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SONIC FOUNDRY INC - Quarter Report: 2020 March (Form 10-Q)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2020
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-30407
 
SONIC FOUNDRY, INC.
(Exact name of registrant as specified in its charter)
 
MARYLAND
 
39-1783372
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
222 West Washington Ave, Madison, WI 53703
(Address of principal executive offices)
(608) 443-1600
(Registrant’s telephone number including area code)
 
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  x           No   ¨
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  x            No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes  ¨     No   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨            No  x
State the number of shares outstanding of each of the issuer’s common equity as of the last practicable date:
Class
 
Outstanding
April 30, 2020
Common Stock, $0.01 par value
 
6,788,321
 


PART I. FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. For a more complete discussion of accounting policies and certain other information, refer to the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2019.


2

TABLE OF CONTENTS
 
 
 
PAGE NO.
PART I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 


3

Item 1
Sonic Foundry, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except for share data)

 
(Unaudited)
 
 

March 31,
2020
 
September 30,
2019
Assets

 

Current assets:

 

Cash and cash equivalents
$
4,586

 
$
4,295

Accounts receivable, net of allowances of $135 & $135
6,344

 
6,532

Inventories, net of reserves of $30 and $0
602

 
558

Investment in sales-type lease, current
11

 
163

Capitalized commissions, current
334

 
464

Prepaid expenses and other current assets
910

 
972

Total current assets
12,787

 
12,984

Property and equipment:

 

Leasehold improvements
1,121

 
1,121

Computer equipment
6,499

 
5,610

Furniture and fixtures
1,291

 
1,233

Total property and equipment
8,911

 
7,964

Less accumulated depreciation and amortization
6,838

 
6,396

Property and equipment, net
2,073

 
1,568

Other assets:

 

Investment in sales-type lease, long-term
159

 
134

Capitalized commissions, long-term
102

 
106

Right-of-use assets under operating leases
1,972

 
—

Other long-term assets
384

 
388

Total assets
$
17,477

 
$
15,180

Liabilities and stockholders’ deficit

 

Current liabilities:

 

Accounts payable
$
1,994

 
$
843

Accrued liabilities
1,649

 
2,216

Unearned revenue
9,453

 
9,610

Current portion of finance lease obligations
155

 
194

Current portion of operating lease obligations
1,160

 
—

Current portion of notes payable and warrant debt, net of discounts
1,915

 
968

Total current liabilities
16,326

 
13,831

Long-term portion of unearned revenue
2,055

 
1,842

Long-term portion of finance lease obligations
130

 
179

Long-term portion of operating lease obligations
840

 
—

Long-term portion of notes payable and warrant debt, net of discounts
4,743

 
5,429

Derivative liability, at fair value
72

 
9

Other liabilities
142

 
143

Total liabilities
24,308

 
21,433

Commitments and contingencies

 

Stockholders’ deficit:
 
 
 
Preferred stock, $.01 par value, authorized 500,000 shares; none issued
—

 
—

9% Preferred stock, Series A, voting, cumulative, convertible, $.01 par value (liquidation preference of $1,000 per share), authorized 4,500 shares; zero shares issued and outstanding, at amounts paid in
—

 
—

5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 1,000,000 shares, none issued
—

 
—

Common stock, $.01 par value, authorized 10,000,000 shares; 6,800,037 and 6,749,359 shares issued, respectively and 6,787,321 and 6,736,643 shares outstanding, respectively
68

 
67

Additional paid-in capital
203,884

 
203,735

Accumulated deficit
(210,065
)
 
(209,340
)
Accumulated other comprehensive loss
(549
)
 
(546
)
Treasury stock, at cost, 12,716 shares
(169
)
 
(169
)
Total stockholders’ deficit
(6,831
)
 
(6,253
)
Total liabilities and stockholders’ deficit
$
17,477

 
$
15,180

See accompanying notes to the condensed consolidated financial statements.



4

Sonic Foundry, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except for share and per share data)
(Unaudited)

Three Months Ended March 31,
 
Six Months Ended March 31,

2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Product and other
$
2,812

 
$
1,796

 
$
4,867

 
$
3,547

Services
5,854

 
6,201

 
11,814

 
11,952

Total revenue
8,666

 
7,997

 
16,681

 
15,499

Cost of revenue:

 
 
 
 
 
 
Product and other
1,158

 
645

 
1,989

 
1,296

Services
1,247

 
1,359

 
2,595

 
2,550

Total cost of revenue
2,405

 
2,004

 
4,584

 
3,846

Gross margin
6,261

 
5,993

 
12,097

 
11,653

Operating expenses:

 
 
 
 
 
 
Selling and marketing
3,057

 
3,836

 
6,453

 
7,779

General and administrative
1,176

 
1,345

 
2,617

 
2,883

Product development
1,499

 
1,935

 
3,089

 
3,768

Total operating expenses
5,732

 
7,116

 
12,159

 
14,430

Income (loss) from operations
529

 
(1,123
)
 
(62
)
 
(2,777
)
Non-operating expenses:
 
 
 
 
 
 
 
Interest expense, net
(218
)
 
(227
)
 
(481
)
 
(381
)
Other expense, net
(58
)
 
(11
)
 
(43
)
 
(3
)
Total non-operating expenses
(276
)
 
(238
)
 
(524
)
 
(384
)
Income (loss) before income taxes
253

 
(1,361
)
 
(586
)
 
(3,161
)
Income tax expense
(158
)
 
(125
)
 
(139
)
 
(113
)
Net income (loss)
$
95

 
$
(1,486
)
 
$
(725
)
 
$
(3,274
)
Dividends on preferred stock
—

 
(45
)
 

 
(98
)
Net income (loss) attributable to common stockholders
$
95

 
$
(1,531
)
 
$
(725
)
 
$
(3,372
)
Income (loss) per common share

 
 
 
 
 
 
– basic
$
0.01

 
$
(0.29
)
 
$
(0.11
)
 
$
(0.64
)
– diluted
$
0.01

 
$
(0.29
)
 
$
(0.11
)
 
$
(0.64
)
Weighted average common shares
 
 
 
 
 
 
 
– basic
6,785,180

 
5,278,500

 
6,760,779

 
5,232,449

– diluted
6,933,227

 
5,278,500

 
6,760,779

 
5,232,449

See accompanying notes to the condensed consolidated financial statements


5

Sonic Foundry, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$
95

 
$
(1,486
)
 
$
(725
)
 
$
(3,274
)
Foreign currency translation adjustment
5

 
(17
)
 
(3
)
 
45

Comprehensive income (loss)
$
100

 
$
(1,503
)
 
$
(728
)
 
$
(3,229
)
See accompanying notes to the condensed consolidated financial statements


6

Sonic Foundry, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
(in thousands)
(Unaudited)

 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, September 30, 2018
$
1,651

 
$
51

 
$
200,130

 
$
(207,419
)
 
$
(676
)
 
$
(26
)
 
$
(169
)
 
$
(6,458
)
Cumulative effect of ASC 606 adoption Note 6
—

 
—

 
—

 
1,691

 
—

 
—

 
—

 
1,691

Adjusted balance, October 1, 2018
1,651

 
51

 
200,130

 
(205,728
)
 
(676
)
 
(26
)
 
(169
)
 
(4,767
)
Stock compensation
—

 
—

 
220

 
—

 
—

 
—

 
—

 
220

Issuance of common stock and warrants
—

 
—

 
4

 
—

 
—

 
—

 
—

 
4

Warrants issued in connection with subordinated notes payable
—

 
—

 
674

 
—

 
—

 
—

 
—

 
674

Conversion of preferred stock
(563
)
 
2

 
561

 
—

 
—

 
—

 
—

 
—

Preferred stock dividends
99

 
—

 
(99
)
 
—

 
—

 
—

 
—

 
—

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
45

 
—

 
—

 
45

Net loss
—

 
—

 
—

 
(3,274
)
 
—

 
—

 
—

 
(3,274
)
Balance, March 31, 2019
$
1,187

 
$
53

 
$
201,490

 
$
(209,002
)
 
$
(631
)
 
$
(26
)
 
$
(169
)
 
$
(7,098
)



 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, December 31, 2018
$
1,141

 
$
53

 
$
200,802

 
$
(207,516
)
 
$
(614
)
 
$
(26
)
 
$
(169
)
 
$
(6,329
)
Stock compensation
—

 
—

 
56

 
—

 
—

 
—

 
—

 
56

Issuance of common stock and warrants
—

 
—

 
4

 
—

 
—

 
—

 
—

 
4

Warrants issued in connection with subordinated notes payable
—

 
—

 
674

 
—

 
—

 
—

 
—

 
674

Preferred stock dividends
46

 
—

 
(46
)
 
—

 
—

 
—

 
—

 
—

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(17
)
 
—

 
—

 
(17
)
Net loss
—

 
—

 
—

 
(1,486
)
 
—

 
—

 
—

 
(1,486
)
Balance, March 31, 2019
$
1,187

 
$
53

 
$
201,490

 
$
(209,002
)
 
$
(631
)
 
$
(26
)
 
$
(169
)
 
$
(7,098
)

7

Sonic Foundry, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
(in thousands)
(Unaudited)

 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, September 30, 2019
—

 
$
67

 
203,735

 
(209,340
)
 
(546
)
 
—

 
(169
)
 
(6,253
)
Stock compensation
—

 
—

 
86

 
—

 
—

 
—

 
—

 
86

Issuance of common stock
—

 
1

 
63

 
—

 
—

 
—

 
—

 
64

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(3
)
 
—

 
—

 
(3
)
Net loss
—

 
—

 
—

 
(725
)
 
—

 
—

 
—

 
(725
)
Balance, March 31, 2020
$
—

 
$
68

 
$
203,884

 
$
(210,065
)
 
$
(549
)
 
$
—

 
$
(169
)
 
$
(6,831
)



 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, December 31, 2019
$
—

 
$
67

 
$
203,787

 
$
(210,160
)
 
$
(554
)
 
$
—

 
$
(169
)
 
$
(7,029
)
Stock compensation
—

 
—

 
34

 
—

 
—

 
—

 
—

 
34

Issuance of common stock
—

 
1

 
63

 
—

 
—

 
—

 
—

 
64

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
5

 
—

 
—

 
5

Net income
—

 
—

 
—

 
95

 
—

 
—

 
—

 
95

Balance, March 31, 2020
$
—

 
$
68

 
$
203,884

 
$
(210,065
)
 
$
(549
)
 
$
—

 
$
(169
)
 
$
(6,831
)







8

Sonic Foundry, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

Six Months Ended
March 31,

2020
 
2019
Operating activities

 

Net loss
(725
)
 
(3,274
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

Amortization of other intangibles
150

 
97

Depreciation and amortization of property and equipment
433

 
516

Provision for doubtful accounts - including financing receivables
9

 
26

Stock-based compensation expense related to stock options and warrants
86

 
219

Deferred loan interest to related party
264

 
—

Stock issued for board of director fees
64

 
—

Remeasurement loss (gain) on derivative liability
63

 
(7
)
Changes in operating assets and liabilities:

 

Accounts receivable
175

 
1,354

Financing receivables
—

 
(2
)
Inventories
(45
)
 
(612
)
Investment in sales-type lease
126

 
—

Capitalized commissions
134

 
105

Prepaid expenses and other current assets
64

 
(25
)
Right-of-use assets under operating leases
562

 
—

Operating lease obligations
(578
)
 
—

Other long-term assets
4

 
—

Accounts payable and accrued liabilities
(162
)
 
89

Other long-term liabilities
(1
)
 
(33
)
Unearned revenue
57

 
(1,704
)
Net cash provided by (used in) operating activities
680

 
(3,251
)
Investing activities

 

Purchases of property and equipment
(118
)
 
(222
)
Net cash used in investing activities
(118
)
 
(222
)
Financing activities

 

Proceeds from notes payable
463

 
4,500

Proceeds from lines of credit
—

 
8,748

Payments on notes payable
(618
)
 
(333
)
Payments on lines of credit
—

 
(9,186
)
Payment of debt issuance costs
—

 
(110
)
Proceeds from issuance of preferred stock and common stock
—

 
5

Proceeds from exercise of common stock options
1

 
—

Payments on finance lease obligations
(124
)
 
(134
)
Net cash provided by (used in) financing activities
(278
)
 
3,490

Changes in cash and cash equivalents due to changes in foreign currency
7

 
(24
)
Net increase (decrease) in cash and cash equivalents
291

 
(7
)
Cash and cash equivalents at beginning of year
4,295

 
1,189

Cash and cash equivalents at end of period
$
4,586

 
$
1,182

Supplemental cash flow information:
 
 
 
Interest paid
$
479

 
$
264

Income taxes paid, foreign
90

 
160

Non-cash financing and investing activities:
 
 
 
Property and equipment financed by finance lease or accounts payable
821

 
112

Debt discount
—

 
676

Preferred stock dividends paid in additional shares
—

 
98

Conversion of preferred shares
—

 
563

See accompanying notes to the condensed consolidated financial statements.

9

Sonic Foundry, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020
(Unaudited)

1.
Basis of Presentation and Significant Accounting Policies
Financial Statements
The accompanying condensed consolidated financial statements are unaudited and have been prepared on a basis substantially consistent with the Company's audited financial statements as of and for the year ended September 30, 2019 included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Operating results for the six month period ended March 31, 2020 are not necessarily indicative of the results that might be expected for the year ending September 30, 2020.
Financing Receivables
Financing receivables consist of customer receivables resulting from the sale of the Company's products and services, primarily software and long-term customer support contracts, and are presented net of allowance for losses. The Company has a single portfolio consisting of fixed-term receivables, which is further segregated into two classes based on type of product and lease.

Amounts receivable of $526 thousand at September 30, 2019 primarily represents sales of perpetual software licenses to a single international distributor on invoices outstanding for product delivered from March 2016 through June 2017.

The Company generally determines its allowance for losses on financing receivables at the customer class level by considering a number of factors, including the length of time financing receivables are past due, historical and anticipated experience, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company writes off financing receivables when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for financing receivable losses. Interest is not accrued on past due receivables. There was an allowance of $526 thousand at September 30, 2019.

During the period ended March 31, 2020 it was determined that the financing receivable would not be collected. Therefore, both the financing receivable of $526 thousand and the corresponding reserve of $526 thousand were written off.
Investment in Sales-Type Lease
The Company has entered into sales-type lease arrangements with certain customers, consisting of recorders leased with terms ranging from 3-5 years.
Investment in sales-type leases consists of the following (in thousands) as of March 31, 2020:
 
 
Investment in sales-type lease, gross:
 
   2020
$
13

   2021
147

   2022
13

Gross investment in sales-type lease
173

Less: Unearned income
3

Total investment in sales-type lease
$
170

 
 
Current portion of total investment in sales-type lease
$
11

Long-term portion of total investment in sales-type lease
159

 
$
170



10

Inventory
Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. An obsolescence reserve has been established to account for slow moving inventory.
Inventory consists of the following (in thousands):
 
March 31,
2020
 
September 30, 2019
Raw materials and supplies
$
230

 
$
163

Finished goods
402

 
395

Less: Obsolescence reserve
(30
)
 
—

 
$
602

 
$
558

Asset Retirement Obligation
An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is recognized as a liability in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-term asset.  The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset.  As of March 31, 2020 and September 30, 2019, the Company has recorded a liability of $130 thousand and $129 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. Asset retirement obligations are included in other-long term liabilities on the condensed consolidated balance sheets.
Fair Value of Financial Instruments

In determining the fair value of financial assets and liabilities, the Company currently utilizes market data or other assumptions that it believes market participants would use in pricing the asset or liability in the principal or most advantageous market, and adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to the Company at the measurement date.
    
Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.

Financial Liabilities Measured at Fair Value on Recurring Basis

The fair value of the bifurcated conversion feature represented by the warrant derivative liability associated with the PFG debt is measured at fair value on a recurring basis based on a Black Scholes option pricing model with assumptions for stock price, exercise price, volatility, expected term, risk free interest rate and dividend yield similar to those described for share-based compensation which were generally observable (Level 2).

Financial liabilities measured at fair value on a recurring basis are summarized below (in thousands):
March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Derivative liability
 
$
—

 
$
72

 
$
—

 
$
72


11

September 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Derivative liability
 
$
—

 
$
9

 
$
—

 
$
9


The gain or loss related to the fair value remeasurement on the derivative liability is included in the other (expense) line on the condensed consolidated statements of operations.

Financial Liabilities Measured at Fair Value on a Nonrecurring Basis

The initial fair values of PFG debt and warrant debt (see Note 4) were based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). 

The Mr. Mark Burish ("Mr. Burish") warrant was measured at fair value using a Black Scholes model and the remaining fair value was allocated to the related Mr. Burish note purchase agreement (see Note 4) which management believes materially approximates the fair value based on calculating the present value of expected future cash flows (Level 3). The non-recurring fair value measurements were performed as of the date of issuance of the note purchase agreement and warrant. The discount is being amortized over the life of the related debt.

Financial Instruments Not Measured at Fair Value

The Company's other financial instruments consist primarily of cash and cash equivalents, accounts receivable, investment in sales-type lease, financing receivables, accounts payable and debt instruments and capital lease obligations. The book values of cash and cash equivalents, accounts receivable, investment in sales-type lease, and accounts payable are considered to be representative of their respective fair values due their short term nature. The carrying value of debt including the current portion, approximates fair market value as the variable and fixed rate approximates the current market rate of interest available to the Company.
Legal Contingencies
When legal proceedings are brought or claims are made against the Company and the outcome is uncertain, we are required to determine whether it is probable that an asset has been impaired or a liability has been incurred. If such impairment or liability is probable and the amount of loss can be reasonably estimated, the loss must be charged to earnings.

No legal contingencies were recorded or were required to be disclosed for the three or six months ended March 31, 2020 or 2019.
Stock Based Compensation
The Company uses a lattice valuation model to account for all employee stock options granted. The lattice valuation model is a more flexible analysis to value options because of its ability to incorporate inputs that change over time, such as actual exercise behavior of option holders. The Company uses historical data to estimate the option exercise and employee departure behavior in the lattice valuation model. Expected volatility is based on historical volatility of the Company’s stock. The Company considers all employees to have similar exercise behavior and therefore has not identified separate homogeneous groups for valuation. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is based on the U.S. Treasury yields in effect at the time of grant. Forfeitures are based on actual behavior patterns. The expected exercise factor and forfeiture rates are calculated using historical exercise and forfeiture activity for the previous three years.







12

The fair value of each option grant is estimated using the assumptions in the following table:
 
Six Months Ended
March 31,
 
2020
 
2019
Expected life
4.5 years
 
4.3 years
Risk-free interest rate
1.41% - 1.63%
 
2.48% - 2.93%
Expected volatility
72.40% - 73.46%
 
60.19% - 66.05%
Expected forfeiture rate
15.05% - 15.38%
 
13.51% - 14.76%
Expected exercise factor
1.2
 
1.2
Expected dividend yield
0%
 
0%
A summary of option activity at March 31, 2020 and changes during the six months then ended is presented below:
 
Options
 
Weighted-
Average
Exercise Price
 
Weighted-Average
Remaining Contractual
Period in Years
Outstanding at October 1, 2019
1,654,429

 
$
5.62

 
4.9
Granted
184,750

 
1.18

 
9.6
Exercised
(1,000
)
 
0.66

 
8.7
Forfeited
(54,700
)
 
4.07

 
4.3
Outstanding at March 31, 2020
1,783,479

 
5.20

 
4.9
Exercisable at March 31, 2020
1,416,998

 
6.21

 
3.8
A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 2020 is presented below:
Non-vested Options
Options
 
Weighted-Average
Grant Date Fair
Value
Non-vested at October 1, 2019
357,114

 
$
0.77

Granted
184,750

 
0.51

Vested
(153,049
)
 
0.97

Forfeited
(22,334
)
 
0.55

Non-vested at March 31, 2020
366,481

 
$
0.57


The weighted average grant date fair value of options granted during the six months ended March 31, 2020 was $0.51. As of March 31, 2020, there was $131 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $95 thousand. The cost is expected to be recognized over a weighted-average remaining life of 2.2 years.
Stock-based compensation recorded in the three and six months ended March 31, 2020 was $34 thousand and $86 thousand. Stock-based compensation recorded in the three and six months ended March 31, 2019 was $57 thousand and $219 thousand. There was $1 thousand in cash received from exercises under all stock option plans and warrants during the three and six months ended March 31, 2020 and zero during the same periods in 2019. There were no tax benefits realized for tax deductions from option exercises in either of the three and six month periods ended March 31, 2020 or 2019. The Company currently expects to satisfy share-based awards with registered shares available to be issued.
The Company also has an Employee Stock Purchase Plan ("Purchase Plan") under which an aggregate of 200,000 common shares may be issued. A total of 23,007 shares are available to be issued under the plan. The Company recorded stock compensation expense under this plan of $1 thousand for each of the three and six month periods ended March 31, 2020 and 2019.



13

Preferred Stock and Dividends
The Company considered relevant guidance when accounting for the issuance of preferred stock, and determined that the preferred shares meet the criteria for equity classification. Dividends accrued on preferred shares will be shown as a reduction to net income (or an increase in net loss) for purposes of calculating earnings per common share.
Per Share Computation
Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income (loss) attributable to common stockholders. The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:
 
Three Months Ended
March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
Denominator for basic net income (loss) per share - weighted average common shares
6,785,180

 
5,278,500

 
6,760,779

 
5,232,449

Effect of dilutive options (treasury method)
148,047

 
—
 
—
 
—
Denominator for diluted net income (loss) per share - adjusted weighted average common shares
6,933,227

 
5,278,500

 
6,760,779

 
5,232,449

Options, warrants and convertible shares outstanding during each period, but not included in the computation of diluted net loss per share because they are antidilutive
1,933,990

 
2,076,083

 
2,082,037

 
2,076,083

Liquidity
At March 31, 2020, approximately $1.5 million of cash and cash equivalents was held by the Company's foreign subsidiaries.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next twelve months. We will likely evaluate lease opportunities to finance equipment purchases in the future and anticipate continuing to utilize proceeds from the note purchase agreement to support working capital needs. We may also seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements", ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", ("ASU 2018-15"). ASU 2018-15 aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in ASU 2018-15 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606", ("ASU 2018-18"). ASU 2018-18 provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. The amendments in ASU 2018-18 are effective for all public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 326, for entities that have adopted ASU 2016-13,

14

the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within fiscal those fiscal years. Early adoption is permitted in any interim period after issuance as long as the entity has adopted the amendments in ASU 2016-13. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)", ("ASU 2019-08"). This ASU requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. For entities that have not yet adopted the amendments in ASU 2018-07, the amendments in this Update are effective for public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)", ("ASU 2019-10"). This ASU addressed effective dates of the aforementioned major Accounting Standards Updates as a result of the challenges implementation of major standards poses for private companies, smaller reporting companies, and not-for-profit organizations. ASU 2019-10 is a major update which would first be effective for bucket-one entities, which are public entities that are Securities and Exchange Commission ("SEC") filers, excluding entities eligible to be smaller reporting companies under the SEC's definition. The Company does qualify as a smaller reporting company under the SEC's definition. Financial Instruments - Credit Losses (Topic 326) is currently not effective for any entities; ASU 2019-10 changes the effective date of this update for all other public companies (including smaller reporting companies) to be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because Derivatives and Hedging (Topic 815) and Leases (Topic 842) are already effective for public business entities the Board retained the effective date for those entities, including smaller reporting companies.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", ("ASU 2019-12"). The amendments in this ASU affect entities within the scope of Topic 740. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for public entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. An entity that elects early adoption much adopt all the amendments in the same period. The Company is currently evaluating the guidance and its impact to the financial statements.
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)", ("ASU 2020-01"). The amendments in this ASU affect all entities that apply the guidance in Topics 321, 323, and 815 and either (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. For public business entities, the amendments in this ASU are effective for fiscal year beginning after December 15, 2020, and interim periods with those fiscal years. The amendments in this ASU should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. The Company is currently evaluating the guidance and its impact to the financial statements.
Accounting standards that have been issued but are not yet effective by the FASB or other standards-setting bodies that do not require adoption until a future date, which are not discussed above, are not expected to have a material impact on the Company’s financial statements upon adoption.
Recently Adopted Accounting Pronouncements

Leases (ASC Topic 842, Leases ("ASC 842"))
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", ("ASU 2016-02") as well as several other related updates which were codified as ASC 842. On October 1, 2019, we adopted this update using the modified retrospective method through a cumulative-effect adjustment. The reported results for the three and six months ended March 31, 2020 reflect the application of Topic 842, while the comparative information has not been restated and continues to be reported under the related lease accounting standards in effect for those periods. The adoption of this update represents a change in accounting principle and resulted in the recognition of right-of-use assets and lease liabilities of $2.5 million on October 1, 2019. We elected the package of practical expedients, which permits us to leverage our prior conclusions about lease identification, lease classification and initial direct costs incurred. We also elected the practical expedient to combine lease and non-lease components when determining the value

15

of right-of-use assets and lease liabilities. The primary effect of adopting this update relates to the recognition of our operating leases on our condensed consolidated balance sheets and providing additional disclosures about our leasing activities. Leases previously designated as capital leases are now identified as finance leases and continue to be reported on the condensed consolidated balance sheets. Leases previously identified as sales-type leases, where the Company is a lessor, continue to be reported on the condensed consolidated balance sheets. Refer to Note 3 - Commitments for additional disclosures related to our leasing activities.

Other Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)", ("ASU 2017-11"). This update was issued to address complexities in accounting for certain equity-linked financial instruments containing down round features. The amendment changes the classification analysis of these financial instruments (or embedded features) so that equity classification is no longer precluded. The amendments in ASU 2017-11 are effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging Topic 815): Targeted Improvements to Accounting for Hedging Activities", ("ASU 2017-12"). This update was issued to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting", ("ASU 2018-07"). The standard addresses aspects of the accounting for nonemployee share-based payment transactions. The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 815, for entities that have not yet adopted ASU 2017-12 as of the issuance date of this ASU, the effective dates and transition requirements for the amendments to Topic 815 are the same as the effective dates and transition requirements in ASU 2017-12. The amendments for Topic 815 in ASU 2019-04 were adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.

2. Related Party Transactions

During the three and six months ended March 31, 2020, the Company incurred fees of $148 thousand and $258 thousand to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $85 thousand and $131 thousand during the three and six months ended March 31, 2019. The Company had accrued liabilities for unbilled services of $0 thousand and $30 thousand at March 31, 2020 and September 30, 2019, respectively, to the same law firm.

On November 9, 2017, the Company sold to Mark Burish $500 thousand of Preferred Stock, Series A, at $762.85 per share. Mark Burish is a director of the Company and beneficially owns more than 5% of the Company’s common stock.

On November 17, 2017, the Company entered into an Agreement in which Mr. Burish's right to convert shares of Preferred Stock, Series A, into common stock was waived until shareholder approval for the issuance of Preferred Stock, Series A had been obtained. The right to vote said shares of Preferred Stock, Series A was also waived pending shareholder approval of the issuance. Shareholder approval was obtained on May 17, 2018.

On January 19, 2018, the Company and Mr. Burish entered into a Subscription Agreement (the "Subscription Agreement"). Pursuant to the Subscription Agreement, (i) on January 19, 2018, Mr. Burish purchased a 10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash; and (ii) on February 15, 2018, the director purchased an additional 10.75% Convertible Secured Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the “Notes”).


16

On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply with rules and regulations of NASDAQ, the Notes were automatically converted into 1,902 shares of Series A Preferred stock. The number of shares was determined by dividing the total principal and accrued interest due on each Note by $542.13 (the “Conversion Rate”).

On April 16, 2018, the Company issued 232,558 shares of common stock to an affiliated party. The shares were issued at a price of $2.15 per share, representing the closing price on April 13, 2018. On April 16, 2018, the closing price of the Company’s common stock was $2.18 per share. The affiliated party also received warrants to purchase 232,558 shares of common stock at an exercise price of $2.50 per share which expire on April 16, 2025.

On June 8, 2018, 905 shares of Preferred Stock, Series A were automatically converted by the Company into 213,437 shares of common stock. The amount of shares converted represents all preferred shares issued on May 30, 2017 and June 8, 2017, including related dividends.

On August 23, 2018, 717 shares of Preferred Stock, Series A were automatically converted by the Company into 169,485 shares of common stock. The amount of shares converted represents all preferred shares issued on August 23, 2017.

On November 15, 2018, 718 shares of Preferred Stock, Series A were automatically converted by the Company into 169,741 shares of common stock. The amount of shares converted represents all preferred shares issued on November 9, 2017, including related dividends.

On April 25, 2019, Mr. Burish exercised his warrant to purchase 728,155 shares of common stock of the Company at an exercise price of $1.18 per share, which was entered into coincident with the execution of the Note Purchase Agreement on February 28, 2019.

On May 17, 2019, 2,080 shares of Preferred Stock Series A were automatically converted by the Company into 491,753 shares of common stock. The amount of shares converted represents all preferred shares issued on May 17, 2018, including related dividends.

The Company has also been provided with debt financing from Mr. Burish. See Note 4 - Credit Arrangements for additional information on the Warrant issued to, and Note Purchase Agreements, with Mr. Burish as well as accrued interest and the related anniversary fee on the Notes.

Mr. Burish beneficially owns more than 5% of the Company’s common stock. Mr. Burish also serves as the Chairman of the Board of Directors. An affiliated party beneficially owns more than 5% of the Company's common stock. All transactions with Mr. Burish and with the affiliated party were approved by a special committee of disinterested and independent directors.

3. Commitments
Inventory Purchase Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At March 31, 2020, the Company has an obligation to purchase $319 thousand of Mediasite product, which is not recorded on the Company’s condensed consolidated balance sheet.
Leases
The Company has operating leases for corporate office space with various expiration dates. Our leases have remaining lease terms of up to three years, some of which include escalation clauses, renewal options for up to twelve years or termination options within one year.
We determine if an arrangement is a lease upon contract inception. The Company has both operating and finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments according to the arrangement.
A contract contains a lease if the contract conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

17

Lease right-of-use assets and lease liabilities are recognized as of the commencement date based on the present value of the lease payments over the lease term. The lease right-of-use asset is reduced for tenant incentives and excludes any initial direct costs incurred. We use the implicit rate when it is readily determinable. Otherwise, the present value of future minimum lease payments is determined using the Company's incremental borrowing rate. The incremental borrowing rate is based on the interest rate of the Company's most recent borrowing.
The lease term we use for the valuation of our right-of-use assets and lease liabilities may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense is recognized on a straight-line basis over the expected lease term for operating leases. Amortization expense of the right-of-use asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental interest rate.
Right-of-use assets and lease liabilities are recognized for our leases. Right-of-use assets under finance leases are included in property and equipment on the condensed consolidated balance sheets.
We have operating lease arrangements with lease and non-lease components. The non-lease components in our arrangements are not significant when compared to the lease components. For all operating leases, we account for the lease and non-lease components as a single component.
As of March 31, 2020, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 are as follows (in thousands):
 
Operating Leases
 
Finance Leases
2020 (remaining)
$
688

 
$
88

2021
1,026

 
128

2022
292

 
79

2023
94

 
8

2024
102

 
5

Thereafter
101

 
—

Total
2,303

 
308

Less: imputed interest
(303
)
 
(23
)
Total
$
2,000

 
$
285

Effect of Adopting ASC 842
Opening Balance Sheet Adjustment on October 1, 2019
As a result of applying the modified retrospective method to adopt ASC 842, the following amounts on our condensed consolidated balance sheet were adjusted as of October 1, 2019 to reflect the cumulative effect adjustment to the opening balance sheet (in thousands):
 
As reported
 
ASC 842 adoption
 
Adjusted
 
September 30, 2019
 
adjustments
 
October 1, 2019
Right-of-use assets under operating leases
—

 
2,533

 
2,533

Total assets
$
15,180

 
$
2,533

 
$
17,713

 
 
 
 
 
 
Current portion of operating lease obligations
$
—

 
$
1,314

 
$
1,314

Accrued liabilities
2,216

 
(44
)
 
2,172

Total current liabilities
13,831

 
1,270

 
15,101

 
 
 
 
 
 
Long-term portion of operating lease obligations
—

 
1,263

 
1,263

Total liabilities
$
21,433

 
$
2,533

 
$
23,966

Supplemental information related to leases is as follows (in thousands, except lease term and discount rate):

18

 
 
Six Months Ended March 31, 2020
Operating lease costs
 
$
662

Variable operating lease costs
 
29

Total operating lease cost
 
$
691

 
 
 
Finance lease cost:
 
 
   Amortization of right-of-use assets
 
$
106

   Interest on lease liabilities
 
12

Total finance lease cost
 
$
118

Variable lease costs include operating costs for U.S. office lease based on square footage and Consumer Price Index ("CPI") rent escalation and related VAT for office lease in the Netherlands.
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
 
 
Six Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
 
 
   Operating cash outflows for operating leases
 
$
679

   Operating cash outflows for finance leases
 
12

   Financing cash outflows for finance leases
 
123

Other information related to leases was as follows:
 
 
March 31, 2020
Weighted average remaining lease term (in years)
 


   Operating leases
 
2.6

   Finance leases
 
2.3

Weighted average discount rate
 


   Operating leases
 
11.82
%
   Finance leases
 
7.14
%

4. Credit Arrangements

Partners for Growth V, L.P.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2018 Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”).
The 2018 Loan and Security Agreement provides for a Term Loan ("Term Loan") in the amount of $2,500,000, which was disbursed in two (2) Tranches as follows: Tranche 1 was disbursed on May 14, 2018 in the amount of $2,000,000; and Tranche 2 in the amount of $500,000, was disbursed on November 8, 2018.
Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000.
The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal to 1% of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.
The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property.

19

Coincident with execution of the 2018 Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”) with PFG V. Pursuant to the terms of the Warrant, the Company issued to PFG V a warrant to purchase up to 66,000 shares of common stock of the Company at an exercise price of $2.57 per share, subject to certain adjustments. Pursuant to the Warrant, PFG V is also entitled, under certain conditions, to require the Company to exchange the Warrant for the sum of $250,000. All warrants issued in connection with PFG V expire on May 11, 2023.

At March 31, 2020, and September 30, 2019, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $72 thousand and $9 thousand, respectively. Included in other expense, the remeasurement loss on the derivative liability during the three and six months ended March 31, 2020 was $61 thousand and $63 thousand, respectively, compared to a remeasurement loss of $8 thousand and a remeasurement gain of $15 thousand during the three and six months ended March 31, 2019.
The proceeds from the 2018 Loan and Security Agreement were allocated between the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair value on the date of issuance which resulted in carrying values of $2.3 million and $156 thousand, respectively. The warrant debt of $156 thousand is treated together as a debt discount on the PFG V Debt and will be accreted to interest expense under the effective interest method over the three-year term of the PFG V Debt and the five-year term of the Warrant Debt. During the three and six months ended March 31, 2020, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $6 thousand and $11 thousand compared to $5 thousand and $9 thousand in the same periods last year. In addition, $14 thousand and $28 thousand amortization of the debt discount was recorded in the current three month and six month period compared to $13 thousand and $27 thousand in the prior year. At March 31, 2020, the carrying value of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $1.2 million and $160 thousand, respectively. In addition, the Company agreed to pay PFG V a cash fee of up to $150,000 payable upon maturity (the “back-end fee”), which will be earned ratably over the three year term of the PFG V loan. During the three and six months ended March 31, 2020, the Company recorded interest expense of $13 thousand and $25 thousand, associated with recognition of the back-end fee compared to $13 thousand and $25 thousand during the three and six months ended March 31, 2019.
The non-cash effective interest expense is calculated on the net balance of the PFG V Debt, debt discount, back-end fee and related loan origination fees, on a monthly basis. During the three and six months ended March 31, 2020, we recorded $3 thousand of gain and $1 thousand of non-cash interest expense related to the effective interest rate on the PFG V loan.
On March 11, 2019, Sonic Foundry, Inc. entered into a Consent, Waiver & Modification to the 2018 Loan and Security Agreement dated May 11, 2018 (the "Modification") with Partners for Growth V, L.P. ("PFG"). Under the Modification: PFG waived the Company's default on the Minimum EBITDA financial covenant for the quarterly reporting period ending December 31, 2018; modified the existing financial covenants to be as follows: (i) Minimum Coverage Ratio (as defined), which requires, as of the last day of each month on or after the closing date, to be equal to or greater than (x) 0.7: 1.00 for the December through May calendar months, and (y) 0.9:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), which requires, as of the last day of each calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be no less than $13,000,000; and modified the negative covenants to be as follows: the Company (x) shall not cause or permit (a) Japanese subsidiary indebtedness under its revolving line of credit facility to exceed at any time $1,000,000 outstanding, or (b) aggregate subsidiary indebtedness to exceed $1,200,000 at any time. At March 31, 2020, the Company was in compliance with all covenants per the 2018 Loan and Security Agreement, as modified.
Under the Modification, the Company was required to draw the next tranche of $1,000,000 in proceeds on the Note Purchase Agreement (detailed below) on or before March 31, 2019 as well as the final tranche of $1,000,000 in proceeds on or before April 30, 2019. The Company met this requirement as all tranches were fully drawn prior to April 30, 2019.
The existing terms of the PFG loan in terms of amortization, interest rate, payment schedule and maturity date are unchanged.
At March 31, 2020, a gross balance of $1.2 million was outstanding on the term debt with PFG V with an effective interest rate of sixteen-and-six-tenths percent (16.60%). At September 30, 2019, a gross balance of $1.7 million was outstanding with PFG V.
Initial Notes of the February 28, 2019 Note Purchase Agreement
On January 4, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the Promissory Note was due and payable on January 4, 2020. The Promissory Note may be prepaid at any time without penalty. The Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.

20

On January 31, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "January 31, 2019 Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the January 31, 2019 Promissory Note was due and payable on January 31, 2020. The January 31, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to Mr. Burish, with each share valued at $1.30 per share. The January 31, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
On February 14, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "February 14, 2019 Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the February 14, 2019 Promissory Note was due and payable on February 14, 2020. The February 14, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to Mr. Burish with each share valued at $1.30 per share. The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
February 28, 2019 Note Purchase Agreement
On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Mr. Burish.
The Note Purchase Agreement provides for subordinated secured promissory notes (the "Subordinated Promissory Notes") in an aggregate original principal amount of up to $5,000,000. Mr. Burish will acquire from the Company (a) on the initial closing date, the notes in an aggregate principal amount of $3,000,000 (the "Initial Notes") and (b) two additional tranches, each in the amount of $1,000,000 and payable at any time prior to the first anniversary of the Agreement (the "Additional Notes" and together with the Initial Notes, collectively, the "Purchase Price"). The Initial Notes were previously disbursed in January and February of 2019, as detailed above (the Promissory Note, the January 31st, 2019 Promissory Note, and the February 14, 2019 Promissory Note, collectively referred to as the "Initial Notes"). The fourth tranche was disbursed on March 13, 2019 and the fifth and final tranche was disbursed on April 4, 2019.
The Subordinated Promissory Notes accrue interest at the variable per annum rate equal to the Prime Rate (as defined) plus four percent (4.00%). The outstanding principal balance of the Subordinated Promissory Notes, plus all unpaid accrued interest, plus all outstanding and unpaid obligations, shall be due and payable on February 28, 2024 (the "Maturity Date"). Principal installments of $100,000 are payable on the last day of each month end beginning with the month ending August 31, 2020, and continuing through the Maturity Date.
The principal of the Subordinated Promissory Notes may be prepaid at any time in whole or in part, by payment of an amount equal to the unpaid principal balance to be pre-paid, plus all unpaid interest accrued thereon through the prepayment date, plus all outstanding and unpaid fees and expenses payable through the prepayment date.
At each anniversary of the Closing, an administration fee ("anniversary fee") will be payable to Mr. Burish equal to 0.5% of the purchase price less principal payments made.
The Subordinated Promissory Notes are collateralized by substantially all the Company's assets, including intellectual property, subject to the rights of Partners for Growth V, L.P., which shall be senior to the Subordinated Promissory Notes.
The Note Purchase Agreement requires compliance with the following financial covenants: (i) Minimum Coverage Ratio, which requires, as of the last day of each month on or after the closing date, the Minimum Coverage Ratio (as defined) to be equal to or greater than (x) 0.7:1.00 for the December through May calendar months, (y) 0.9:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), as of the last day of any calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be no less than $13,000,000. At March 31, 2020, the Company was in compliance with all covenants per the Note Purchase Agreement.
The Note Purchase Agreement dated February 28, 2019 is subordinated to the existing PFG loan.
The Company used the proceeds from the notes issued under the Note Purchase Agreement to replace the revolving line of credit with Silicon Valley Bank, which matured on January 31, 2019.
The proceeds from the Note Purchase Agreement were allocated between the Subordinated Promissory Notes and the Warrant debt based on their relative fair value on the date of issuance. The warrant debt of $674 thousand is treated together as a debt

21

discount on the Subordinated Notes Payable and will be accreted to interest expense under the effective interest rate method over the five-year term of the Subordinated Notes Payable. During the three and six months ended March 31, 2020, the Company recorded accretion of discount expense associated with the Subordinated Promissory Notes of $33 thousand and $67 thousand compared to the three and six months ended March 31, 2019 of $13 thousand and $13 thousand.
During the three and six months ended March 31, 2020, the Company recorded an accrued anniversary fee associated with the Subordinated Promissory Notes of $6 thousand and $12 thousand. There was no accrued anniversary fee for the prior periods.
The non-cash effective interest expense is calculated on the net balance of the Subordinated Promissory Notes, Warrant, and related loan origination fees, on a monthly basis. During the three and six months ended March 31, 2020, we recorded $13 thousand and $2 thousand of non-cash interest benefit related to the effective interest rate on the Subordinated Promissory Notes.
At March 31, 2020, a gross principal balance of $5.0 million was outstanding on the Subordinated Promissory Notes, with an effective interest rate of twelve-and-four-tenths percent (12.4%). At September 30, 2019, a gross principal balance of $5.0 million was outstanding on the Subordinated Promissory Notes.
Accrued interest on the Subordinated Promissory Notes was paid through March 31, 2019, but has been deferred since that date. In April 2019 it was informally agreed between the Company and Mr. Burish that the interest would be deferred. On November 22, 2019, the Company entered into a Note Modification Agreement to formalize the deferment of the accrued interest. The Note Modification Agreement modifies the terms of the Subordinated Promissory Notes by deferring all interest payments due at the end of each calendar month beginning April 30, 2019 and continuing through and including July 31, 2020, in an amount which will be determined based on the variable interest rate on the Subordinated Promissory Notes. The deferred interest amount shall be added to the principal amount due on the Subordinated Notes and shall be paid on the maturity date. As a result of the Note Modification Agreement, $502 thousand and $259 thousand of accrued interest related to the Subordinated Notes Payable was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020 and September 30, 2019, respectively.
The anniversary fee on the Subordinated Promissory Notes was due on February 28, 2020 ("first year anniversary fee") and has been deferred. On March 24, 2020, the Company entered into a First Amendment to Note Modification Agreement ("First Amendment") to formalize the deferment of the first year anniversary fee. The First Amendment modified the terms of the Subordinated Promissory Notes by deferring the first year anniversary fee due on February 28, 2020. The deferred first year anniversary fee was added to the principal amount due on the Subordinated Notes and is required to be paid on the maturity date. As a result of the First Amendment, $25 thousand was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020.
February 28, 2019 Warrant
Coincident with execution of the Note Purchase Agreement, the Company entered into a Warrant Agreement ("Warrant") with Mr. Burish. Pursuant to the terms of the Warrant, the Company issued to Mr. Burish a warrant to purchase up to 728,155 shares of common stock of the Company at an exercise price of $1.18 per share, subject to certain adjustments.
On April 25, 2019, Mr. Burish exercised his warrant to purchase 728,155 shares of common stock of the Company at an exercise price of $1.18 per share. A special committee of disinterested and independent directors approved the issuance of the Subordinated Promissory Notes and the Warrant.
Other Indebtedness
On January 30, 2020, Mediasite K.K. entered into a Term Loan ("Term Loan") with Sumitomo Mitsui Banking Corporation for $460 thousand in cash. The Term loan accrues interest at an annual rate of 1.475%. Beginning in January 2020, principal is due in 12 equal monthly installments, plus accrued interest, continuing through December 30, 2020, when the principal balance will be paid in full.
At March 31, 2020, $347 thousand was outstanding on the term loan with Mitsui Sumitomo Bank. The term loan accrues interest at an annual rate of approximately one-and-one-half percent (1.475%).
At March 31, 2020 and September 30, 2019, no balance was outstanding on the line of credit with Mitsui Sumitomo Bank. The credit facility is related to Mediasite K.K., and accrues interest at an annual rate of approximately one-and-one half percent (1.575%).


22


5. Income Taxes
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at March 31, 2020 or September 30, 2019, and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three or six months ended March 31, 2020 or 2019.
The Company’s tax rate differs from the expected tax rate each reporting period as a result of permanent differences, the valuation allowance, and international tax items.

6. Revenue
Disaggregation of Revenues
The following tables summarize revenues from contracts with customers for the three and six months ended March 31, 2020 and 2019, respectively, (in thousands):

23

Three months ended March 31, 2020
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
1,563

$
153

$
181

$
(124
)
$
1,773

Software
883

64

194

(178
)
963

Shipping
74

2

—

—

76

 
 
 
 
 
 
Product and other total
2,520

219

375

(302
)
2,812

 
 
 
 
 
 
Support
1,887

136

919

(168
)
2,774

Hosting
1,132

160

321

—

1,613

Events
705

12

655

—

1,372

Installs & training
94

1

—

—

95

 
 
 
 
 
 
Services total
3,818

309

1,895

(168
)
5,854

 
 
 
 
 
 
Total revenue
$
6,338

$
528

$
2,270

$
(470
)
$
8,666

Six months ended March 31, 2020
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
2,609

$
219

$
196

$
(197
)
$
2,827

Software
1,597

253

231

(234
)
1,847

Shipping
190

3

—

—

193

 
 
 
 
 
 
Product and other total
4,396

475

427

(431
)
4,867

 
 
 
 
 
 
Support
3,897

291

1,237

(360
)
5,065

Hosting
2,138

280

697

—

3,115

Events
2,023

74

1,327

—

3,424

Installs & training
208

2

—

—

210

 
 
 
 
 
 
Services total
8,266

647

3,261

(360
)
11,814

 
 
 
 
 
 
Total revenue
$
12,662

$
1,122

$
3,688

$
(791
)
$
16,681



24

Three months ended March 31, 2019
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
784

$
35

$
376

$
(189
)
$
1,006

Software
618

124

120

(159
)
703

Shipping
87

—

—

—

87

 
 
 
 
 
 
Product and other total
1,489

159

496

(348
)
1,796

 
 
 
 
 
 
Support
1,961

145

976

(241
)
2,841

Hosting
1,062

115

513

—

1,690

Events
850

38

742

—

1,630

Installs & training
29

11

—

—

40

 
 
 
 
 
 
Services total
3,902

309

2,231

(241
)
6,201

 
 
 
 
 
 
Total revenue
$
5,391

$
468

$
2,727

$
(589
)
$
7,997



Six Months Ended March 31, 2019
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
1,598

$
174

$
385

$
(300
)
$
1,857

Software
1,260

239

318

(276
)
1,541

Shipping
148

1

—

—

149

 
 
 
 
 
 
Product and other total
3,006

414

703

(576
)
3,547

 
 
 
 
 
 
Support
3,948

334

1,222

(472
)
5,032

Hosting
2,116

264

866

—

3,246

Events
2,081

76

1,394

—

3,551

Installs & training
108

15

—

—

123

 
 
 
 
 
 
Services total
8,253

689

3,482

(472
)
11,952

 
 
 
 
 
 
Total revenue
$
11,259

$
1,103

$
4,185

$
(1,048
)
$
15,499


Transaction price allocated to future performance obligations
ASC 606 allows for the use of certain practical expedients, which we have elected and applied to measure our future performance obligations as of March 31, 2020.

As of March 31, 2020, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately $3.6 million in the next three months, $9.5 million in the next twelve months, and the remaining $2.1 million thereafter.


25

Disclosures related to our contracts with customers

Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. We record assets for amounts related to performance obligations that are satisfied but not yet billed and/or collected. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. These liabilities are classified as current and non-current unearned revenue.
Unearned revenues

Unearned revenues represent our obligation to transfer products or services to our client for which we have received consideration, or an amount of consideration is due, from the client. During the three and six months ended March 31, 2020, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $2.4 million and $6.7 million compared to $2.6 million and $6.9 million recognized during the three and six months ended March 31, 2019.
Assets recognized from the costs to obtain our contracts with customers

We recognize an asset for the incremental costs of obtaining a contract with a customer. We amortize these deferred costs proportionate with related revenues over the period of the contract. During the three and six months ended March 31, 2020, amortization expense recognized related to the amount included in the capitalized commissions at the beginning of the period was $127 thousand and $330 thousand compared to $147 thousand and $396 thousand recognized during the three and six months ended March 31, 2019.


7. Subsequent Events

On March 11, 2020, COVID-19 was declared a pandemic by the World Health Organization. The disruption caused by the outbreak is uncertain and continues to evolve rapidly, however, it may result in material adverse impact on the Company's financial position, operations and cash flows. While we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies and their employees affected by the COVID-19 pandemic. Following the approval of the Board of Directors, the Company and First Business Bank entered into a $2,314,815 Promissory Note (the "Promissory Note") under the Paycheck Protection Program (PPP) contained within the (CARES) Act. The PPP loan has a term of two years, is unsecured, and is guaranteed by the U.S. Small Business Administration. The loan carries a fixed interest rate of 1% per annum, with the first six months of interest deferred. Under the terms of the CARES Act, the Company will be eligible to apply for forgiveness of all loan proceeds used for payroll costs, rent, utilities, and other qualifying expenses during the eight-week period following receipt of the loan, provided the Company maintains its employment and compensation within certain parameters during such period, and provided further that not more than 25% of the amount forgiven can be attributable to non-payroll costs. Any amount not forgiven is due in equal installments of principal and interest beginning seven months from the date of the Promissory Note through the maturity date of two years from the date of first disbursement. The note was effective upon receipt of funds on April 21, 2020.
On April 27, 2020, the Company announced that its Special Committee of Independent and Disinterested Directors had accepted an offer from Mr. Mark Burish to purchase all outstanding shares of the Company’s common stock not presently held by Mr. Burish at $5.00 per share. The transaction was expected to close in the third calendar quarter of 2020. As previously announced, the Company formed the Special Committee to consider strategic alternatives.
In May 2020, the Special Committee and the Disinterested Directors and Mr. Burish agreed to not pursue the transaction at this time. Both Mr. Burish and the Special Committee were concerned that the proposal would not obtain the required shareholder approval, and therefore concluded that converting the debt to equity at the same value proposed by Mr. Burish for the acquisition was the most appropriate way to maximize both Company and Shareholder value, improve the Company's financial position, and provide the Company with resources to further its growth opportunities. In accordance therewith, on May 13, 2020, the Company entered into a Debt Conversion Agreement with Mr. Burish to convert Mr. Burish's existing secured debt of approximately $5.6 million into common stock at $5.00 per share.
 

26


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risks and Uncertainties
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis,” and “Risk Factors.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part I, Item 1A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2019 and Part II, Item 1A of this Form 10-Q), “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q and Part II, Item 7A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2019), and “Management’s Discussion and Analysis” (Part I, Item 2 of this Form 10-Q). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
Overview
Sonic Foundry, Inc. is a trusted global leader for video capture, management and streaming solutions. Trusted by educational institutions, corporations and government entities, Mediasite Video Platform quickly and cost-effectively automates the capture, management, delivery and search of live and on-demand streaming video and rich media. Mediasite transforms communications, training, education and events for our customers.


Recent Developments

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time. To support the health and well-being of our employees, business partners and communities, a vast majority of our employees have been working remotely since mid-March 2020 and continue to do so. We are currently researching and preparing for a limited return to the office at the end of May 2020.

COVID-19 has had negative near-term impacts on our operations and the future impacts of the pandemic and any corresponding economic results are largely unknown and rapidly evolving. Beginning in March, the events portion of our business was and continues to be significantly impacted by cancellations and/or postponements due to social distancing protocols enacted to stem the spread of the virus. In addition, the closure of educational institutions globally and the negative financial impact on their funding, could impact our sales in the upcoming quarters. While the virus has increased awareness of the need for distance learning tools and the adoption of video as a necessary communication medium, it is impossible for us to predict with confidence the long-term financial impact on our business including results of operations and liquidity.
RESULTS OF OPERATIONS
ASC 842

27

On October 1, 2019, we adopted ASC Topic 842, Leases ("ASC 842"), using the modified retrospective method. Under this method, we recognized the cumulative effect of applying the new standard to existing leases that were active as of the adoption date as an adjustment to the opening balance sheet. The reported results for the three and six months ended March 31, 2020 reflect the adoption of ASC 842, while the comparative information has not been restated and continues to be reported under the related accounting standards in effect for those periods. Refer to Note 3 - Commitments to the notes to the condensed consolidated financial statements (unaudited) for additional information related to the effect of the adoption of ASC 842 as of and for the three and six months ended March 31, 2020.
Revenue

Revenue from our business includes the sale of Mediasite recorders and server software products and related services contracts, such as customer support, installation, customization services, training, content hosting and event services. We market our products to educational institutions, corporations and government agencies that need to deploy, manage, index and distribute video content on Internet-based networks. We reach both our domestic and international markets through reseller networks, a direct sales effort and partnerships with system integrators.
Q2-2020 compared to Q2-2019
Revenue in Q2-2020 increased $669 thousand, or 8% to $8.7 million, from Q2-2019 revenue of $8.0 million. Revenue consisted of the following:

•
Product and other revenue from sale of Mediasite recorder units and server software was $2.8 million in Q2-2020 and $1.8 million in Q2-2019. Average selling price was lower in Q2-2020 as compared to Q2-2019 primarily as a result of a higher sales volume of low-cost recorders. Production and other revenue in Q2-2020 included a large refresh recorder transaction while Q2-2019 was negatively impacted by our planned reduced reliance on distribution.
 
Q2-2020
 
Q2-2019
Recorders sold
369

 
131

Rack units to mobile units ratio
25.4 to 1

 
3.4 to 1

Average sales price, excluding service (000’s)
$
4.7

 
$
7.5

Refresh Units
58

 
70


•
Services revenue represents the portion of fees charged for Mediasite customer support contracts amortized over the length of the contract, typically 12 months, as well as training, installation, events and content hosting services. Services revenue decreased $347 thousand or 6% from $6.2 million in Q2-2019 to $5.9 million in Q2-2020 primarily due to cancellations in event services due to COVID-19.

•
At March 31, 2020, $11.5 million of revenue was deferred, of which we expect to recognize $9.5 million in the next twelve months, including approximately $3.6 million in the quarter ending June 30, 2020. At September 30, 2019, $11.5 million of revenue was deferred.

•
Other revenue relates to freight charges billed separately to our customers.
YTD-2020 (six months) compared to YTD-2019 (six months)
Revenues for YTD-2020 totaled $16.7 million compared to YTD-2019 revenues of $15.5 million. Revenues included the following:

•
$4.9 million product and other revenue from the sale of 572 Mediasite recorders and software during YTD-2020 versus $3.5 million from the delivery of 235 Mediasite recorders and software in YTD-2019. Recorders sold were substantially more than YTD-2019, partially due to a large refresh order in Q2-2020 and our planned reduced reliance on distribution.

•
$11.8 million from Mediasite customer support contracts, installation, training, events and hosting services versus $12.0 million in 2019.

28


Gross Margin
Q2-2020 compared to Q2-2019
Gross margin for Q2-2020 was $6.3 million or 72% of revenue compared to Q2-2019 gross margin of $6.0 million or 75%. The significant components of cost of revenue include:

•
Material and freight costs for the Mediasite recorders. Costs for Q2-2020 Mediasite recorder hardware and other costs totaled $453 thousand, along with $37 thousand of freight costs, and $645 thousand of labor and allocated costs, compared to Q2-2019 Mediasite recorder costs of $233 thousand for hardware and other costs, $50 thousand for freight and $383 thousand of labor and allocated costs. This resulted in gross margin on products of 59% in Q2-2020 and 64% in Q2-2019.

•
Services costs. Staff wages and other costs allocated to cost of service revenue were $1.2 million in Q2-2020 and $1.4 million in Q2-2019, resulting in gross margin on services of 79% in Q2-2020 and 78% in Q2-2019.
YTD-2020 (six months) compared to YTD-2019 (six months)

Gross margin for YTD-2020 was $12.1 million or 73% of revenue compared to YTD-2019 gross margin of $11.7 million or 75% . The significant components of cost of revenue include:

•
Material and freight costs for the Mediasite recorders. Costs for YTD-2020 Mediasite recorder hardware and other costs totaled $600 thousand, along with $58 thousand of freight costs, and $1,289 thousand of labor and allocated costs, compared to YTD-2019 Mediasite recorder costs of $491 thousand for hardware and other costs, $103 thousand for freight and $775 thousand of labor and allocated costs. This resulted in gross margin on products of 59% in YTD-2020 and 63% in YTD-2019.

•
Service costs. Staff wages and other costs allocated to cost of service revenue were $2.6 million in YTD-2020 and $2.6 million in YTD-2019, resulting in gross margin on services of 78% in YTD-2020 and 79% in YTD-2019.

Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses include wages and commissions for sales, marketing and business development personnel, print advertising and various promotional expenses for our products. Timing of these costs may vary greatly depending on introduction of new products and services or entrance into new markets, or participation in major tradeshows.
Q2-2020 compared to Q2-2019
Selling and marketing expenses decreased $779 thousand or 20% from $3.8 million in Q2-2019 to $3.1 million in Q2-2020. Differences in the major categories include:

•
Salary, commissions, and benefits expense decreased by $392 thousand as a result of reduced headcount.

•
Travel expenses, including entertainment and meals, decreased by $153 thousand.

•
Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $143 thousand and $615 thousand respectively, an aggregate decrease of $51 thousand from Q2-2019.
YTD-2020 (six months) compared to YTD-2019 (six months)
Selling and marketing expenses decreased $1,326 thousand or 17% from $7.8 million in YTD-2019 to $6.5 million in YTD-2020. Differences in the major categories include:

29


•
Salary, commissions, and benefits expense decreased by $736 thousand as a result of reduced headcount.

•
Travel expenses, including entertainment and meals, decreased by $308 thousand.

•
Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $281 thousand and $1,337 thousand, respectively, an aggregate decrease of $43 thousand from YTD-2019.

We anticipate selling and marketing headcount to remain consistent throughout the remainder of the fiscal year.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities, finance, legal, human resource and information technology departments, as well as other expenses not fully allocated to functional areas.

Q2-2020 compared to Q2-2019

G&A expenses decreased $169 thousand or 13% from $1.4 million in Q2-2019 to $1.2 million in Q2-2020. Differences in the major categories include:

•
Decrease in compensation and benefits of $81 thousand as a result of reduced headcount.

•
Professional services increased by $72 thousand primarily due to increase in legal and advisory fees.

•
G&A expenses for Sonic Foundry International and Mediasite KK accounted for $13 thousand and $185 thousand respectively, an aggregate decrease of $78 thousand from Q2-2019.

YTD-2020 (six months) compared to YTD-2019 (six months)

G&A expenses decreased $266 thousand or 9% from $2.9 million in YTD-2019 to $2.6 million in YTD-2020. Differences in the major categories include:

•
Decrease in compensation and benefits of $356 thousand as a result of reduced headcount.

•
Professional services increased by $172 thousand primarily due to an increase in legal and advisory fees.

•
G&A expenses for Sonic Foundry International and Mediasite KK accounted for $30 thousand and $425 thousand respectively, an aggregate decrease of $71 thousand from YTD-2019.

We anticipate general and administrative headcount to remain consistent throughout the remainder of the fiscal year.
Product Development Expenses
Product development expenses include salaries and wages of the software research and development staff and an allocation of benefits, facility and administrative expenses.

Q2-2020 compared to Q2-2019
Product development expenses decreased by $436 thousand, or 23% from $1.9 million in Q2-2019 to $1.5 million in Q2-2020. Differences in the major categories include:

•
Decrease in compensation and benefits of $341 thousand as a result of reduced headcount.

•
Decrease in professional services of $41 thousand.

•
Product development expense for Sonic Foundry International and Mediasite KK accounted for $108 thousand and $76 thousand respectively, an aggregate decrease of $24 thousand compared to Q2-2019.


30

YTD-2020 (six months) compared to YTD-2019 (six months)

Product development expenses decreased by $679 thousand, or 18% from $3.8 million in YTD-2019 to $3.1 million in YTD-2020. Differences in the major categories include:

•
Decrease in compensation and benefits of $463 thousand related primarily to an increase in compensation rates and the cost of benefits.

•
Decrease in professional services of $50 thousand, due to decreased use of outsourced development.

•
Product development expense for Sonic Foundry International and Mediasite KK accounted for $226 thousand and $146 thousand respectively, an aggregate decrease of $31 thousand compared to YTD-2019.

We anticipate product development headcount to remain consistent throughout the remainder of the fiscal year. We do not anticipate that any fiscal 2020 software development efforts will qualify for capitalization.


Other Income and Expense, Net
Interest expense for the three and six months ended March 31, 2020 decreased $9 thousand and increased $100 thousand, respectively, compared to the same periods last year mainly as a result of interest on the Subordinated Promissory Notes with Mr. Burish, the first tranche of which was disbursed on January 4, 2019. Interest payments and the first anniversary fee on the Burish notes are currently being deferred. See Note 4 - Credit Arrangements for further details on the deferred interest and fees. The Company also recorded $14 thousand and $28 thousand of interest expense for the three and six months ended March 31, 2020 related to the accretion of discounts on the PFG Loan and Warrant Debt compared to $14 thousand and $27 thousand for the three and six months ended March 31, 2019. The Company also recorded amortization expense related to the back-end fee on the PFG loan of $13 thousand and $25 thousand in both the three and six month ended March 31, 2020 compared to $13 thousand and $25 thousand for the same periods last year. The Company also recorded $34 thousand and $67 thousand of interest expense during the three and six months ended March 31, 2020 related to the accretion of discounts on the Burish notes payable compared to $13 thousand for the three and six months ended March 31, 2019.
During the three and six months ended March 31, 2020, a loss in fair value of $61 thousand and $63 thousand, respectively, was recorded related to the fair value remeasurement on the derivative liability associated with the Loan and Security Agreement and Warrant Debt with PFG compared to a loss in fair value of $8 thousand and a gain of $15 thousand, respectively, during the three and six months ended March 31, 2019.


Foreign Currency Translation Adjustment

The Company's wholly-owned subsidiaries operate in Japan and the Netherlands, and utilize the Japanese Yen and Euro, respectively, as their functional currency. Assets and liabilities of the Company's foreign operations are translated in US dollars at period end exchange rates while revenues and expenses are translated using average rates for the period. Gains and losses from the translation are deferred and included in accumulated other comprehensive loss the consolidated statements of operations.

For the three and six months ended March 31, 2020, the Company's foreign currency translation adjustment was a gain of $5 thousand and a loss of $3 thousand compared to to a loss of $17 thousand and a gain of $45 thousand for the three and six months ended March 31, 2019. The gain is attributable to the strengthening in the Japanese Yen compared to the US dollar compared to the prior period.

During the three and six months ended March 31, 2020, the Company recorded an aggregate transaction of $0 and a gain of $15 thousand compared to an aggregate loss of $3 thousand and $40 thousand for the three and six months ended March 31, 2019. The aggregate transaction gain or loss is included in the other expense line of the condensed consolidated statements of operations.






31

Liquidity and Capital Resources
The Company’s primary sources of liquidity are its cash from operations and debt and equity financing. During the first six months of fiscal 2020, the Company generated $680 thousand of cash from operating activities compared with $3.3 million used in the same period of fiscal 2019.
Capital expenditures were $118 thousand in the first six months of fiscal 2020 compared to $222 thousand in the same period in fiscal 2019.

The Company used $278 thousand of cash from financing activities during the first six months of fiscal 2020, primarily due to net proceeds from the disbursement of the Mediasite term note of $463 thousand offset by payments of $618 thousand on existing debt. For the same period in fiscal 2019, the Company generated $3.5 million of cash from financing activities, mainly due to notes payable proceeds, primarily due to net proceeds from the disbursement of Tranches 1-4 of the Burish Note Purchase Agreement.

At March 31, 2020, the Company had $6.7 million outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V, the subordinated notes issued under the Burish Note Purchase Agreement and the Mediasite KK term debt. The Company made principal payments of $250 thousand and $500 thousand for the three and six months ended March 31, 2020 on the PFG V debt, and $113 thousand on the Mediasite KK term debt in the current quarter.
At March 31, 2020, approximately $1.5 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.
On May 13, 2020, the Company and Mr. Burish entered into a Debt Conversion Agreement to convert Mr. Burish's existing secured debt of approximately $5.6 million into common stock at $5.00 per share. Both the Special Committee and Mr. Burish concluded that converting the debt to equity was the most appropriate way to maximize both Company and Shareholder value, improve the Company's financial position, and provide the Company with resources to further its growth opportunities.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next twelve months. We will likely evaluate lease opportunities to finance equipment purchases in the future and anticipate continuing to utilize proceeds from the notes and term debt to support working capital needs. We may also seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company.


32

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year-ended September 30, 2019. At March 31, 2020, $4.9 million of the Company’s $6.7 million in outstanding debt is variable rate. We do not expect that an increase in the level of interest rates would have a material impact on our Consolidated Financial Statements. We monitor our positions with, and the credit quality of, the financial institutions that are party to any of our financial transactions.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on evaluations at March 31, 2020, our principal executive officer and principal financial officer, with the participation of our management team, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act). Disclosure controls and procedures ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.
Changes in Internal Controls
On October 1, 2019, we adopted ASC 842. As a result, changes were made to the relevant business processes and related control activities in order to monitor and maintain appropriate controls over financial reporting.
During the period covered by the quarterly report on Form 10-Q, the Company has not made any other changes to its internal control over financial reporting (as referred to in Paragraph 4(b) of the Certifications of the Company's principal executive officer and principal financial officer included as exhibits to the report) that have materially affected, or are reasonably likely to affect the Company's internal control over financial reporting.




33

PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.

ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in our Form 10-K for the fiscal year ended September 30, 2019 filed with the SEC.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.

ITEM 6. EXHIBITS
NUMBER
 
DESCRIPTION
3.1

 
 
 
 
3.2

 
 
 
 
3.3

 
 
 
 
3.4

 
 
 
 
3.5

 
 
 
 
10.1*

 
 
 
 
10.2*

 
 
 
 
10.3*

 
 
 
 
10.4

 
 
 
 
10.5*

 
10.6

 
Forms of Subscription Agreements, Lock-Up Agreements and Warrant Agreements dated December 22, 2014 among Sonic Foundry, Inc. and Mark Burish, and Sonic Foundry, Inc. and Andrew Burish, filed as Exhibits 10.1, 10.2, and 10.3 to the Form 8-K filed on December 30, 2014 and hereby incorporated by reference.
 
 
 
10.7

 
 
 
 
10.8

 
 
 
 
10.9

 
 
 
 
10.10

 
 
 
 

34

10.11

 
 
 
 
10.12

 
 
 
 
10.13

 
 
 
 
10.14

 
 
 
 
10.15

 
 
 
 
10.16

 
 
 
 
10.17

 
 
 
 
10.18

 
 
 
 
10.19

 
 
 
 
10.20

 
 
 
 
10.21

 
 
 
 
10.22

 
 
 
 
10.23

 
 
 
 
10.24

 
 
 
 
10.25

 
 
 
 
10.26

 
 
 
 
10.27

 
 
 
 
10.28

 
 
 
 
10.29

 
 
 
 
10.30

 
 
 
 
10.31

 
 
 
 
10.32

 
 
 
 
10.33

 

35

 
 
 
10.34

 
 
 
 
10.35

 
 
 
 
10.36

 
 
 
 
10.37

 
 
 
 
10.38

 
 
 
 
10.39

 
 
 
 
10.40

 
 
 
 
10.41

 
 
 
 
10.42

 
 
 
 
31.1

 
 
 
 
31.2

 
 
 
 
32

 
 
 
 
101

 
The following materials from the Sonic Foundry, Inc. Form 10-Q for the quarter ended March 31, 2020 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders' Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.
Registrant will furnish upon request to the Securities and Exchange Commission a copy of all exhibits, annexes and schedules attached to each contract referenced in item 10.
*
Compensatory Plan or Arrangement


36

SIGNATURES
Pursuant to the requirement 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.
Sonic Foundry, Inc.
(Registrant)
 
 
 
 
 
May 14, 2020
 
By:
 
/s/ Michael Norregaard
 
 
 
 
Michael Norregaard
 
 
 
 
Chief Executive Officer
 
 
 
 
 
May 14, 2020
 
By:
 
/s/ Kenneth A. Minor
 
 
 
 
Kenneth A. Minor
 
 
 
 
Interim Chief Financial Officer

37