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 March 31, 2011
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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
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(I.R.S. Employer
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Incorporation or Organization)
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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
o
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 a 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 April 29, 2011 there were 4,859,644 shares of Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
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Item 1.
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Condensed Financial Statements.
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MakeMusic, Inc.
Condensed Balance Sheets
(In thousands of U.S. dollars, except share data)
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March 31,
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December 31,
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2011
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2010
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(Unaudited)
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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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10,079
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$
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11,532
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Accounts receivable (net of allowance of $15 and $20 in
2011 and 2010, respectively)
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1,340
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1,238
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Inventories
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164
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201
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Deferred income taxes, net
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2,786
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2,786
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Prepaid expenses and other current assets
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427
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252
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Total current assets
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14,796
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16,009
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Property and equipment, net
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308
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342
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Capitalized software products, net
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2,367
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2,424
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Goodwill
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3,630
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3,630
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Long term deferred income taxes, net
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388
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214
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Other non-current assets
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2
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2
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Total assets
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$
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21,491
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$
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22,621
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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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11
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$
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25
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Accounts payable
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380
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489
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Accrued compensation
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863
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1,372
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Other accrued expenses
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433
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307
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Post contract support
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150
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150
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Reserve for product returns
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480
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380
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Current portion of deferred revenue
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3,227
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3,603
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Total current liabilities
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5,544
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6,326
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Capital lease obligations, net of current portion
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3
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4
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Deferred revenue, net of current portion
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90
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96
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Shareholders equity:
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Common stock, $0.01 par value:
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Authorized shares 10,000,000
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Issued and outstanding shares 4,852,572 and 4,895,983
in 2011 and 2010, respectively
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49
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49
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Additional paid-in capital
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66,471
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66,632
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Accumulated deficit
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(50,666
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)
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(50,486
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Total shareholders equity
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15,854
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16,195
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Total liabilities and shareholders equity
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$
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21,491
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$
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22,621
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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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Ended March 31,
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2011
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2010
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Notation revenue
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$
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2,334
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$
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2,568
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SmartMusic revenue
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1,660
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1,432
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NET REVENUE
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3,994
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4,000
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COST OF REVENUES
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594
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651
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GROSS PROFIT
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3,400
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3,349
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OPERATING EXPENSES:
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Development expenses
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1,215
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1,322
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Selling and marketing expenses
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1,233
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1,199
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General and administrative expenses
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1,108
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1,038
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Patent litigation accrual
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225
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0
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Total operating expenses
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3,781
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3,559
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LOSS FROM OPERATIONS
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(381
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(210
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Interest, net
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27
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26
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Net loss before income tax
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(354
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(184
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Income tax benefit
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(174
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(67
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Net loss
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$
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(180
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$
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(117
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Loss per common share:
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Basic and diluted
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$
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(0.04
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$
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(0.02
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Weighted average common shares outstanding:
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Basic and diluted
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4,885,616
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4,768,095
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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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3 Months
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Ended March 31,
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2011
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2010
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Cash flows from operating activities
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Net loss
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$
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(180
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$
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(117
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Adjustments to reconcile net loss to net cash
used by operating activities:
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Depreciation and amortization
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277
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256
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Deferred income taxes, net
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(174
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(98
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Share based compensation
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133
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160
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Net changes in operating assets and liabilities:
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Accounts receivable
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(102
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(98
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Inventories
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37
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99
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Prepaid expenses and other current assets
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(175
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(107
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Accounts payable
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(109
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(282
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Accrued expenses and product returns
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(268
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(310
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Deferred revenue
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(382
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(188
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Net cash used by operating activities
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(943
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(685
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Cash flows from investing activities
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Purchases of property and equipment
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(44
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(68
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Capitalized development and other intangibles
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(142
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(105
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Net cash used in investing activities
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(186
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)
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(173
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Cash flows from financing activities
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Proceeds from stock options exercised
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0
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6
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Payments on redemption of stock options
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(18
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0
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Repurchase of common stock
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(291
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0
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Payments on capital leases
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(15
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(15
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Net cash used in financing activities
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(324
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)
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(9
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Net decrease in cash and cash equivalents
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(1,453
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)
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(867
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Cash and cash equivalents, beginning of period
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11,532
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8,943
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Cash and cash equivalents, end of period
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$
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10,079
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$
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8,076
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Supplemental disclosure of cash flow information
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Interest paid
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$
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1
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$
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2
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Income taxes paid
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116
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97
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See Notes to Condensed Financial Statements
5
MakeMusic, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 1
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Accounting Policies.
The information
furnished in this report is unaudited but reflects all adjustments
that are necessary, in the opinion of management, for a fair
statement of the results for the interim period. The operating
results for three months ended March 31, 2011 are not necessarily
indicative of the operating results to be expected for the full
fiscal year. In preparing the accompanying financial statements,
management has evaluated subsequent events and has determined no
events have occurred that require disclosure. The Company believes
that although the disclosures contained herein are adequate to
prevent the information presented from being misleading, these
statements should be read in conjunction with the Companys most
recent Form 10-K.
Accounting
Pronouncements
. In September 2009, the FASB issued ASU No.
2009-13, Revenue Recognition (ASC 605): Multiple-Deliverable
Revenue Arrangements a consensus of the FASB Emerging Issues
Task Force, which addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for
products or services separately rather than as a combined unit and
requires expanded revenue recognition policy disclosures. This
amendment addresses how to separate deliverables and how to measure
and allocate arrangement consideration to one or more units of
accounting. As noted above, our adoption of ASU No. 2009-13,
effective January 1, 2011, had no impact on our consolidated
financial condition or results of operations.
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Note 2
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Net Loss Per Share.
Net loss per share was calculated by dividing
the net loss by the weighted average number of shares outstanding
during the period. The effect of options and warrants are excluded
for the three-month periods ended March 31, 2011 and 2010 because
the effect is anti-dilutive.
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Note 3
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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.
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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.
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As of March 31, 2011 and March 31, 2010, there are no open positions for which the
unrecognized tax benefits will significantly increase or decrease during the next twelve
months. Additionally, tax years still open for examination by Federal and major state
agencies as of March 31, 2011 are 2006-2010.
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As of December 31, 2010, we had U.S. net operating loss carry-forwards of approximately
$15,771,000, Minnesota net operating loss carry-forwards of $5,946,000, and research and
development tax credits of $1,164,000 and Minnesota research and development tax credits of
$490,000. The losses and tax credits are carried forward for federal and state corporate
income taxes and may be used to reduce future taxes.
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Significant management judgment is required in determining any valuation allowance recorded
against our net deferred tax assets. Prior to the fourth quarter of 2009, we remained
uncertain on how economic conditions would impact our back to school selling cycle and
annual financial results. Based upon our strong performance in the fourth quarter of 2009,
our operating results in recent years and an assessment of our expected future results of
operations, we determined in 2009 that it had become more likely than not that we would
realize a portion of our net deferred tax assets. As a result, during the fourth quarter of
2009, we reduced our valuation allowance by $2,564,000, representing the approximate
estimated tax on three years of forecasted net income. During 2010, we maintained our policy
established in the fourth quarter of
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2009 of recording a deferred tax asset representing tax on three years of forecasted income. We
continue to believe that this policy is prudent, as the likelihood of technological and
industry developments limit our ability to forecast income beyond three years. Due to
uncertainties related to our ability to utilize the balance of our deferred tax assets, as
of March 31, 2011 we have maintained a valuation allowance of $5,690,000. The additional
future potential decrease of the valuation allowance is dependent on our future ability to
realize the deferred tax assets that are affected by our future profitability. Should the
remaining $5,690,000 valuation allowance be reversed in the future, a liability of
$3,175,000 would have to be established for uncertain tax positions.
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We recorded a benefit for income taxes of $174,000 for the three months ended March 31,
2011 and a benefit for income taxes of $67,000 for the three months ended March 31, 2010.
The effective tax rate for the current-year period was 49% and was impacted by a $35,000
refundable Minnesota R&D tax credit.
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In addition, future utilization of NOL carry-forwards is subject to certain limitations
under Section 382 of the Internal Revenue Code. This section generally relates to a 50
percent change in ownership of a company over a three-year period. The acquisition of
additional shares by a greater than 5% shareholder in January 2007 resulted in an ownership
change under Section 382. Accordingly, our ability to use NOLs in the future may be
limited.
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Note 4
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Stock-Based Compensation.
The MakeMusic, Inc. 2003 Equity Incentive Plan (the 2003 Plan),
as amended, reserves a total of 1,500,000 shares of our common stock for issuance under stock
options, restricted stock, performance awards and stock appreciation rights. The 2003 Plan is
administered by the Compensation Committee of the Board of Directors, which recommends to the
Board persons eligible to receive awards and the number of shares and/or options subject to
each award, the terms, conditions, performance measures, and other provisions of the award.
Readers should refer to Note 5 of our financial statements on Form 10-K for the fiscal year
ended December 31, 2010 for additional information related to our stock-based compensation
plans.
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We measure stock-based compensation cost at the grant date based on the fair value of the
award and recognize the compensation expense over the requisite service period, which is
generally the vesting period. For the three months ended March 31, 2011 and 2010, we
recognized $70,000 and $108,000, respectively, of expense related to stock based
compensation.
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Stock Options
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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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March 31,
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March 31,
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2011
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2010
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Black-Scholes Model:
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Risk-free interest rate
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0.80
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%
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1.98
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%
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Expected life, in years
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2.6
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4.4
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Expected volatility
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73.76
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%
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79.30
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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.
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7
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The following table represents stock option and restricted stock activity under the 2003
Plan for the three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Reserved
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
Remaining
|
|
|
|
for Future
|
|
|
2003 Plan
|
|
|
Plan Option
|
|
|
Exercise
|
|
|
Contract
|
|
|
|
Grant
|
|
|
Restricted Shares
|
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
At December 31, 2010
|
|
|
361,103
|
|
|
|
80,049
|
|
|
|
504,536
|
|
|
$
|
5.51
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(58,714
|
)
|
|
|
15,381
|
|
|
|
43,333
|
|
|
$
|
5.01
|
|
|
|
|
|
Expired
|
|
|
101,664
|
|
|
|
|
|
|
|
(101,664
|
)
|
|
$
|
6.00
|
|
|
|
|
|
Cancelled
|
|
|
15,920
|
|
|
|
|
|
|
|
(15,920
|
)
|
|
$
|
4.22
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(14,882
|
)
|
|
$
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011
|
|
|
419,973
|
|
|
|
95,430
|
|
|
|
415,403
|
|
|
$
|
5.42
|
|
|
4.3 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Exercisable at
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
191,153
|
|
|
$
|
5.97
|
|
|
3.2 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011 the aggregate intrinsic value of options outstanding was $148,000,
and the aggregate intrinsic value of options exercisable was $88,000.
|
|
|
At March 31, 2011 there was $310,000 of unrecognized compensation cost related to nonvested
share-based option payments which is expected to be recognized over a weighted-average
period of 1.6 years. At March 31, 2011 there was $53,000 of unrecognized compensation cost
related to the issuance of restricted stock which is expected to be recognized over a
weighted-average period of 2.0 years.
|
Note 5
|
|
Segment Reporting.
|
|
|
MakeMusic reports results of operations by two unique reportable segments, Notation and
SmartMusic.
|
|
|
The Notation segment includes the design, development and sales and marketing of music
notation software in the Finale family of products.
|
|
|
The SmartMusic segment includes the design, development, amortization of capitalized song
title development and sales and marketing of the subscription-based SmartMusic product line
and related accessories.
|
|
|
The remaining activities are included in Other. These are unallocated expenses which
include costs related to general and administrative and business systems functions that are
not directly attributable to a particular segment. Unallocated expenses are reported in the
reconciliation of the segment totals to consolidated totals as Other items.
|
|
|
Segment assets or other balance sheet information are not prepared or presented to
management. Therefore, information relating to segment assets is not presented.
|
|
|
The following table presents results of operations by reportable segment:
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 3 Months Ended March 31, 2011
|
|
|
For the 3 Months Ended March 31, 2010
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
Notation
|
|
|
SmartMusic
|
|
|
Other
|
|
|
Total
|
|
|
Notation
|
|
|
SmartMusic
|
|
|
Other
|
|
|
Total
|
|
NET REVENUE
|
|
$
|
2,334
|
|
|
$
|
1,660
|
|
|
$
|
0
|
|
|
$
|
3,994
|
|
|
$
|
2,568
|
|
|
$
|
1,432
|
|
|
$
|
0
|
|
|
$
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
148
|
|
|
|
446
|
|
|
|
0
|
|
|
|
594
|
|
|
|
214
|
|
|
|
437
|
|
|
|
0
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,186
|
|
|
|
1,214
|
|
|
|
0
|
|
|
|
3,400
|
|
|
|
2,354
|
|
|
|
995
|
|
|
|
0
|
|
|
|
3,349
|
|
Percentage of Net Revenue
|
|
|
94
|
%
|
|
|
73
|
%
|
|
|
0
|
%
|
|
|
85
|
%
|
|
|
92
|
%
|
|
|
69
|
%
|
|
|
0
|
%
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expenses
|
|
|
517
|
|
|
|
426
|
|
|
|
272
|
|
|
|
1,215
|
|
|
|
536
|
|
|
|
533
|
|
|
|
253
|
|
|
|
1,322
|
|
Selling and marketing expenses
|
|
|
386
|
|
|
|
614
|
|
|
|
233
|
|
|
|
1,233
|
|
|
|
503
|
|
|
|
459
|
|
|
|
237
|
|
|
|
1,199
|
|
General and administrative
expenses
|
|
|
19
|
|
|
|
19
|
|
|
|
1,070
|
|
|
|
1,108
|
|
|
|
18
|
|
|
|
17
|
|
|
|
1,003
|
|
|
|
1,038
|
|
Patent litigation accrual
|
|
|
0
|
|
|
|
0
|
|
|
|
225
|
|
|
|
225
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
922
|
|
|
|
1,059
|
|
|
|
1,800
|
|
|
|
3,781
|
|
|
|
1,057
|
|
|
|
1,009
|
|
|
|
1,493
|
|
|
|
3,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss) from Operations
|
|
|
1,264
|
|
|
|
155
|
|
|
|
(1,800
|
)
|
|
|
(381
|
)
|
|
|
1,297
|
|
|
|
(14
|
)
|
|
|
(1,493
|
)
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income/(Expense)
|
|
|
0
|
|
|
|
0
|
|
|
|
201
|
|
|
|
201
|
|
|
|
0
|
|
|
|
0
|
|
|
|
93
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
$
|
1,264
|
|
|
$
|
155
|
|
|
$
|
(1,599
|
)
|
|
$
|
(180
|
)
|
|
$
|
1,297
|
|
|
$
|
(14
|
)
|
|
$
|
(1,400
|
)
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill represents the cost in excess of fair value of the tangible and identified
intangible assets of businesses acquired. In accordance with ASC 350, Intangibles
Goodwill and Other, (formerly SFAS 142) goodwill is not amortized but rather is reviewed for
impairment annually in the fourth quarter of MakeMusics fiscal year, or more often if
indicators of impairment exist.
|
|
|
|
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 voice and Finale
®
music notation software. We believe
these innovative products reinforce each others features and competitiveness and will allow us to
continue to achieve positive operating results. The well-established Finale family of music
notation software products provides a solid base business that serves a large customer base and
generates consistent revenue through sales of new products, annual upgrades and trade-up campaigns.
During the first quarter of 2011, net revenues for MakeMusic were $3,994,000 which was
comparable to $4,000,000 reported in the first quarter 2010. SmartMusic revenue grew 16% due to our
year over year subscription growth from 139,363 to 164,836 and price increases implemented in the
third quarter of 2010, from $130 to $140 for teacher subscriptions and from $30 to $36 for student
subscriptions. Notation revenue decreased 9% overall, which
9
we attribute primarily to reductions in our sales to distribution partners and direct sales of
our Finale academic products. Our distribution partner sales were impacted by the earthquake in
Japan on March 11, 2011 and we anticipate further reductions on a year-over-year basis on our sales
in Japan during 2011. At this time, the full impact on our sales is still indeterminable. Gross
margin percentages were comparable at 85% in 2011 and 84% in 2010. Operating expenses increased in
2011, due to expenses relating to a patent infringement accrual, increased selling and marketing
expenses due to expansion in our direct educational sales force, and increases in general and
administrative expenses primarily due to recruiting initiatives for our Chief Executive Officer
position. Development expenses decreased primarily due to personnel costs relating to our open
Chief Technology Officer position. We anticipate finalizing the selection of our Chief Executive
Officer in the second quarter of 2011 with the Chief Technology Officer position to be filled
thereafter. Our net loss before taxes in the first quarter of 2011 was $354,000 compared to
$184,000 in 2010. The tax benefit in first quarter of 2011 was $174,000 compared to $67,000 in the
first quarter of 2010. As a result of the factors mentioned, we reported net loss of approximately
$180,000 in 2011 compared to net loss of $117,000 in 2010.
As a result of our recent strategic product planning research, we believe that there is an
opportunity for us to develop new products that address the way todays consumers want to interact
with their music. In order to take advantage of these potential growth opportunities, we are
implementing an investment program for our notation business that will be in addition to our normal
maintenance-level expenditures. This program will be carried out over the medium term and will
include investments in potential new products, in a repositioning of our current products to take
advantage of newer technologies and in building a common technology platform for all of our
products.
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 music titles,
skill-development exercises and a web service to provide students with a compelling experience and
teachers with the realistic means to document the progress of every student.
SmartMusic software enhances and transforms the hours spent practicing by putting students
inside a professional band or orchestra so that they can hear how the music is supposed to be
performed and how their part fits in. This makes practicing much more engaging, 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 engaging and productive leads to rapid student skill-development, increased student
confidence, higher student retention, and stronger music programs. We anticipate releasing
SmartMusic 2012 in the summer of 2011 which will provide vocal assessment for the first time.
Choral directors and general music teachers will have access to the same award-winning interactive
technology that has been available to band and orchestra directors.
SmartMusic Gradebook is a web-based grade book that is included with each teacher subscription
designed to manage student assignments, grades, and recordings while 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. In the second quarter
of 2011, we expect to launch a mobile app called SmartMusic Inbox. SmartMusic Inbox is an app for
Apple/iOS and Android devices which allows SmartMusic teachers to listen to and grade assignments
at any time and at any place.
Our educational sales organization focuses on direct school district sales aimed at the 17,000
schools who match our ideal demographic profile. We sell site agreements that provide discounts
for volume purchases. The SmartMusic quarterly site agreement 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 (Gradebook Teachers). As of March
31, 2011, we reported 1,416 Gradebook teachers compared to 1,156 Gradebook teachers as of March 31,
2010.
10
The following table illustrates our quarterly SmartMusic metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar-10
|
|
Jun-10
|
|
Sep-10
|
|
Dec-10
|
|
Mar-11
|
Total Subscriptions
|
|
|
139,363
|
|
|
|
143,095
|
|
|
|
158,574
|
|
|
|
162,189
|
|
|
|
164,836
|
|
Educator Accounts
|
|
|
9,368
|
|
|
|
9,073
|
|
|
|
9,312
|
|
|
|
9,402
|
|
|
|
9,727
|
|
Educators who have issued
assignments*
|
|
|
2,340
|
|
|
|
2,379
|
|
|
|
1,085
|
|
|
|
2,040
|
|
|
|
2,680
|
|
Gradebook Teachers *
|
|
|
1,156
|
|
|
|
1,172
|
|
|
|
415
|
|
|
|
1,019
|
|
|
|
1,416
|
|
Site Agreements
|
|
|
356
|
|
|
|
372
|
|
|
|
466
|
|
|
|
485
|
|
|
|
506
|
|
Site Agreement Educator Subscriptions
|
|
|
2,458
|
|
|
|
2,532
|
|
|
|
3,403
|
|
|
|
3,343
|
|
|
|
3,537
|
|
|
|
|
*
|
|
Annual statistics that restart on July 1 of each year reflecting the start of the school-year cycle
|
The SmartMusic target business model is to have music educators increase their use of
SmartMusic Gradebook to set up their classes, enroll students and issue assignments, which we
believe would result in an increase in student subscriptions. As stated above, 2,680, or 28%, of
the teachers who have purchased SmartMusic have utilized SmartMusic Gradebook.
We increased the size of our educational sales force from 5 to 7 and our marketing staff from
8 to 9 in 2010 to strengthen our strategic sales and marketing initiatives. In the first quarter of
2011, we increased our sales force to 9 and expect to expand to 12 in the second quarter of 2011.
We are aggressively investing in expanding our sales force to increase the penetration level of our
target market. In addition, we have engaged in development efforts focused on improving and
simplifying the SmartMusic purchase process, 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. As a result of the increased focus of our direct sales force and
product enhancements, site agreement educator subscriptions increased 44%, from 2,458 at March 31,
2010, to 3,537 at March 31, 2011.
We believe that our technological investments in SmartMusic have created a digital pipeline
between our growing subscriber base of more than 160,000 and the music publishers who provide
SmartMusic content. This growing platform is a strategic asset for MakeMusic and we are focusing on
finding additional ways to monetize it.
The following tables illustrate the total net new SmartMusic subscriptions and educator net
new subscriptions for each quarter during the year ended December 31, 2010 and for the quarter
ended March 31, 2011:
All Subscribers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
Quarter
|
|
Beginning
|
|
New
|
|
Renewed
|
|
Renewal
|
|
Subscriptions
|
|
Quarter End
|
|
Net New
|
End Date
|
|
Subscriptions
|
|
Subscriptions
|
|
Subscriptions
|
|
Rate
|
|
Ended
|
|
Subscriptions
|
|
Subscriptions
|
3/31/2010
|
|
|
133,782
|
|
|
|
11,590
|
|
|
|
15,330
|
|
|
|
72
|
%
|
|
|
21,339
|
|
|
|
139,363
|
|
|
|
5,581
|
|
6/30/2010
|
|
|
139,363
|
|
|
|
5,391
|
|
|
|
14,069
|
|
|
|
89
|
%
|
|
|
15,728
|
|
|
|
143,095
|
|
|
|
3,732
|
|
9/30/2010
|
|
|
143,095
|
|
|
|
23,826
|
|
|
|
47,383
|
|
|
|
85
|
%
|
|
|
55,730
|
|
|
|
158,574
|
|
|
|
15,479
|
|
12/31/2010
|
|
|
158,574
|
|
|
|
20,453
|
|
|
|
29,065
|
|
|
|
63
|
%
|
|
|
45,903
|
|
|
|
162,189
|
|
|
|
3,615
|
|
3/31/2011
|
|
|
162,189
|
|
|
|
13,322
|
|
|
|
14,579
|
|
|
|
58
|
%
|
|
|
25,254
|
|
|
|
164,836
|
|
|
|
2,647
|
|
Educators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
Quarter
|
|
Beginning
|
|
New
|
|
Renewed
|
|
Renewal
|
|
Subscriptions
|
|
Quarter End
|
|
Net New
|
End Date
|
|
Subscriptions
|
|
Subscriptions
|
|
Subscriptions
|
|
Rate
|
|
Ended
|
|
Subscriptions
|
|
Subscriptions
|
3/31/2010
|
|
|
11,667
|
|
|
|
728
|
|
|
|
2,087
|
|
|
|
80
|
%
|
|
|
2,606
|
|
|
|
11,876
|
|
|
|
209
|
|
6/30/2010
|
|
|
11,876
|
|
|
|
500
|
|
|
|
1,837
|
|
|
|
72
|
%
|
|
|
2,561
|
|
|
|
11,652
|
|
|
|
(224
|
)
|
9/30/2010
|
|
|
11,652
|
|
|
|
1,434
|
|
|
|
3,440
|
|
|
|
87
|
%
|
|
|
3,932
|
|
|
|
12,594
|
|
|
|
942
|
|
12/31/2010
|
|
|
12,594
|
|
|
|
873
|
|
|
|
2,192
|
|
|
|
66
|
%
|
|
|
3,299
|
|
|
|
12,360
|
|
|
|
(234
|
)
|
3/31/2011
|
|
|
12,360
|
|
|
|
741
|
|
|
|
2,026
|
|
|
|
77
|
%
|
|
|
2,618
|
|
|
|
12,509
|
|
|
|
149
|
|
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.
11
In the first quarter of 2011, total SmartMusic renewal rates declined when compared to prior
quarters. However, the educator renewal rate improved to 77% in the first quarter from 66% in the
fourth quarter of 2010. We believe that the educator renewal rate is a better indicator of renewal
patterns than student renewal rates since some students leave music programs every year and many of
the students who are continuing in the music program transition from one grade level to the next
(e.g. from middle school programs to high school programs).
We have achieved positive cash flow from operations for the last six years, including the most
recent year ended December 31, 2010. Our quarterly results will fluctuate as a result of the
seasonality of the education market. Due to current economic conditions and concerns over school
budgets, we remain cautious regarding our future financial projections. However, we expect that our
revenues and, in particular, continued growth in SmartMusic subscriptions, plus recent improvements
in operational efficiency and the availability of contingency plans to be implemented if our
revenue and cash flow objectives are not met, will allow us to continue to achieve positive
operating cash flow for the next twelve months.
In our Form 10-K filed with the Securities and Exchange Commission for the year ended December
31, 2010, we identified critical accounting policies and estimates for our business that we are
incorporating herein by reference.
12
Results of Operations
Comparison of the three-month period ended March 31, 2011 to the three-month period ended March 31,
2010
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
|
($ in thousands)
|
|
|
|
2011
|
|
|
2010
|
|
|
Incr (Decr)
|
|
|
%
|
|
Notation
|
|
$
|
2,334
|
|
|
$
|
2,568
|
|
|
$
|
(234
|
)
|
|
|
-9
|
%
|
SmartMusic
|
|
|
1,660
|
|
|
|
1,432
|
|
|
|
228
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,994
|
|
|
$
|
4,000
|
|
|
$
|
(6
|
)
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue for the three months ended March 31, 2011 was comparable to net revenue for the
three months ended March 31, 2010.
Notation revenue decreased by $234,000 to $2,334,000 when comparing the three-month periods
ended March 31, 2011 and 2010. Decreases during the quarter were due to reductions in our channel
sales with the largest decline by our distributor in Japan. Additionally, there was a decline in
our direct sales of our Finale Academic products.
SmartMusic revenue for the quarter ended March 31, 2011, was $1,660,000, an increase of
$228,000, or 16%, over the quarter ended March 31, 2010. The increase in revenue is due to the
growth of total SmartMusic subscriptions and price increases implemented in the third quarter of
2010, offset by a decrease in accessory and CD revenue. SmartMusic subscriptions have increased due
in part to the success of our site agreement program which encourages school district deployment of
SmartMusic student subscriptions and our direct sales force which focuses on district level sales.
As of March 31, 2011, there were 506 site agreements for SmartMusic. 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 SmartMusic
subscription revenue for the three-month period ended March 31, 2011 was $1,430,000, an increase of
$299,000, or 26%, over the three-month period ended March 31, 2010. This increase was due to the
increase in the total number of subscriptions and the 2010 price increases. Total unearned
SmartMusic subscription revenue (deferred revenue) was $3,256,000 as of March 31, 2011, an increase
of $623,000, or 24%, over the balance at March 31, 2010 and a decrease of $377,000, or 10%,
compared to the balance of $3,633,000 at December 31, 2010. Deferred SmartMusic revenue represents
the future revenue to be recorded on current subscriptions and fluctuates based on new subscription
sales, the total number of subscriptions and the remaining life of those subscriptions.
SmartMusic has shown sustained growth since its launch. More than 9,727 educators have
purchased SmartMusic, an increase of 4% over the 9,368 educators that had purchased it as of March
31, 2010. Total SmartMusic subscriptions as of March 31, 2011 number 164,836, representing a net
gain of 25,473, or 18% over the March 31, 2010 subscription count of 139,363.
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 teachers that use SmartMusic as well as the number of those teachers who are
using SmartMusic Gradebook to deliver and manage student assignments to 50 or more students
(Gradebook teachers). As of March 31, 2011, we had 1,416 SmartMusic Gradebook teachers compared to
1,156 Gradebook teachers at March 31, 2010. 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.
Many SmartMusic customers, especially new customers, also purchase accessories (primarily
microphones) that are used with the software. Revenue for the sales of accessories, included in the
SmartMusic revenue category, for the quarter ended March 31, 2011 was $157,000, which was a
decrease of $15,000, or 9%, from the revenue of $173,000 for SmartMusic accessories in the quarter
ended March 31, 2010. This slight decline is primarily due to a decrease in the number of net new
subscriptions added during quarter ended March 31, 2011 as compared to the number of net new
subscriptions added during the same period of the prior year.
13
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
|
($ in thousands)
|
|
|
|
2011
|
|
|
2010
|
|
|
Incr (Decr)
|
|
|
%
|
|
Notation
|
|
$
|
2,186
|
|
|
$
|
2,354
|
|
|
$
|
(168
|
)
|
|
|
-7
|
%
|
SmartMusic
|
|
|
1,214
|
|
|
|
995
|
|
|
|
219
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,400
|
|
|
$
|
3,349
|
|
|
$
|
51
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit in the quarter ended March 31, 2011 increased by $51,000, to $3,400,000, compared
to the quarter ended March 31, 2010. Gross profit for notation decreased for the three months ended
March 31, 2011 due to the decrease in notation revenue. The increase in SmartMusic gross profit for
the three months ended March 31, 2011 is a result of the increase in SmartMusic revenue and
slightly improved accessory margins.
Cost of revenue includes product costs, royalties paid to publishers, amortization of
capitalized software development costs for repertoire and SmartMusic Gradebook software development
costs, shipping, and credit card fees. Capitalized SmartMusic repertoire added into SmartMusic is
amortized over a five-year period and repertoire development amortization as a percentage of
SmartMusic revenue was 12% for each of the first quarters in 2011 and 2010. We expect amortization
related to repertoire development to increase as we continue to add repertoire to SmartMusic. Gross
margin as a percentage of sales was 85% for the three months ended March 31, 2011 and 84% for the
three months ended March 31, 2010.
Development expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
|
($ in thousands)
|
|
|
|
2011
|
|
|
2010
|
|
|
Incr (Decr)
|
|
|
%
|
|
Notation
|
|
$
|
517
|
|
|
$
|
536
|
|
|
$
|
(19
|
)
|
|
|
-4
|
%
|
SmartMusic
|
|
|
426
|
|
|
|
533
|
|
|
|
(107
|
)
|
|
|
-20
|
%
|
Other
|
|
|
272
|
|
|
|
253
|
|
|
|
19
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,215
|
|
|
$
|
1,322
|
|
|
$
|
(107
|
)
|
|
|
-8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expenses decreased 8% to $1,215,000, from $1,322,000, when comparing the three
months ended March 31, 2011 and 2010. Development expenses consist primarily of internal payroll,
payments to independent contractors and related expenses for the development and maintenance of our
Finale notation, SmartMusic and SmartMusic Gradebook products as well as non-capitalized SmartMusic
repertoire development, business systems and quality assurance. Notation development expenses
decreased due to reduced personnel costs relating to the open Chief Technology Officer position.
SmartMusic development expenses decreased primarily due to personnel costs relating to the open
Chief Technology Officer position and a reduction in consulting expenses relating to the SmartMusic
user-interface design firm engaged in 2010. During the quarter ended March 31, 2011, 76 new
SmartMusic large ensemble band, jazz ensemble, and orchestra titles with pre-authored assignments
were released, compared to 48 new titles in the quarter ended March 31, 2010.
Selling and marketing expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
|
($ in thousands)
|
|
|
|
2011
|
|
|
2010
|
|
|
Incr
|
|
|
% Change
|
|
Notation
|
|
$
|
386
|
|
|
$
|
503
|
|
|
$
|
(117
|
)
|
|
|
-23
|
%
|
SmartMusic
|
|
|
614
|
|
|
|
459
|
|
|
|
155
|
|
|
|
34
|
%
|
Other
|
|
|
233
|
|
|
|
237
|
|
|
|
(4
|
)
|
|
|
-2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,233
|
|
|
$
|
1,199
|
|
|
$
|
34
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 3% to
14
$1,233,000 in the quarter ended March 31, 2011 compared to $1,199,000 for
the quarter ended March 31, 2010. Notation selling and marketing expenses decreased primarily due
to reduced personnel costs allocated to notation. SmartMusic selling and marketing expenses
increased due to increased personnel relating to our strategic sales and marketing initiatives for
SmartMusic.
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
|
($ in thousands)
|
|
|
|
2011
|
|
|
2010
|
|
|
Incr (Decr)
|
|
|
% Change
|
|
Notation
|
|
$
|
19
|
|
|
$
|
18
|
|
|
$
|
1
|
|
|
|
6
|
%
|
SmartMusic
|
|
|
19
|
|
|
|
17
|
|
|
|
2
|
|
|
|
12
|
%
|
Other
|
|
|
1,070
|
|
|
|
1,003
|
|
|
|
67
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,108
|
|
|
$
|
1,038
|
|
|
$
|
70
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 by 7% to $1,108,000 during the first quarter of 2011 compared
to $1,038,000 for the same period of 2010. Other general and administrative costs increased
primarily as a result of recruiting initiatives for the Chief Executive Officer.
Patent litigation accrual
Patent litigation costs of $225,000 were accrued and included in operating expenses during the
quarter ended March 31, 2011. There were no comparable expenses in the first quarter of 2010.
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
|
($ in thousands)
|
|
|
|
2011
|
|
|
2010
|
|
|
Incr (Decr)
|
|
|
% Change
|
|
Notation
|
|
$
|
1,264
|
|
|
$
|
1,297
|
|
|
$
|
(33
|
)
|
|
|
-3
|
%
|
SmartMusic
|
|
|
155
|
|
|
|
(14
|
)
|
|
|
169
|
|
|
|
1,207
|
%
|
Other
|
|
|
(1,800
|
)
|
|
|
(1,493
|
)
|
|
|
(307
|
)
|
|
|
-21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(381
|
)
|
|
$
|
(210
|
)
|
|
$
|
(171
|
)
|
|
|
-81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations decreased by $171,000 to $381,000 for the three months ended March
31, 2011 compared to $210,000 in the three months ended March 31, 2010. We maintained our operating
performance in the first quarter due mainly to the continued performance of our SmartMusic product.
The notation segment results for the first quarter of 2011 reflects a decrease in income from
operations due to lower net revenue, offset by decreased development and selling and marketing
expenses. SmartMusic income from operations improved due to increased SmartMusic revenue and lower
expenses. The increase in the other loss is due to recruiting expenses for our Chief Executive
Officer, the patent litigation accrual and the increase in unallocated sales and marketing
expenses.
Net Loss
Net loss in the first quarter of 2011 was $180,000, or $0.04 per basic and diluted share,
compared to net loss of $117,000, or $0.02 per basic and diluted share, in the first quarter of
2010. The increase in net loss in the first quarter of 2011 is primarily due to litigation expenses
of $225,000 relating to a patent infringement accrual, partially
offset by an increased tax benefit. There were no comparable legal accruals or settlements in
the first quarter of 2010. Payment for this settlement is expected to be made in the second quarter
of 2011. The tax benefit in the first quarter of 2011 was $174,000, compared to a tax benefit of
$67,000 in the first quarter of 2010.
15
Liquidity and capital resources
Net cash used by operating activities was $943,000 for the quarter ended March 31, 2011,
compared to $685,000 of cash used by operating activities in the quarter ended March 31, 2010. The
increase in cash used in the first quarter of 2011 compared to the same period in 2010 is primarily
due to a decrease in our SmartMusic deferred revenue as a result of fewer new subscriptions added
during the quarter when compared to the first quarter of 2010.
Net cash used in investing activities was $186,000 for the quarter ended March 31, 2011,
compared to $173,000 cash used in investing activities for the comparable quarter of 2010. The
increase is primarily due to the increase in capitalization of software development, primarily for
repertoire development. Our spending on repertoire development increased due to 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 $324,000 in the first quarter of 2011 compared to
$9,000 in the first quarter of 2010. The increase in cash used by financing primarily consisted of
$291,000 used to repurchase company shares under the Stock Repurchase Program which was announced
in November 2010. The Stock Repurchase Program was discontinued effective May 6, 2011.
Cash and cash equivalents as of March 31, 2011 was $10,079,000 compared to $8,076,000 as of
March 31, 2010. The increase in cash is due to our net income reported for the year ended December
31, 2010. 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, which in recent years has
occurred in the second or third quarters, and school budget cycles.
We expect that our revenues and, in particular, continued growth in SmartMusic subscriptions,
plus recent improvements in operational efficiency and the availability of contingency plans to be
implemented if our revenue and cash flow objectives are not met, will allow us to continue to
achieve positive operating cash flow for the next twelve months.
16
|
|
|
Item 4.
|
|
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 the synergies that
exist between our two product lines, future operating results, cash flows from operations and
revenue growth from new SmartMusic subscriptions; our expectations, including release dates,
regarding our future product offerings; our expectations regarding recruiting and hiring a Chief
Executive Officer and a Chief Technology Officer; our intent to expand our notation platform; our
expectations regarding our target business model, future subscription growth for SmartMusic and our
ability to leverage the SmartMusic platform; our intent to expand SmartMusic repertoire; our plans
relating to marketing and sales efforts, including staff increases; our belief that updates to the
SmartMusic and Gradebook interface will result in subscription growth and higher retention rates;
our expectation that amortization will increase; our beliefs relating to adequacy of capital
resources; and our beliefs relating to the sufficiency of managements contingency plans.
Forward-looking statements cannot be guaranteed and actual results may vary materially due to the
uncertainties and risks, known and unknown, associated with such statements. MakeMusic cautions
investors that many important factors have affected, and in the future could affect our actual
results of operations and cause such results to differ materially from those anticipated in
forward-looking statements made in this release and elsewhere by MakeMusic or on its behalf. These
factors include, but are not limited to: unforeseen capital demands; the market acceptance of
Finale, SmartMusic, SmartMusic Gradebook and other products; the success of our direct sales
efforts; the success of our initiatives to improve the user interface of our products; the
maintenance of strategic partnerships and customer relationships; our ability to license titles
from music publishers; the effectiveness of, and our ability to implement, our target business
model; our ability to execute strategic development plans with respect to our notation and
SmartMusic segments; our ability to attract and integrate qualified officers; the limited and
fluctuating sales of certain of our products; the intense competition that we face; the rapid
technological changes and obsolescence in software industry; our dependence on key personnel and
the proprietary nature of our technology; other general business and economic conditions (including
changes to discretionary spending by schools and students); and those factors described from time
to time in our reports to the Securities and Exchange Commission (including our Annual Report on
Form 10-K). It is not possible to foresee or identify all factors that could cause actual results
to differ from expected or historic results. As such, investors should not consider any list of
such factors to be an exhaustive statement of all of the risks, uncertainties or potentially
inaccurate assumptions that investors should take into account when making investment decisions.
Shareholders and other readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date on which they are made. We do not intend to update
publicly or revise any forward-looking statements
17
PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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As previously disclosed, on September 14, 2010, a complaint was filed against us by Uniloc
USA, Inc. and Uniloc Singapore Private Limited (collectively Uniloc) in the United States
District Court for the Eastern District of Texas. The complaint alleged infringement of Unilocs
patent for securely registering software and other digital media to prevent illicit copying and
software piracy and seeks a permanent injunction. In addition, Uniloc sought compensatory damages
in an unspecified amount, and interest, costs and expenses associated with the litigation. We are
one of approximately 120 companies that have been similarly sued by Uniloc. MakeMusic entered into
a confidential settlement with Uniloc on April 28, 2011. As part of the settlement, MakeMusic
received a license to the patent in question. Management of MakeMusic has determined that the
settlement will not have a material impact on MakeMusics business, financial condition, or results
of operations. We have accrued $225,000 related to this lawsuit and believe such accrual is
sufficient.
In the ordinary course of business, we may be party to additional legal actions, proceedings,
or claims. Corresponding costs are accrued when it is reasonably possible that loss will be
incurred and the amount can be precisely or reasonably estimated. We are not aware of any actual or
threatened litigation that would have a material adverse effect on its financial condition or
results of operations.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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Unregistered Sales of Equity Securities
There were no sales of unregistered equity securities during the quarter ended March 31,
2011.
Issuer Purchases of Equity Securities
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Total Number of Shares
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Maximum Dollar Value
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Total Number
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Average
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Purchased as Part of
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of Shares that May Yet
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of Shares
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Price Paid
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Publicly Announced
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Be Purchased Under the
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Period
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Purchased(a)
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per Share
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Plans or Programs
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Plans or Programs
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Jan. 1 through Jan. 31, 2011
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60,000
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$
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4.85
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60,000
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$
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9,709,000
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Feb. 1 through Feb. 28, 2011
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$
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9,709,000
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Mar. 1 through Mar. 31, 2011
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$
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9,709,000
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Total
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60,000
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$
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4.85
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60,000
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$
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9,709,000
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(a)
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On November 10, 2010 we announced our Boards approval of a Stock Repurchase
Program, which authorizes the repurchase up to $10 million of our common stock over a
two-year period through open market transactions (including through 10b5-1 plans) or
private transactions at the discretion of management. The Stock Repurchase Program has
been discontinued effective May 6, 2011.
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Item 3.
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Defaults Upon Senior Securities
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Item 4.
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(Removed and Reserved)
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Item 5.
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Other Information
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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: May 6, 2011
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MAKEMUSIC, INC.
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By: /s/ Jeffrey A. Koch
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Jeffrey A. Koch, Interim Chief Executive Officer
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(Principal Executive Officer)
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And: /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
Three months ended March 31, 2011
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Exhibit No.
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Description
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10.1
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Lease Agreement dated March 1, 2005 by and between First Industrial,
L.P. and MakeMusic, Inc. incorporated by reference to Exhibit
10.1 to the Registrants Form 10-QSB for the quarter ended March 31,
2005
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10.2
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First Amendment to Lease Agreement dated March 7, 2011 by and
between Eden Prairie Associates LLC and MakeMusic, Inc.
incorporated by reference to Exhibit 10.2 to the Registrants Form
8-K filed March 11, 2011.
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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*
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Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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32.2*
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Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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20
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