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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly period ended December 31, 2021
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-30407
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SONIC FOUNDRY, INC.
(Exact name of registrant as specified in its charter)
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Maryland |
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39-1783372 |
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(State or other jurisdiction of incorporation or organization) |
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(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)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
| Common Stock, $0.01 par value | SOFO | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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☒ |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s common equity as of the last practicable date:
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Class |
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Outstanding January 23, 2022 |
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Common Stock, $0.01 par value |
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9,113,162 |
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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, 2021
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
(Unaudited)
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December 31, |
September 30, |
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2021 |
2021 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 6,521 | $ | 9,989 | ||||
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Accounts receivable, net of allowances of $198 & $236 |
5,303 | 5,167 | ||||||
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Inventories |
717 | 442 | ||||||
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Investment in sales-type lease, current |
267 | 294 | ||||||
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Capitalized commissions, current |
341 | 360 | ||||||
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Prepaid expenses and other current assets |
1,168 | 1,153 | ||||||
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Total current assets |
14,317 | 17,405 | ||||||
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Property and equipment: |
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Leasehold improvements |
1,085 | 1,111 | ||||||
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Computer equipment |
8,840 | 8,527 | ||||||
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Furniture and fixtures |
1,547 | 1,528 | ||||||
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Total property and equipment |
11,472 | 11,166 | ||||||
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Less accumulated depreciation and amortization |
8,374 | 8,368 | ||||||
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Property and equipment, net |
3,098 | 2,798 | ||||||
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Other assets: |
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Investment in sales-type lease, long-term |
436 | 490 | ||||||
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Capitalized commissions, long-term |
75 | 76 | ||||||
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Right-of-use assets under operating leases |
2,786 | 2,441 | ||||||
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Other long-term assets |
1,130 | 805 | ||||||
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Total assets |
$ | 21,842 | $ | 24,015 | ||||
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
$ | 1,444 | $ | 1,072 | ||||
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Accrued liabilities |
2,020 | 2,522 | ||||||
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Current portion of unearned revenue |
8,352 | 9,413 | ||||||
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Current portion of finance lease obligations |
60 | 79 | ||||||
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Current portion of operating lease obligations |
1,128 | 930 | ||||||
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Total current liabilities |
13,004 | 14,016 | ||||||
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Long-term portion of unearned revenue |
1,495 | 1,614 | ||||||
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Long-term portion of finance lease obligations |
22 | 26 | ||||||
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Long-term portion of operating lease obligations |
1,759 | 1,583 | ||||||
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Long-term portion of notes payable and warrant debt |
554 | 556 | ||||||
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Derivative liability, at fair value |
26 | 53 | ||||||
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Other liabilities |
118 | 27 | ||||||
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Total liabilities |
16,978 | 17,875 | ||||||
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $.01 par value, authorized 500,000 shares; none issued |
— | — | ||||||
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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 |
— | — | ||||||
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5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 1,000,000 shares, none issued |
— | — | ||||||
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Common stock, $.01 par value, authorized 15,000,000 shares; 9,108,071 and 9,064,821 shares issued, respectively and 9,095,355 and 9,052,105 shares outstanding, respectively |
91 | 91 | ||||||
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Additional paid-in capital |
213,557 | 213,278 | ||||||
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Accumulated deficit |
(207,970 | ) | (206,442 | ) | ||||
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Accumulated other comprehensive loss |
(645 | ) | (618 | ) | ||||
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Treasury stock, at cost, 12,716 shares |
(169 | ) | (169 | ) | ||||
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Total stockholders’ equity |
4,864 | 6,140 | ||||||
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Total liabilities and stockholders’ equity |
$ | 21,842 | $ | 24,015 | ||||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(in thousands, except for share and per share data)
(Unaudited)
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Three Months Ended December 31, |
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2021 |
2020 |
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Revenue: |
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Product and other |
$ | 2,009 | $ | 2,161 | ||||
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Services |
5,244 | 7,004 | ||||||
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Total revenue |
7,253 | 9,165 | ||||||
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Cost of revenue: |
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Product and other |
861 | 813 | ||||||
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Services |
1,244 | 1,598 | ||||||
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Total cost of revenue |
2,105 | 2,411 | ||||||
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Gross margin |
5,148 | 6,754 | ||||||
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Operating expenses: |
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Selling and marketing |
3,091 | 3,010 | ||||||
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General and administrative |
1,798 | 1,198 | ||||||
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Product development |
1,774 | 1,741 | ||||||
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Total operating expenses |
6,663 | 5,949 | ||||||
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Income (loss) from operations |
(1,515 | ) | 805 | |||||
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Non-operating expenses: |
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Interest income (expense), net |
5 | (29 | ) | |||||
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Other expense, net |
(19 | ) | 11 | |||||
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Total non-operating expenses |
(14 | ) | (18 | ) | ||||
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Income (loss) before income taxes |
(1,529 | ) | 787 | |||||
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Income tax benefit (expense) |
1 | (155 | ) | |||||
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Net income (loss) |
$ | (1,528 | ) | $ | 632 | |||
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Dividends on preferred stock |
— | — | ||||||
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Net income (loss) attributable to common stockholders |
$ | (1,528 | ) | $ | 632 | |||
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Income (loss) per common share |
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– basic |
$ | (0.17 | ) | $ | 0.08 | |||
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– diluted |
$ | (0.17 | ) | $ | 0.08 | |||
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Weighted average common shares |
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– basic |
9,077,492 | 7,963,775 | ||||||
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– diluted |
9,077,492 | 8,336,028 | ||||||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
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Three Months Ended December 31, |
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2021 |
2020 |
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Net income (loss) |
$ | (1,528 | ) | $ | 632 | |||
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Other comprehensive income (loss) |
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Foreign currency translation adjustment |
(27 | ) | 88 | |||||
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Comprehensive income (loss) |
$ | (1,555 | ) | $ | 720 | |||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
(in thousands)
(Unaudited)
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Accumulated |
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Additional |
other |
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Common |
paid-in |
Accumulated |
comprehensive |
Treasury |
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Preferred stock |
stock |
capital |
deficit |
loss |
stock |
Total |
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Balance, September 30, 2020 |
$ | — | $ | 80 | $ | 209,022 | $ | (209,519 | ) | $ | (462 | ) | $ | (169 | ) | $ | (1,048 | ) | ||||||||||
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Stock compensation |
— | — | 119 | — | — | — | 119 | |||||||||||||||||||||
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Issuance of common stock |
— | — | 142 | — | — | — | 142 | |||||||||||||||||||||
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Foreign currency translation adjustment |
— | — | — | — | 88 | — | 88 | |||||||||||||||||||||
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Net income |
— | — | — | 632 | — | — | 632 | |||||||||||||||||||||
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Balance, December 31, 2020 |
$ | — | $ | 80 | $ | 209,283 | $ | (208,887 | ) | $ | (374 | ) | $ | (169 | ) | $ | (67 | ) | ||||||||||
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Accumulated |
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Additional |
other |
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Common |
paid-in |
Accumulated |
comprehensive |
Treasury |
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Preferred stock |
stock |
capital |
deficit |
loss |
stock |
Total |
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Balance, September 30, 2021 |
$ | — | $ | 91 | $ | 213,278 | $ | (206,442 | ) | $ | (618 | ) | $ | (169 | ) | $ | 6,140 | |||||||||||
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Stock compensation |
— | — | 221 | — | — | — | 221 | |||||||||||||||||||||
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Issuance of common stock |
— | — | 58 | — | — | 58 | ||||||||||||||||||||||
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Foreign currency translation adjustment |
— | — | — | — | (27 | ) | — | (27 | ) | |||||||||||||||||||
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Net loss |
— | — | — | (1,528 | ) | — | — | (1,528 | ) | |||||||||||||||||||
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Balance, December 31, 2021 |
$ | — | $ | 91 | $ | 213,557 | $ | (207,970 | ) | $ | (645 | ) | $ | (169 | ) | $ | 4,864 | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
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Three Months Ended |
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December 31, |
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2021 |
2020 |
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Operating activities |
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Net Income (Loss) |
$ | (1,528 | ) | $ | 632 | |||
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Amortization of warrant debt, debt discount and debt issuance costs |
8 | 19 | ||||||
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Depreciation and amortization of property and equipment |
252 | 268 | ||||||
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Loss on sale of fixed assets |
167 | — | ||||||
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Provision for doubtful accounts |
(63 | ) | 22 | |||||
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Stock-based compensation expense related to stock options |
221 | 119 | ||||||
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Remeasurement loss (gain) on derivative liability |
(27 | ) | 5 | |||||
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Changes in operating assets and liabilities: |
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Accounts receivable |
(171 | ) | 1,079 | |||||
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Inventories |
(279 | ) | (42 | ) | ||||
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Investment in sales-type lease |
60 | 63 | ||||||
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Capitalized commissions |
20 | 95 | ||||||
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Prepaid expenses and other current assets |
(34 | ) | 45 | |||||
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Right-of-use assets under operating leases |
(371 | ) | 285 | |||||
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Operating lease obligations |
404 | (295 | ) | |||||
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Other long-term assets |
(21 | ) | (91 | ) | ||||
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Accounts payable and accrued liabilities |
(177 | ) | (2,053 | ) | ||||
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Other long-term liabilities |
95 | 12 | ||||||
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Unearned revenue |
(1,122 | ) | (1,431 | ) | ||||
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Net cash used in operating activities |
(2,566 | ) | (1,268 | ) | ||||
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Investing activities |
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Purchases of property and equipment |
(616 | ) | (287 | ) | ||||
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Capitalization of software development costs |
(328 | ) | — | |||||
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Net cash used in investing activities |
(944 | ) | (287 | ) | ||||
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Financing activities |
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Payments on notes payable |
— | (368 | ) | |||||
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Proceeds from exercise of common stock options |
58 | 142 | ||||||
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Payments on finance lease obligations |
(23 | ) | (41 | ) | ||||
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Net cash provided by (used in) financing activities |
35 | (267 | ) | |||||
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Changes in cash and cash equivalents due to changes in foreign currency |
7 | 48 | ||||||
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Net decrease in cash and cash equivalents |
(3,468 | ) | (1,774 | ) | ||||
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Cash and cash equivalents at beginning of year |
9,989 | 7,619 | ||||||
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Cash and cash equivalents at end of period |
$ | 6,521 | $ | 5,845 | ||||
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Supplemental cash flow information: |
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Interest paid |
$ | 2 | $ | 20 | ||||
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Income taxes paid, foreign |
28 | 44 | ||||||
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Non-cash financing and investing activities: |
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Property and equipment financed by finance lease or accounts payable |
253 | — | ||||||
See accompanying notes to the condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
December 31, 2021
(Unaudited)
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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, 2021 included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Operating results for the three month period ended December 31, 2021 are not necessarily indicative of the results that might be expected for the year ending September 30, 2022. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
Impacts of COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time. The Company continues to follow guidelines outlined by the CDC and local county protocol. On August 2, 2021, the Company returned to in-person working. The Company implemented a newly developed hybrid module to allow employees to work 60% in office and 40% from home.
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, the Company has implemented new products and new approaches to deliver existing products to grow revenue. In response to the cancellations if in-person event, the Company introduced a new virtual events platform as an alternate solution for our customers. Full return to in-person event is not anticipated until summer 2022. In addition, the Company is confident the pandemic will accelerate the Company's new product strategy.
Restructuring and exit activities
The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. The Company accounts for on-going benefit arrangements, such as those documented by employment agreements, in accordance with Accounting Standards Codification 712 ("ASC 712") Nonretirement Postemployment Benefits. Under ASC 712, liabilities for postemployment benefits are recorded at the time the obligations are probable of being incurred and can be reasonably estimated. The Company accounts for one-time employment benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. When applicable, the Company records such costs into operating expense.
During the quarter ended December 31, 2021, the Company did not incur expense associated with involuntary termination benefits under ASC 420 compared to $101 thousand during the same quarter 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 December 31, 2021:
| $ | 703 |
Inventory
Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. An obsolescence reserve has been established to account for slow moving inventory.
Inventory consists of the following (in thousands):
| December 31, | September 30, | |||||||
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2021 |
2021 |
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Raw materials and supplies |
$ | 336 | $ | 301 | ||||
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Finished goods |
487 | 247 | ||||||
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Less: Obsolescence reserve |
(106 | ) | (106 | ) | ||||
| $ | 717 | $ | 442 |
Asset Retirement Obligation
An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is recognized as a liability in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-term asset. The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset. As of December 31, 2021 and September 30, 2021, the Company has recorded a liability of $95 thousand and $129 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. At September 30, 2021, asset retirement obligations were included in short-term liabilities and paid off during Q1. A new asset retirement obligation was recorded for the new MSKK office lease and is 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):
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December 31, 2021 |
Level 1 |
Level 2 |
Level 3 |
Total Fair Value |
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Derivative liability |
$ | — | $ | 26 | $ | — | $ | 26 | ||||||||
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September 30, 2021 |
Level 1 |
Level 2 |
Level 3 |
Total Fair Value |
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Derivative liability |
$ | — | $ | 53 | $ | — | $ | 53 | ||||||||
The gain or loss related to the fair value remeasurement on the derivative liability is included in the other expense line on the condensed consolidated statements of operations.
Financial Liabilities Measured at Fair Value on a Non-Recurring Basis
The initial fair values of PFG debt and warrant debt (see Note 4) were based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3).
Financial Instruments Not Measured at Fair Value
The Company's other financial instruments consist primarily of cash and cash equivalents, accounts receivable, investment in sales-type lease, accounts payable, debt instruments and 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 months ended December 31, 2021 or 2020.
Software Development Cost
Software development costs incurred in conjunction with product development are charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the net realizable value of the related product. Until the first quarter of 2022, the period between achieving technological feasibility of the Company’s products and the general availability of the products has been short. During the quarter ended December 31, 2021, the Company capitalized approximately $328 thousand in software development costs related to new products as technological feasibility was established during the period, and this is included in other long term assets on the balance sheet.
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. There are a number of options subject to performance vesting. The Company evaluates these options on a quarterly basis to assess the probability of vesting. Compensation costs are recorded for options that are probable of vesting.
The fair value of each option grant is estimated using the assumptions in the following table:
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Three Months Ended |
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December 31, |
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2021 |
2020 |
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Expected life (in years) |
5.3 | 4.7 | ||||||
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Risk-free interest rate |
1.07 | % | 0.33 | % | ||||
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Expected volatility |
64.83 | % | 82.61 | % | ||||
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Expected forfeiture rate |
14.65 | % | 14.18 | % | ||||
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Expected exercise factor |
2.02 | 1.2 | ||||||
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Expected dividend yield |
0.00 | % | 0.00 | % | ||||
A summary of option activity at December 31, 2021 and changes during the three months then ended is presented below:
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Weighted- |
Weighted-Average |
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Average |
Remaining Contractual |
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Options |
Exercise Price |
Period in Years |
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Outstanding at October 1, 2021 |
1,853,479 | $ | 4.44 | 4.60 | ||||||||
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Granted |
654,250 | 3.25 | 9.95 | |||||||||
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Exercised |
(43,250 | ) | 1.36 | 7.29 | ||||||||
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Forfeited and cancelled |
(119,053 | ) | 6.42 | — | ||||||||
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Outstanding at December 31, 2021 |
2,345,426 | $ | 4.06 | 7.18 | ||||||||
|
Exercisable at December 31, 2021 |
1,370,279 | $ | 4.63 | 5.53 | ||||||||
A summary of the status of the Company’s non-vested options and changes during the three month period ended December 31, 2021 is presented below:
|
Weighted-Average |
||||||||
|
Grant Date Fair |
||||||||
|
Non-vested Options |
Options |
Value |
||||||
|
Non-vested at October 1, 2021 |
583,458 | $ | 1.40 | |||||
|
Granted |
654,250 |
1.39 |
||||||
|
Vested |
(247,242 | ) | 1.03 | |||||
|
Forfeited |
(15,486 | ) | 1.30 | |||||
|
Non-vested at December 31, 2021 |
974,980 | $ |
1.49 |
|||||
The weighted average grant date fair value of options granted during the three months ended December 31, 2021 was $1.39. As of December 31, 2021, there was $906 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $678 thousand. The cost is expected to be recognized over a weighted-average remaining life of 2.5 years.
Stock-based compensation recorded in the three months ended December 31, 2021 was $221 thousand. Stock-based compensation recorded in the three months ended December 31, 2020 was $119 thousand. There was $58 thousand in cash received from transactions under all stock option plans during the three months ended December 31, 2021 and $142 thousand during the same period of the three months ended December 31, 2020. There were no tax benefits realized for tax deductions from option exercises in either of the three month period ended December 31, 2021 or 2020. The Company currently expects to satisfy share-based awards with registered shares available to be issued.
The Company also has an Employee Stock Purchase Plan ("Purchase Plan") under which an aggregate of 300,000 common shares may be issued. The board passed a resolution in December 2020 to increase the share count by an additional 100,000 shares, which was approved by common stockholders in January 2021. A total of
92,057 shares are available to be issued under the plan at December 31, 2021. The Company recorded stock compensation expense under this plan of $3 thousand for the three month period ended December 31, 2021 and less than $1 thousand for the three month periods ended December 31, 2020.
Preferred Stock and Dividends
No shares of Preferred Stock, Series A were issued and outstanding as of December 31, 2021 and 2020.
Capital Raise
On July 20, 2021, the Company entered into a transaction with four investors on identical terms pursuant to which they agreed to purchase, and the Company agreed to issue and sell, an aggregate of 945,946 shares at a price of $3.70 per share (total of $3,500,000). The Company closed on the issuance and sale on July 27, 2021. The Company and the investors also entered into (i) warrant agreements pursuant to which the investors have the right to purchase 141,892 shares at a price of $5.50 per share on or before July 20, 2026 and, (ii) registration rights agreements (“Rights Agreement”) whereby the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission (the “Commission”) within six months after the effective date of the Rights Agreement and further agreed to use its commercially reasonable efforts to have the registration statement declared effective and to ensure that the registration statement remains effective throughout the term of the Rights Agreement.
The investors above included Mr. Mark Burish, the Company’s chairman and largest shareholder who purchased $1,250,000 of common stock for a total of 337,838 shares and 50,676 warrants. The Company’s special committee of disinterested directors met several times to discuss and negotiate the terms of the above transactions, including the participation of Mr. Burish. The special committee unanimously approved such terms.
Per Share Computation
Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income (loss) attributable to common stockholders. The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:
|
Three Months Ended |
||||||||
|
December 31, |
||||||||
|
2021 |
2020 |
|||||||
|
Denominator for basic net income (loss) per share - weighted average common shares |
9,077,492 | 7,963,775 | ||||||
|
Effect of dilutive options and warrants (treasury method) |
— | 372,253 | ||||||
|
Denominator for diluted net income (loss) per share - adjusted weighted average common shares |
9,077,492 | 8,336,028 | ||||||
|
Options, warrants and convertible shares outstanding during each period, but not included in the computation of diluted net loss per share because they are antidilutive |
2,785,876 | 1,132,365 | ||||||
Liquidity
At December 31, 2021, approximately $2.5 million of cash and cash equivalents was held by the Company's foreign subsidiaries.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next 12 months. The Company completed a common stock issuance to certain investors totaling $3.5 million, net of $75 thousand expenses, on July 27, 2021. The proceeds of the stock issuance are intended to satisfy the initial listing requirements of the Nasdaq Capital Market. Additionally, the Company signed a line of credit agreement on July 28, 2021, with US Bank for $3 million at an annual rate equal to 1.35% plus the greater of zero percent and the one month LIBOR rate. The Company will likely evaluate lease opportunities to finance equipment purchases in the future and support working capital needs and will likely seek additional equity financing opportunities. However, there are no assurances that these will be on terms acceptable to the Company.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", ("ASU 2016-13"). The amendments in this ASU affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments are effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendment is permitted, including adoption in any interim periods for which financial statement have not yet issued. 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.
Recent Adopted Accounting Pronouncements
Income Taxes (ASC Topic 740)
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", ("ASU 2019-12"). On October 1, 2021, the company adopted ASU 2019-12. The primary effect of adopting this update relates to making tax accounting more simple. The ASU removes the following exceptions to the general principles in ASC 740 and eliminates the need for an entity to analyze whether they apply in a given accounting period:
|
● |
Exception to the incremental approach for intra-period tax allocation |
|
● |
Exceptions to accounting for basis differences when there are ownership changes in foreign investments |
|
● |
Exception in interim-period income tax accounting for year-to-date losses that exceed anticipated losses |
|
● |
Franchise taxes that are partially based on income |
|
● |
Transactions with a government that result in a step-up in the tax basis of goodwill |
|
● |
Separate financial statements of legal entities that are not subject to tax |
|
● |
Enacted changes in tax laws in interim periods |
The ASU also clarifies the existing guidance with respect to where the tax benefit of tax-deductible dividends on employee stock ownership plan shares should be recorded in the income statement.
The implementation of this standard did not result in a material impact to the Company's consolidated financial statements.
2. Related Party Transactions
During the three months ended December 31, 2021, the Company had recorded liabilities of $27 thousand as legal expense to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $32 thousand during the three months ended December 31, 2020.
On July 20, 2021, the Company entered into a transaction with four investors on identical terms pursuant to which they agreed to purchase, and the Company agreed to issue and sell, an aggregate of 945,946 shares at a price of $3.70 per share (total of $3,500,000). The Company closed on the issuance and sale on July 27, 2021. The Company and the investors also entered into (i) warrant agreements pursuant to which the investors have the right to purchase 141,892 shares at a price of $5.50 per share on or before July 20, 2026 and, (ii) registration rights agreements (“Rights Agreement”) whereby the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission (the “Commission”) within six months after the effective date of the Rights Agreement and further agreed to use its commercially reasonable efforts to have the registration statement declared effective and to ensure that the registration statement remains effective throughout the term of the Rights Agreement. The investors above included Mr. Mark Burish, who purchased $1,250,000 of common stock for a total of 337,838 shares and 50,676 warrants. The Company’s special committee of disinterested directors met several times to discuss and negotiate the terms of the above transactions, including the participation of Mr. Burish. The special committee unanimously approved such terms.
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. All transactions with Mr. Burish were approved by a Special Committee of Disinterested and Independent Directors.
3. Commitments
Inventory Purchase Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product for hardware inventory, as well as services to support our hosting environment, which are not recorded on the Company's condensed consolidated balance sheet. At December 31, 2021, the Company had an obligation to purchase $3.0 million of Mediasite product and $183 thousand of services during fiscal 2022, and services of $168 thousand during fiscal 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 operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.
Lease right-of-use assets and lease liabilities are recognized as of the commencement date based on the present value of the lease payments over the lease term. The lease right-of use asset is reduced for tenant incentives and includes any initial direct costs incurred. We use the implicit interest rate when it is readily determinable. Otherwise, the present value of future minimum lease payments is determined using the Company's incremental borrowing rate. The incremental borrowing rate is based on the interest rate of the Company's most recent borrowing.
The lease term we use for the valuation of our right-of-use assets and lease liabilities may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense is recognized on a straight-line basis over the expected lease term for operating leases. Amortization expense of the right-of-use asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental interest rate.
Right-of-use assets and lease liabilities are recognized for our leases. Right-of-use assets under finance leases are included in property and equipment on the condensed consolidated balance sheets and have a net carrying value of $90 thousand at September 30, 2021 and $69 thousand at December 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.
Effective June 2021, the Company renewed its building leases with a two and half year term starting January 1, 2022. Monthly rent payments will be $56 thousand in year 1 and increase annually at an escalation rate of 4.30% in year 2 and 3.30% in year 3. In June 2021, the Company was granted a monthly rent credit of $53 thousand for the period from April 2021 to September 2021. The Company treated the rent credit as variable lease payments for the periods effected.
As of December 31, 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 |
|||||||
|
2022 (remaining) |
$ | 903 | $ | 58 | ||||
|
2023 |
1,229 | 11 | ||||||
|
2024 |
787 | 9 | ||||||
|
2025 |
32 | 4 | ||||||
|
2026 |
8 | 3 | ||||||
|
Thereafter |
55 | — | ||||||
|
Total |
3,014 | 85 | ||||||
|
Less: imputed interest |
(127 | ) | (3 | ) | ||||
|
Total |
$ | 2,887 | $ | 82 | ||||
Supplemental information related to leases is as follows (in thousands, except lease term and discount rate):
|
Three Months Ended December 31, 2021 |
Three Months Ended December 31, 2020 |
|||||||
|
Operating lease costs |
$ | 467 | $ | 337 | ||||
|
Variable operating lease costs |
(17 | ) | 16 | |||||
|
Total operating lease cost |
$ | 450 | $ | 353 | ||||
|
Finance lease cost: |
||||||||
|
Amortization of right-of-use assets |
$ | 21 | $ | 40 | ||||
|
Interest on lease liabilities |
2 | 4 | ||||||
|
Total finance lease cost |
$ | 23 | $ | 44 | ||||
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, and COVID-19 rent credit.
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
|
Three Months Ended December 31, 2021 |
Three Months Ended December 31, 2020 |
|||||||
|
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
|
Operating cash outflows for operating leases |
$ | 395 | $ | 347 | ||||
|
Operating cash outflows for finance leases |
2 | 4 | ||||||
|
Financing cash outflows for finance leases |
23 | 41 | ||||||
Other information related to leases was as follows:
|
December 31, 2021 |
December 31, 2020 |
|||||||
|
Weighted average remaining lease term (in years) |
||||||||
|
Operating leases |
2.7 | 2.1 | ||||||
|
Finance leases |
1.8 | 1.7 | ||||||
|
Weighted average discount rate |
||||||||
|
Operating leases |
3.26 | % | 9.39 | % | ||||
|
Finance leases |
6.13 | % | 7.46 | % | ||||
4. Credit Arrangements
Partners for Growth V, L.P.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2018 Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”).
The 2018 Loan and Security Agreement provides for a Term Loan ("Term Loan") in the amount of $2,500,000, which was disbursed in two (2) Tranches as follows: Tranche 1 was disbursed on May 14, 2018 in the amount of $2,000,000; and Tranche 2 in the amount of $500,000, was disbursed on November 8, 2018. Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan was payable interest only until November 30, 2018. Thereafter, principal was due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance was due in full. Tranche 2 of the Term Loan was payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry was required to pay PFG V a cash fee of $150,000. The principal of the Term Loan may have been prepaid at any time without penalty as of May 14, 2019. The Term Loan was 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 December 31, 2021, and September 30, 2021, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $26 thousand and $53 thousand, respectively. Included in other expense, the remeasurement gain on the derivative liability during the three months ended December 31, 2021 was $28 thousand compared to remeasurement loss of $5 thousand during the three months ended December 31, 2020.
The proceeds from the 2018 Loan and Security Agreement were allocated between the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair value on the date of issuance which resulted in carrying values of $2.3 million and $156 thousand, respectively. The warrant debt is treated together as a debt discount on the PFG V Debt and is being accreted to interest expense under the effective interest method over the three-year term of the PFG V Debt and the five-year term of the Warrant Debt. During the three months ended December 31, 2021, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $7 thousand compared to $6 thousand in the same period last year. The carrying balance of the Warrant Debt at December 31, 2021 and September 31, 2021 was $206 thousand and $198 thousand, respectively.
In addition,no amortization of the debt discount was recorded at December 31, 2021 due to debt being paid off in May 2021, compared to $14 thousand in the prior quarter. During the three months ended December 31, 2021 the Company recorded interest expense of $0 thousand associated with recognition of the back-end fee compared to $13 thousand during the three months ended December 31, 2020.
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. Due to debt and back-end fees being paid off, non-cash interest expense of $0 thousand was recorded during the three months ended December 31, 2021, compared to $18 thousand, respectively, during the same period last year.
At December 31, 2021 and September 30, 2021, there was no balance outstanding on the term debt with PFG V.
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 had a term of two years for those companies receiving loan proceeds prior to June 5, 2020, was unsecured, and was guaranteed by the U.S. Small Business Administration ("SBA"). The loan carried a fixed interest rate of 1% per annum. Under the terms of the CARES Act, the Company was eligible for and submitted its application for forgiveness of all loan proceeds on March 2, 2021. On June 14, 2021 the Company received SBA approval of forgiveness for the loan principal of $2,314,815 and $26,382 in interest.
Line of Credit dated July 28, 2021
The Company entered into a Revolving Credit Agreement (the “Credit Agreement”) with U.S. Bank National Association (the “Bank”) on July 28, 2021. Under the Credit Agreement the Company may borrow the lesser of $3,000,000 or the applicable Borrowing Base comprised of (1) 80% of Qualified Accounts Receivable; (2) 50% of Qualified Inventory; and (3) an available over-advance of $500,000.
The Credit Agreement matures on July 28, 2022, is secured by all assets of the Company and accrues an interest rate equal to the one-month LIBOR rate plus 1.35% per annum, paid monthly. The Credit Agreement requires compliance with typical warranties and covenants including financial covenants of (1) Fixed Charge Coverage Ratio, as defined in the agreement, of at least 1.20:1 at the end of each quarter and (2) Senior Cash Flow Coverage Ratio, as defined in the agreement, of no more than 3.00:1 for each fiscal quarter. There was $0 outstanding on the line of credit at December 31, 2021 and September 31, 2021.
In connection with the Credit Agreement, the Company entered into the Stock Pledge Agreement with the Bank, as a condition of the Credit Loan. Upon default, the Bank shall have the right to transfer and claim the securities of the subsidiaries, Sonic Foundry International B.V. in Netherland and Mediasite K.K. in Japan.
Other Indebtedness
On January 30, 2020, Mediasite K.K. entered into a Term Loan ("Term Loan") with Sumitomo Mitsui Banking Corporation for $460 thousand in cash. The Term loan accrued interest at an annual rate of 1.475%. Beginning in January 2020, principal payments in 12 equal monthly installments, plus accrued interest were made. The principal has been paid in full as of December 30, 2020.
At December 31, 2021 and September 30, 2021, 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 December 31, 2021 was $434 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 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 December 31, 2021 the full principal 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 has net operating losses (NOL) carried over from previous years. The Company doesn't have income tax liability until it exhausts its NOL. Therefore, the Company had no accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at December 31, 2021 or September 30, 2021, and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three months ended December 31, 2021 or 2020.
The Company’s tax rate differs from the expected tax rate each reporting period as a result of permanent differences, the valuation allowance, international tax items, and forgiveness of the PPP loan. The Company's income tax expense/benefit for the three months ended December 31, 2021 and 2020 primarily consists of income tax expense/benefit at its foreign subsidiaries.
6. Revenue
Disaggregation of Revenues
The following tables summarize revenues from contracts with customers for the three months ended December 31, 2021 and 2020, respectively, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK) :
|
Three months ended December 31, 2021 |
||||||||||||||||||||
|
SOFO |
SFI |
MSKK |
Eliminations |
Total |
||||||||||||||||
|
Revenue: |
||||||||||||||||||||
|
Hardware |
$ | 1,308 | $ | 61 | $ | 3 | $ | (69 | ) | $ | 1,303 | |||||||||
|
Software |
587 | 125 | 24 | (65 | ) | 671 | ||||||||||||||
|
Shipping |
34 | 1 | — | — | 35 | |||||||||||||||
|
Product and other total |
1,929 | 187 | 27 | (134 | ) | 2,009 | ||||||||||||||
|
Support |
1,407 | 134 | 220 | (161 | ) | 1,600 | ||||||||||||||
|
Hosting |
1,420 | 330 | 305 | (218 | ) | 1,837 | ||||||||||||||
|
Events |
971 | 24 | 412 | — | 1,407 | |||||||||||||||
|
Installs, training & other |
100 | 192 | 108 | — | 400 | |||||||||||||||
|
Services total |
3,898 | 680 | 1,045 | (379 | ) | 5,244 | ||||||||||||||
|
Total revenue |
$ | 5,827 | $ | 867 | $ | 1,072 | $ | (513 | ) | $ | 7,253 | |||||||||
|
Three months ended December 31, 2020 |
||||||||||||||||||||
|
SOFO |
SFI |
MSKK |
Eliminations |
Total |
||||||||||||||||
|
Revenue: |
||||||||||||||||||||
|
Hardware |
$ | 1,315 | $ | 86 | $ | 80 | $ | (134 | ) | $ | 1,347 | |||||||||
|
Software |
787 | 101 | 59 | (147 | ) | 800 | ||||||||||||||
|
Shipping |
13 | 1 | — | — | 14 | |||||||||||||||
|
Product and other total |
2,115 | 188 | 139 | (281 | ) | 2,161 | ||||||||||||||
|
Support |
1,806 | 179 | 239 | (216 | ) | 2,008 | ||||||||||||||
|
Hosting |
1,477 | 258 | 704 | (63 | ) | 2,376 | ||||||||||||||
|
Events |
1,053 | 17 | 872 | — | 1,942 | |||||||||||||||
|
Installs, training & other |
417 | 10 | 251 | — | 678 | |||||||||||||||
|
Services total |
4,753 | 464 | 2,066 | (279 | ) | 7,004 | ||||||||||||||
|
Total revenue |
$ | 6,868 | $ | 652 | $ | 2,205 | $ | (560 | ) | $ | 9,165 | |||||||||
Transaction price allocated to future performance obligations
As of December 31, 2021, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately$3.6 million in the next three months, $8.4 million in the next twelve months, and the remaining $1.5 million thereafter.
Disclosures related to our contracts with customers
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. We record assets for amounts related to performance obligations that are satisfied but not yet billed and/or collected. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. These liabilities are classified as current and non-current unearned revenue.
Unearned revenues
Unearned revenues represent our obligation to transfer products or services to our client for which we have received consideration, or an amount of consideration is due, from the client. During the three months ended December 31, 2021, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $3.6 million compared to $4.2 million recognized during the three months ended December 31, 2020.
Assets recognized from the costs to obtain our contracts with customers
We recognize an asset for the incremental costs of obtaining a contract with a customer. We amortize these deferred costs, primarily capitalized commissions, proportionate with related revenues over the period of the contract. During the three months ended December 31, 2021, amortization expense related to the amount included in the capitalized commissions at the beginning of the period was $178 thousand compared to $215 thousand recognized during the three months ended December 31, 2020.
7. Subsequent Events
Uplisting to Nasdaq Capital Market
On January 24, 2022 the Company announced that the Nasdaq Stock Market LLC (“Nasdaq”) had approved its application for uplisting the Company’s common stock to the Nasdaq Capital Market. Sonic Foundry’s common stock commenced trading on the Nasdaq Capital Market at the opening of the market on Tuesday, January 25, 2022, under the Company’s former ticker symbol “SOFO.”
Increase in Authorized Shares of Common Stock
On February 2, 2022 the Company's Board of Directors approved a resolution to increase the authorized number of shares of common stock of the Company, par value $.01 per share, from 15,000,000 to 25,000,000.
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, 2021 and Part II, Item 1A of this Form 10-Q), “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Form 10-Q and Part II, Item 7A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2021), 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.
Impacts of COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time. The Company continues to follow guidelines outlined by the CDC and local county protocol. On August 2, 2021, the Company returned to in-person working. The Company implemented a newly developed hybrid module to allow employees to work 60% in office and 40% from home. Full return to in-person events is not anticipated until summer 2022.
While 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, the Company has implemented new products and new approaches to deliver existing products to grow revenue. In response to the cancellations if in-person event, the Company introduced a new virtual events platform as an alternate solution for our customers. The Company is confident the pandemic will accelerate the Company's new product strategy.
Evolving Strategy on Growth Initiatives
While the Company continues to work at steadily improving results of its Mediasite business, we recognize growth constraints in our existing business, and, therefore, we are shifting our focus toward building our runway in adjacent markets for future growth strategies as follows:
| • | First, we are expanding our cloud capabilities to better support our customers’ video needs. This is an important step in moving Sonic Foundry from primarily a hardware provider to a SaaS service provider with recurring revenue streams. | |
| • | Second, we are building a library of AI -enabled video solutions that can deliver instant, comprehensive, and automated video enhancement at scale. We believe the market for this technology is compelling. | |
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The third key component of our growth strategy is aimed at democratizing global higher education. U.S. and U.K. universities are being increasingly challenged with lower enrollment and are looking for ways to expand into new growth markets. In close collaboration with several university clients, we have identified a global supply-demand imbalance. There are many students worldwide that can afford a higher education yet do not have access to it for a variety of reasons—geo/political instability; international travel restrictions; and inadequate infrastructure. Our innovative solution will allow students to have an in-person experience in locally supported, affordable, community-centric environments that offer aggregated educational content through our Mediasite platform. This is essentially master classes taught by top professors that encourage students to engage with one another in a collaborative and supported setting that bridges the educational gap and offers education opportunities in economically disadvantaged regions. |
This quarter is the beginning of our transformation from focusing solely on our existing business to investing substantially, not only in our current space, but in these adjacent markets where we believe we can realize greater growth opportunities. While this strategy will take some time to fully realize, we have deals signed by key enterprise clients who are excited to bring these new ventures to market with us, and we intend to aggressively invest in this strategy.
RESULTS OF OPERATIONS
Revenue
Revenue from our business includes the sale of Mediasite recorders and server software products and related services contracts, such as customer support, installation, customization services, training, content hosting and event services. We market our products to educational institutions, corporations and government agencies that need to deploy, manage, index and distribute video content on Internet-based networks. We reach both our domestic and international markets through reseller networks, a direct sales effort and partnerships with system integrators.
Q1-2022 compared to Q1-2021
Q1-2022 revenue of $7.3 million decreased 21% compared to Q1-2020 revenue of $9.2 million. Revenue consisted of the following:
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Product and other revenue from sale of Mediasite recorder units and server software Q1-2022 revenue of $2.0 million decreased $152 thousand or 7.0% compared to Q1-2021 revenue of $2.2 million and consistent with the decline in demand for hardware devices experienced over the last several years. |
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| • | 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 decreased $1.8 million or 25% from $7.0 million in Q1-2021 to $5.2 million in Q1-2022, primarily due to event cancellations due to COVID and support contracts not renewed, primarily associated with a decilne in sales of hardware units. | |
| • | At December 31, 2021, $9.8 million of revenue was deferred, of which we expect to recognize $8.4 million in the next twelve months, including approximately $3.6 million in the quarter ending March 31, 2022. At September 30, 2021, $11.0 million of revenue was deferred. | |
| • | Other revenue relates to freight charges billed separately to our customers. |
Gross Margin
Q1-2022 compared to Q1-2021
Gross margin for Q1-2022 was $5.1 million or 71% of revenue compared to Q1-2021 gross margin of $6.8 million or 74%. The significant components of cost of revenue include:
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Product costs. Product costs consist of costs associated with our Mediasite recorder hardware, freight, labor and certain allocated costs. These costs were $861 thousand in Q1-2022 and $813 thousand in Q1-2021, resulting in gross margin on products of 57% and 62%, respectively. Gross margin decrease is largely due to the loss of revenue due to loss of client billings in Q1-2022 as compared to Q1-2021. |
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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 $1.2 million in Q1-2022 and $1.6 thousand in Q1-2021, resulting in gross margin on services of 76% and 77%, respectively. Gross margin decrease is largely due to the loss of revenue due to loss of client billings in Q1-2022 as compared to Q1-2021. |
Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses include wages and commissions for sales, marketing and business development personnel, print advertising and various promotional expenses for our products. Timing of these costs may vary greatly depending on introduction of new products and services or entrance into new markets, or participation in major tradeshows.
Q1-2022 compared to Q1-2021
Selling and marketing expenses increased $81 thousand or 3% from $3.0 million in Q1-2021 to $3.1 million in Q1-2022. Differences in the major categories include:
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Salary, commissions, and benefits expense decreased by $259 thousand as a result of employee turnover and hiring delay. |
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Advertising expense decreased by $43 thousand as a result of virtually hosted tradeshows. |
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Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for $156 thousand and $1.0 million respectively, an aggregate increase of $326 thousand from Q1-2021. |
We anticipate selling and marketing headcount to remain consistent throughout the remainder of the fiscal year.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities, finance, legal, human resource and information technology departments, as well as other expenses not fully allocated to functional areas.
Q1-2022 compared to Q1-2021
G&A expenses increased $600 thousand or 50% from $1.2 million in Q1-2021 to $1.8 million in Q1-2022. Differences in the major categories include:
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Increase in compensation, bonus expense, benefits, and professional services of $341 thousand. |
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G&A expenses for Sonic Foundry International and Mediasite KK accounted for $67 thousand and $248 thousand respectively, an aggregate increase of $132 thousand from Q1-2021, due to expected headcount additions related to strategy investment. |
Product Development Expenses
Product development expenses include salaries and wages of the software research and development staff and an allocation of benefits, facility and administrative expenses.
Q1-2022 compared to Q1-2021
Product development expenses increased $33 thousand, or 2% from $1.7 million in Q1-2021 to $1.8 million in Q1-2022. Differences in the major categories include:
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Decrease in compensation and benefits of $61 thousand due to capitalization associated with new product initiatives and outside product development resources. In addition, $328 thousand of product development costs were capitalized associated with our new product initiatives as internally developed software. |
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Product development expense for Sonic Foundry International and Mediasite KK accounted for $81 thousand and $112 thousand respectively, an aggregate increase of $11 thousand compared to Q1-2021. The Company anticipates subsidiaries' R&D expense to stay flat or less than FY21. |
Other Income and Expense, Net
Interest income for the three months ended December 31, 2021 was $5 thousand. Interest expense was $29 thousand for the same period last year. The quarterly decrease over the prior year is a net effect of the PFG debt payoff and PPP Loan forgiveness. The Company recorded no amortization expense related to the back-end fee on the PFG loan for the three months ended December 31, 2021 due to the debt being paid out in May 2021, compared to $13 thousand for the same period last year.
During the three months ended December 31, 2021, a gain in fair value of $27 thousand, was recorded related to the fair value remeasurement on the derivative liability associated with the Loan and Security Agreement and Warrant Debt with PFG compared to a loss in fair value of $5 thousand during the three months ended December 31, 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.
Foreign Currency
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 months ended December 31, 2021, the Company's foreign currency translation adjustment was a loss of $27 thousand, compared to a gain of $88 for the three months ended December 31, 2020.
During the three months ended December 31, 2021, the Company recorded an aggregate transaction loss of $3 thousand, compared to an aggregate transaction loss of $5 thousand for the three months ended December 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 three months of fiscal 2022, the Company had used $2.6 million cash for operating activities, compared with $1.3 million cash used by operating activities in the same period of fiscal 2021. The primary factors effecting the $2.6 million cash used by operating activities is the $1.5 million net loss and $1.1 million change in unearned revenue.
Capital expenditures were $944 thousand in the first three months of fiscal 2022 compared to $287 thousand in the same period in fiscal 2021.
The Company was provided $35 thousand of cash from financing activities during the first three months of fiscal 2022. Payments on capital lease and financing arrangements of $23 thousand were offset by proceeds from stock option exercises of $58 thousand. For the same period in fiscal 2021, the Company used $267 thousand for financing activities.
At December 31, 2021, the Company had $554 thousand outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V and the Mediasite KK term debt.
At December 31, 2021, approximately $2.5 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next 12 months.
The Company completed a common stock issuance to certain investors totaling $3.5 million, net of $75 thousand expenses, on July 27, 2021. The proceeds of the stock issuance were intended to satisfy the initial listing requirements of the Nasdaq Capital Market. Additionally, the Company signed a line of credit agreement on July 28, 2021, with US Bank for $3 million at an annual rate equal to 1.35% plus the greater of zero percent and the one month LIBOR rate. The Company will likely evaluate lease opportunities to finance equipment purchases in the future and support working capital needs. We likely will seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company.
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, 2021. At December 31, 2021, none of the Company’s $554 thousand in outstanding debt is variable rate, therefore, an increase in the level of interest rates would not have any 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 December 31, 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 December 31, 2021.
Changes in Internal Controls
During the period covered by the quarterly report on Form 10-Q, the Company has not made any changes to its internal control over financial reporting (as referred to in Paragraph 4(b) of the Certifications of the Company's principal executive officer and principal financial officer included as exhibits to the report) that have materially affected, or are reasonably likely to affect the Company's internal control over financial reporting.
OTHER INFORMATION
None.
There have been no material changes in our risk factors from those disclosed in our Form 10-K for the fiscal year ended September 30, 2021 filed with the SEC.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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| 3.6 | Article of Amendment to the Company Charter of the Registrant, filed as Exhibit 3.6 to Form 10-Q on August 12, 2021, and hereby incorporated by reference. | |
| 4.1 | Form of Warrant Agreement between registrant and four investors, dated July 20, 2021, filed as Exhibit 4.1 to the 8-K, filed on July 30, 2021 and here by incorporated by reference. | |
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10.1* |
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10.7 |
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10.8 |
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10.9 |
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10.10 |
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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.
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Compensatory Plan or Arrangement |
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Sonic Foundry, Inc.
(Registrant
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February 10, 2022 |
By: |
/s/ Joe Mozden, Jr. |
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Joe Mozden, Jr. |
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Chief Executive Officer |
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| February 10, 2022 |
By: |
/s/ Kenneth A. Minor |
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Kenneth A. Minor |
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Chief Financial Officer |
Exhibit 31.1
CERTIFICATIONS
I, Joe Mozden, Jr., the CEO of Sonic Foundry, Inc., certify that:
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I have reviewed this quarterly report on Form 10-Q of Sonic Foundry, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 10, 2022
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By: |
/s/ Joe Mozden, Jr. |
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By: |
Joe Mozden, Jr. | ||
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Title: |
CEO |
Exhibit 31.2
I, Ken Minor, the CFO of Sonic Foundry, Inc., certify that:
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I have reviewed this quarterly report on Form 10-Q of Sonic Foundry, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 10, 2022
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By: |
/s/ Kenneth A. Minor |
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By: |
Kenneth A. Minor |
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Title: |
Chief Financial Officer |
SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Exhibit 32
Statement
Solely for the purposes of complying with 18 U.S.C.§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and the Chief Financial Officer of Sonic Foundry, Inc. (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2021 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 10, 2022
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By: |
/s/ Joe Mozden, Jr. |
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By: |
Joe Mozden, Jr. |
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Title: |
Chief Executive Officer |
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By: |
/s/ Kenneth A. Minor |
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By: |
Kenneth A. Minor |
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Title: |
Chief Financial Officer |