SONIC FOUNDRY INC - Quarter Report: 2021 March (Form 10-Q)

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended March 31, 2021

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  ☒           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  ☒            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		☒
				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  ☒

State the number of shares outstanding of each of the issuer’s common equity as of the last practicable date:

Class		Outstanding April 30, 2021
Common Stock, $0.01 par value		8,064,838

 

 

 

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, 2020

 

 

 

 

		March 31				September 30,
		2021				2020
Assets
Current assets:
Cash and cash equivalents		$	5,425			$	7,619
Accounts receivable, net of allowances of $233 & $236			5,109				6,250
Inventories			1,090				1,167
Investment in sales-type lease, current			203				275
Capitalized commissions, current			315				440
Prepaid expenses and other current assets			1,083				1,065
Total current assets			13,225				16,816
Property and equipment:
Leasehold improvements			1,113				1,128
Computer equipment			8,282				7,960
Furniture and fixtures			1,400				1,366
Total property and equipment			10,795				10,454
Less accumulated depreciation and amortization			7,760				7,295
Property and equipment, net			3,035				3,159
Other assets:
Investment in sales-type lease, long-term			72				76
Capitalized commissions, long-term			71				100
Right-of-use assets under operating leases			1,403				2,081
Other long-term assets			467				397
Total assets		$	18,273			$	22,629
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable		$	1,077			$	2,689
Accrued liabilities			2,454				2,565
Current portion of unearned revenue			7,813				10,402
Current portion of finance lease obligations			85				119
Current portion of operating lease obligations			1,135				1,425
Current portion of notes payable and warrant debt, net of discounts			1,086				1,104
Total current liabilities			13,650				18,304
Long-term portion of unearned revenue			1,766				1,736
Long-term portion of finance lease obligations			46				89
Long-term portion of operating lease obligations			267				665
Long-term portion of notes payable and warrant debt, net of discounts			2,089				2,673
Derivative liability, at fair value			85				66
Other liabilities			154				144
Total liabilities			18,057				23,677
Commitments and contingencies
Stockholders’ equity (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; 8,063,713 and 7,965,325 shares issued, respectively and 8,050,997 and 7,952,609 shares outstanding, respectively			81				80
Additional paid-in capital			209,523				209,022
Accumulated deficit			(208,630	)			(209,519	)
Accumulated other comprehensive loss			(589	)			(462	)
Treasury stock, at cost, 12,716 shares			(169	)			(169	)
Total stockholders’ equity (deficit)			216				(1,048	)
Total liabilities and stockholders’ equity (deficit)		$	18,273			$	22,629

 

		Three Months Ended March 31,								Six Months Ended March 31,
		2021				2020				2021				2020
Revenue:
Product and other		$	2,586			$	2,812			$	4,747			$	4,867
Services			6,125				5,854				13,129				11,814
Total revenue			8,711				8,666				17,876				16,681
Cost of revenue:
Product and other			951				1,158				1,764				1,989
Services			1,624				1,247				3,222				2,595
Total cost of revenue			2,575				2,405				4,986				4,584
Gross margin			6,136				6,261				12,890				12,097
Operating expenses:
Selling and marketing			2,895				3,057				5,905				6,453
General and administrative			1,055				1,176				2,253				2,617
Product development			1,731				1,499				3,472				3,089
Total operating expenses			5,681				5,732				11,630				12,159
Income (loss) from operations			455				529				1,260				(62	)
Non-operating expenses:
Interest expense, net			(23	)			(218	)			(52	)			(481	)
Other expense, net			(38	)			(58	)			(27	)			(43	)
Total non-operating expenses			(61	)			(276	)			(79	)			(524	)
Income (loss) before income taxes			394				253				1,181				(586	)
Income tax (expense)			(137	)			(158	)			(292	)			(139	)
Net income (loss)		$	257			$	95			$	889			$	(725	)
Dividends on preferred stock			—				—				—				—
Net income (loss) attributable to common stockholders		$	257			$	95			$	889			$	(725	)
Income (loss) per common share
– basic		$	0.03			$	0.01			$	0.11			$	(0.11	)
– diluted		$	0.03			$	0.01			$	0.11			$	(0.11	)
Weighted average common shares
– basic			8,040,513				6,785,180				8,001,723				6,760,779
– diluted			8,557,788				6,933,227				8,451,913				6,760,779

 

		Three Months Ended March 31,								Six Months Ended March 31,
		2021				2020				2021				2020
Net income (loss)		$	257			$	95			$	889			$	(725	)
Other comprehensive loss
Foreign currency translation adjustment			(215	)			5				(127	)			(3	)
Comprehensive income (loss)		$	42			$	100			$	762			$	(728	)

 

																		Accumulated
										Additional								other
						Common				paid-in				Accumulated				comprehensive				Treasury
		Preferred stock				stock				capital				deficit				loss				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	)

																		Accumulated
										Additional								other
						Common				paid-in				Accumulated				comprehensive				Treasury
		Preferred stock				stock				capital				deficit				loss				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	)

																		Accumulated
										Additional								other
						Common				paid-in				Accumulated				comprehensive				Treasury
		Preferred stock				stock				capital				deficit				loss				stock				Total
Balance, September 30, 2020		$	—			$	80			$	209,022			$	(209,519	)		$	(462	)		$	(169	)		$	(1,048	)
Stock compensation			—				—				283				—				—				—				283
Issuance of common stock			—				1				218				—				—				—				219
Foreign currency translation adjustment			—				—				—				—				(127	)			—				(127	)
Net Income			—				—				—				889				—				—				889
Balance, March 31, 2021		$	—			$	81			$	209,523			$	(208,630	)		$	(589	)		$	(169	)		$	216

																		Accumulated
										Additional								other
						Common				paid-in				Accumulated				comprehensive				Treasury
		Preferred stock				stock				capital				deficit				loss				stock				Total
Balance, December 31, 2020		$	—			$	80			$	209,283			$	(208,887	)		$	(374	)		$	(169	)		$	(67	)
Stock compensation			—				—				165				—				—				—				165
Issuance of common stock			—				1				75				—				—				—				76
Foreign currency translation adjustment			—				—				—				—				(215	)			—				(215	)
Net income			—				—				—				257				—				—				257
Balance, March 31, 2021		$	—			$	81			$	209,523			$	(208,630	)		$	(589	)		$	(169	)		$	216

 

		Six Months Ended
		March 31,
		2021				2020
Operating activities
Net Income (loss)		$	889			$	(725	)
Adjustments to reconcile net income ( loss ) to net cash provided by (used in) operating activities:
Amortization of other intangibles			33				150
Depreciation and amortization of property and equipment			539				433
Loss on sale of fixed assets			5				—
Provision for doubtful accounts - including financing receivables			3				9
Stock-based compensation expense related to stock options			283				86
Stock issued for board of director fees			—				64
Deferred loan interest to related party			—				264
Remeasurement loss on derivative liability			19				63
Changes in operating assets and liabilities:
Accounts receivable			925				175
Inventories			71				(45	)
Investment in sales-type lease			63				126
Capitalized commissions			154				134
Prepaid expenses and other current assets			(45	)			64
Right-of-use assets under operating leases			655				562
Operating lease obligations			(665	)			(578	)
Other long-term assets			(93	)			4
Accounts payable and accrued liabilities			(1,628	)			(162	)
Other long-term liabilities			17				(1	)
Unearned revenue			(2,495	)			57
Net cash provided by (used in) operating activities			(1,270	)			680
Investing activities
Purchases of property and equipment			(448	)			(118	)
Net cash used in investing activities			(448	)			(118	)
Financing activities
Proceeds from notes payable			—				463
Payments on notes payable			(618	)			(618	)
Proceeds from issuance of common stock			10				—
Proceeds from exercise of common stock options			209				1
Payments on finance lease obligations			(76	)			(124	)
Net cash used in financing activities			(475	)			(278	)
Changes in cash and cash equivalents due to changes in foreign currency			(1	)			7
Net increase (decrease) in cash and cash equivalents			(2,194	)			291
Cash and cash equivalents at beginning of year			7,619				4,295
Cash and cash equivalents at end of period		$	5,425			$	4,586
Supplemental cash flow information:
Interest paid		$	31			$	479
Income taxes paid, foreign			44				90
Non-cash financing and investing activities:
Property and equipment financed by finance lease or accounts payable			—				821

 

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, 2020 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, 2021 are not necessarily indicative of the results that might be expected for the year ending September 30, 2020. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

 

Impacts of COVID-19

 

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. The Company continues to follow guidelines outlined by the CDC and local county protocol. Given these guidelines and current trends, the Company is targeting August 2, 2021 for a return to in-person working.  

 

COVID-19 has had negative 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 2020, the in-person events portion of our business was, and continues to be, significantly impacted by cancellations and/or postponements due to social distancing protocols enacted to stop the spread of the virus.  In response to the cancellations, the Company introduced a new virtual events platform as an alternate solution for our customers. While a return to in-person events and conferences is anticipated to begin during the summer of 2021, a full return is not anticipated until 2022. In addition, the Company is confident many future in-person events will be hybrid and will include our virtual events platform. 

 

In addition, the closure of educational institutions globally and the negative financial impact on their funding, could impact 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.

 

Restructuring and exit activities

 

The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. The Company accounts for on-going benefit arrangements, such as those documented by employment agreements, in accordance with Accounting Standards Codification 712 ("ASC 712") Nonretirement Postemployment Benefits. Under ASC 712, liabilities for postemployment benefits are recorded at the time the obligations are probable of being incurred and can be reasonably estimated. The Company accounts for one-time employment benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. When applicable, the Company records such costs into operating expense.

 

For the three and six months ended March 31, 2021, the Company expensed involuntary termination benefits of $0 and $101 thousand under ASC 420 compared to zero during the same periods last year.

 

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, 2021:

 

 

 

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):

 

 

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, 2021 and September 30, 2020, the Company has recorded a liability of $129 thousand and $134 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):

 

 

 

 

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 Non-Recurring 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 D. 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 approximated 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 was being amortized over the life of the related debt until May 2020, at which time the debt was extinguished and exchanged for the Company's common stock.

 

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, accounts payable, 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, 2021 or 2020.

 

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.

 

 

The fair value of each option grant is estimated using the assumptions in the following table:

 

A summary of option activity at March 31, 2021 and changes during the six months then ended is presented below:

 

 

A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 2021 is presented below:

 

 

The weighted average grant date fair value of options granted during the six months ended March 31, 2021 was $2.01. As of March 31, 2021, there was $668 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $515 thousand. The cost is expected to be recognized over a weighted-average remaining life of 1.8 years.

 

Stock-based compensation recorded in the three and six months ended March 31, 2021 was $165 thousand and $283 thousand, respectively. Stock-based compensation recorded in the three and six months ended March 31, 2020 was $34 thousand and $86 thousand, respectively. There was $66 thousand and $209 thousand in cash received from transactions under all stock option plans during the three and six months ended March 31, 2021 and $1 thousand during the the three and six months ended March 31, 2020. There were no tax benefits realized for tax deductions from option exercises in either of the three and six month periods ended March 31, 2021 or 2020. 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 300,000 common shares may be issued. The board passed a resolution in December 2020 to increase the share count by an additional 100,000 shares. A total of 106,704 shares are available to be issued under the plan as March 31, 2021. The Company recorded stock compensation expense under this plan of $6 thousand and $7 thousand for the for the three and six month periods ended March 31, 2021 and $1 thousand for the three and six month periods ended March 31, 2020.

 

 

Preferred Stock and Dividends

 

No shares of Preferred Stock, Series A were issued and outstanding as of March 31, 2021 and 2020.

 

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:

 

 

Liquidity

 

At March 31, 2021, approximately $3.1 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 12 months. The Company is inquiring with its bank regarding a line of credit. The Company will likely evaluate lease opportunities to finance equipment purchases in the future and 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 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, 2020, and interim periods within fiscal years beginning after December 15, 2020. 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 must adopt all the amendments in the same period. 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.

 

 

 

 

 

 

2. Related Party Transactions

 

During the three and six months ended March 31, 2021, the Company incurred fees of $28 thousand and $60 thousand, respectively, to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $148 thousand and $258 thousand during the three and six months ended March 31, 2020. The Company had recorded liabilities of $9 thousand and $36 thousand for unbilled services to the same law firm at March 31, 2021 and September 30, 2020, respectively.

 

On May 13, 2020, the Company entered into a debt conversion agreement with Mr. Burish to convert all outstanding debt owed to Mr. Burish into common stock at a conversion price of $5.00 per share. The total debt amount, including accrued interest and fees, of $5.6 million was converted into 1,114,723 shares of common stock. The transaction was recommended by the Company's Special Committee of Independent and Disinterested Directors, unanimously approved by all disinterested directors of the Company, and ratified by shareholders at the Company's most recent shareholder meeting. Silverwood Partners, the Special Committee's financial advisor, issued a fairness opinion in connection with the transaction. The debt conversion was also ratified by the shareholders at the annual shareholders meeting held on January 28, 2021.

 

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 for hardware inventory, as well as services to support our hosting environment, which are not recorded on the Company's condensed consolidated balance sheet. At March 31, 2021, the Company had an obligation to purchase $62 thousand of Mediasite product and $139 thousand of services during the remainder of fiscal 2021, and $423 thousand during fiscal 2022 and 2023.

 

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.

 

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 includes 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 and have a net carrying value of $191 thousand at September 30, 2020 and $111 thousand at March 31,2021.

 

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, 2021, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 are as follows (in thousands):

 

 

 

 

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

 

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):

 

Other information related to leases was as follows:

 

 

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 without penalty as of May 14, 2019. The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property.

 

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, 2021, and September 30, 2020, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $85 thousand and $66 thousand, respectively. Included in other expense, the remeasurement loss on the derivative liability during the three and six months ended March 31, 2021 was $14 thousand and $19 thousand, respectively, compared to remeasurement loss of $61 thousand and $63 thousand, respectively, during the three and six months ended March 31, 2020.

 

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 is treated together as a debt discount on the PFG V Debt and is being 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. . The Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $7 thousand and $13 thousand, respectively, compared to $6 thousand and $11 thousand in the same periods last year.

 

In addition, $14 thousand and $28 thousand of amortization of the debt discount was recorded in the three and six month periods, respectively, in both 2021 and 2020. At March 31, 2021, the carrying value of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $167 thousand and $185 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 for both fiscal 2021 and 2020, the Company recorded interest expense associated with recognition of the back-end fee of $13 thousand and $25 thousand, respectively.

 

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, 2021, non-cash interest expense of $23 thousand and $41 thousand was recorded compared to $3 thousand gain and $1 thousand loss during the same periods last year.

 

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, 2021, the Company was in compliance with all covenants per the 2018 Loan and Security Agreement, as modified.

 

 

 

 

The existing terms of the PFG loan in terms of amortization, interest rate, payment schedule and maturity date are unchanged.

 

At March 31, 2021, a gross balance of $167 thousand 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, 2020, a gross balance of $667 thousand 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.

 

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 provided for subordinated secured promissory notes (the "Subordinated Promissory Notes") in an aggregate original principal amount of up to $5,000,000. Mr. Burish acquired 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 31, 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 accrued 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, was set to mature on February 28, 2024 (the "Maturity Date"). Principal installments of $100,000 were to begin monthly on August 31, 2020, and continue through the Maturity Date. The Note Purchase Agreement dated February 28, 2019 was subordinated to the existing PFG loan.

 

At each anniversary of the Closing, an administration fee will be payable to Mr. Burish equal to 0.5% of the purchase price less principal payments made.

 

 

The proceeds from the Note Purchase Agreement were allocated between the Subordinated Promissory Notes and the Burish Warrant based on their relative fair value on the date of issuance. The warrant was treated together as a debt discount on the Subordinated Notes Payable and was accreted to interest expense under the effective interest rate method over the five-year term of the Subordinated Notes Payable. During the first fiscal quarter of 2020, the Company recorded accretion of discount expense associated with the Subordinated Promissory Notes of $34 thousand.

 

The non-cash effective interest expense was calculated on the net balance of the Subordinated Promissory Notes, Burish Warrant, and related loan origination fees, on a monthly basis. During the three months ended December 31, 2019, $15 thousand of non-cash interest benefit related to the effective interest rate on the Subordinated Promissory Notes was recorded.

 

February 28, 2019 Warrant

 

Coincident with execution of the Note Purchase Agreement, the Company entered into a Warrant Agreement ("Burish Warrant") with Mr. Burish. Pursuant to the terms of the Burish 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 Burish Warrant.

 

May 13, 2020 Debt Conversion Agreement

 

On May 13, 2020, the Company entered into a debt conversion agreement with Mr. Burish to convert all outstanding debt owed to Mr. Burish into common stock at a conversion price of $5.00 per share. The net carrying value of $5.0 million, including principal and accrued interest of $5.6 million less debt discount and loan origination fees of $596 thousand, was converted into 1,114,723 shares of common stock. The debt conversion was treated as a debt extinguishment, and resulted in a net loss of $26 thousand.

 

Paycheck Protection Program (PPP) Loan Dated April 20, 2020

 

Following the approval of the Board of Directors, the Company and First Business Bank entered into a $2.3 million Promissory Note (the "Promissory Note") under the Paycheck Protection Program (PPP) contained within the new Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP loan has a term of two years for those companies receiving loan proceeds prior to June 5, 2020, is unsecured, and is guaranteed by the U.S. Small Business Administration ("SBA"). The loan carries a fixed interest rate of 1% per annum. Under the terms of the CARES Act, the Company is eligible for and submitted its application for forgiveness of all loan proceeds on March 2nd, 2021. The lending bank reviewed the application and has submitted it to the SBA for approval. The SBA has 90 days from receipt of the application to review and render a decision back to the lender. The Company expects to receive full forgiveness of the loan. As of March 31, 2021 the full amount of the loan has been split between short-term and long-term notes payable of $772 thousand and $1.5 million, respectively, as well as short-term accrued interest of $22 thousand.

 

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 accrued interest at an annual rate of 1.475%. Beginning in January 2020, principal payments in 12 equal monthly installments, plus accrued interest were made. The principal has been paid in full as of December 30, 2020.

 

At March 31, 2021 and September 30, 2020, 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%). The available line of credit at March 31, 2021 was $485 thousand and maturity date is on February 28,  2022.

 

On August 20, 2020, Mediasite K.K. and Sumitomo Mitsui Banking Corporation entered into a $379 thousand Promissory Note under an initiative by the Japanese Finance Corporation government institution in response to the Cabinet Decision entitled "Emergency Economic Measures to Cope With COVID-19." Extending financial relief to organizations impacted by COVID-19, the loan has a term of three years and carries a fixed interest rate of 0.46% per annum. Government subsidies provided through the Japanese Finance Corporations will provide interest relief throughout the term of the loan. In addition, the loan agreement includes a three year grace period with principal payments deferred through the end of the loan, which is September 30, 2023. As of March 31, 2021 the full amount of the loan has been included in long-term notes payable.

 

 

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, 2021 or September 30, 2020, 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, 2021 or  2020.

 

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. The Company's income tax expense for the three and six months ended March 31, 2021 and 2020 primarily consists of income tax expense at its foreign subsidiaries.

 

 

6. Revenue

 

Disaggregation of Revenues

 

The following tables summarize revenues from contracts with customers for the three and six months ended March 31, 2021 and 2020, respectively, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK) :

 

 

 

 

 

 

Transaction price allocated to future performance obligations

 

As of March 31, 2021, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately $3.8 million in the next three months, $7.8 million in the next twelve months, and the remaining $1.8 million thereafter.

 

 

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, 2021, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $4.0 million and $8.2 million , respectively, compared to $2.4 million and 6.7 million, respectively, recognized during the  three and six months ended March 31, 2020.

 

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, 2021, amortization expense related to the amount included in the capitalized commissions at the beginning of the period was $240 thousand and $457 thousand , respectively, compared to $127 thousand and $330 thousand , respectively, recognized during the three and six months ended March 31, 2020.

 

 

 

 

 

Differences in the major categories include: