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 December 31, 2019
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
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
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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
State the number of shares outstanding of each of the issuer’s common equity as of the last practicable date:
Class | Outstanding January 31, 2021 | |
Common Stock, $0.01 par value | 8,012,279 |
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, 2019.2020.
PAGE NO. | ||
PART I | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 1. | ||
Item 1A. | ||
Item 6. | ||
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
(Unaudited)
December 31, | September 30, | |||||||
2020 | 2020 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,845 | $ | 7,619 | ||||
Accounts receivable, net of allowances of $258 & $236 | 5,260 | 6,250 | ||||||
Inventories | 1,214 | 1,167 | ||||||
Investment in sales-type lease, current | 217 | 275 | ||||||
Capitalized commissions, current | 373 | 440 | ||||||
Prepaid expenses and other current assets | 1,048 | 1,065 | ||||||
Total current assets | 13,957 | 16,816 | ||||||
Property and equipment: | ||||||||
Leasehold improvements | 1,136 | 1,128 | ||||||
Computer equipment | 8,213 | 7,960 | ||||||
Furniture and fixtures | 1,444 | 1,366 | ||||||
Total property and equipment | 10,793 | 10,454 | ||||||
Less accumulated depreciation and amortization | 7,596 | 7,295 | ||||||
Property and equipment, net | 3,197 | 3,159 | ||||||
Other assets: | ||||||||
Investment in sales-type lease, long-term | 78 | 76 | ||||||
Capitalized commissions, long-term | 72 | 100 | ||||||
Right-of-use assets under operating leases | 1,827 | 2,081 | ||||||
Other long-term assets | 499 | 397 | ||||||
Total assets | $ | 19,630 | $ | 22,629 | ||||
Liabilities and stockholders’ deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 891 | $ | 2,689 | ||||
Accrued liabilities | 2,374 | 2,565 | ||||||
Unearned revenue | 9,053 | 10,402 | ||||||
Current portion of finance lease obligations | 100 | 119 | ||||||
Current portion of operating lease obligations | 1,482 | 1,425 | ||||||
Current portion of notes payable and warrant debt, net of discounts | 1,038 | 1,104 | ||||||
Total current liabilities | 14,938 | 18,304 | ||||||
Long-term portion of unearned revenue | 1,717 | 1,736 | ||||||
Long-term portion of finance lease obligations | 68 | 89 | ||||||
Long-term portion of operating lease obligations | 344 | 665 | ||||||
Long-term portion of notes payable and warrant debt, net of discounts | 2,399 | 2,673 | ||||||
Derivative liability, at fair value | 71 | 66 | ||||||
Other liabilities | 160 | 144 | ||||||
Total liabilities | 19,697 | 23,677 | ||||||
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; 8,012,279 and 7,965,325 shares issued, respectively and 7,999,563 and 7,952,609 shares outstanding, respectively | 80 | 80 | ||||||
Additional paid-in capital | 209,283 | 209,022 | ||||||
Accumulated deficit | (208,887 | ) | (209,519 | ) | ||||
Accumulated other comprehensive loss | (374 | ) | (462 | ) | ||||
Treasury stock, at cost, 12,716 shares | (169 | ) | (169 | ) | ||||
Total stockholders’ deficit | (67 | ) | (1,048 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 19,630 | $ | 22,629 | ||||
| (Unaudited) | |||||||
| December 31, 2019 | September 30, 2019 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 3,511 | $ | 4,295 | |||
| Accounts receivable, net of allowances of $135 | 5,381 | 6,532 | |||||
| Inventories | 908 | 558 | |||||
| Investment in sales-type lease, current | 129 | 163 | |||||
| Capitalized commissions, current | 390 | 464 | |||||
| Prepaid expenses and other current assets | 766 | 972 | |||||
| Total current assets | 11,085 | 12,984 | |||||
| Property and equipment: | |||||||
| Leasehold improvements | 1,119 | 1,121 | |||||
| Computer equipment | 5,659 | 5,610 | |||||
| Furniture and fixtures | 1,287 | 1,233 | |||||
| Total property and equipment | 8,065 | 7,964 | |||||
| Less accumulated depreciation and amortization | 6,628 | 6,396 | |||||
| Property and equipment, net | 1,437 | 1,568 | |||||
| Other assets: | |||||||
| Investment in sales-type lease, long-term | 133 | 134 | |||||
| Capitalized commissions, long-term | 93 | 106 | |||||
| Right-of-use assets under operating leases | 2,253 | — | |||||
| Other long-term assets | 381 | 388 | |||||
| Total assets | $ | 15,382 | $ | 15,180 | |||
| Liabilities and stockholders’ deficit | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 1,348 | $ | 843 | |||
| Accrued liabilities | 1,546 | 2,216 | |||||
| Unearned revenue | 8,663 | 9,610 | |||||
| Current portion of finance lease obligations | 173 | 194 | |||||
| Current portion of operating lease obligations | 1,270 | — | |||||
| Current portion of notes payable and warrant debt, net of discounts | 1,268 | 968 | |||||
| Total current liabilities | 14,268 | 13,831 | |||||
| Long-term portion of unearned revenue | 1,716 | 1,842 | |||||
| Long-term portion of finance lease obligations | 166 | 179 | |||||
| Long-term portion of operating lease obligations | 1,018 | — | |||||
| Long-term portion of notes payable and warrant debt, net of discounts | 5,096 | 5,429 | |||||
| Derivative liability, at fair value | 11 | 9 | |||||
| Other liabilities | 136 | 143 | |||||
| Total liabilities | 22,411 | 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; 6,749,359 shares issued, respectively and 6,736,643 shares outstanding, respectively | 67 | 67 | |||||
| Additional paid-in capital | 203,787 | 203,735 | |||||
| Accumulated deficit | (210,160 | ) | (209,340 | ) | |||
| Accumulated other comprehensive loss | (554 | ) | (546 | ) | |||
| Treasury stock, at cost, 12,716 shares | (169 | ) | (169 | ) | |||
| Total stockholders’ deficit | (7,029 | ) | (6,253 | ) | |||
| Total liabilities and stockholders’ deficit | $ | 15,382 | $ | 15,180 | |||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(in thousands, except for share and per share data)
(Unaudited)
Three Months Ended December 31, | ||||||||
2020 | 2019 | |||||||
Revenue: | ||||||||
Product and other | $ | 2,161 | $ | 2,055 | ||||
Services | 7,004 | 5,960 | ||||||
Total revenue | 9,165 | 8,015 | ||||||
Cost of revenue: | ||||||||
Product and other | 813 | 831 | ||||||
Services | 1,598 | 1,348 | ||||||
Total cost of revenue | 2,411 | 2,179 | ||||||
Gross margin | 6,754 | 5,836 | ||||||
Operating expenses: | ||||||||
Selling and marketing | 3,010 | 3,396 | ||||||
General and administrative | 1,198 | 1,441 | ||||||
Product development | 1,741 | 1,590 | ||||||
Total operating expenses | 5,949 | 6,427 | ||||||
Income (loss) from operations | 805 | (591 | ) | |||||
Non-operating expenses: | ||||||||
Interest expense, net | (29 | ) | (263 | ) | ||||
Other expense, net | 11 | 15 | ||||||
Total non-operating expenses | (18 | ) | (248 | ) | ||||
Income (loss) before income taxes | 787 | (839 | ) | |||||
Income tax (expense) benefit | (155 | ) | 19 | |||||
Net income (loss) | $ | 632 | $ | (820 | ) | |||
Dividends on preferred stock | — | — | ||||||
Net income (loss) attributable to common stockholders | $ | 632 | $ | (820 | ) | |||
Income (loss) per common share | ||||||||
– basic | $ | 0.08 | $ | (0.12 | ) | |||
– diluted | $ | 0.08 | $ | (0.12 | ) | |||
Weighted average common shares | ||||||||
– basic | 7,963,775 | 6,736,643 | ||||||
– diluted | 8,336,028 | 6,736,643 | ||||||
| Three Months Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| Revenue: | |||||||
| Product and other | $ | 2,055 | $ | 1,751 | |||
| Services | 5,960 | 5,751 | |||||
| Total revenue | 8,015 | 7,502 | |||||
| Cost of revenue: | |||||||
| Product and other | 831 | 651 | |||||
| Services | 1,348 | 1,191 | |||||
| Total cost of revenue | 2,179 | 1,842 | |||||
| Gross margin | 5,836 | 5,660 | |||||
| Operating expenses: | |||||||
| Selling and marketing | 3,396 | 3,943 | |||||
| General and administrative | 1,441 | 1,538 | |||||
| Product development | 1,590 | 1,833 | |||||
| Total operating expenses | 6,427 | 7,314 | |||||
| Loss from operations | (591 | ) | (1,654 | ) | |||
| Non-operating income (expenses): | |||||||
| Interest expense, net | (263 | ) | (154 | ) | |||
| Other income, net | 15 | 8 | |||||
| Total non-operating expenses | (248 | ) | (146 | ) | |||
| Loss before income taxes | (839 | ) | (1,800 | ) | |||
| Income tax benefit | 19 | 12 | |||||
| Net loss | $ | (820 | ) | $ | (1,788 | ) | |
| Dividends on preferred stock | — | (53 | ) | ||||
| Net loss attributable to common stockholders | $ | (820 | ) | $ | (1,841 | ) | |
| Loss per common share | |||||||
| – basic | $ | (0.12 | ) | $ | (0.36 | ) | |
| – diluted | $ | (0.12 | ) | $ | (0.36 | ) | |
| Weighted average common shares | |||||||
| – basic | 6,736,643 | 5,100,684 | |||||
| – diluted | 6,736,643 | 5,100,684 | |||||
See accompanying notes to the condensed consolidated financial statements
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
Three Months Ended December 31, | ||||||||
2020 | 2019 | |||||||
Net income (loss) | $ | 632 | $ | (820 | ) | |||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustment | 88 | (8 | ) | |||||
Comprehensive income (loss) | $ | 720 | $ | (828 | ) | |||
| Three Months Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| Net loss | $ | (820 | ) | $ | (1,788 | ) | |
| Foreign currency translation adjustment | (8 | ) | 62 | ||||
| Comprehensive loss | $ | (828 | ) | $ | (1,726 | ) | |
| 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 9 | — | — | — | 1,691 | — | — | — | 1,691 | |||||||||||||||||||||||
| Adjusted balance, October 1, 2018 | 1,651 | 51 | 200,130 | (205,728 | ) | (676 | ) | (26 | ) | (169 | ) | (4,767 | ) | ||||||||||||||||||
| Stock compensation | — | — | 164 | — | — | — | — | 164 | |||||||||||||||||||||||
| Conversion of preferred stock | (563 | ) | 2 | 561 | — | — | — | — | — | ||||||||||||||||||||||
| Preferred stock dividends | 53 | — | (53 | ) | — | — | — | — | — | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 62 | — | — | 62 | |||||||||||||||||||||||
| Net loss | — | — | — | (1,788 | ) | — | — | — | (1,788 | ) | |||||||||||||||||||||
| Balance, December 31, 2018 | $ | 1,141 | $ | 53 | $ | 200,802 | $ | (207,516 | ) | $ | (614 | ) | $ | (26 | ) | $ | (169 | ) | $ | (6,329 | ) | ||||||||||
| 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 | — | — | 52 | — | — | — | — | 52 | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (8 | ) | — | — | (8 | ) | |||||||||||||||||||||
| Net loss | — | — | — | (820 | ) | — | — | — | (820 | ) | |||||||||||||||||||||
| Balance, December 31, 2019 | $ | — | $ | 67 | $ | 203,787 | $ | (210,160 | ) | $ | (554 | ) | $ | — | $ | (169 | ) | $ | (7,029 | ) | |||||||||||
| Three Months Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| Operating activities | |||||||
| Net loss | $ | (820 | ) | $ | (1,788 | ) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||
| Amortization of other intangibles | 94 | 46 | |||||
| Depreciation and amortization of property and equipment | 227 | 273 | |||||
| Provision for doubtful accounts - including financing receivables | 9 | 26 | |||||
| Stock-based compensation expense related to stock options and warrants | 52 | 164 | |||||
| Deferred loan interest to related party | 123 | — | |||||
| Remeasurement loss (gain) on derivative liability | 2 | (15 | ) | ||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | 1,137 | 3,788 | |||||
| Financing receivables | — | (2 | ) | ||||
| Inventories | (351 | ) | (381 | ) | |||
| Investment in lease | 33 | — | |||||
| Capitalized commissions | 87 | 70 | |||||
| Prepaid expenses and other current assets | 216 | 24 | |||||
| Right-of-use assets under operating leases | 289 | — | |||||
| Operating lease obligations | (289 | ) | — | ||||
| Other long-term assets | 5 | — | |||||
| Accounts payable and accrued liabilities | (136 | ) | (752 | ) | |||
| Other long-term liabilities | (6 | ) | (22 | ) | |||
| Unearned revenue | (1,090 | ) | (1,183 | ) | |||
| Net cash provided by (used in) operating activities | (418 | ) | 248 | ||||
| Investing activities | |||||||
| Purchases of property and equipment | (59 | ) | (83 | ) | |||
| Net cash used in investing activities | (59 | ) | (83 | ) | |||
| Financing activities | |||||||
| Proceeds from notes payable | — | 500 | |||||
| Proceeds from lines of credit | — | 7,051 | |||||
| Payments on notes payable | (250 | ) | (83 | ) | |||
| Payments on lines of credit | — | (6,792 | ) | ||||
| Payment of debt issuance costs | — | (10 | ) | ||||
| Payments on finance lease obligations | (70 | ) | (73 | ) | |||
| Net cash provided by (used in) financing activities | (320 | ) | 593 | ||||
| Changes in cash and cash equivalents due to changes in foreign currency | 13 | (35 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (784 | ) | 723 | ||||
| Cash and cash equivalents at beginning of year | 4,295 | 1,189 | |||||
| Cash and cash equivalents at end of year | $ | 3,511 | $ | 1,912 | |||
| Supplemental cash flow information: | |||||||
| Interest paid | $ | 253 | $ | 136 | |||
| Income taxes paid, foreign | 81 | 92 | |||||
| Non-cash financing and investing activities: | |||||||
| Property and equipment financed by finance lease or accounts payable | 36 | 49 | |||||
| Debt discount | — | 3 | |||||
| Preferred stock dividends paid in additional shares | — | 53 | |||||
| Conversion of preferred shares | — | 563 | |||||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders' Deficit
(in thousands)
(Unaudited)
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 | — | — | 52 | — | — | — | 52 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (8 | ) | — | (8 | ) | |||||||||||||||||||
Net loss | — | — | — | (820 | ) | — | — | (820 | ) | |||||||||||||||||||
Balance, December 31, 2019 | $ | — | $ | 67 | $ | 203,787 | $ | (210,160 | ) | $ | (554 | ) | $ | (169 | ) | $ | (7,029 | ) | ||||||||||
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 | — | — | 119 | — | — | — | 119 | |||||||||||||||||||||
Issuance of common stock | — | — | 142 | — | — | — | 142 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 88 | — | 88 | |||||||||||||||||||||
Net income | — | — | — | 632 | — | — | 632 | |||||||||||||||||||||
Balance, December 31, 2020 | $ | — | $ | 80 | $ | 209,283 | $ | (208,887 | ) | $ | (374 | ) | $ | (169 | ) | $ | (67 | ) | ||||||||||
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended | ||||||||
December 31, | ||||||||
2020 | 2019 | |||||||
Operating activities | ||||||||
Net income (loss) | $ | 632 | $ | (820 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Amortization of other intangibles | 19 | 94 | ||||||
Depreciation and amortization of property and equipment | 268 | 227 | ||||||
Provision for doubtful accounts - including financing receivables | 22 | 9 | ||||||
Stock-based compensation expense related to stock options and warrants | 119 | 52 | ||||||
Deferred loan interest to related party | — | 123 | ||||||
Remeasurement loss on derivative liability | 5 | 2 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,079 | 1,137 | ||||||
Inventories | (42 | ) | (351 | ) | ||||
Investment in sales-type lease | 63 | 33 | ||||||
Capitalized commissions | 95 | 87 | ||||||
Prepaid expenses and other current assets | 45 | 216 | ||||||
Right-of-use assets under operating leases | 285 | 289 | ||||||
Operating lease obligations | (295 | ) | (289 | ) | ||||
Other long-term assets | (91 | ) | 5 | |||||
Accounts payable and accrued liabilities | (2,053 | ) | (136 | ) | ||||
Other long-term liabilities | 12 | (6 | ) | |||||
Unearned revenue | (1,431 | ) | (1,090 | ) | ||||
Net cash used in operating activities | (1,268 | ) | (418 | ) | ||||
Investing activities | ||||||||
Purchases of property and equipment | (287 | ) | (59 | ) | ||||
Net cash used in investing activities | (287 | ) | (59 | ) | ||||
Financing activities | ||||||||
Payments on notes payable | (368 | ) | (250 | ) | ||||
Proceeds from exercise of common stock options | 142 | — | ||||||
Payments on finance lease obligations | (41 | ) | (70 | ) | ||||
Net cash used in financing activities | (267 | ) | (320 | ) | ||||
Changes in cash and cash equivalents due to changes in foreign currency | 48 | 13 | ||||||
Net decrease in cash and cash equivalents | (1,774 | ) | (784 | ) | ||||
Cash and cash equivalents at beginning of year | 7,619 | 4,295 | ||||||
Cash and cash equivalents at end of period | $ | 5,845 | $ | 3,511 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 20 | $ | 253 | ||||
Income taxes paid, foreign | 44 | 81 | ||||||
Non-cash financing and investing activities: | ||||||||
Property and equipment financed by finance lease or accounts payable | — | 36 | ||||||
See accompanying notes to the condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(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, 20192020 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 three month period ended December 31, 20192020 are not necessarily indicative of the results that might be expected for the year ending September 30, 2020.
Impacts of customer receivables resultingCOVID-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 saleduration, severity and impact of the Company's productspandemic and services, primarily softwarecontainment 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 for the foreseeable future.
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 and continuing through today, 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 stem 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. 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 customer support contracts,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 presented net of allowance for losses.provided under an on-going benefit arrangement or under a one-time benefit arrangement. The Company has a single portfolio consistingaccounts 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 fixed-term receivables, which is further segregated into two classes based on type of productbeing incurred and lease.
During 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 atquarter ended December 31, 2019 and September 30, 2019.
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 December 31, 2019:2020:
Investment in sales-type lease, gross: | ||||
2021 | $ | 218 | ||
2022 | 78 | |||
Gross investment in sales-type lease | 296 | |||
Less: Unearned income | (1 | ) | ||
Total investment in sales-type lease | $ | 295 | ||
Current portion of total investment in sales-type lease | $ | 217 | ||
Long-term portion of total investment in sales-type lease | 78 | |||
| $ | 295 |
| Investment in sales-type lease, gross: | |||
| 2020 | $ | 133 | |
| 2021 | 133 | ||
| Gross investment in sales-type lease | 266 | ||
| Less: Unearned income | (4 | ) | |
| Total investment in sales-type lease | $ | 262 | |
| Current portion of total investment in sales-type lease | $ | 129 | |
| Long-term portion of total investment in sales-type lease | 133 | ||
| $ | 262 | ||
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.
Inventory consists of the following (in thousands):
| December 31, | September 30, | |||||||
2020 | 2020 | |||||||
Raw materials and supplies | $ | 282 | $ | 267 | ||||
Finished goods | 1,054 | 1,022 | ||||||
Less: Obsolescence reserve | (122 | ) | (122 | ) | ||||
| $ | 1,214 | $ | 1,167 | |||||
| December 31, 2019 | September 30, 2019 | ||||||
| Raw materials and supplies | $ | 259 | $ | 163 | |||
| Finished goods | 649 | 395 | |||||
| $ | 908 | $ | 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 December 31, 20192020 and September 30, 2019,2020, the Company has recorded a liability of $129$138 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 assetsliabilities 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):
December 31, 2020 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
Derivative liability | $ | — | $ | 71 | $ | — | $ | 71 | ||||||||
| December 31, 2019 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
| Derivative liability | $ | — | $ | 11 | $ | — | $ | 11 | ||||||||
| September 30, 2019 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||||||||
September 30, 2020 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||||||||
| Derivative liability | $ | — | $ | 9 | $ | — | $ | 9 | $ | — | $ | 66 | $ | — | $ | 66 | ||||||||||||||||
The gain or loss related to the fair value remeasurement on the derivative liability is included in the other income (expense)expense line on the condensed consolidated statements of operations.
Financial Liabilities Measured at Fair Value on a NonrecurringNon-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 approximatesapproximated 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 iswas 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 capital lease obligations and 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 months ended December 31, 20192020 or 2018, respectively.
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:
Three Months Ended | ||||||
December 31, | ||||||
2020 | 2019 | |||||
Expected life | 4.7 years | 4.5 years | ||||
Risk-free interest rate | 0.33 | % | 1.63 | % | ||
Expected volatility | 82.61 | % | 72.40 | % | ||
Expected forfeiture rate | 14.18 | % | 15.05 | % | ||
Expected exercise factor | 1.2 | 1.2 | ||||
Expected dividend yield | 0 | % | 0 | % | ||
| Three Months Ended December 31, | |||
| 2019 | 2018 | ||
| Expected life | 4.5 years | 4.3 years | |
| Risk-free interest rate | 1.63% | 2.93% | |
| Expected volatility | 72.40% | 60.19% | |
| Expected forfeiture rate | 15.05% | 13.51% | |
| Expected exercise factor | 1.2 | 1.2 | |
| Expected dividend yield | 0% | 0% | |
A summary of option activity at December 31, 20192020 and changes during the three months then ended is presented below:
Weighted- | Weighted-Average | |||||||||||
Average | Remaining Contractual | |||||||||||
Options | Exercise Price | Period in Years | ||||||||||
Outstanding at October 1, 2020 | 1,707,515 | $ | 5.09 | 4.6 | ||||||||
Granted | 489,250 | 3.29 | 9.9 | |||||||||
Exercised | (59,670 | ) | 2.39 | 0.1 | ||||||||
Forfeited | (168,409 | ) | 7.34 | 0.0 | ||||||||
Outstanding at December 31, 2020 | 1,968,686 | 4.53 | 6.5 | |||||||||
Exercisable at December 31, 2020 | 1,256,704 | 4.6 | ||||||||||
| 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 | 179,500 | 1.16 | 9.9 | |||||
| Exercised | — | — | 0.0 | |||||
| Forfeited | (17,749 | ) | 5.23 | 1.8 | ||||
| Outstanding at December 31, 2019 | 1,816,180 | 5.18 | 5.2 | |||||
| Exercisable at December 31, 2019 | 1,372,968 | 3.9 | ||||||
A summary of the status of the Company’s non-vested options and changes during the three month period ended December 31, 20192020 is presented below:
Weighted-Average | ||||||||
Grant Date Fair | ||||||||
Non-vested Options | Options | Value | ||||||
Non-vested at October 1, 2020 | 339,897 | $ | 0.60 | |||||
Granted | 489,250 | 1.55 | ||||||
Vested | (141,336 | ) | 0.78 | |||||
Forfeited | (8,745 | ) | 0.58 | |||||
Non-vested at December 31, 2020 | 679,066 | $ | 1.33 | |||||
| Non-vested Options | Options | Weighted-Average Grant Date Fair Value | ||||
| Non-vested at October 1, 2019 | 357,114 | $ | 0.77 | |||
| Granted | 179,500 | 0.50 | ||||
| Vested | (91,902 | ) | 0.96 | |||
| Forfeited | (1,500 | ) | 0.61 | |||
| Non-vested at December 31, 2019 | 443,212 | $ | 0.62 | |||
The weighted average grant date fair value of options granted during the three months ended December 31, 20192020 was $0.50.$1.55. As of December 31, 2019,2020, there was $169$510 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $124$394 thousand. The cost is expected to be recognized over a weighted-average remaining life of 2.11.9 years.
Stock-based compensation recorded in the three months ended December 31, 20192020 was $52$119 thousand. Stock-based compensation recorded in the three months ended December 31, 20182019 was $164$52 thousand. There was no$142 thousand in cash received from exercises under all stock option plans and warrants in either ofduring the three months ended December 31, 2020 and zero during the same period in 2019 or 2018.. There were no tax benefits realized for tax deductions from option exercises in either of the three month periodsperiod ended December 31, 20192020 or 2018.2019. 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 200,000300,000 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 23,013106,710 shares are available to be issued under the plan which includes 2,660 shares issued on Januaryas December 31, 2020. The Company recorded stock compensation expense under this plan of less than $1 thousand for each of the three month periodsperiod ended December 31, 20192020 and 2018, respectively.2019.
Preferred Stock and Dividends
A total of preferred stock,zero shares of Preferred Stock, Series A were issued and determined that the preferred shares meet the criteria for equity classification. Dividends accrued on preferred shares will be shownoutstanding 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 | ||||||||
December 31, | ||||||||
2020 | 2019 | |||||||
Denominator for basic net income (loss) per share - weighted average common shares | 7,963,775 | 6,736,643 | ||||||
Effect of dilutive options and warrants (treasury method) | 372,253 | — | ||||||
Denominator for diluted net income (loss) per share - adjusted weighted average common shares | 8,336,028 | 6,736,643 | ||||||
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 | 1,132,365 | 2,124,738 | ||||||
| Three Months Ended December 31, | |||||
| 2019 | 2018 | ||||
| Denominator for basic net loss per share - weighted average common shares | 6,736,643 | 5,100,684 | |||
| Effect of dilutive options (treasury method) | — | — | |||
| Denominator for diluted net loss per share - adjusted weighted average common shares | 6,736,643 | 5,100,684 | |||
| 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 | 2,124,738 | 2,545,719 | |||
Liquidity
At December 31, 2019,2020, approximately $1.0$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 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 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, 2021,2020, and interim periods within fiscal years beginning after December 15, 2022.2020. 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 muchmust 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 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 months ended December 31, 2019 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 result in the recognition of right-of-use assets and lease liabilities of $2.6 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 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.
On November 9, 2017, the Company sold to Mark Burish $500 thousand shares 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.
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 committeeSpecial Committee of disinterestedDisinterested and independent directors.Independent Directors.
3. Commitments
Inventory Purchase Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product.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 December 31, 2019,2020, the Company hashad an obligation to purchase $356$199 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.
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-useright-of use asset is reduced for tenant incentives and excludesincludes 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
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 December 31, 2019,2020, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 are as follows (in thousands):
Operating Leases | Finance Leases | |||||||
2021 (remaining) | $ | 1,208 | $ | 85 | ||||
2022 | 472 | 80 | ||||||
2023 | 105 | 8 | ||||||
2024 | 111 | 5 | ||||||
2025 | 35 | — | ||||||
Thereafter | 70 | — | ||||||
Total | 2,001 | 178 | ||||||
Less: imputed interest | (175 | ) | (10 | ) | ||||
Total | $ | 1,826 | $ | 168 | ||||
| Operating Leases | Finance Leases | ||||||
| 2020 (remaining) | $ | 1,029 | $ | 147 | |||
| 2021 | 1,025 | 128 | |||||
| 2022 | 301 | 79 | |||||
| 2023 | 98 | 8 | |||||
| 2024 | 104 | 5 | |||||
| Thereafter | 103 | — | |||||
| Total | 2,660 | 367 | |||||
| Less: imputed interest | (372 | ) | (28 | ) | |||
| Total | $ | 2,288 | $ | 339 | |||
Adoption of ASC 842
| 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):
Three Months Ended December 31, 2020 | ||||
Operating lease costs | $ | 337 | ||
Variable operating lease costs | 16 | |||
Total operating lease cost | $ | 353 | ||
Finance lease cost: | ||||
Amortization of right-of-use assets | $ | 40 | ||
Interest on lease liabilities | 4 | |||
Total finance lease cost | $ | 44 | ||
| Three Months Ended December 31, 2019 | ||||
| Operating lease costs | $ | 330 | ||
| Variable operating lease costs | 13 | |||
| Total operating lease cost | $ | 343 | ||
| Finance lease cost: | ||||
| Amortization of right-of-use assets | $ | 65 | ||
| Interest on lease liabilities | 6 | |||
| Total finance lease cost | $ | 71 | ||
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):
Three Months Ended December 31, 2020 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash outflows for operating leases | $ | 347 | ||
Operating cash outflows for finance leases | 4 | |||
Financing cash outflows for finance leases | 41 | |||
| Three Months Ended December 31, 2019 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash outflows for operating leases | $ | 339 | ||
| Operating cash outflows for finance leases | 6 | |||
| Financing cash outflows for finance leases | 70 | |||
Other information related to leases was as follows:
December 31, | ||||
Weighted average remaining lease term (in years) | ||||
Operating leases | 2.1 | |||
Finance leases | 1.7 | |||
Weighted average discount rate | ||||
Operating leases | 9.39 | % | ||
Finance leases | 7.46 | % | ||
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.
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 December 31, 2019,2020, and September 30, 2019,2020, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $11$71 thousand and $9$66 thousand, respectively. TheIncluded in other expense, the remeasurement loss on the derivative liability during the three months ended December 31, 2020 was $5 thousand compared to remeasurement loss of $2 thousand during the three months ended December 31, 2019 was $2 thousand, included in the other income (expense) compared to a remeasurement gain of $15 thousand during the three months ended December 31, 2018.
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 months ended December 31, 2019,2020, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $5$6 thousand compared to $4$5 thousand in the same periodperiods last year, as well asyear. In addition, $14 thousand related to amortization of the debt discount was recorded in the current three month period compared to $13$14 thousand in the prior year. At December 31, 2019,2020, the fair valuescarrying value of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $1.5 million$417 thousand and $154$178 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 months ended December 31, 2019 and 2018, respectively,2020, the Company recorded interest expense of $13 thousand respectively, associated with recognition of the back-end fee.
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 months ended December 31, 2019, we recorded $3 thousand of2020, non-cash interest expense of $18 thousand 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 December 31, 2019,2020, 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 December 31, 2019,2020, a gross balance of $1.4 million$417 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, 2019,2020, a gross balance of $1.7 million$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
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 providesprovided for subordinated secured promissory notes (the "Subordinated Promissory Notes") in an aggregate original principal amount of up to $5,000,000. Mr. Burish will acquireacquired 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 accrueaccrued 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 payablewas set to mature on February 28, 2024 (the "Maturity Date"). Principal installments of $100,000 are payablewere to begin monthly on the last day of each month end beginning with the month ending August 31, 2020, and continuingcontinue through the Maturity 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 proceeds from the Note Purchase Agreement were allocated between the Subordinated Promissory Notes and the Burish Warrant debt based on their relative fair value on the date of issuance. The warrant debt of $674 thousand iswas treated together as a debt discount on the Subordinated Notes Payable and will bewas accreted to interest expense under the effective interest rate method over the five-year term of the Subordinated Notes Payable. During the three months ended December 31, 2019,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 iswas 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, we recorded $15 thousand of non-cash interest benefit related to the effective interest rate on the Subordinated Promissory Notes.
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 will be eligible for and intends to apply for forgiveness of all loan proceeds used for payroll costs, rent, utilities, and other qualifying expenses during the eight-week or twenty-four week period ("covered 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 40% of the amount forgiven can be attributable to non-payroll costs. The Company must apply for forgiveness within 10 months from the end of the covered period. First Business Bank will then have 60 days to review the application and submit it to the SBA and the SBA will have 90 days from receipt of the application to review and render a decision back to the lender. If the borrower does not apply for loan forgiveness within the 10 month time frame, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the amount and the date the first payment is due. The SBA began accepting applications for forgiveness from lenders on August 10, 2020 when the development of its new software-as-a-service platform went live. As of December 31, 20192020 the full amount of the loan has been split between short-term and long-term notes payable of $482 thousand and $1.8 million, respectively, as well as short-term accrued interest of $16 thousand. The Company plans to apply for 100% forgiveness in Q2-2021.
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 December 31, 2020 and September 30, 2019,2020, 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%).
On January 19, 2018, the CompanyAugust 20, 2020, Mediasite K.K. and Mr. BurishSumitomo Mitsui Banking Corporation entered into a Subscription Agreement (the “Subscription Agreement”). Pursuant$379 thousand Promissory Note under an initiative by the Japanese Finance Corporation government institution in response to the Subscription Agreement, (i) on January 19, 2018, Mr. Burish purchasedCabinet Decision entitled "Emergency Economic Measures to Cope With COVID-19." Extending financial relief to organizations impacted by COVID-19, the loan has a 10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash;term of three years and (ii) on February 15, 2018, Mr. Burish purchased an additional 10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash (each,carries a “Note”, and collectively,fixed interest rate of 0.46% per annum. Government subsidies provided through the “Notes”).
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 December 31, 20192020 or September 30, 2019,2020, and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three or three months ended December 31, 20192020 or 2018, respectively.
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 months ended December 31, 20192020 and 2018,2019, respectively, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK) :
Three months ended December 31, 2020 | ||||||||||||||||||||
SOFO | SFI | MSKK | Eliminations | Total | ||||||||||||||||
Revenue: | ||||||||||||||||||||
Hardware | $ | 1,315 | $ | 86 | $ | 80 | $ | (134 | ) | $ | 1,347 | |||||||||
Software | 787 | 101 | 59 | (147 | ) | 800 | ||||||||||||||
Shipping | 13 | 1 | — | — | 14 | |||||||||||||||
Product and other total | 2,115 | 188 | 139 | (281 | ) | 2,161 | ||||||||||||||
Support | 1,806 | 179 | 239 | (216 | ) | 2,008 | ||||||||||||||
Hosting | 1,477 | 258 | 704 | (63 | ) | 2,376 | ||||||||||||||
Events | 1,053 | 17 | 872 | — | 1,942 | |||||||||||||||
Installs & training | 417 | 10 | 251 | — | 678 | |||||||||||||||
Services total | 4,753 | 464 | 2,066 | (279 | ) | 7,004 | ||||||||||||||
Total revenue | $ | 6,868 | $ | 652 | $ | 2,205 | $ | (560 | ) | $ | 9,165 | |||||||||
| SOFO | SFI | MSKK | Eliminations | Total | |||||||||||
| Revenue: | |||||||||||||||
| Hardware | $ | 1,046 | $ | 66 | $ | 15 | $ | (73 | ) | $ | 1,054 | ||||
| Software | 714 | 189 | 37 | (56 | ) | 884 | |||||||||
| Shipping | 116 | 1 | — | — | 117 | ||||||||||
| Product and other total | 1,876 | 256 | 52 | (129 | ) | 2,055 | |||||||||
| Support | 2,010 | 155 | 318 | (192 | ) | 2,291 | |||||||||
| Hosting | 1,006 | 120 | 376 | — | 1,502 | ||||||||||
| Events | 1,318 | 62 | 672 | — | 2,052 | ||||||||||
| Installs & training | 114 | 1 | — | — | 115 | ||||||||||
| Services total | 4,448 | 338 | 1,366 | (192 | ) | 5,960 | |||||||||
| Total revenue | $ | 6,324 | $ | 594 | $ | 1,418 | $ | (321 | ) | $ | 8,015 | ||||
Three months ended December 31, 2019 | Three months ended December 31, 2019 | ||||||||||||||||||||||||||||||||||
| SOFO | SFI | MSKK | Eliminations | Total | SOFO | SFI | MSKK | Eliminations | Total | ||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| Hardware | $ | 812 | $ | 139 | $ | 9 | $ | (110 | ) | $ | 850 | $ | 1,046 | $ | 66 | $ | 15 | $ | (73 | ) | $ | 1,054 | |||||||||||||
| Software | 642 | 115 | 198 | (117 | ) | 838 | 714 | 189 | 37 | (56 | ) | 884 | |||||||||||||||||||||||
| Shipping | 62 | 1 | — | — | 63 | 116 | 1 | — | — | 117 | |||||||||||||||||||||||||
| Product and other total | 1,516 | 255 | 207 | (227 | ) | 1,751 | 1,876 | 256 | 52 | (129 | ) | 2,055 | |||||||||||||||||||||||
| Support | 1,987 | 189 | 247 | (231 | ) | 2,192 | 2,010 | 155 | 318 | (192 | ) | 2,291 | |||||||||||||||||||||||
| Hosting | 1,054 | 149 | 353 | — | 1,556 | 1,006 | 120 | 376 | — | 1,502 | |||||||||||||||||||||||||
| Events | 1,231 | 38 | 651 | — | 1,920 | 1,318 | 62 | 672 | — | 2,052 | |||||||||||||||||||||||||
| Installs & training | 79 | 4 | — | — | 83 | 114 | 1 | — | — | 115 | |||||||||||||||||||||||||
| Services total | 4,351 | 380 | 1,251 | (231 | ) | 5,751 | 4,448 | 338 | 1,366 | (192 | ) | 5,960 | |||||||||||||||||||||||
| Total revenue | $ | 5,867 | $ | 635 | $ | 1,458 | $ | (458 | ) | $ | 7,502 | $ | 6,324 | $ | 594 | $ | 1,418 | $ | (321 | ) | $ | 8,015 | |||||||||||||
Transaction price allocated to future performance obligations
As of certain practical expedients, which we have elected and applied to measure our future performance obligations as of December 31, 2019.
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 months ended December 31, 2019,2020, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $4.3$4.2 million compared to $4.3 million recognized during the three months ended December 31, 2018.
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 months ended December 31, 2019,2020, amortization expense recognized related to the amount included in the capitalized commissions at the beginning of the period was $203$215 thousand compared to $249$203 thousand recognized during the three months ended December 31, 2018.2019.
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, 20192020 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)2020), 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 October 1, 2019,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 adopted ASC Topic 842,
COVID-19 has had both positive and 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 2020 and continuing through this quarter and beyond, the in-person events portion of our business continues to be impacted by cancellations and/or postponements due to social distancing protocols enacted to stem the spread of the virus. While there was a return in the current quarter to the type of smaller, in-person web events that are common for our Japan subsidiary, the events business in the US remains primarily a virtual events initiative, which has been a growing portion of our events business. 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.
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 842"712"), usingNonretirement Postemployment Benefits. Under ASC 712, liabilities for postemployment benefits are recorded at the modified retrospective method. Under this method, we recognizedtime the cumulative effectobligations are probable of applyingbeing 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 new standard to existing leases that were active asCompany records such costs into operating expense.
During the fourth quarter of fiscal 2020, the adoption date as an adjustment toCompany expensed involuntary termination benefits of $705 thousand under ASC 712. During the opening balance sheet. The reported results for the three monthsquarter ended December 31, 2019 reflect2020, the adoptionCompany expensed involuntary termination benefits of $101 thousand under ASC 842, while420 compared to zero in the comparative information has not been restated and continuessame quarter last year. No further expenses relating to be reported under the related accounting standardsthis restructuring are anticipated 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 months ended December 31, 2019.
RESULTS OF OPERATIONS
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.
Q1-2021 compared to Q1-2019
Revenue in
• | Product and other revenue from sale of Mediasite recorder units and server software increased 5% to $2.2 million in Q1-2021 from $2.1 million inQ1-2020. Unit sales in Q1-2021 were slightly higher due to a small number of hardware refresh orders both here and in Japan. Average selling price was slightly lower in Q1-2021as compared toQ1-2020 even though the rack to mobile ratio shifted. This is due to a larger mix of the rack-mounted pro recorder in the current quarter as opposed to the lower priced units. |
Q1-2021 | Q1-2020 | |||||||
Recorders sold | 232 | 203 | ||||||
Rack units to mobile units ratio | 18.33 to 1 | 9.15 to 1 | ||||||
Average sales price, excluding service (000’s) | $ | 5.40 | $ | 5.80 | ||||
Refresh Units | 116 | 64 | ||||||
• | Service 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 increased $1.0 million or 18% from $6.0 million in Q1-2020 to $7.0 million in Q1-2021 primarily due to increases in hosting and professional services. |
• | At December 31, 2020, $10.8 million of revenue was deferred, of which we expect to recognize $9.0 million in the next twelve months, including approximately $4.0 million in the quarter ending March 31, 2021. At September 30, 2020, $12.1 million of revenue was deferred. |
| Q1-2020 | Q1-2019 | ||||||
| Recorders sold | 203 | 104 | |||||
| Rack units to mobile units ratio | 9.15 to 1 | 2.25 to 1 | |||||
| Average sales price, excluding service (000’s) | $ | 5.8 | $ | 6.3 | |||
| Refresh Units | 64 | 74 | |||||
Other revenue relates to freight charges billed separately to our customers.
Gross Margin
Q1-2021 compared to Q1-2019
Gross margin for
• | Product costs. Product costs consist of costs associated with our Mediasite recorder hardware, freight, labor and certain allocated costs. These costs were $813 thousand in Q1-2021 and $831 thousand in Q1-2020, resulting in gross margin on products of 62% and 60%, respectively. |
• | Services costs. Service costs consist of staff wages for tech support, hosting and events, operating costs for events and hosting, as well as depreciation expense for hosting infrastructure. These costs were $1.6 million in Q1-2021 and $1.3 million in Q1-2020, resulting in gross margin on services of 77% for both periods. . |
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.
Q1-2021 compared to Q1-2019
Selling and marketing expenses decreased $547$386 thousand or 14%11% from $3.9 million in
Salary, commissions, and benefits expense decreased by $345$94 thousand as a result of reduced headcount.
Travel expenses, including entertainment and meals, decreased by
• | Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $195 thousand and $692 thousand respectively, an aggregate increase of $71 thousand from Q1-2020 |
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.
Q1-2021 compared to Q1-2019
G&A expenses decreased $97$243 thousand or 6%17% from $1.5 million in
Increase in compensation and benefits of $212$280 thousand due to an increase in option expense as well as a resultbonus accrual for employees..
Decrease in professional fees of reduced headcount.
• | G&A expenses for Sonic Foundry International and Mediasite KK accounted for $24 thousand and $159 thousand respectively, an aggregate decrease of $74 thousand from Q1-2020. |
We anticipate general and administrativeG&A 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.
Q1-2021 compared to Q1-2019
Product development expenses decreasedincreased by $243$151 thousand, or 13%9% from $1.8 million in
Increase in compensation and benefits of $123$99 thousand as a result of reduced headcount.
• | Product development expense for Sonic Foundry International and Mediasite KK accounted for $96 thousand and $87 thousand respectively, an aggregate decrease of $5 thousand compared to Q1-2020 |
We anticipate product development headcount to remain consistent throughout the remainder of the fiscal year. We do not anticipate that any fiscal 20202021 software development efforts will qualify for capitalization.
Other Income and Expense, Net
Interest expense for the three months ended December 31, 2019 increased $1092020 was $29 thousand, compared toa decrease of $234 thousand from the same period last year. The YTD decrease over the prior year is 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 on the Burish notes are currently being deferred. See Note 4 - Credit Arrangements for further detailsdebt to equity conversion, which occurred on the deferred interest.May 13, 2020. The Company also recorded $14 thousand of interest expense for the three months ended December 31, 20192020 related to the accretion of discounts on the PFG Loan and Warrant Debt compared to $13$14 thousand for the three months ended December 31, 2018.2019. The Company also recorded amortization expense related to the back-end fee on the PFG loan of $13 thousand in bothfor the three month period ended December 31, 2019 and 2018, respectively. The Company also recorded $34 thousand of interest expense during the three months ended December 31, 20192020 compared to $13 thousand for the same period last year. The Company also recorded zero interest expense during the three months ended December 31, 2020 related to the accretion of discounts on the Burish notes payable which was first disbursed incompared to $34 thousand for the quarter ended March 31, 2019.
During the three months ended December 31, 2020, a changeloss in fair value of $2$5 thousand 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 changeloss in fair value of $15$2 thousand during the three months ended December 31, 2018.2019. The fair value of the derivative liability is measured at fair value 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.
The Company’sCompany'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’sCompany's foreign operations are translated intoin US dollars at period end exchange rates whileswhile 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 onin the consolidated statements of operations.
For the three months ended December 31, 2019,2020, the Company’sCompany's foreign currency translation adjustment was a gain of $88 thousand compared to a loss of $8 thousand compared to a gain of $62 thousand for the three months ended December 31, 2018. The loss in fiscal 2020 is attributable to the weakening in the Japanese Yen and the Euro compared to the U.S. dollar during the period as compared to fiscal 2019.
During the three months ended December 31, 2020, the Company recorded an aggregate transaction gainloss of $15$5 thousand compared to an aggregate lossgain of $38$15 thousand and for the three months ended December 31, 2018.2019. The aggregate transaction gain or loss is included in the other expense line of the condensed consolidated statements of operations.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are its cash from operations and debt and equity financing. During the first three months of fiscal 2020,2021, the Company used $418 thousand$1.3 million of cash from operating activities compared with $248$418 thousand generatedused in the same period of fiscal 2019.
Capital expenditures were $59$287 thousand in the first three months of fiscal 20202021 compared to $83$59 thousand in the same period in fiscal 2019.
The Company used $320$267 thousand of cash fromfor financing activities during the first three months of fiscal 2020, for2021. Payments on notes payable of $368 thousand and payments on outstanding notes payable and capital leases.finance lease obligations of $41 thousand were offset by proceeds from stock option exercises of $142 thousand. For the same period in fiscal 2019,2020, the Company generated $593used $320 thousand, of cash for financing activities, mainly due to line of credit proceeds, partially offset by debt payments.
At December 31, 2019,2020, the Company had $6.4$3.4 million outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V, the Mediasite KK term debt and Mr. Burish. Thethe PPP loan. During the current quarter, the Company made principal payments of $250 thousand on the PFG V debt, duringand $118 thousand on the three months ended Mediasite KK term debt.
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 agreementnotes 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.
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, 2019.2020. At December 31, 2019, $4.7 million2020, none of the Company’s $6.4$3.7 million in outstanding debt is variable rate. We do not expect thatrate, therefore, an increase in the level of interest rates would not have aany 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.
Evaluation of Disclosure Controls and Procedures
Based on evaluations at December 31, 2019,2020, 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 December 31, 2019.
Changes in Internal Controls
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.
OTHER INFORMATION
None.
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, 20192020 filed with the SEC.
None.
NUMBER | DESCRIPTION | ||
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10.6 | Forms of Subscription Agreements, Lock-Up Agreements and WarrantAgreements 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. | ||
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10.44 | Employment Agreement dated October 20, 2020 between Sonic Foundry, Inc. and Joseph Mozden, Jr., filed as Exhibit 10.1 to the Form 8-K filed on October 22, 2020, and hereby incorporated by reference. | ||
31.1 | |||
31.2 | |||
32 | |||
101 | The following materials from the Sonic Foundry, Inc. Form 10-Q for the quarter ended December 31, | ||
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 |
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
February 11, 2021 | By: | /s/ Joe Mozden, Jr. | ||
Joe Mozden, Jr. | ||||
Chief Executive Officer | ||||
February | By: | /s/ | ||
Kelsy L. Boyd | ||||
Chief Financial Officer |