SFAS No. 123R). Under the
fair value
6
recognition provisions of SFAS No. 123R we measure stock-based compensation cost at the grant date based
on the fair value of the award and recognize the compensation expense over the requisite
service period, which is generally the vesting period. For the three months ended June 30,
2009 and 2008, we recognized $27,000 and $92,000, respectively, and for the six months ended
June 30, 2009 and 2008, we recognized $185,000 and $231,000, 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.
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June 30,
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June 30,
|
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2009
|
|
2008
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Black-Scholes Model:
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|
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Risk-free interest rate
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1.0
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%
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3.0
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%
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Expected life, in years
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4.1
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3.5
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Expected volatility
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75.4
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%
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67.2
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%
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Dividend yield
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0.00
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%
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0.00
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%
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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 managements 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.
Equity Award Activity
The following table represents stock option and restricted stock activity under the 2003
Plan for the six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
2003 Plan
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Reserved
|
|
|
Restricted
|
|
|
2003 Plan
|
|
|
Option
|
|
|
Remaining
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Option Shares
|
|
|
Exercise Price
|
|
|
Contract Life
|
|
At December 31, 2008
|
|
|
635,663
|
|
|
|
|
|
|
|
659,855
|
|
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(116,644
|
)
|
|
|
26,644
|
|
|
|
90,000
|
|
|
$
|
3.30
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
(15,800
|
)
|
|
$
|
4.88
|
|
|
|
|
|
Cancelled
|
|
|
34,528
|
|
|
|
(2,528
|
)
|
|
|
(32,000
|
)
|
|
$
|
5.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
|
553,547
|
|
|
|
24,116
|
|
|
|
702,055
|
|
|
$
|
4.28
|
|
|
2.3 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Exercisable at June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
474,090
|
|
|
$
|
4.03
|
|
|
1.4 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009, the intrinsic value of options outstanding was $303,000, and the
aggregate intrinsic value of options exercisable was $267,000.
At June 30, 2009, there was $322,000 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 June 30, 2009, there was $78,000 of unrecognized compensation cost
related to the issuance of restricted stock which is expected to be recognized over a
weighted-average period of 2.5 years.
7
Note 5
New Accounting Pronouncements.
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 141
(revised 2007), Business Combinations (SFAS 141R), which replaces FASB Statement No.
141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities
assumed, any non- controlling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements that will enable users to evaluate the nature and
financial effects of the business combination. SFAS 141R is effective as of the beginning of
an entitys fiscal year beginning January 1, 2009. The company adopted FASB Statement 141R
during the first quarter of 2009. There has been no impact on the companys financial
statements as a result of adoption.
Note 6
Segment Reporting.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS
131), requires an enterprise to report segment information in the same way that management
internally organizes its business for assessing performance and making decisions regarding
the allocation of resources.
Effective January 1, 2009, MakeMusic began reporting results of operations by two unique
reportable segments, Notation and SmartMusic. Historically, net revenue has been reported
separately for these two product lines. However, direct and operating costs had not been
previously assessed or reported by segment and therefore prior year comparative costs are
not reported.
The Notation segment includes the design, development and sales and marketing for the Finale
family of music notation software 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.
Unallocated expenses are reported in the reconciliation of the segment totals to
consolidated totals as Other items. These expenses include costs related to general and
administrative and business systems functions performed that are not directly attributable
to a particular segment.
MakeMusic does not allocate its balance sheet assets by segment because such information is
not available nor is it used by the chief operating decision maker. Therefore, information
relating to segment assets is not presented.
The following table presents results of operations by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 3 Months Ended June 30, 2009
|
|
|
For the 6 Months Ended June 30, 2009
|
|
|
|
Notation
|
|
|
SmartMusic
|
|
|
Other
|
|
|
Total
|
|
|
Notation
|
|
|
SmartMusic
|
|
|
Other
|
|
|
Total
|
|
NET REVENUE
|
|
$
|
2,393
|
|
|
$
|
1,081
|
|
|
$
|
0
|
|
|
$
|
3,474
|
|
|
$
|
5,009
|
|
|
$
|
2,306
|
|
|
$
|
0
|
|
|
$
|
7,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
196
|
|
|
|
279
|
|
|
|
0
|
|
|
|
475
|
|
|
|
377
|
|
|
|
654
|
|
|
|
0
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,197
|
|
|
|
802
|
|
|
|
0
|
|
|
|
2,999
|
|
|
|
4,632
|
|
|
|
1,652
|
|
|
|
0
|
|
|
|
6,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expenses
|
|
|
488
|
|
|
|
441
|
|
|
|
300
|
|
|
|
1,229
|
|
|
|
975
|
|
|
|
923
|
|
|
|
609
|
|
|
|
2,508
|
|
Selling and marketing expenses
|
|
|
455
|
|
|
|
350
|
|
|
|
214
|
|
|
|
1,019
|
|
|
|
937
|
|
|
|
806
|
|
|
|
407
|
|
|
|
2,150
|
|
General and administrative
expenses
|
|
|
27
|
|
|
|
9
|
|
|
|
824
|
|
|
|
860
|
|
|
|
46
|
|
|
|
25
|
|
|
|
1,822
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
970
|
|
|
|
800
|
|
|
|
1,338
|
|
|
|
3,108
|
|
|
|
1,958
|
|
|
|
1,754
|
|
|
|
2,838
|
|
|
|
6,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss) from Operations
|
|
|
1,227
|
|
|
|
2
|
|
|
|
(1,338
|
)
|
|
|
(109
|
)
|
|
|
2,674
|
|
|
|
(102
|
)
|
|
|
(2,838
|
)
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income/(Expense)
|
|
|
0
|
|
|
|
0
|
|
|
|
18
|
|
|
|
18
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
$
|
1,227
|
|
|
$
|
2
|
|
|
$
|
(1,320
|
)
|
|
$
|
(91
|
)
|
|
$
|
2,674
|
|
|
$
|
(102
|
)
|
|
$
|
(2,808
|
)
|
|
$
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Note 7
Goodwill.
In 2009, as a result of the reorganization of its internal reporting structure, MakeMusic
now has two reporting units. Accordingly, effective January 1, 2009, MakeMusic assigned all
goodwill ($3.63 million) to the Notation reporting unit.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
MakeMusics mission is to develop and market solutions that transform how music is composed,
taught, learned and performed. This is accomplished by:
|
|
|
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.
|
MakeMusic develops and markets two product lines, SmartMusic
®
learning software for
band, jazz ensemble, orchestra and choir, and Finale
®
music notation software. We
believe these innovative products that reinforce each others features and competitiveness, will
allow us to continue to achieve positive annual operating results. The well-established Finale
family of music notation software products provides a solid base business that generates cash and
has a large customer database. Music notation software is a niche business since only a small
percentage of musicians ever notate music.
The first six months of 2009 resulted in continued sales growth for SmartMusic and increased
sales for notation products due to the second quarter release of Finale 2010. Overall, we achieved
an 18% increase in net revenue over the first six months of 2008. Gross margin percentages
increased to 86% in the first six months of 2009 compared to 85% in the first six months of 2008,
primarily due to increased notation revenues. Operating expenses increased 5% in the first six
months of 2009, primarily due to increased business systems expenses as a result of increased
staffing and expansion of our systems infrastructure to support our anticipated SmartMusic growth.
As a result of the factors mentioned, net loss in the first six months of 2009 was $236,000,
compared to a net loss of $960,000 for the same period last year.
We believe our greatest growth potential lies with SmartMusic, a subscription-based product
directed toward the very large and constantly renewing market of music students and their teachers.
SmartMusic combines a software application, a library of thousands of titles and skill-development
exercises and a web service to provide students with a compelling experience and teachers with a
comprehensive solution.
SmartMusic software enhances and transforms the hours spent practicing by putting students
inside a professional band, orchestra or choir so that they can hear how the music is supposed to
be performed and how their part fits in. This makes practicing much more fun, causing students to
practice longer and more often. SmartMusic provides access to an ever-increasing library of band,
jazz ensemble and orchestra literature. Each title includes individual part assignments authored by
respected educators, thereby providing music teachers with a time-saving solution for preparing
selections for their next performance. SmartMusic also offers a rich variety of effective practice
tools that make practice time more efficient and productive. The combination of making practice
time more fun and productive leads to rapid student skill-development, increased student
confidence, higher student retention and stronger music programs.
In April 2007, we introduced SmartMusic Impact
®
, a web-based grade book that is
included with each teacher subscription. We have renamed this feature SmartMusic
Gradebook
to more clearly define the capability of the product. SmartMusic Gradebook is
designed to manage student assignments, grades and recordings while
9
documenting the progress of
each student and assessing student achievement. This provides music educators (and
students) with exciting new possibilities to assist in developing strong music programs and
complying with accountability requirements. SmartMusic Gradebook enables teachers to easily send
assignments to each of their students. Students complete the assignment on their home computer
provided that they have a SmartMusic subscription, or on a school computer equipped with
SmartMusic. Submitted assignments are automatically graded and posted in the teachers SmartMusic
Gradebook thereby providing teachers with the visible means for measuring student achievement.
Our sales organization focuses on direct school district sales activities and site licenses
are sold which provide discounts for volume purchases. As of June 30, 2009 we slightly modified the
definition of our SmartMusic site licenses. In order to continue to qualify for the volume purchase
discount, a purchasing entity must have purchased 100 or more subscriptions upon the one-year
anniversary of the site license agreement date. If they did not achieve the 100 subscription
level, they no longer qualify for the discount and the site license is not counted in our reported
totals. The effect of these changes represents a slight reduction, but more accurate count of the
monthly total site license numbers. The updated SmartMusic monthly site license totals are shown in
the SmartMusic metrics table below.
In addition to tracking the total number of subscriptions, we track the number of teachers who
use SmartMusic Gradebook and the number of those teachers who are using SmartMusic Gradebook to
deliver and manage student assignments to fifty students or more (formerly known as Impact
teachers, now Gradebook teachers). As of June 30, 2009, we reported 874 Gradebook teachers
compared to 538 Gradebook teachers as of June 30, 2008.
The following table illustrates our quarterly SmartMusic metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun-08
|
|
Sep-08
|
|
Dec-08
|
|
Mar-09
|
|
Jun-09
|
Total Subscriptions
|
|
|
95,632
|
|
|
|
98,119
|
|
|
|
106,584
|
|
|
|
110,318
|
|
|
|
111,059
|
|
Educator Accounts
|
|
|
8,165
|
|
|
|
9,165
|
|
|
|
9,185
|
|
|
|
9,091
|
|
|
|
8,616
|
|
Educators who have issued assignments*
|
|
|
1,282
|
|
|
|
827
|
|
|
|
1,436
|
|
|
|
1,874
|
|
|
|
1,994
|
|
Gradebook Teachers *
|
|
|
538
|
|
|
|
247
|
|
|
|
601
|
|
|
|
829
|
|
|
|
874
|
|
Site Licenses
|
|
|
97
|
|
|
|
178
|
|
|
|
203
|
|
|
|
208
|
|
|
|
203
|
|
Site License Educator Subscriptions
|
|
|
871
|
|
|
|
1,145
|
|
|
|
1,341
|
|
|
|
1,461
|
|
|
|
1,417
|
|
|
|
|
*
|
|
Annual statistics that restart on July 1 of each year reflecting the start of the school-year cycle
|
Educator accounts experienced a 20% growth rate during the 2008 fiscal year which creates
the potential for growth in student subscriptions. However, this growth depends upon teachers
increasing their use of SmartMusic Gradebook to set up their classes, enroll students and issue
assignments. To date, there are not enough teachers that have actively utilized SmartMusic
Gradebook to reflect a significant growth rate in student subscriptions, which has contributed to
student subscriptions lagging behind our expectations. Current statistics relating to the use of
SmartMusic Gradebook and the number of subscriptions associated with each educator are as follows:
|
|
|
|
|
|
|
|
|
|
|
Avg. Subscriptions without
|
|
Avg. Subscriptions with
|
Gradebook Category
|
|
Site License
|
|
Site License
|
No classes established
|
|
|
28
|
|
|
|
88
|
|
Classes, but no assignments
|
|
|
41
|
|
|
|
98
|
|
Classes with frequent assignments
|
|
|
60
|
|
|
|
115
|
|
The SmartMusic target business model is based on music educators integrating SmartMusic into
their teaching and using the SmartMusic Gradebook to issue frequent assignments, which we believe
would result in an increase in student subscriptions. As stated above, 1,994, or 23%, of the
teachers who have purchased SmartMusic have utilized SmartMusic Gradebook, and those teachers have
113,985 students receiving SmartMusic assignments. The total student subscriptions associated with
these Gradebook accounts are 46,363, an average of 23.3 per Gradebook account.
10
To accelerate the adoption of this target business model and address the lower-than-expected
subscription rates in 2008, in the first quarter of 2009 we hired a sales director and increased
the focus of our direct sales force on existing SmartMusic teachers that have not yet utilized
Gradebook in their curriculum. In addition, our development efforts are focused on improving and
simplifying the SmartMusic purchase processes, Gradebook class set-up, student enrollment and
SmartMusic assignments. The overall objective is to make these processes easy and intuitive for
both teachers and students. These product enhancements were included in SmartMusic 2010, which was
released on July 28, 2009.
During the second quarter of 2009, we completed research that identified the universe of
schools matching the ideal SmartMusic profile. The profile was determined by evaluating our
existing customer base and determining the demographic profile of the schools that have fully
adopted SmartMusic in their music programs. The total number of schools which matched the profile
was approximately 17,000 (representing 31% of schools with instrumental music programs). To allow
for targeted marketing and sales efforts to these profile schools, we are integrating this data
into our newly-implemented Customer Relationship Management system (CRM) and also plan to utilize
information associated with the current federal stimulus program in our marketing and sales
initiatives.
In the third quarter of 2008, we began tracking new versus renewed SmartMusic subscriptions.
The following table illustrates the net new SmartMusic subscription data for the quarters ended
September 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
Quarter End
|
|
Beginning
|
|
New
|
|
Renewed
|
|
Subscriptions
|
|
Quarter End
|
|
Net New
|
Date
|
|
Subscriptions
|
|
Subscriptions
|
|
Subscriptions
|
|
Ended
|
|
Subscriptions
|
|
Subscriptions
|
9/30/2008
|
|
95,632
|
|
20,347
|
|
20,017
|
|
37,877
|
|
98,119
|
|
2,487
|
12/31/2008
|
|
98,119
|
|
17,907
|
|
17,942
|
|
27,384
|
|
106,584
|
|
8,465
|
3/31/2009
|
|
106,584
|
|
10,609
|
|
12,241
|
|
19,116
|
|
110,318
|
|
3,734
|
6/30/2009
|
|
110,318
|
|
5,256
|
|
11,350
|
|
15,865
|
|
111,059
|
|
741
|
We define renewed subscriptions as those subscriptions that customers purchase within the
two-month period after their prior subscription ended. Because of changes to the start of school
from year to year as well as fluctuations in the date that music teachers implement their
curriculum, we commonly see subscribers that have a delay of up to two months in renewing their
subscription. As a result, we believe that using the above definition of a renewal more accurately
reflects the renewal rate for SmartMusic subscriptions. We intend to report SmartMusic subscription
renewals on a quarterly basis.
We have achieved positive cash flow from operations for the last five years, including the
most recent year ended December 31, 2008. Our quarterly results will fluctuate as a result of the
cyclicality of the education market. Due to current economic conditions and concerns over school
budgets, we are cautious regarding our ability to continue annual profitability. However, with
increased revenues and, in particular, the growth in SmartMusic subscriptions, plus improvements in
operational efficiency over the last few years and the establishment of contingency plans to be
implemented if our revenue and cash flow objectives are not met, we feel that we can continue to
achieve positive operating cash flow on an annual basis in the future.
In 2009, we began reporting results of operations by two unique reportable segments, Notation
and SmartMusic. Historically, net revenue has been reported separately for these two product lines.
However, direct and operating costs had not been previously assessed or reported by segment.
Therefore, prior year comparative costs are not available and operating costs by segment are not
discussed in this Managements Discussion and Analysis of Financial Condition and Results of
Operations. For further information on segment reporting, refer to Note 6 to the financial
statements appearing in Part I, Item 1 of this report.
Critical Accounting Policies
In our Form 10-K filed with the Securities and Exchange Commission for the year ended December
31, 2008, we identified critical accounting policies and estimates for our business. There have
been no material changes to our application of critical accounting policies and estimates since
December 31, 2008, and we are incorporating
11
our previous disclosure herein by reference, except
that we are restating our critical accounting policy regarding impairment of goodwill as follows:
Impairment of goodwill.
We review goodwill for potential impairment at least annually or when
events or changes in circumstances indicate the carrying value of goodwill may be impaired. We
compare the fair value of each reporting unit (effective January 2009), as computed primarily by
applying a combination of income or market valuation approaches, to its book carrying value,
including goodwill (step 1). If the fair value exceeds the carrying value, no further work is
required and no impairment loss is recognized. If the carrying value exceeds the fair value, the
goodwill of the reporting unit is potentially impaired and we would then complete step 2 to arrive
at an implied fair value of the goodwill, by deducting the fair value of all tangible and
intangible net assets (including unrecognized intangible assets) and liabilities of the reporting
unit from the fair value of the reporting unit. If the implied fair value of the goodwill is less
than the reported value of goodwill, we would recognize an impairment loss equal to the difference.
The assessment of potential impairment requires certain judgments and estimates by us, including
the determination of an event indicating impairment, the future cash flows to be generated by
reporting units, the risks associated with those cash flows, and the discount rate to be utilized.
12
Results of Operations
The following table summarizes key operating information for the three and six months ended
June 30, 2009 and 2008.
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3 Months Ended June 30
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6 Months Ended June 30
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Incr
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|
|
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|
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Incr
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|
|
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|
|
2009
|
|
|
2008
|
|
|
(Decr)
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|
|
%
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|
|
2009
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|
|
2008
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|
|
(Decr)
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|
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%
|
|
|
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($ in thousands)
|
|
Notation revenue
|
|
$
|
2,293
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|
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$
|
1,625
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|
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$
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668
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|
|
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41
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%
|
|
$
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4,820
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|
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$
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4,182
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|
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$
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638
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|
|
|
15
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%
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SmartMusic revenue
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|
|
1,051
|
|
|
|
859
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|
|
|
192
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|
|
|
22
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%
|
|
|
2,207
|
|
|
|
1,740
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|
|
|
467
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|
|
|
27
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%
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Other revenue
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|
|
130
|
|
|
|
117
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|
|
|
13
|
|
|
|
11
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%
|
|
|
288
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|
|
|
301
|
|
|
|
(13
|
)
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|
|
-4
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%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Net revenue
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3,474
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|
|
|
2,601
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|
|
|
873
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|
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34
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%
|
|
|
7,315
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|
|
|
6,223
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|
|
|
1,092
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|
|
|
18
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%
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Cost of revenues
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|
|
475
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|
|
|
442
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|
|
|
33
|
|
|
|
7
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%
|
|
|
1,031
|
|
|
|
949
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|
|
|
82
|
|
|
|
9
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Gross profit
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|
|
2,999
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|
|
|
2,159
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|
|
|
840
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|
|
|
39
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%
|
|
|
6,284
|
|
|
|
5,274
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|
|
|
1,010
|
|
|
|
19
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%
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Percentage of net sales
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|
|
86
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%
|
|
|
83
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%
|
|
|
|
|
|
|
|
|
|
|
86
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%
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expense
|
|
|
1,229
|
|
|
|
1,171
|
|
|
|
58
|
|
|
|
5
|
%
|
|
|
2,508
|
|
|
|
2,284
|
|
|
|
224
|
|
|
|
10
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%
|
Selling and marketing
|
|
|
1,019
|
|
|
|
965
|
|
|
|
54
|
|
|
|
6
|
%
|
|
|
2,150
|
|
|
|
2,140
|
|
|
|
10
|
|
|
|
0
|
%
|
General administrative
|
|
|
860
|
|
|
|
855
|
|
|
|
5
|
|
|
|
1
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%
|
|
|
1,892
|
|
|
|
1,840
|
|
|
|
52
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
3,108
|
|
|
|
2,991
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|
|
|
117
|
|
|
|
4
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%
|
|
|
6,550
|
|
|
|
6,264
|
|
|
|
286
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(109
|
)
|
|
|
(832
|
)
|
|
|
723
|
|
|
|
87
|
%
|
|
|
(266
|
)
|
|
|
(990
|
)
|
|
|
724
|
|
|
|
73
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%
|
Other income
|
|
|
18
|
|
|
|
27
|
|
|
|
(9
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)
|
|
|
-33
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%
|
|
|
32
|
|
|
|
36
|
|
|
|
(4
|
)
|
|
|
-11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss before taxes
|
|
$
|
(91
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)
|
|
$
|
(805
|
)
|
|
$
|
714
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|
|
|
89
|
%
|
|
$
|
(234
|
)
|
|
$
|
(954
|
)
|
|
$
|
720
|
|
|
|
75
|
%
|
Income tax provision
|
|
|
0
|
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
100
|
%
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
4
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(91
|
)
|
|
$
|
(811
|
)
|
|
$
|
720
|
|
|
|
89
|
%
|
|
$
|
(236
|
)
|
|
$
|
(960
|
)
|
|
$
|
724
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the three- and six-month periods ended June 30, 2009 to the three- and six-month
periods ended June 30, 2008
Net revenue.
Net revenue increased 34% from $2,601,000 to $3,474,000, when comparing the
three months ended June 30, 2009 and 2008 and increased 18% from $6,223,000 to $7,315,000, when
comparing the six months ended June 30, 2009 and 2008. Revenue increases are due to the continued
sales growth in SmartMusic and the second quarter release of the Finale 2010 upgrade in June 2009.
In 2008 and prior years, the Finale upgrade has been released in the third fiscal quarter. As a
result of the early release, we anticipate that Finale net revenue in the third quarter of 2009
will be below Finale net revenue reported in the third quarter of 2008.
Notation revenue increased by $668,000 to $2,293,000, when comparing the three-month periods
ended June 30, 2009 and 2008 and increased by $638,000 when comparing the six-month periods ending
June 30, 2009 and 2008. Revenue in 2009 increased due to the early release of Finale 2010 on June
3, 2009 and sales of Finale NotePad
®
, which we began charging for in October 2008. Prior
to the release of Finale 2010, notation revenue had been declining due to reductions in our channel
sales due to economic conditions. In addition, the first six months of 2008 included revenue from a
$133,000 Finale site license, whereas there was no comparable sale in 2009.
SmartMusic revenue increased by $192,000 to $1,051,000, when comparing the three-month periods
ended June 30, 2009 and 2008 and increased by $467,000 to $2,207,000, when comparing the six-month
periods ended June 30, 2009 and 2008. The increase in revenue reflects the continued growth of the
SmartMusic product that was originally launched in 2001 and the SmartMusic Gradebook product that
was released in 2007. It also reflects the success of our SmartMusic site license program which
encourages school district deployment of SmartMusic student subscriptions and our direct sales
force which focuses on district level sales. As of June 30, 2009 there were 203 site licenses for
SmartMusic with average subscriptions per license of 137.
13
SmartMusic is sold to schools, students and music organization members on a subscription
basis. Revenue for these subscriptions is recognized over the life of the subscription which is
typically 12 months. Total earned subscription revenue was $941,000 for the three months ended June
30, 2009, a 26% increase over subscription revenue of $748,000 during the same period in 2008.
Subscription revenue was $1,852,000 for the six months ended June 30, 2009, a 28% increase over
subscription revenue of $1,449,000 during the same period in 2008. These increases are due to
increases in the total number of subscriptions as well as a price increase in July 2008 where
teacher subscriptions increased from $100 to $130 and student subscriptions increased from $25 to
$30. Total unearned SmartMusic subscription revenue (deferred revenue) was $1,699,000 as of June
30, 2009, an increase of $325,000, or 24%, over the balance at June 30, 2008. Deferred SmartMusic
revenue represents the future revenue to be recorded on current subscriptions. Unearned SmartMusic
subscription revenue decreased $531,000 compared to the balance of $2,230,000 at December 31, 2008
due to the seasonality of the purchase cycle of subscriptions and the subscription revenue that was
recognized during the first six months of 2009.
SmartMusic has shown sustained growth since its launch. At June 30, 2009, 8,616 educators have
purchased SmartMusic, an increase of 6% over the 8,165 educators that had purchased it as of June
30, 2008. Total SmartMusic subscriptions as of June 30, 2009 number 111,059, representing a net
gain of 15,427, or 16% over the June 30, 2008 subscription count of 95,632.
SmartMusic Gradebook is a web-based service that is designed to manage student assignments,
recordings and grades while documenting the progress of each student and assessing student
achievement. We track the number of teachers who use SmartMusic Gradebook and the number of those
teachers who are using SmartMusic Gradebook to deliver and manage student assignments to 50 or more
students (formerly known as Impact teachers, now Gradebook teachers). As of June 30, 2009, we
had 874 Gradebook teachers with an average of 37 student subscriptions per teacher, compared to 538
Gradebook teachers with an average of 27 student subscriptions per teacher as of June 30, 2008.
This is an annual statistic, counting only teachers who have issued assignments to 50 or more
students during a school fiscal year. The number of Gradebook teachers restarts at zero on July 1
of each year to correspond with the start of the school year. Therefore, we gained 874 SmartMusic
Gradebook teachers during the 2008/2009 school year. However, we believe that not enough teachers
have actively utilized SmartMusic Gradebook to reflect a significant growth rate in student
subscriptions and we continue to focus specific marketing activities on SmartMusic and SmartMusic
Gradebook, including hiring a sales director in the first quarter of 2009, introducing training
materials to teachers and students that simplify getting started with our products and profiling
our customer base to allow targeted marketing and sales activities towards schools that match the
demographic profiles.. Additionally we intend to increase the focus of our direct sales force on
existing SmartMusic teachers that have not yet utilized the SmartMusic Gradebook in their
curriculum and anticipate continued growth in the number of new subscriptions in the future.
Many SmartMusic customers, especially new customers, also purchase accessories
(primarily microphones and foot pedals) that are used with the software. Revenue for the sales of
accessories, included in the SmartMusic revenue category, for the three months ended June 30, 2009
was $98,000, which was $12,000, or 11%, less than revenue of $110,000 for SmartMusic accessories in
the three months ended June 30, 2008. Sales of accessories for the six months ended June 30, 2009
were $274,000, which was $17,000 or 6% less than revenue of $291,000 for SmartMusic accessories in
the six months ended June 30, 2008. These decreases are due to fewer new SmartMusic subscribers in
the three and six-month periods ended June 30, 2009 when compared to the same period in 2008.
During the three- and six-month periods ended June 30, 2009, total subscriptions increased 741 and
4,475, respectively, compared to an increase of 2,856 and 8,731, respectively, of total
subscriptions during the three- and six-month periods ended June 30, 2008.
Gross profit.
Gross profit in the three-month period ended June 30, 2009 increased by
$840,000, to $2,999,000 compared to the three-month period ended June 30, 2008. The increase in
gross profit for the three months ended June 30, 2009 is primarily a result of the increase in net
revenue due to the second quarter 2009 release of the Finale upgrade. Gross margin as a percentage
of sales was comparable at 86% and 83%, respectively, for the three months ended June 30, 2009 and
2008.
Gross profit in the six-month period ended June 30, 2009 increased by $1,010,000 to
$6,284,000, compared to the six-month period ended June 30, 2008. The increase in gross profit for
the six months ended June 30, 2009 is a result of the increase in revenues due to the second
quarter 2009 release of the Finale upgrade. Gross margin as a percentage of sales was generally
comparable at 86% and 85% for the six months ended June 30, 2009 and 2008, respectively.
Repertoire development amortization as a percentage of SmartMusic revenue was comparable at 12%
14
for
each of the six-month periods ended June 30, 2009 and 2008. We expect amortization related to
repertoire development to increase as we add repertoire to SmartMusic in the second half of the
year, including the addition of over 300 new large ensemble titles that were included with the
release of SmartMusic 2010 on July 28, 2009. Large ensemble titles included in SmartMusic are
amortized over a five-year period.
Development expense.
Development expenses increased 5% to $1,229,000 from $1,171,000, when
comparing the three months ended June 30, 2009 and 2008 and increased 10% to $2,508,000 from
$2,284,000, when comparing the six months ended June 30, 2009 and 2008. Development expenses
consist primarily of internal payroll, payments to independent contractors and related expenses for
the development and maintenance of our Finale notation, SmartMusic and SmartMusic Gradebook
products as well as non-capitalized SmartMusic repertoire development, business systems and quality
assurance. Personnel and contract labor costs increased from the first half of 2009 compared to the
same period in 2008 due to staff increases that management believes were necessary in order to
achieve numerous product development goals related to the simplification of SmartMusic user
interface, enrollment and purchase processes. Additionally, in June 2008 we completed a server
co-location project and expansion of our infrastructure to support our anticipated SmartMusic
growth. We anticipate increased development costs in 2009 due to the annualized impact of the
increased headcount additions in 2008 and early 2009 and ongoing expenses related to our
infrastructure expansion.
Selling and marketing expense.
Selling and marketing expenses primarily consist of marketing,
advertising and promotion expenses, business development and customer service activities and
payroll. Sales and marketing expenses increased 6% to $1,019,000 from $965,000, when comparing the
three months ended June 30, 2009 and 2008 and were comparable at $2,150,000 and $2,140,000 during
the six months ended June 30, 2009 and 2008, respectively. The increase in expenses is primarily
due to costs relating to the departure of our Chief Marketing Officer in the second quarter of 2009
and hiring of our Education Sales Director. We are currently recruiting for a senior vice president
of Marketing and anticipate sales and marketing expenses for future months in 2009 to be comparable
to those in 2008.
General and administrative expense.
General and administrative expenses consist primarily of
payroll and related expenses for executive and administrative personnel, professional services,
facility costs, amortization of certain intangible assets with finite lives, bad debt and other
general corporate expenses. General and administrative expenses increased 1% to $860,000 during the
three months ended June 30, 2009, compared to $855,000 for the same period of 2008, and increased
3% to $1,892,000 during the six months ended June 30, 2009, compared to $1,840,000 for the same
period of 2008. General and administrative costs increased primarily as a result of standard annual
increases in health insurance premiums and sales tax expense which had not been collected from our
customers in certain states, partially offset by decreases in payroll and personnel expenses.
Operating loss.
Loss from operations decreased to $109,000 for the three months ended June
30, 2009 compared to a loss from operations of $832,000 for the three months ended June 30, 2008.
Loss from operations for the six months ended June 30, 2009 decreased to $266,000 from a loss of
$990,000 for the six months ended June 30, 2008. Our operating performance improved due to the
release of the Finale upgrade in the second quarter of 2009 and the continued improved performance
of our SmartMusic products, offset in part by the increased development, selling and marketing, and
general and administrative costs noted above, when compared to the same periods last year.
The Notation segment reported operating income of $2,674,000 for the first six months of 2009,
whereas the SmartMusic segment reported an operating loss of $102,000. We reported other costs of
$2,808,000 which are primarily general and administrative and are not allocated by segment. Prior
year comparative costs were not reported or assessed for direct and operating costs by segment and
as such, operating income or loss by segment is not available on a comparative basis.
Net loss
. Net loss in the three months ended June 30, 2009 decreased to $91,000, or $0.02 per
basic and diluted share, compared to net loss of $811,000, or $0.17 per basic and diluted share, in
the three months ended June 30, 2008. Net loss in the six months ended June 30, 2009 decreased to
$236,000, or $0.05 per basic and diluted share,
compared to a net loss of $960,000, or $0.21 per basic and diluted share, in the six months
ended June 30, 2008. The decrease in net loss was due mainly to the same factors noted above.
Liquidity and capital resources.
Net cash provided by operating activities was $19,000 for
the six months ended June 30, 2009, compared to $288,000 of net cash used by operating activities
in the six months ended June 30,
15
2008. The decrease in cash used in the first six months of 2009
compared to the same period in 2008 is primarily the result of the decrease in net loss and the
decline in the number of net new SmartMusic subscriptions, which reduced deferred revenue. Net new
subscriptions in the first six months of 2009 were 4,475 compared to 8,731 in the first six months
of 2008. This reduction in the number of net new subscriptions may result in reduced future
SmartMusic revenue unless subscription increases occur during the remainder of 2009.
Net cash used in investing activities was $502,000 for the six months ended June 30, 2009,
compared to $1,276,000 cash used in investing activities for the comparable period of 2008. The
decrease is primarily due to the decrease of capitalization of software development, primarily for
repertoire development. Our spending on repertoire development has declined due to reducing the
overall number of titles being developed, shifting from band to orchestra titles that have fewer
parts and are therefore less expensive, and moving engraving work in-house from external
contractors.
Net cash used by financing activities was $13,000 in the first six months of 2009, compared to
net cash provided by financing activities of $269,000 in the six months of 2008. During the first
six months of 2008, $297,000 was received for stock option and warrant exercises compared to $0 in
the first six months of 2009. We expect cash provided from financing activities to continue to be
lower in 2009 due to the fact that substantially all of our outstanding warrants were exercised or
expired in 2008 and the relatively low intrinsic value of options outstanding at June 30, 2009.
Cash and cash equivalents as of June 30, 2009 was $6,096,000 compared to $4,746,000 as of June
30, 2008. The increase in cash is due to our net income reported for the year ended December 31,
2008 and the reduced net loss reported for the six months ended June 30, 2009. Our quarterly
revenues and operating cash flows are typically seasonal, with the first and second quarters being
historically lower than the third and fourth quarters. This seasonal pattern is primarily due to
timing of the upgrade releases of Finale and timing of customer purchases of new SmartMusic
subscriptions, which increase significantly during the fall back to school period and school budget
cycles. This seasonal pattern has shifted somewhat in 2009 due to timing of the upgrade release of
Finale in the second quarter, which has historically occurred in the third quarter.
Management believes that we currently have sufficient cash to finance operations for the
foreseeable future. If we do not meet our anticipated future revenue levels, management is
committed to taking actions necessary to ensure the conservation of adequate cash to continue to
finance our operations. Due to current economic conditions, we have established contingency plans
that we will implement if certain revenue and cash flow objectives are not met, which we believe
will be adequate to maintain positive cash flow.
16
|
|
|
Item 4T.
|
|
Controls and Procedures
|
(a)
Evaluation of disclosure controls and procedures
. Our Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covering this report.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures are effective to provide reasonable assurance that
information required to be disclosed in the reports that are filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified by the
Securities and Exchange Commissions rules and forms and that our disclosure controls and
procedures are designed to ensure that information required to be disclosed in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our management including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b)
Changes in internal controls
. There were no changes in our internal controls over financial
reporting that occurred during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial reporting.
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. Managements 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 future cash flows from
operations; our beliefs relating to the sufficiency of managements contingency plans; our
expectations regarding our target business model and future subscription growth for SmartMusic; our
anticipated product release dates; our plans relating to marketing efforts and our ability to
provide assistance associated with federal stimulus programs; our anticipated development costs and
sales and marketing expenses; our expectation that amortization will increase as we add additional
products and repertoire to SmartMusic; and our beliefs relating to adequacy of capital resources.
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 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 risks 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
PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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None.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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There were no sales of unregistered equity securities during the quarter ended June
30, 2009.
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Item 3.
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Defaults Upon Senior Securities
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None.
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Item 4.
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Submission of Matters to a Vote of Security Holders
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The annual meeting of the Companys shareholders was held on Wednesday, May 20, 2009. Proxies
for the annual meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act
of 1934. Of the 4,662,173 shares of common stock outstanding and entitled to vote at the meeting,
3,532,003 shares were represented at the meeting.
The following describes the matters considered by the shareholders at the annual meeting, as
well as the results of the votes cast at the meeting:
(a) To elect seven directors of MakeMusic to serve until the next annual meeting of
shareholders and until their successors shall have been duly elected and qualified.
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NOMINEE
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FOR
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WITHHELD
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Jeffrey A. Koch
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3,361,904
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|
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170,099
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Ronald B. Raup
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3,503,562
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28,441
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Michael Cahr
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|
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3,225,309
|
|
|
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306,694
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Keith A. Fenhaus
|
|
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3,195,259
|
|
|
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336,744
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|
Robert B. Morrison
|
|
|
3,195,214
|
|
|
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336,789
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|
Graham Richmond
|
|
|
3,195,259
|
|
|
|
336,744
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Michael Skinner
|
|
|
3,195,259
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|
|
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336,744
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(b) To ratify the appointment of McGladrey & Pullen, LLP as our independent registered public
accounting firm for the year ending December 31, 2009.
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FOR
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AGAINST
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ABSTAIN
|
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BROKER NON-VOTE
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3,522,283
|
|
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9,720
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0
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|
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0
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|
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Item 5.
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Other Information
|
As previously disclosed in Item 5 of our Report on Form 10-Q for the quarter ended March 31,
2009 (the First Quarter Report), the Compensation Committee of the Board of Directors adopted an
Executive Incentive Compensation Plan on March 2, 2009 and amended such plan on May 5, 2009. The
Executive Incentive Compensation Plan was attached to the First Quarter Report as Exhibit 10.2.
As also previously disclosed in Item 5 of the First Quarter Report, the Board of Directors,
based on the recommendation of the Compensation Committee, approved employment agreements for our
Chief Executive Officer and Chief Financial Officer. The employment agreements were attached to the
First Quarter Report as Exhibits 10.3 and 10.4.
See the attached exhibit index.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: August 11, 2009
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MAKEMUSIC, INC.
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By:
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/s/ Ronald B. Raup
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Ronald B. Raup, Chief Executive Officer
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(Principal Executive Officer)
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And:
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/s/ Karen L. VanDerBosch
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Karen L. VanDerBosch, Chief Financial Officer
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(Principal Financial Officer)
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19
EXHIBIT INDEX
Form 10-Q
The quarterly period ended June 30, 2009
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Exhibit No.
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|
Description
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|
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10.1
|
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Executive Incentive Compensation Plan, as amended May 5, 2009
incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2009.
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10.2
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|
Employment Agreement dated May 8, 2009 between the Registrant and
Ronald B. Raup incorporated by reference to Exhibit 10.3 to the
Registrants Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2009.
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|
|
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10.3
|
|
Employment Agreement dated May 8, 2009 between the Registrant and
Karen L. VanDerBosch incorporated by reference to Exhibit 10.4 to
the Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2009.
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31.1*
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Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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31.2*
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Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
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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.
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