UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q
 

FORM 10-Q

(Mark One)

x

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

For the Quarterly period ended March 31, 2020

2021

OR

¨

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

Commission File Number 000-30407

SONIC FOUNDRY, INC.

(Exact name of registrant as specified in its charter)

 

MARYLAND

39-1783372

MARYLAND39-1783372

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

222 West Washington Ave, Madison, WI 53703

(Address of principal executive offices)

(608) 443-1600

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

Yes  x           No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x            No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

Emerging growth company

¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes  ¨ ☐    No   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨            No  x

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

Class

Outstanding

April 30, 2021

Class
Outstanding
April 30, 2020

Common Stock, $0.01 par value

6,788,321

8,064,838



PART I. FINANCIAL INFORMATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. For a more complete discussion of accounting policies and certain other information, refer to the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2019.2020

2



TABLE OF CONTENTS
 

TABLE OF CONTENTS

PAGE NO.

PART I

FINANCIAL INFORMATION

2

PAGE NO.

PART I

Item 1.

Item 2.

Item 3.

Item 4.

PART II

Item 1.

Item 1A.

Item 6.

3


Item 1

Sonic Foundry, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share data)

(Unaudited)

  

March 31

  

September 30,

 
  

2021

  

2020

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $5,425  $7,619 

Accounts receivable, net of allowances of $233 & $236

  5,109   6,250 

Inventories

  1,090   1,167 

Investment in sales-type lease, current

  203   275 

Capitalized commissions, current

  315   440 

Prepaid expenses and other current assets

  1,083   1,065 

Total current assets

  13,225   16,816 

Property and equipment:

        

Leasehold improvements

  1,113   1,128 

Computer equipment

  8,282   7,960 

Furniture and fixtures

  1,400   1,366 

Total property and equipment

  10,795   10,454 

Less accumulated depreciation and amortization

  7,760   7,295 

Property and equipment, net

  3,035   3,159 

Other assets:

        

Investment in sales-type lease, long-term

  72   76 

Capitalized commissions, long-term

  71   100 

Right-of-use assets under operating leases

  1,403   2,081 

Other long-term assets

  467   397 

Total assets

 $18,273  $22,629 

Liabilities and stockholders equity (deficit)

        

Current liabilities:

        

Accounts payable

 $1,077  $2,689 

Accrued liabilities

  2,454   2,565 

Current portion of unearned revenue

  7,813   10,402 

Current portion of finance lease obligations

  85   119 

Current portion of operating lease obligations

  1,135   1,425 

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

  1,086   1,104 

Total current liabilities

  13,650   18,304 

Long-term portion of unearned revenue

  1,766   1,736 

Long-term portion of finance lease obligations

  46   89 

Long-term portion of operating lease obligations

  267   665 

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

  2,089   2,673 

Derivative liability, at fair value

  85   66 

Other liabilities

  154   144 

Total liabilities

  18,057   23,677 

Commitments and contingencies

        

Stockholders’ equity (deficit):

        

Preferred stock, $.01 par value, authorized 500,000 shares; none issued

      

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

      

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

      

Common stock, $.01 par value, authorized 10,000,000 shares; 8,063,713 and 7,965,325 shares issued, respectively and 8,050,997 and 7,952,609 shares outstanding, respectively

  81   80 

Additional paid-in capital

  209,523   209,022 

Accumulated deficit

  (208,630)  (209,519)

Accumulated other comprehensive loss

  (589)  (462)

Treasury stock, at cost, 12,716 shares

  (169)  (169)

Total stockholders’ equity (deficit)

  216   (1,048)

Total liabilities and stockholders equity (deficit)

 $18,273  $22,629 

 (Unaudited)  

March 31,
2020
 September 30,
2019
Assets
 
Current assets:
 
Cash and cash equivalents$4,586
 $4,295
Accounts receivable, net of allowances of $135 & $1356,344
 6,532
Inventories, net of reserves of $30 and $0602
 558
Investment in sales-type lease, current11
 163
Capitalized commissions, current334
 464
Prepaid expenses and other current assets910
 972
Total current assets12,787
 12,984
Property and equipment:
 
Leasehold improvements1,121
 1,121
Computer equipment6,499
 5,610
Furniture and fixtures1,291
 1,233
Total property and equipment8,911
 7,964
Less accumulated depreciation and amortization6,838
 6,396
Property and equipment, net2,073
 1,568
Other assets:
 
Investment in sales-type lease, long-term159
 134
Capitalized commissions, long-term102
 106
Right-of-use assets under operating leases1,972
 
Other long-term assets384
 388
Total assets$17,477
 $15,180
Liabilities and stockholders’ deficit
 
Current liabilities:
 
Accounts payable$1,994
 $843
Accrued liabilities1,649
 2,216
Unearned revenue9,453
 9,610
Current portion of finance lease obligations155
 194
Current portion of operating lease obligations1,160
 
Current portion of notes payable and warrant debt, net of discounts1,915
 968
Total current liabilities16,326
 13,831
Long-term portion of unearned revenue2,055
 1,842
Long-term portion of finance lease obligations130
 179
Long-term portion of operating lease obligations840
 
Long-term portion of notes payable and warrant debt, net of discounts4,743
 5,429
Derivative liability, at fair value72
 9
Other liabilities142
 143
Total liabilities24,308
 21,433
Commitments and contingencies
 
Stockholders’ deficit:   
Preferred stock, $.01 par value, authorized 500,000 shares; none issued
 
9% Preferred stock, Series A, voting, cumulative, convertible, $.01 par value (liquidation preference of $1,000 per share), authorized 4,500 shares; zero shares issued and outstanding, at amounts paid in
 
5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 1,000,000 shares, none issued
 
Common stock, $.01 par value, authorized 10,000,000 shares; 6,800,037 and 6,749,359 shares issued, respectively and 6,787,321 and 6,736,643 shares outstanding, respectively68
 67
Additional paid-in capital203,884
 203,735
Accumulated deficit(210,065) (209,340)
Accumulated other comprehensive loss(549) (546)
Treasury stock, at cost, 12,716 shares(169) (169)
Total stockholders’ deficit(6,831) (6,253)
Total liabilities and stockholders’ deficit$17,477
 $15,180

See accompanying notes to the condensed consolidated financial statements.



Sonic Foundry, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except for share and per share data)

(Unaudited)

  

Three Months Ended March 31,

  

Six Months Ended March 31,

 
  

2021

  

2020

  

2021

  

2020

 

Revenue:

                

Product and other

 $2,586  $2,812  $4,747  $4,867 

Services

  6,125   5,854   13,129   11,814 

Total revenue

  8,711   8,666   17,876   16,681 

Cost of revenue:

                

Product and other

  951   1,158   1,764   1,989 

Services

  1,624   1,247   3,222   2,595 

Total cost of revenue

  2,575   2,405   4,986   4,584 

Gross margin

  6,136   6,261   12,890   12,097 

Operating expenses:

                

Selling and marketing

  2,895   3,057   5,905   6,453 

General and administrative

  1,055   1,176   2,253   2,617 

Product development

  1,731   1,499   3,472   3,089 

Total operating expenses

  5,681   5,732   11,630   12,159 

Income (loss) from operations

  455   529   1,260   (62)

Non-operating expenses:

                

Interest expense, net

  (23)  (218)  (52)  (481)

Other expense, net

  (38)  (58)  (27)  (43)

Total non-operating expenses

  (61)  (276)  (79)  (524)

Income (loss) before income taxes

  394   253   1,181   (586)

Income tax (expense)

  (137)  (158)  (292)  (139)

Net income (loss)

 $257  $95  $889  $(725)

Dividends on preferred stock

            

Net income (loss) attributable to common stockholders

 $257  $95  $889  $(725)

Income (loss) per common share

                

– basic

 $0.03  $0.01  $0.11  $(0.11)

– diluted

 $0.03  $0.01  $0.11  $(0.11)

Weighted average common shares

                

– basic

  8,040,513   6,785,180   8,001,723   6,760,779 

– diluted

  8,557,788   6,933,227   8,451,913   6,760,779 
(Unaudited)

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

2020 2019 2020 2019
Revenue:       
Product and other$2,812
 $1,796
 $4,867
 $3,547
Services5,854
 6,201
 11,814
 11,952
Total revenue8,666
 7,997
 16,681
 15,499
Cost of revenue:
      
Product and other1,158
 645
 1,989
 1,296
Services1,247
 1,359
 2,595
 2,550
Total cost of revenue2,405
 2,004
 4,584
 3,846
Gross margin6,261
 5,993
 12,097
 11,653
Operating expenses:
      
Selling and marketing3,057
 3,836
 6,453
 7,779
General and administrative1,176
 1,345
 2,617
 2,883
Product development1,499
 1,935
 3,089
 3,768
Total operating expenses5,732
 7,116
 12,159
 14,430
Income (loss) from operations529
 (1,123) (62) (2,777)
Non-operating expenses:       
Interest expense, net(218) (227) (481) (381)
Other expense, net(58) (11) (43) (3)
Total non-operating expenses(276) (238) (524) (384)
Income (loss) before income taxes253
 (1,361) (586) (3,161)
Income tax expense(158) (125) (139) (113)
Net income (loss)$95
 $(1,486) $(725) $(3,274)
Dividends on preferred stock
 (45) 
 (98)
Net income (loss) attributable to common stockholders$95
 $(1,531) $(725) $(3,372)
Income (loss) per common share
      
– basic$0.01
 $(0.29) $(0.11) $(0.64)
– diluted$0.01
 $(0.29) $(0.11) $(0.64)
Weighted average common shares       
– basic6,785,180
 5,278,500
 6,760,779
 5,232,449
– diluted6,933,227
 5,278,500
 6,760,779
 5,232,449

See accompanying notes to the condensed consolidated financial statementsstatements.


Sonic Foundry, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

  

Three Months Ended March 31,

  

Six Months Ended March 31,

 
  

2021

  

2020

  

2021

  

2020

 

Net income (loss)

 $257  $95  $889  $(725)

Other comprehensive loss

                

Foreign currency translation adjustment

  (215)  5   (127)  (3)

Comprehensive income (loss)

 $42  $100  $762  $(728)
(Unaudited)
 Three Months Ended March 31, Six Months Ended March 31,
 2020 2019 2020 2019
Net income (loss)$95
 $(1,486) $(725) $(3,274)
Foreign currency translation adjustment5
 (17) (3) 45
Comprehensive income (loss)$100
 $(1,503) $(728) $(3,229)
See accompanying notes to the condensed consolidated financial statements


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

 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, September 30, 2018$1,651
 $51
 $200,130
 $(207,419) $(676) $(26) $(169) $(6,458)
Cumulative effect of ASC 606 adoption Note 6
 
 
 1,691
 
 
 
 1,691
Adjusted balance, October 1, 20181,651
 51
 200,130
 (205,728) (676) (26) (169) (4,767)
Stock compensation
 
 220
 
 
 
 
 220
Issuance of common stock and warrants
 
 4
 
 
 
 
 4
Warrants issued in connection with subordinated notes payable
 
 674
 
 
 
 
 674
Conversion of preferred stock(563) 2
 561
 
 
 
 
 
Preferred stock dividends99
 
 (99) 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 45
 
 
 45
Net loss
 
 
 (3,274) 
 
 
 (3,274)
Balance, March 31, 2019$1,187
 $53
 $201,490
 $(209,002) $(631) $(26) $(169) $(7,098)



 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, December 31, 2018$1,141
 $53
 $200,802
 $(207,516) $(614) $(26) $(169) $(6,329)
Stock compensation
 
 56
 
 
 
 
 56
Issuance of common stock and warrants
 
 4
 
 
 
 
 4
Warrants issued in connection with subordinated notes payable
 
 674
 
 
 
 
 674
Preferred stock dividends46
 
 (46) 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 (17) 
 
 (17)
Net loss
 
 
 (1,486) 
 
 
 (1,486)
Balance, March 31, 2019$1,187
 $53
 $201,490
 $(209,002) $(631) $(26) $(169) $(7,098)

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

 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, September 30, 2019
 $67
 203,735
 (209,340) (546) 
 (169) (6,253)
Stock compensation
 
 86
 
 
 
 
 86
Issuance of common stock
 1
 63
 
 
 
 
 64
Foreign currency translation adjustment
 
 
 
 (3) 
 
 (3)
Net loss
 
 
 (725) 
 
 
 (725)
Balance, March 31, 2020$
 $68
 $203,884
 $(210,065) $(549) $
 $(169) $(6,831)



 Preferred stock 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 Total
Balance, December 31, 2019$
 $67
 $203,787
 $(210,160) $(554) $
 $(169) $(7,029)
Stock compensation
 
 34
 
 
 
 
 34
Issuance of common stock
 1
 63
 
 
 
 
 64
Foreign currency translation adjustment
 
 
 
 5
 
 
 5
Net income
 
 
 95
 
 
 
 95
Balance, March 31, 2020$
 $68
 $203,884
 $(210,065) $(549) $
 $(169) $(6,831)







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

Six Months Ended
March 31,

2020 2019
Operating activities
 
Net loss(725) (3,274)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
Amortization of other intangibles150
 97
Depreciation and amortization of property and equipment433
 516
Provision for doubtful accounts - including financing receivables9
 26
Stock-based compensation expense related to stock options and warrants86
 219
Deferred loan interest to related party264
 
Stock issued for board of director fees64
 
Remeasurement loss (gain) on derivative liability63
 (7)
Changes in operating assets and liabilities:
 
Accounts receivable175
 1,354
Financing receivables
 (2)
Inventories(45) (612)
Investment in sales-type lease126
 
Capitalized commissions134
 105
Prepaid expenses and other current assets64
 (25)
Right-of-use assets under operating leases562
 
Operating lease obligations(578) 
Other long-term assets4
 
Accounts payable and accrued liabilities(162) 89
Other long-term liabilities(1) (33)
Unearned revenue57
 (1,704)
Net cash provided by (used in) operating activities680
 (3,251)
Investing activities
 
Purchases of property and equipment(118) (222)
Net cash used in investing activities(118) (222)
Financing activities
 
Proceeds from notes payable463
 4,500
Proceeds from lines of credit
 8,748
Payments on notes payable(618) (333)
Payments on lines of credit
 (9,186)
Payment of debt issuance costs
 (110)
Proceeds from issuance of preferred stock and common stock
 5
Proceeds from exercise of common stock options1
 
Payments on finance lease obligations(124) (134)
Net cash provided by (used in) financing activities(278) 3,490
Changes in cash and cash equivalents due to changes in foreign currency7
 (24)
Net increase (decrease) in cash and cash equivalents291
 (7)
Cash and cash equivalents at beginning of year4,295
 1,189
Cash and cash equivalents at end of period$4,586
 $1,182
Supplemental cash flow information:   
Interest paid$479
 $264
Income taxes paid, foreign90
 160
Non-cash financing and investing activities:   
Property and equipment financed by finance lease or accounts payable821
 112
Debt discount
 676
Preferred stock dividends paid in additional shares
 98
Conversion of preferred shares
 563

See accompanying notes to the condensed consolidated financial statements.

Sonic Foundry, Inc.

Condensed Consolidated Statements of Stockholders' Equity (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

        86            86 

Issuance of common stock

     1   63            64 

Foreign currency translation adjustment

              (3)     (3)

Net loss

           (725)        (725)

Balance, March 31, 2020

 $  $68  $203,884  $(210,065) $(549) $(169) $(6,831)

                  

Accumulated

         
          

Additional

      

other

         
      

Common

  

paid-in

  

Accumulated

  

comprehensive

  

Treasury

     
  

Preferred stock

  

stock

  

capital

  

deficit

  

loss

  

stock

  

Total

 

Balance, December 31, 2019

 $  $67  $203,787  $(210,160) $(554) $(169) $(7,029)

Stock compensation

        34            34 

Issuance of common stock

     1   63            64 

Foreign currency translation adjustment

              5      5 

Net income

           95         95 

Balance, March 31, 2020

 $  $68  $203,884  $(210,065) $(549) $(169) $(6,831)

                  

Accumulated

         
          

Additional

      

other

         
      

Common

  

paid-in

  

Accumulated

  

comprehensive

  

Treasury

     
  

Preferred stock

  

stock

  

capital

  

deficit

  

loss

  

stock

  

Total

 

Balance, September 30, 2020

 $  $80  $209,022  $(209,519) $(462) $(169) $(1,048)

Stock compensation

        283            283 

Issuance of common stock

     1   218            219 

Foreign currency translation adjustment

              (127)     (127)

Net Income

           889         889 

Balance, March 31, 2021

 $  $81  $209,523  $(208,630) $(589) $(169) $216 

                  

Accumulated

         
          

Additional

      

other

         
      

Common

  

paid-in

  

Accumulated

  

comprehensive

  

Treasury

     
  

Preferred stock

  

stock

  

capital

  

deficit

  

loss

  

stock

  

Total

 

Balance, December 31, 2020

 $  $80  $209,283  $(208,887) $(374) $(169) $(67)

Stock compensation

        165            165 

Issuance of common stock

     1   75            76 

Foreign currency translation adjustment

              (215)     (215)

Net income

           257         257 

Balance, March 31, 2021

 $  $81  $209,523  $(208,630) $(589) $(169) $216 

See accompanying notes to the condensed consolidated financial statements.

Sonic Foundry, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

  

Six Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Operating activities

        

Net Income (loss)

 $889  $(725)

Adjustments to reconcile net income ( loss ) to net cash provided by (used in) operating activities:

        

Amortization of other intangibles

  33   150 

Depreciation and amortization of property and equipment

  539   433 

Loss on sale of fixed assets

  5    

Provision for doubtful accounts - including financing receivables

  3   9 

Stock-based compensation expense related to stock options

  283   86 

Stock issued for board of director fees

     64 

Deferred loan interest to related party

     264 

Remeasurement loss on derivative liability

  19   63 

Changes in operating assets and liabilities:

        

Accounts receivable

  925   175 

Inventories

  71   (45)

Investment in sales-type lease

  63   126 

Capitalized commissions

  154   134 

Prepaid expenses and other current assets

  (45)  64 

Right-of-use assets under operating leases

  655   562 

Operating lease obligations

  (665)  (578)

Other long-term assets

  (93)  4 

Accounts payable and accrued liabilities

  (1,628)  (162)

Other long-term liabilities

  17   (1)

Unearned revenue

  (2,495)  57 

Net cash provided by (used in) operating activities

  (1,270)  680 

Investing activities

        

Purchases of property and equipment

  (448)  (118)

Net cash used in investing activities

  (448)  (118)

Financing activities

        

Proceeds from notes payable

     463 

Payments on notes payable

  (618)  (618)

Proceeds from issuance of common stock

  10    

Proceeds from exercise of common stock options

  209   1 

Payments on finance lease obligations

  (76)  (124)

Net cash used in financing activities

  (475)  (278)

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

  (1)  7 

Net increase (decrease) in cash and cash equivalents

  (2,194)  291 

Cash and cash equivalents at beginning of year

  7,619   4,295 

Cash and cash equivalents at end of period

 $5,425  $4,586 

Supplemental cash flow information:

        

Interest paid

 $31  $479 

Income taxes paid, foreign

  44   90 

Non-cash financing and investing activities:

        

Property and equipment financed by finance lease or accounts payable

     821 

See accompanying notes to the condensed consolidated financial statements.

Sonic Foundry, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 20202021

(Unaudited)

(Unaudited)

1.

1.

Basis of Presentation and Significant Accounting Policies

Financial Statements

The accompanying condensed consolidated financial statements are unaudited and have been prepared on a basis substantially consistent with the Company's audited financial statements as of and for the year ended September 30, 2019 included2020 included in the Company's Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Operating results for the six month period ended March 31, 20202021 are not necessarily indicative of the results that might be expected for the year ending September 30, 2020.

Financing Receivables
Financing receivables consist The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

Impacts of 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 long-term customercould 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 contracts,the health and are presented netwell-being of allowance for losses.our employees, business partners and communities, a vast majority of our employees have been working remotely since mid-March 2020 and continue to do so. The Company continues to follow guidelines outlined by the CDC and local county protocol. Given these guidelines and current trends, the Company is targeting August 2, 2021 for a return to in-person working.  

COVID-19 has had negative impacts on our operations and the future impacts of the pandemic and any corresponding economic results are largely unknown and rapidly evolving.  Beginning in March 2020, the in-person events portion of our business was, and continues to be, significantly impacted by cancellations and/or postponements due to social distancing protocols enacted to stop the spread of the virus.  In response to the cancellations, the Company introduced a single portfolio consistingnew virtual events platform as an alternate solution for our customers. While a return to in-person events and conferences is anticipated to begin during the summer of fixed-term receivables, which2021, a full return is further segregated into two classes basednot anticipated until 2022. In addition, the Company is confident many future in-person events will be hybrid and will include our virtual events platform. 

In addition, the closure of educational institutions globally and the negative financial impact on typetheir funding, could impact sales in the upcoming quarters.  While the virus has increased awareness of productthe need for distance learning tools and lease.


Amounts receivablethe adoption of $526 thousand at September 30, 2019 primarily represents salesvideo 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 perpetual software licenses tooperations 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 single international distributor on invoices outstanding for product delivered from March 2016 through June 2017.


one-time benefit arrangement. The Company generally determines its allowanceaccounts for losses on financing receivableson-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 customer class level by considering a numbertime the obligations are probable of factors, including the length of time financing receivables are past due, historicalbeing incurred 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.can be reasonably estimated. The Company writes off financing receivables when they become uncollectible,accounts for one-time employment benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. When applicable, the Company records such costs into operating expense.

For the three and payments subsequently received on such receivables are credited to the allowance for financing receivable losses. Interest is not accrued on past due receivables. There was an allowance of $526 thousand at September 30, 2019.


During the periodsix months ended March 31, 2020 it was determined that2021, the financing receivable would not be collected. Therefore, bothCompany expensed involuntary termination benefits of $0 and $101 thousand under ASC 420 compared to zero during the financing receivable of $526 thousand and the corresponding reserve of $526 thousand were written off.
same periods last year.

Investment in Sales-Type Lease

The Company has entered into sales-type lease arrangements with certain customers, consisting of recorders leased with terms ranging from 3-5 years.

Investment in sales-type leases consists of the following (in thousands) as of March 31, 2020:2021:

Investment in sales-type lease, gross:

    

2021

 $204 

2022

  72 

Gross investment in sales-type lease

  276 

Less: Unearned income

  1 

Total investment in sales-type lease

 $275 
     

Current portion of total investment in sales-type lease

 $203 

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

  72 
  $275 

9

  
Investment in sales-type lease, gross: 
   2020$13
   2021147
   202213
Gross investment in sales-type lease173
Less: Unearned income3
Total investment in sales-type lease$170
  
Current portion of total investment in sales-type lease$11
Long-term portion of total investment in sales-type lease159
 $170

Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. An obsolescence reserve has been established to account for slow moving inventory.

Inventory consists of the following (in thousands):

  March 31,  September 30, 
  

2021

  

2020

 

Raw materials and supplies

 $207  $267 

Finished goods

  1,005   1,022 

Less: Obsolescence reserve

  (122)  (122)
  $1,090  $1,167 
 March 31,
2020
 September 30, 2019
Raw materials and supplies$230
 $163
Finished goods402
 395
Less: Obsolescence reserve(30) 
 $602
 $558

Asset Retirement Obligation

An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is recognized as a liability in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-term asset.  The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset.  As of March 31, 20202021 and September 30, 2019, 2020, the Company has recorded a liability of $130$129 thousand and $129$134 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. Asset retirement obligations are included in other-long term liabilities on the condensed consolidated balance sheets.

Fair Value of Financial Instruments


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


Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to the Company at the measurement date.

Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.


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


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


Financial Liabilities Measured at Fair Value on Recurring Basis


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


Financial liabilities measured at fair value on a recurring basis are summarized below (in thousands):

March 31, 2021

 

Level 1

  

Level 2

  

Level 3

  

Total Fair Value

 

Derivative liability

 $  $85  $  $85 

10
March 31, 2020 Level 1 Level 2 Level 3 Total Fair Value
Derivative liability $
 $72
 $
 $72


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 (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.


debt until May 2020, at which time the debt was extinguished and exchanged for the Company's common stock.

Financial Instruments Not Measured at Fair Value


The Company's other financial instruments consist primarily of cash and cash equivalents, accounts receivable, investment in sales-type lease, financing receivables, accounts payable, and debt instruments and capital lease obligations. The book values of cash and cash equivalents, accounts receivable, investment in sales-type lease, and accounts payable are considered to be representative of their respective fair values due their short term nature. The carrying value of debt including the current portion, approximates fair market value as the variable and fixed rate approximates the current market rate of interest available to the Company.

Legal Contingencies

When legal proceedings are brought or claims are made against the Company and the outcome is uncertain, we are required to determine whether it is probable that an asset has been impaired or a liability has been incurred. If such impairment or liability is probable and the amount of loss can be reasonably estimated, the loss must be charged to earnings.


No legal contingencies were recorded or were required to be disclosed for the three or six months ended March 31, 20202021 or 2019.

2020.

Stock Based Compensation

The Company uses a lattice valuation model to account for all employee stock options granted. The lattice valuation model is a more flexible analysis to value options because of its ability to incorporate inputs that change over time, such as actual exercise behavior of option holders. The Company uses historical data to estimate the option exercise and employee departure behavior in the lattice valuation model. Expected volatility is based on historical volatility of the Company’s stock. The Company considers all employees to have similar exercise behavior and therefore has not identified separate homogeneous groups for valuation. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is based on the U.S. Treasury yields in effect at the time of grant. Forfeitures are based on actual behavior patterns. The expected exercise factor and forfeiture rates are calculated using historical exercise and forfeiture activity for the previous three years.

11








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

  

Six Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Expected life

  4.7 years   4.5 years 

Risk-free interest rate

  0.33% - 0.40%   1.14% - 1.63% 

Expected volatility

  82.26% - 83.29%   72.40% - 73.46% 

Expected forfeiture rate

  14.18%  15.05% - 15.38% 

Expected exercise factor

  1.2   1.2 

Expected dividend yield

  0%  0%
 Six Months Ended
March 31,
 2020 2019
Expected life4.5 years 4.3 years
Risk-free interest rate1.41% - 1.63% 2.48% - 2.93%
Expected volatility72.40% - 73.46% 60.19% - 66.05%
Expected forfeiture rate15.05% - 15.38% 13.51% - 14.76%
Expected exercise factor1.2 1.2
Expected dividend yield0% 0%

A summary of option activity at March 31, 20202021 and changes during the six 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  $5.08   4.6 

Granted

  516,667   3.34   9.9 

Exercised

  (95,652)  2.18   1.1 

Forfeited

  (226,184)  7.75   0.0 

Outstanding at March 31, 2021

  1,902,346   4.44   6.3 
Exercisable at March 31, 2021  1,286,686   5.20   4.8 
 Options 
Weighted-
Average
Exercise Price
 
Weighted-Average
Remaining Contractual
Period in Years
Outstanding at October 1, 20191,654,429
 $5.62
 4.9
Granted184,750
 1.18
 9.6
Exercised(1,000) 0.66
 8.7
Forfeited(54,700) 4.07
 4.3
Outstanding at March 31, 20201,783,479
 5.20
 4.9
Exercisable at March 31, 20201,416,998
 6.21
 3.8

A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 20202021 is presented below:

      

Weighted-Average

 
      

Grant Date Fair

 

Non-vested Options

 

Options

  

Value

 

Non-vested at October 1, 2020

  339,897  $0.60 

Granted

  516,667   

2.01

 

Vested

  (231,159)  1.57 

Forfeited

  (9,746)  0.55 

Non-vested at March 31, 2021

  615,659  $

1.45

 
Non-vested OptionsOptions 
Weighted-Average
Grant Date Fair
Value
Non-vested at October 1, 2019357,114
 $0.77
Granted184,750
 0.51
Vested(153,049) 0.97
Forfeited(22,334) 0.55
Non-vested at March 31, 2020366,481
 $0.57

The weighted average grant date fair value of options granted during the six months ended March 31, 20202021 was $0.51.$2.01. As of March 31, 2020,2021, there was $131$668 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $95$515 thousand. The cost is expected to be recognized over a weighted-average remaining life of 2.21.8 years.

Stock-based compensation recorded in the three and six months ended March 31, 2021 was $165 thousand and $283 thousand, respectively. Stock-based compensation recorded in the three and six months ended March 31, 2020 was $34 thousand and $86 thousand, respectively. There was $66thousand and $209 thousand in cash received from transactions under all stock option plans during the three and six months ended March 31, 2021and $1 thousand during the the three and six months ended March 31, 2020 was $34 thousand and $86 thousand. Stock-based compensation recorded in the three and six months ended March 31, 2019 was $57 thousand and $219 thousand. There was $1 thousand in cash received from exercises under all stock option plans and warrants during the three and six months ended March 31, 2020 and zero during the same periods in 2019.. There were no tax benefits realized for tax deductions from option exercises in either of the three and six month periods ended March 31, 20202021 or 2019.2020. The Company currently expects to satisfy share-based awards with registered shares available to be issued.

The Company also has an Employee Stock Purchase Plan ("Purchase Plan") under which an aggregate of 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 23,007106,704 shares are available to be issued under the plan.plan as March 31, 2021. The Company recorded stock compensation expense under this plan of $6 thousand and $7 thousand for the for the three and six month periods ended March 31, 2021 and $1 thousand for each of the three and six month periods ended March 31, 2020 and 2019.2020.

12




Preferred Stock and Dividends

The Company considered relevant guidance when accounting for the issuance

No shares of preferred stock,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.

March 31, 2021 and 2020.

Per Share Computation

Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income (loss) attributable to common stockholders. The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:

  

Three Months Ended

  

Six Months Ended

 
  

March 31

  

March 31

 
  

2021

  

2020

  

2021

  

2020

 

Denominator for basic net income (loss) per share - weighted average common shares

  8,040,513   6,785,180   8,001,723   6,760,779 

Effect of dilutive options and warrants (treasury method)

  517,275   148,047   450,190    

Denominator for diluted net income (loss) per share - adjusted weighted average common shares

  8,557,788   6,933,227   8,451,913   6,760,779 

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

  1,036,907   1,933,990   1,289,407   2,082,037 
 Three Months Ended
March 31,
 Six Months Ended March 31,
 2020 2019 2020 2019
Denominator for basic net income (loss) per share - weighted average common shares6,785,180
 5,278,500
 6,760,779
 5,232,449
Effect of dilutive options (treasury method)148,047
   
Denominator for diluted net income (loss) per share - adjusted weighted average common shares6,933,227
 5,278,500
 6,760,779
 5,232,449
Options, warrants and convertible shares outstanding during each period, but not included in the computation of diluted net loss per share because they are antidilutive1,933,990
 2,076,083
 2,082,037
 2,076,083

Liquidity

At March 31, 2020,2021, approximately $1.5$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 12 months. WeThe Company is inquiring with its bank regarding a line of credit. The Company will likely evaluate lease opportunities to finance equipment purchases in the future and anticipate continuing to utilize proceeds from the note purchase agreement to support working capital needs. We may also seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements", ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", ("ASU 2018-15"). ASU 2018-15 aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in ASU 2018-15 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606", ("ASU 2018-18"). ASU 2018-18 provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. The amendments in ASU 2018-18 are effective for all public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 326, for entities that have adopted ASU 2016-13,

the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within fiscal those fiscal years. Early adoption is permitted in any interim period after issuance as long as the entity has adopted the amendments in ASU 2016-13. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)", ("ASU 2019-08"). This ASU requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. For entities that have not yet adopted the amendments in ASU 2018-07, the amendments in this Update are effective for public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)", ("ASU 2019-10"). This ASU addressed effective dates of the aforementioned major Accounting Standards Updates as a result of the challenges implementation of major standards poses for private companies, smaller reporting companies, and not-for-profit organizations. ASU 2019-10 is a major update which would first be effective for bucket-one entities, which are public entities that are Securities and Exchange Commission ("SEC") filers, excluding entities eligible to be smaller reporting companies under the SEC's definition. The Company does qualify as a smaller reporting company under the SEC's definition. Financial Instruments - Credit Losses (Topic 326) is currently not effective for any entities; ASU 2019-10 changes the effective date of this update for all other public companies (including smaller reporting companies) to be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because Derivatives and Hedging (Topic 815) and Leases (Topic 842) are already effective for public business entities the Board retained the effective date for those entities, including smaller reporting companies.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", ("ASU 2019-12"). The amendments in this ASU affect entities within the scope of Topic 740. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2021,2020, 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.

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)", ("ASU 2020-01"). The amendments in this ASU affect all entities that apply the guidance in Topics 321, 323, and 815 and either (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. For public business entities, the amendments in this ASU are effective for fiscal year beginning after December 15, 2020, and interim periods with those fiscal years. The amendments in this ASU should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. The Company is currently evaluating the guidance and its impact to the financial statements.

Accounting standards that have been issued but are not yet effective by the FASB or other standards-setting bodies that do not require adoption until a future date, which are not discussed above, are not expected to have a material impact on the Company’s financial statements upon adoption.

Recently Adopted Accounting Pronouncements

Leases (ASC Topic 842, Leases ("ASC 842"))


In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)"2021, ("ASU 2017-11"). This update was issued to address complexities in accounting for certain equity-linked financial instruments containing down round features. The amendment changes the classification analysis of these financial instruments (or embedded features) so that equity classification is no longer precluded. The amendments in ASU 2017-11 are effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging Topic 815): Targeted Improvements to Accounting for Hedging Activities", ("ASU 2017-12"). This update was issued to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting", ("ASU 2018-07"). The standard addresses aspects of the accounting for nonemployee share-based payment transactions. The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 815, for entities that have not yet adopted ASU 2017-12 as of the issuance date of this ASU, the effective dates and transition requirements for the amendments to Topic 815 are the same as the effective dates and transition requirements in ASU 2017-12. The amendments for Topic 815 in ASU 2019-04 were adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.

2. Related Party Transactions

During the three and six months ended March 31, 2020, the Company incurred fees of $148$28 thousand and $258$60 thousand, respectively, to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $85$148 thousand and $131$258 thousand during the three and six months ended March 31, 2019.2020. The Company had accruedrecorded liabilities of $9 thousand and $36 thousand for unbilled services of $0 thousand and $30 thousand at March 31, 2020 and September 30, 2019, respectively, to the same law firm.

firm at March 31, 2021 and September 30, 2020, respectively.

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


On November 17, 2017,May 13, 2020, the Company entered into an Agreement in whicha debt conversion agreement with Mr. Burish's rightBurish to convert shares of Preferred Stock, Series A,all outstanding debt owed to Mr. Burish into common stock was waived until shareholder approval for the issuance of Preferred Stock, Series A had been obtained. The right to vote said shares of Preferred Stock, Series A was also waived pending shareholder approval of the issuance. Shareholder approval was obtained on May 17, 2018.

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


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

On April 16, 2018, the Company issued 232,558 shares of common stock to an affiliated party. The shares were issued at a conversion price of $2.15 per share, representing the closing price on April 13, 2018. On April 16, 2018, the closing price of the Company’s common stock was $2.18$5.00 per share. The affiliated party also received warrants to purchase 232,558 sharestotal debt amount, including accrued interest and fees, of common stock at an exercise price of $2.50 per share which expire on April 16, 2025.

On June 8, 2018, 905 shares of Preferred Stock, Series A were automatically$5.6 million was converted by the Company into 213,4371,114,723 shares of common stock. The amount of shares converted represents all preferred shares issued on May 30, 2017 and June 8, 2017, including related dividends.

On August 23, 2018, 717 shares of Preferred Stock, Series A were automatically convertedtransaction was recommended by the Company into 169,485 sharesCompany's Special Committee of common stock. The amount of shares converted representsIndependent and Disinterested Directors, unanimously approved by all preferred shares issued on August 23, 2017.

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

On April 25, 2019, Mr. Burish exercised his warrant to purchase 728,155 shares of common stockdisinterested directors of the Company, and ratified by shareholders at an exercise price of $1.18 per share, which was entered into coincidentthe Company's most recent shareholder meeting. Silverwood Partners, the Special Committee's financial advisor, issued a fairness opinion in connection with the execution of the Note Purchase Agreement on February 28, 2019.

On May 17, 2019, 2,080 shares of Preferred Stock Series A were automatically convertedtransaction. The debt conversion was also ratified by the Company into 491,753 shares of common stock. The amount of shares converted represents all preferred shares issuedshareholders at the annual shareholders meeting held on May 17, 2018, including related dividends.

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

January 28, 2021.

Mr. Burish beneficially owns more than 5% of the Company’s common stock. Mr. Burish also serves as the Chairman of the Board of Directors. An affiliated party beneficially owns more than 5% of the Company's common stock. All transactions with Mr. Burish and with the affiliated party were approved by a special 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 March 31, 2020,2021, the Company hashad an obligation to purchase $319$62 thousand of Mediasite product which is not recorded onand $139 thousand of services during the Company’s condensed consolidated balance sheet.

remainder of fiscal 2021, and $423 thousand during fiscal 2022 and 2023.

Leases

The Company has operating leases for corporate office space with various expiration dates. Our leases have remaining lease terms of up to three years, some of which include escalation clauses, renewal options for up to twelve years or termination options within one year.

We determine if an arrangement is a lease upon contract inception. The Company has both operating and finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments according to the arrangement.

A contract contains a lease if the contract conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.


Lease right-of-use assets and lease liabilities are recognized as of the commencement date based on the present value of the lease payments over the lease term. The lease right-of-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 over the expected lease term for operating leases. Amortization expense of the right-of-use asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental interest rate.

Right-of-use assets and lease liabilities are recognized for our leases. Right-of-use assets under finance leases are included in property and equipment on the condensed consolidated balance sheets.

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

We have operating lease arrangements with lease and non-lease components. The non-lease components in our arrangements are not significant when compared to the lease components. For all operating leases, we account for the lease and non-lease components as a single component.

As of March 31, 2020,2021, 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)

 $773  $46 

2022

  455   80 

2023

  100   8 

2024

  106   5 

2025

  33    

Thereafter

  67    

Total

  1,534   139 

Less: imputed interest

  (132)  (8)

Total

 $1,402  $131 

15

 Operating Leases Finance Leases
2020 (remaining)$688
 $88
20211,026
 128
2022292
 79
202394
 8
2024102
 5
Thereafter101
 
Total2,303
 308
Less: imputed interest(303) (23)
Total$2,000
 $285
Effect
 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 liabilities2,216
 (44) 2,172
Total current liabilities13,831
 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):

  

Six Months Ended March 31, 2021

  

Six Months Ended March 31, 2020

 

Operating lease costs

 $724  $662 

Variable operating lease costs

  33   29 

Total operating lease cost

 $757  $691 
         

Finance lease cost:

        

Amortization of right-of-use assets

 $80  $106 

Interest on lease liabilities

  8   12 

Total finance lease cost

 $88  $118 

  Six Months Ended March 31, 2020
Operating lease costs $662
Variable operating lease costs 29
Total operating lease cost $691
   
Finance lease cost:  
   Amortization of right-of-use assets $106
   Interest on lease liabilities 12
Total finance lease cost $118

Variable lease costs include operating costs for U.S. office lease based on square footage and Consumer Price Index ("CPI") rent escalation and related VAT for office lease in the Netherlands.

Supplemental cash flow information related to operating and finance leases were as follows (in thousands):

  

Six Months Ended March 31, 2021

  

Six Months Ended March 31, 2020

 

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash outflows for operating leases

 $724  $679 

Operating cash outflows for finance leases

  8   12 

Financing cash outflows for finance leases

  76   123 
  Six Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:  
   Operating cash outflows for operating leases $679
   Operating cash outflows for finance leases 12
   Financing cash outflows for finance leases 123

Other information related to leases was as follows:

  

March 31, 2021

  

March 31, 2020

 

Weighted average remaining lease term (in years)

        

Operating leases

  2.2   2.6 

Finance leases

  1.6   2.3 

Weighted average discount rate

        

Operating leases

  9.66%  11.82%

Finance leases

  7.63%  7.14%

March 31, 2020
Weighted average remaining lease term (in years)

   Operating leases2.6
   Finance leases2.3
Weighted average discount rate

   Operating leases11.82%
   Finance leases7.14%

4. Credit Arrangements


Partners for Growth V, L.P.

On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2018 Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”).

The 2018 Loan and Security Agreement provides for a Term Loan ("Term Loan") in the amount of $2,500,000, which was disbursed in two (2) Tranches as follows: Tranche 1 was disbursed on May 14, 2018 in the amount of $2,000,000; and Tranche 2 in the amount of $500,000, was disbursed on November 8, 2018.

Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000.
The principal of the Term Loan may be prepaid at any time provided that Sonic Foundry pays to PFG V a prepayment fee equal to 1%without penalty as of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.
May 14, 2019. The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property.

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


At March 31, 2020,2021, 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 $72$85 thousand and $9$66 thousand, respectively. Included in other expense, the remeasurement loss on the derivative liability during the three and six months ended March 31, 2021 was $14 thousand and $19 thousand, respectively, compared to remeasurement loss of $61 thousand and $63 thousand, respectively, during the three and six months ended March 31, 2020 was $61 thousand and $63 thousand, respectively, compared to a remeasurement loss of $8 thousand and a remeasurement gain of $15 thousand during the three and six months ended March 31, 2019.

.

The proceeds from the 2018 Loan and Security Agreement were allocated between the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair value on the date of issuance which resulted in carrying values of $2.3 million and $156 thousand, respectively. The warrant debt of $156 thousand is treated together as a debt discount on the PFG V Debt and will beis being accreted to interest expense under the effective interest method over the three-year term of the PFG V Debt and the five-year term of the Warrant Debt. During the three and six months ended March 31, 2020, the. The Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $7 thousand and $13 thousand, respectively, compared to $6 thousand and $11 thousand compared to $5 thousand and $9 thousand in the same periods last year.

In addition, $14 thousand and $28 thousand of amortization of the debt discount was recorded in the current three month and six month period compared to $13 thousandperiods, respectively, in both 2021 and $27 thousand in the prior year.2020. At March 31, 2020,2021, the carrying value of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $1.2 million$167 thousand and $160$185 thousand, respectively. In addition, the Company agreed to pay PFG V a cash fee of up to $150,000 payable upon maturity (the “back-end fee”), which will be earned ratably over the three year term of the PFG V loan. During the three and six months ended March 31 for both fiscal 2021 and 2020, the Company recorded interest expense of $13 thousand and $25 thousand, associated with recognition of the back-end fee compared toof $13 thousand and $25 thousand, during the three and six months ended March 31, 2019.

respectively.

The non-cash effective interest expense is calculated on the net balance of the PFG V Debt, debt discount, back-end fee and related loan origination fees, on a monthly basis. During the three and six months ended March 31, 2020, we2021, non-cash interest expense of $23 thousand and $41 thousand was recorded $3compared to $3 thousand of gain and $1 thousand of non-cash interest expense related toloss during the effective interest rate on the PFG V loan.

same periods last year.

On March 11, 2019, Sonic Foundry, Inc. entered into a Consent, Waiver & Modification to the 2018 Loan and Security Agreement dated May 11, 2018 (the "Modification") with Partners for Growth V, L.P. ("PFG"). Under the Modification: PFG waived the Company's default on the Minimum EBITDA financial covenant for the quarterly reporting period ending December 31, 2018; modified the existing financial covenants to be as follows: (i) Minimum Coverage Ratio (as defined), which requires, as of the last day of each month on or after the closing date, to be equal to or greater than (x) 0.7: 1.00 for the December through May calendar months, and (y) 0.9:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), which requires, as of the last day of each calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be no less than $13,000,000; and modified the negative covenants to be as follows: the Company (x) shall not cause or permit (a) Japanese subsidiary indebtedness under its revolving line of credit facility to exceed at any time $1,000,000 outstanding, or (b) aggregate subsidiary indebtedness to exceed $1,200,000 at any time. At March 31, 2020,2021, the Company was in compliance with all covenants per the 2018 Loan and Security Agreement, as modified.

17

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

At March 31, 2020,2021, a gross balance of $1.2 million$167 thousand was outstanding on the term debt with PFG V with an effective interest rate of sixteen-and-six-tenths percent (16.60%). At September 30, 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 to Mr. Burish with each share valued at $1.30 per share. The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.

February 28, 2019 Note Purchase Agreement

On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Mr. Burish.

The Note Purchase Agreement 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,31, 2019 Promissory Note, and the February 14, 2019 Promissory Note, collectively referred to as the "Initial Notes"). The fourth tranche was disbursed on March 13, 2019 and the fifth and final tranche was disbursed on April 4, 2019.

The Subordinated Promissory Notes 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.

The principal of the Subordinated Promissory Notes may be prepaid at any time in whole or in part, by payment of an amount equalNote Purchase Agreement dated February 28, 2019 was subordinated to the unpaid principal balance to be pre-paid, plus all unpaid interest accrued thereon through the prepayment date, plus all outstanding and unpaid fees and expenses payable through the prepayment date.
existing PFG loan.

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.

18

The Subordinated Promissory Notes are collateralized by substantially all the Company's assets, including intellectual property, subject to the rights
The Note Purchase Agreement requires compliance with the following financial covenants: (i) Minimum Coverage Ratio, which requires, as of the last day of each month on or after the closing date, the Minimum Coverage Ratio (as defined) to be equal to or greater than (x) 0.7:1.00 for the December through May calendar months, (y) 0.9:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), as of the last day of any calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be no less than $13,000,000. At March 31, 2020, the Company was in compliance with all covenants per the Note Purchase Agreement.
The Note Purchase Agreement dated February 28, 2019 is subordinated to the existing PFG loan.
The Company used the proceeds from the notes issued under the Note Purchase Agreement to replace the revolving line of credit with Silicon Valley Bank, which matured on January 31, 2019.

The proceeds from the Note Purchase Agreement were allocated between the Subordinated Promissory Notes and the 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 and six months ended March 31,first fiscal quarter of 2020, the Company recorded accretion of discount expense associated with the Subordinated Promissory Notes of $33 thousand and $67 thousand compared to the three and six months ended March 31, 2019 of $13 thousand and $13$34 thousand.
During the three and six months ended March 31, 2020, the Company recorded an accrued anniversary fee associated with the Subordinated Promissory Notes of $6 thousand and $12 thousand. There was no accrued anniversary fee for the prior periods.

The non-cash effective interest expense 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 and six months ended MarchDecember 31, 2020, we recorded $13 thousand and $22019, $15 thousand of non-cash interest benefit related to the effective interest rate on the Subordinated Promissory Notes.

At March 31, 2020, a gross principal balance of $5.0 million was outstanding on the Subordinated Promissory Notes, with an effective interest rate of twelve-and-four-tenths percent (12.4%). At September 30, 2019, a gross principal balance of $5.0 million was outstanding on the Subordinated Promissory Notes.
Accrued interest on the Subordinated Promissory Notes was paid through March 31, 2019, but has been deferred since that date. In April 2019 it was informally agreed between the Company and Mr. Burish that the interest would be deferred. On November 22, 2019, the Company entered into a Note Modification Agreement to formalize the deferment of the accrued interest. The Note Modification Agreement modifies the terms of the Subordinated Promissory Notes by deferring all interest payments due at the end of each calendar month beginning April 30, 2019 and continuing through and including July 31, 2020, in an amount which will be determined based on the variable interest rate on the Subordinated Promissory Notes. The deferred interest amount shall be added to the principal amount due on the Subordinated Notes and shall be paid on the maturity date. As a result of the Note Modification Agreement, $502 thousand and $259 thousand of accrued interest related to the Subordinated Notes Payable was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020 and September 30, 2019, respectively.
The anniversary fee on the Subordinated Promissory Notes was due on February 28, 2020 ("first year anniversary fee") and has been deferred. On March 24, 2020, the Company entered into a First Amendment to Note Modification Agreement ("First Amendment") to formalize the deferment of the first year anniversary fee. The First Amendment modified the terms of the Subordinated Promissory Notes by deferring the first year anniversary fee due on February 28, 2020. The deferred first year anniversary fee was added to the principal amount due on the Subordinated Notes and is required to be paid on the maturity date. As a result of the First Amendment, $25 thousand was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020.
recorded.

February 28, 2019 Warrant

Coincident with execution of the Note Purchase Agreement, the Company entered into a Warrant Agreement ("Burish Warrant") with Mr. Burish. Pursuant to the terms of the Burish Warrant, the Company issued to Mr. Burish a warrant to purchase up to 728,155 shares of common stock of the Company at an exercise price of $1.18 per share, subject to certain adjustments.

On April 25, 2019, Mr. Burish exercised his warrant to purchase 728,155 shares of common stock of the Company at an exercise price of $1.18 per share. A special committee of disinterested and independent directors approved the issuance of the Subordinated Promissory Notes and the Burish Warrant.

May 13, 2020 Debt Conversion Agreement

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

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

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

Other Indebtedness

On January 30, 2020, Mediasite K.K. entered into a Term Loan ("Term Loan") with Sumitomo Mitsui Banking Corporation for $460 thousand in cash. The Term loan accruesaccrued interest at an annual rate of 1.475%. Beginning in January 2020, principal is duepayments in 12 equal monthly installments, plus accrued interest continuing throughwere made. The principal has been paid in full as of December 30, 2020, when the principal balance will be paid in full.

At March 31, 20202021 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%).The available line of credit at March 31, 2021 was $485 thousand and maturity date is on February 28,  2022.

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



5. Income Taxes

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at March 31, 20202021 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 six months ended March 31, 20202021 or  2019.

The2020.

The Company’s tax rate differs from the expected tax rate each reporting period as a result of permanent differences, the valuation allowance, and international tax items. The Company's income tax expense for the three and six months ended March 31, 2021 and 2020 primarily consists of income tax expense at its foreign subsidiaries.


6. Revenue

Disaggregation of Revenues

The following tables summarize revenues from contracts with customers for the three and six months ended March 31, 20202021 and 2019,2020, respectively, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK) :

Three months ended March 31, 2021

 
  

SOFO

  

SFI

  

MSKK

  

Eliminations

  

Total

 
                     

Revenue:

                    
                     

Hardware

 $1,153  $257  $697  $(314) $1,793 

Software

  653   119   115   (109)  778 

Shipping

  14   1         15 
                     

Product and other total

  1,820   377   812   (423)  2,586 
                     

Support

  1,693   145   238   (202)  1,874 

Hosting

  1,371   248   424      2,043 

Events

  784   30   530      1,344 

Installs, training & other

  272   17   575      864 
                     

Services total

  4,120   440   1,767   (202)  6,125 
                     

Total revenue

 $5,940  $817  $2,579  $(625) $8,711 


Six months ended March 31, 2021 
  

SOFO

  

SFI

  

MSKK

  

Eliminations

  

Total

 
                     

Revenue:

                    
                     

Hardware

 $2,468  $343  $777  $(448) $3,140 

Software

  1,440   220   174   (256)  1,578 

Shipping

  27   2         29 
                     

Product and other total

  3,935   565   951   (704)  4,747 
                     

Support

  3,499   324   477   (418)  3,882 

Hosting

  2,848   506   1,128   (63)  4,419 

Events

  1,837   47   1,402      3,286 

Installs, training & other

  689   27   826      1,542 
                     

Services total

  8,873   904   3,833   (481)  13,129 
                     

Total revenue

 $12,808  $1,469  $4,784  $(1,185) $17,876 

21
Three months ended March 31, 2020
 SOFOSFIMSKKEliminationsTotal
      
Revenue:     
      
Hardware$1,563
$153
$181
$(124)$1,773
Software883
64
194
(178)963
Shipping74
2


76
      
Product and other total2,520
219
375
(302)2,812
      
Support1,887
136
919
(168)2,774
Hosting1,132
160
321

1,613
Events705
12
655

1,372
Installs & training94
1


95
      
Services total3,818
309
1,895
(168)5,854
      
Total revenue$6,338
$528
$2,270
$(470)$8,666

Six months ended March 31, 2020
 SOFOSFIMSKKEliminationsTotal
      
Revenue:     
      
Hardware$2,609
$219
$196
$(197)$2,827
Software1,597
253
231
(234)1,847
Shipping190
3


193
      
Product and other total4,396
475
427
(431)4,867
      
Support3,897
291
1,237
(360)5,065
Hosting2,138
280
697

3,115
Events2,023
74
1,327

3,424
Installs & training208
2


210
      
Services total8,266
647
3,261
(360)11,814
      
Total revenue$12,662
$1,122
$3,688
$(791)$16,681


Three months ended March 31, 2019

Three months ended March 31, 2020

Three months ended March 31, 2020

 
SOFOSFIMSKKEliminationsTotal 

SOFO

  

SFI

  

MSKK

  

Eliminations

  

Total

 
                     
Revenue:                     
                     
Hardware$784
$35
$376
$(189)$1,006
 $1,563  $153  $181  $(124) $1,773 
Software618
124
120
(159)703
  883   64   194   (178)  963 
Shipping87



87
  74   2         76 
                     
Product and other total1,489
159
496
(348)1,796
  2,520   219   375   (302)  2,812 
                     
Support1,961
145
976
(241)2,841
  1,887   136   919   (168)  2,774 
Hosting1,062
115
513

1,690
  1,132   160   321      1,613 
Events850
38
742

1,630
  705   12   655      1,372 
Installs & training29
11


40

Installs, training & other

  94   1         95 
                     
Services total3,902
309
2,231
(241)6,201
  3,818   309   1,895   (168)  5,854 
                     
Total revenue$5,391
$468
$2,727
$(589)$7,997
 $6,338  $528  $2,270  $(470) $8,666 


Six months ended March 31, 2020

 
  

SOFO

  

SFI

  

MSKK

  

Eliminations

  

Total

 
                     

Revenue:

                    
                     

Hardware

 $2,609  $219  $196  $(197) $2,827 

Software

  1,597   253   231   (234)  1,847 

Shipping

  190   3         193 
                     

Product and other total

  4,396   475   427   (431)  4,867 
                     

Support

  3,897   291   1,237   (360)  5,065 

Hosting

  2,138   280   697      3,115 

Events

  2,023   74   1,327      3,424 

Installs, training & other

  208   2         210 
                     

Services total

  8,266   647   3,261   (360)  11,814 
                     

Total revenue

 $12,662  $1,122  $3,688  $(791) $16,681 

Six Months Ended March 31, 2019
 SOFOSFIMSKKEliminationsTotal
      
Revenue:     
      
Hardware$1,598
$174
$385
$(300)$1,857
Software1,260
239
318
(276)1,541
Shipping148
1


149
      
Product and other total3,006
414
703
(576)3,547
      
Support3,948
334
1,222
(472)5,032
Hosting2,116
264
866

3,246
Events2,081
76
1,394

3,551
Installs & training108
15


123
      
Services total8,253
689
3,482
(472)11,952
      
Total revenue$11,259
$1,103
$4,185
$(1,048)$15,499

Transaction price allocated to future performance obligations

ASC 606 allows for the use

As of certain practical expedients, which we have elected and applied to measure our future performance obligations as of March 31, 2020.


As of March 31, 2020,2021, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately $3.6$3.8 million in the next three months, $9.5$7.8 million in the next twelve months, and the remaining $2.1$1.8 million thereafter.

22


Disclosures related to our contracts with customers


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

Unearned revenues


Unearned revenues represent our obligation to transfer products or services to our client for which we have received consideration, or an amount of consideration is due, from the client. During the three and six months ended March 31, 2020,2021, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $4.0 million and $8.2 million, respectively,compared to $2.4 million and $6.76.7 million compared to $2.6 million and $6.9 million, respectively, recognized during the  three and six months ended March 31, 2019.

2020.

Assets recognized from the costs to obtain our contracts with customers


We recognize an asset for the incremental costs of obtaining a contract with a customer. We amortize these deferred costs proportionate with related revenues over the period of the contract. During the three and six months ended March 31, 2020,2021, amortization expense recognized related to the amount included in the capitalized commissions at the beginning of the period was $240 thousand and $457 thousand , respectively, compared to $127 thousand and $330 thousand compared to $147 thousand and $396 thousand, respectively, recognized during the three and six months ended March 31, 2019.2020.

23



7. Subsequent Events

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

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

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Risks and Uncertainties

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis,” and “Risk Factors.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part I, Item 1A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2019 2020and 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 March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time. To support the health and well-being of our employees, business partners and communities, a vast majority of our employees have been working remotely since mid-March 2020 and continue to do so. We are currently researching and preparing for a limited return to the office at the end of May 2020.


COVID-19 has had 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 was and continues to be significantly impacted by cancellations and/or postponements due to social distancing protocols enacted to stem  stop 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.

24

RESULTS OF OPERATIONS
ASC 842

On October 1, 2019, we adopted ASC Topic 842, Leases

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 to the opening balance sheet. The reported results forCompany expensed involuntary termination benefits of $705 thousand under ASC 712. During the three and six months ended March 31, 2020 reflect2021, the adoptionCompany expensed involuntary termination benefits of zero and $101 thousand, respectively, under ASC 842, while420 compared to zero in the comparative information has not been restatedsame periods last year. No further expenses relating to this restructuring are anticipated in future quarters. The expense is recorded in the general and continues to be reported under the related accounting standardsadministrative expense line in effect for those periods. Refer to Note 3 - Commitments to the notes to the condensed consolidated financial statements (unaudited) for additional information related to the effect of the adoption of ASC 842 as of and for the three and six months ended March 31, 2020.

income statement 

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.

Q2Q2-2020-2021 compared to Q2-2019

Q2Revenue in -2020

Q2Q2-2020 increased $669 thousand, or 8% to-2021 revenue of  $8.7 million fromremained consistent with Q2Q2-2019-2020 revenue of $8.0$8.7 million. Revenue consisted of the following:

Product and other revenue from sale of Mediasite recorder units and server software decreased 8% to $2.6 million in Q2-2021 from $2.8 million inQ2-2020.

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. Service revenue increased $271 thousand or 5% from $5.9 million in Q2-2020 to $6.1 million in Q2-2021, primarily due to increases in hosting and professional services.

At March 31, 2021, $9.6 million of revenue was deferred, of which we expect to recognize $7.8 million in the next twelve months, including approximately $3.8 million in the quarter ending June 30, 2021. At March 31, 2020,$11.5 million of revenue was deferred.


Product and other revenue from sale of Mediasite recorder units and server software was $2.8 million in Q2-2020 and $1.8 million inQ2-2019. Average selling price was lower in Q2-2020as compared toQ2-2019 primarily as a result of a higher sales volume of low-cost recorders. Production and other revenue in Q2-2020 included a large refresh recorder transaction while Q2-2019 was negatively impacted by our planned reduced reliance on distribution.
 Q2-2020 Q2-2019
Recorders sold369
 131
Rack units to mobile units ratio25.4 to 1
 3.4 to 1
Average sales price, excluding service (000’s)$4.7
 $7.5
Refresh Units58
 70

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

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

Other revenue relates to freight charges billed separately to our customers.

YTD-2021 (six months) compared to YTD-2019YTD 2020 (six months)

Revenues

Revenue for YTD-2020YTD-2021 totaled $16.7$17.9 million compared to YTD-2019 revenuesYTD-2020 revenue of $15.5 million. Revenues included$16.7 million, a $1.2 million or 7% increase. Revenue consisted of the following:


$4.94.7 million product and other revenue from the sale of 572 Mediasite recorders and software during YTD-2020YTD-2021 versus $3.5$4.9 million YTD 2020. The decrease reflects continued shift in demand from the deliveryon-premise to cloud deployments as well as continued impact of 235 Mediasite recordersCOVID on recorder and software in YTD-2019. Recorders sold were substantially more than YTD-2019, partially due to a large refresh order in Q2-2020 and our planned reduced reliance on distribution.capture installations.

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

$13.1 million revenue from Services compared to $11.8 million in 2020. The $1.3 million or 11% increase is due to the Company's growth in hosting.

Gross Margin

Q2-2020

Q2-2021 compared to Q2-2019

Q2-2020

Gross margin for Q2-2020Q2-2021 was $6.1 million or 70% of revenue compared to Q2-2020 gross margin of $6.3 million or 72% of revenue compared to Q2-2019 gross margin of $6.0 million or 75%. The significant components of cost of revenue include:


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

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

Product costs. Product costs consist of costs associated with our Mediasite recorder hardware, freight, labor and certain allocated costs. These costs were $951 thousand in Q2-2021 and $1.2 million in Q2-2020, resulting in gross margin on products of 63% and 59%, 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 Q2-2021 and $1.2 million in Q2-2020, resulting in gross margin on services of 73% and 79%, respectively.

YTD-2021 (six months) compared to YTD-2019YTD-2020 (six months)


Gross margin for YTD-2020YTD-2021 was $12.9 million or 72% of revenue compared to Q2-2020 gross margin of $12.1 million or 73% of revenue compared to YTD-2019 gross margin of $11.7 million or 75% . The significant components of cost of revenue include:


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

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

Product costs. YTD-2021 product costs were $1.8 million compared to $2.0 million in YTD-2020, resulting in gross margin on products of 63% in YTD-2021 and 59% in YTD-2020.

Service costs. YTD-2021 service costs were $3.2 million compared to $2.6 in YTD-2020, resulting in gross margin on services of 75% in YTD-2021 and 78% in YTD-2020.

Operating Expenses

Selling and Marketing Expenses

Selling and marketing expenses include wages and commissions for sales, marketing and business development personnel, print advertising and various promotional expenses for our products. Timing of these costs may vary greatly depending on introduction of new products and services or entrance into new markets, or participation in major tradeshows.

Q2-2020

Q2-2021 compared to Q2-2019

Q2-2020

Selling and marketing expenses decreased $779 $162 thousand or 20%5% from $3.8 million in Q2-2019 to $3.1 million in Q2-2020.Q2-2020 to $2.9 million in Q2-2021. Differences in the major categories include:


Salary, commissions, and benefits expense decreased by $392$259 thousand as a result of reduced headcount.

Travel expenses, professional services and marketing research decreased $108 thousand primarily due to restrictions related to the pandemic.

Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $219 thousand and $760 thousand respectively, an aggregate increase of $221 thousand from Q2-2020

.

YTD-2021 (six months) compared to YTD-2020 (six months)

Selling and marketing expenses including entertainmentdecreased $548 thousand or 8% from $6.5 million in YTD-2020 to $5.9 million in YTD-2021.

Differences in the major categories include:

Salary, commissions, and meals,benefits expense decreased by $153 thousand.$354 thousand as a result of reduced headcount.


Travel expenses, professional services and marketing research decreased $257thousand primarily due to restrictions related to the pandemic.

Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $143$414 thousand and $615 thousand$1.5 million, respectively, an aggregate decreaseincrease of $51$292 thousand from Q2-2019.YTD-2020.

YTD-2020 (six months) compared to YTD-2019 (six months)
Selling and marketing expenses decreased $1,326 thousand or 17% from $7.8 million in YTD-2019 to $6.5 million in YTD-2020. Differences in the major categories include:

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

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

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

We anticipate selling and marketing headcount to remain consistent throughout the remainder of the fiscal year.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities, finance, legal, human resource and information technology departments, as well as other expenses not fully allocated to functional areas.


Q2-2020

Q2-2021 compared to Q2-2019


Q2-2020

G&A expenses decreased $169 $121 thousand or 13%10% from $1.4$1.2 million  in Q2-2020 to $1.1 million in Q2-2019 to $1.2 million in Q2-2020.Q2-2021. Differences in the major categories include:


Decrease of $141 thousand in property tax, facilities, supplies and depreciation offset by increase in compensation and benefits of $81$93 thousand as a result of reduced headcount.


Professional services increased by $72 thousand primarily due to an increase in legalnon-cash option expense.

G&A expenses for Sonic Foundry International and Mediasite KK accounted for $28 thousand and $211 thousand respectively, an aggregate increase of $41 thousand from Q2-2020.

YTD-2021 (six months) compared to YTD-2020 (six months)

G&A expenses decreased $364 thousand or 14% from $2.6 million in YTD-2020 to $2.3 million in YTD-2021. Differences in the major categories include:

Decrease in professional fees and advisory fees.facilities $587 thousand offset by $372 thousand increase in compensation and benefits.


G&A expenses for Sonic Foundry International and Mediasite KK accounted for $13$52 thousand and $185$370 thousand respectively, an aggregate decrease of $78$33 thousand from Q2-2019.YTD-2020.


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

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

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

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

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

We anticipate general and 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.


Q2Q2-2020-2021 compared to Q2-2019

Q2-2020

Product development expenses decreased by $436 increased $232 thousand, or 23%15% from $1.9 million in Q2-2019 to $1.5 million in Q2Q2-2020-2020 to $1.7 million in Q2.-2021. Differences in the major categories include:


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

Decrease in professional services of $41 thousand.

Increase in compensation and benefits of $125 thousand as a result of additional headcount and outside product development resources.

Product development expense for Sonic Foundry International and Mediasite KK accounted for $112 thousand and $95 thousand respectively, an aggregate increase of $24 thousand compared to Q2-2020.

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


YTD-2020YTD-2021 (six months) compared to YTD-2019YTD-2020 (six months)

Product development expenses decreasedincreased by $679$383 thousand, or 18%12% from $3.8 million in YTD-2019 to $3.1 million in YTD-2020.YTD-2020 to $3.5 million in YTD-2021. Differences in the major categories include:

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

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

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

Increase in compensation and benefits of $224 thousand as a result of additional headcount.

Product development expense for Sonic Foundry International and Mediasite KK accounted for $208 thousand and $182 thousand respectively, an aggregate increase of $18 thousand compared to Q2-2020

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 and six months ended March 31, 2020 decreased $92021 was $23 thousand and increased $100$52 thousand, respectively, compared to $218 thousand and $481 thousand for the same periods last year. The quarterly and 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 and the first anniversary fee 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 and fees.May 13, 2020. The Company also recorded $14 thousand$14 thousand and $28 thousand of interest expense, respectively, for the three and six months ended March 31, 20202021 related to the accretion of discounts on the PFG Loan and Warrant Debt compared to $14 thousand and $27$28 thousand for the three and six months ended March 31, 2019.2020. The Company also recorded amortization expense related to the back-end fee on the PFG loan of $13 thousand and $25, thousand in bothrespectively, for the three and six monthmonths ended March 31, 20202021 compared to $13 thousand and $25 thousand for the same periodsperiod last year. The Company also recorded $34 thousand and $67 thousand ofzero interest expense during the three and six months ended March 31, 20202021 related to the accretion of discounts on the Burish notes payable compared to $13$34 thousand and $67 thousand, respectively, for the three and six months ended March 31, 2019.

During the three and six months ended March 31, 2020.

During the three and six months ended March 31, 2021, a loss in fair value of $61$14 thousand and $63$19 thousand, respectively, was recorded related to the fair value remeasurement on the derivative liability associated with the Loan and Security Agreement and Warrant Debt with PFG compared to a loss in fair value of $8$61 thousand and a gain of $15$63 thousand respectively, during the three and six months ended March 31, 2019.2020. 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.

29


Foreign Currency Translation Adjustment


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


For the three and six months ended March 31, 2020,2021, the Company's foreign currency translation adjustment was a loss of $215 thousand and $127 thousand, respectively, compared to a gain of $5 thousand and a loss of $3 thousand, compared to to a loss of $17 thousand and a gain of $45 thousandrespectively, for the three and six months ended March 31, 2019. The gain is attributable to the strengthening in the Japanese Yen compared to the US dollar compared to the prior period.


During the three and six months ended March 31, 2020.

During the Company recorded an aggregate transaction of $0 and a gain of $15 thousand compared to an aggregate loss of $3 thousand and $40 thousand for the three and six months ended March 31, 2019.2021, the Company recorded an aggregate transaction gain of $29 thousand and $24 thousand compared to an aggregate transaction gain of $0 and $15 thousand for the three and six months ended March 31, 2020. 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 six months of fiscal 2020,2021, the Company generated $680 thousandused $1.3 million of cash from operating activities compared with $3.3 million used$680 thousand in cash provided by operating activities in the same period of fiscal 2019.

2020. The $1.3 million used by operating is a net effect of net income of $889 thousand, $283 thousand stock-based compensation expenses, and $925 thousand change in accounts receivable offset by $1.6 million change in accounts payable and $2.5 million changes in unearned revenue.

Capital expenditures were $118 $448 thousand in the first six months of fiscal 20202021 compared to $222$118 thousand in the same period in fiscal 2019.


2020.

The Company used $278$475 thousand of cash fromfor financing activities during the first six months of fiscal 2021. Payments on notes payable of $618 thousand and payments on finance lease obligations of $76 thousand were offset by proceeds from stock option exercises of $209 thousand. For the same period in fiscal 2020, primarily due to netthe Company used $278 thousand, which included $463 thousand in loan proceeds from the disbursement of the Mediasite K.K.'s term note of $463 thousand offset by payments of $618 thousand on existing debt. For the same period in fiscal 2019, the Company generated $3.5 million of cash from financing activities, mainly due to notes payable proceeds, primarily due to net proceeds from the disbursement of Tranches 1-4 of the Burish Note Purchase Agreement.


At March 31, 2020,2021, the Company had $6.7$3.2 million outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V, the subordinated notes issued under the Burish Note Purchase Agreement and the Mediasite KK term debt. Thedebt and the PPP loan. During the current quarter, the Company made principal payments of $250 thousand and $500 thousand for the three and six months ended March 31, 2020 on the PFG V debt, and $113 thousand on the Mediasite KK term debt in the current quarter.

debt.

At March 31, 2020,2021, approximately $1.5$3.1 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.

On May 13, 2020, the Company and Mr. Burish entered into a Debt Conversion Agreement to convert Mr. Burish's existing secured debt of approximately $5.6 million into common stock at $5.00 per share. Both the Special Committee and Mr. Burish concluded that converting the debt to equity was the most appropriate way to maximize both Company and Shareholder value, improve the Company's financial position, and provide the Company with resources to further its growth opportunities.

The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next twelve 12 months. WeThe Company is inquiring with its bank regarding a line of credit. The Company will likely evaluate lease opportunities to finance equipment purchases in the future and anticipate continuing to utilize proceeds from the notes and term debt to support working capital needs. We may also seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company.

30

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year-ended September 30, 2019. 2020. At March 31, 2020, $4.9 million2021, none of the Company’s $6.7$3.2 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.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on evaluations at March 31, 2020,2021, 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 oMarch 31, 2020.

2021.

Changes in Internal Controls

On October 1, 2019, we adopted ASC 842. As a result, changes were made to the relevant business processes and related control activities in order to monitor and maintain appropriate controls over financial reporting.

During the period covered by the quarterly report on Form 10-Q, the Company has not made any other changes to its internal control over financial reporting (as referred to in Paragraph 4(b) of the Certifications of the Company's principal executive officer and principal financial officer included as exhibits to the report) that have materially affected, or are reasonably likely to affect the Company's internal control over financial reporting.

31





PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.


ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Form 10-K for the fiscal year ended September 30, 2019 filed2020filed with the SEC.


ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 6. EXHIBITS

NUMBER

DESCRIPTION

3.1

NUMBERDESCRIPTION
3.1

3.2


3.3


3.4


3.5


10.1*


10.2*


10.3*


10.4


10.5*


10.6
 

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.

10.7


10.8


10.9


10.10



10.11

10.11

10.12


10.13


10.14


10.15


10.16


10.17


10.18


10.19


10.20


10.21


10.22


10.23


10.24


10.25


10.26


10.27


10.28


10.29


10.30


10.31


10.32


10.33



10.34

10.34

10.35


10.36


10.37


10.38


10.39


10.40


10.41


10.42


   
31.1

10.43

 

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.

10.45

Engagement Letter dated as of February 25, 2021 by and between Sonic Foundry, Inc. and Kenneth Minor, filed as Exhibit 10.1 to the Form 8-K filed on March 1, 2021, and hereby incorporated by reference.

10.46Retirement Transition Agreement dated February 25, 2021 between Sonic Foundry, Inc. and Kelsy Boyd.

31.1

Section 302 Certification of Chief Executive Officer

31.2


32


101


The following materials from the Sonic Foundry, Inc. Form 10-Q for the quarter ended March 31, 20202021 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders' Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

Registrant will furnish upon request to the Securities and Exchange Commission a copy of all exhibits, annexes and schedules attached to each contract referenced in item 10.

*

*

Compensatory Plan or Arrangement

34

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)

(Registrant

May 13, 2021

By:

/s/ Joe Mozden, Jr.

Joe Mozden, Jr.

May 14, 2020By:/s/ Michael Norregaard
Michael Norregaard

Chief Executive Officer

May 14, 202013, 2021

By:

By:

/s/ Kenneth A.Ken Minor

Kenneth A.

Ken Minor

Interim Chief Financial Officer


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