Report of Independent Registered Public Accounting Firm
To the Shareholders, Audit Committee and Board of Directors
Sonic Foundry, Inc. and Subsidiaries
Madison, WI
We have audited the accompanying consolidated balance sheets of Sonic Foundry, Inc. and Subsidiaries (the “Company”) as of
September 30, 2016
and
2015
, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sonic Foundry, Inc. and Subsidiaries as of
September 30, 2016
and
2015
, and the results of their operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Baker Tilly Virchow Krause, LLP
Madison, Wisconsin
December 22, 2016
Sonic Foundry, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
1,794
|
|
|
$
|
1,976
|
|
Accounts receivable, net of allowances of $225 and $150
|
11,646
|
|
|
12,659
|
|
Inventories
|
1,904
|
|
|
2,385
|
|
Prepaid expenses and other current assets
|
1,404
|
|
|
927
|
|
Total current assets
|
16,748
|
|
|
17,947
|
|
Property and equipment:
|
|
|
|
Leasehold improvements
|
879
|
|
|
904
|
|
Computer equipment
|
5,837
|
|
|
5,852
|
|
Furniture and fixtures
|
825
|
|
|
837
|
|
Total property and equipment
|
7,541
|
|
|
7,593
|
|
Less accumulated depreciation and amortization
|
5,510
|
|
|
4,785
|
|
Property and equipment, net
|
2,031
|
|
|
2,808
|
|
Other assets:
|
|
|
|
Goodwill
|
11,310
|
|
|
10,853
|
|
Customer relationships, net of amortization of $723 and $457
|
1,882
|
|
|
1,872
|
|
Software development costs, net of amortization of $533 and $429
|
—
|
|
|
104
|
|
Product rights, net of amortization of $287 and $164
|
385
|
|
|
508
|
|
Other intangibles, net of amortization of $236 and $190
|
76
|
|
|
112
|
|
Other long-term assets
|
726
|
|
|
599
|
|
Total assets
|
$
|
33,158
|
|
|
$
|
34,803
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Revolving line of credit
|
$
|
1,772
|
|
|
$
|
1,818
|
|
Accounts payable
|
961
|
|
|
2,026
|
|
Accrued liabilities
|
1,883
|
|
|
1,666
|
|
Unearned revenue
|
12,834
|
|
|
11,359
|
|
Current portion of capital lease and financing arrangements
|
283
|
|
|
211
|
|
Current portion of notes payable and warrant debt, net of discounts
|
1,567
|
|
|
1,299
|
|
Current portion of subordinated note payable
|
93
|
|
|
186
|
|
Total current liabilities
|
19,393
|
|
|
18,565
|
|
Long-term portion of unearned revenue
|
1,257
|
|
|
1,325
|
|
Long-term portion of capital lease and financing arrangements
|
231
|
|
|
196
|
|
Long-term portion of notes payable and warrant debt, net of discounts
|
871
|
|
|
2,080
|
|
Long-term portion of subordinated note payable
|
—
|
|
|
92
|
|
Derivative liability, at fair value
|
67
|
|
|
109
|
|
Other liabilities
|
259
|
|
|
311
|
|
Deferred tax liability
|
4,564
|
|
|
4,322
|
|
Total liabilities
|
26,642
|
|
|
27,000
|
|
Commitments and contingencies
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $.01 par value, authorized 500,000 shares; none issued
|
—
|
|
|
—
|
|
5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 1,000,000 shares, none issued
|
—
|
|
|
—
|
|
Common stock, $.01 par value, authorized 10,000,000 shares; 4,424,275 and 4,376,456 shares issued and 4,411,559 and 4,363,740 shares outstanding
|
44
|
|
|
44
|
|
Additional paid-in capital
|
197,064
|
|
|
195,973
|
|
Accumulated deficit
|
(190,214
|
)
|
|
(186,897
|
)
|
Accumulated other comprehensive loss
|
(183
|
)
|
|
(1,122
|
)
|
Sonic Foundry, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
Receivable for common stock issued
|
(26
|
)
|
|
(26
|
)
|
Treasury stock, at cost, 12,716 shares
|
(169
|
)
|
|
(169
|
)
|
Total stockholders’ equity
|
6,516
|
|
|
7,803
|
|
Total liabilities and stockholders’ equity
|
$
|
33,158
|
|
|
$
|
34,803
|
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
Product
|
$
|
15,823
|
|
|
$
|
15,884
|
|
Services
|
21,734
|
|
|
20,160
|
|
Other
|
418
|
|
|
415
|
|
Total revenue
|
37,975
|
|
|
36,459
|
|
Cost of revenue:
|
|
|
|
Product
|
6,459
|
|
|
7,406
|
|
Services
|
3,526
|
|
|
3,229
|
|
Total cost of revenue
|
9,985
|
|
|
10,635
|
|
Gross margin
|
27,990
|
|
|
25,824
|
|
Operating expenses:
|
|
|
|
Selling and marketing
|
17,801
|
|
|
18,016
|
|
General and administrative
|
5,628
|
|
|
5,635
|
|
Product development
|
6,837
|
|
|
6,265
|
|
Total operating expenses
|
30,266
|
|
|
29,916
|
|
Loss from operations
|
(2,276
|
)
|
|
(4,092
|
)
|
Non-operating income (expenses):
|
|
|
|
Interest expense, net
|
(594
|
)
|
|
(372
|
)
|
Other income (expense), net
|
(178
|
)
|
|
46
|
|
Total non-operating income (expenses)
|
(772
|
)
|
|
(326
|
)
|
Loss before income taxes
|
(3,048
|
)
|
|
(4,418
|
)
|
Provision for income taxes
|
(269
|
)
|
|
(107
|
)
|
Net loss
|
$
|
(3,317
|
)
|
|
$
|
(4,525
|
)
|
Loss per common share:
|
|
|
|
Basic net loss per common share
|
$
|
(0.76
|
)
|
|
$
|
(1.04
|
)
|
Diluted net loss per common share
|
$
|
(0.76
|
)
|
|
$
|
(1.04
|
)
|
Weighted average common shares – Basic
|
4,389,421
|
|
|
4,332,576
|
|
– Diluted
|
4,389,421
|
|
|
4,332,576
|
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
Net loss
|
$
|
(3,317
|
)
|
|
$
|
(4,525
|
)
|
Foreign currency translation adjustment
|
939
|
|
|
(701
|
)
|
Comprehensive loss
|
$
|
(2,378
|
)
|
|
$
|
(5,226
|
)
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Additional
paid-in
capital
|
|
Accumulated
deficit
|
|
Accumulated
other
comprehensive
loss
|
|
Receivable
for
common
stock issued
|
|
Treasury
stock
|
|
Total
|
Balance, September 30, 2014
|
$
|
43
|
|
|
$
|
194,260
|
|
|
$
|
(182,372
|
)
|
|
$
|
(421
|
)
|
|
$
|
(26
|
)
|
|
$
|
(169
|
)
|
|
$
|
11,315
|
|
Stock compensation
|
—
|
|
|
963
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
963
|
|
Issuance of common stock
|
1
|
|
|
709
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
710
|
|
Exercise of common stock options
|
—
|
|
|
41
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(701
|
)
|
|
—
|
|
|
—
|
|
|
(701
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
(4,525
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,525
|
)
|
Balance, September 30, 2015
|
$
|
44
|
|
|
$
|
195,973
|
|
|
$
|
(186,897
|
)
|
|
$
|
(1,122
|
)
|
|
$
|
(26
|
)
|
|
$
|
(169
|
)
|
|
$
|
7,803
|
|
Stock compensation
|
—
|
|
|
847
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
847
|
|
Issuance of common stock and warrants
|
—
|
|
|
244
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
244
|
|
Exercise of common stock options
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
939
|
|
|
—
|
|
|
—
|
|
|
939
|
|
Net loss
|
—
|
|
|
—
|
|
|
(3,317
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,317
|
)
|
Balance, September 30, 2016
|
$
|
44
|
|
|
$
|
197,064
|
|
|
$
|
(190,214
|
)
|
|
$
|
(183
|
)
|
|
$
|
(26
|
)
|
|
$
|
(169
|
)
|
|
$
|
6,516
|
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
2016
|
|
2015
|
Operating activities
|
|
|
|
Net loss
|
$
|
(3,317
|
)
|
|
$
|
(4,525
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
Amortization of other intangibles
|
652
|
|
|
669
|
|
Depreciation and amortization of property and equipment
|
1,553
|
|
|
1,599
|
|
Loss on sale of fixed assets
|
72
|
|
|
—
|
|
Provision for doubtful accounts
|
75
|
|
|
57
|
|
Deferred taxes
|
341
|
|
|
53
|
|
Stock-based compensation expense related to stock options and warrants
|
861
|
|
|
963
|
|
Remeasurement gain on subordinated debt
|
(3
|
)
|
|
(202
|
)
|
Remeasurement gain on derivative liability
|
(58
|
)
|
|
(11
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
1,341
|
|
|
(4,379
|
)
|
Inventories
|
514
|
|
|
(344
|
)
|
Prepaid expenses and other current assets
|
(532
|
)
|
|
169
|
|
Accounts payable and accrued liabilities
|
(966
|
)
|
|
111
|
|
Other long-term liabilities
|
(60
|
)
|
|
(86
|
)
|
Unearned revenue
|
1,243
|
|
|
2,800
|
|
Net cash provided by (used in) operating activities
|
1,716
|
|
|
(3,126
|
)
|
Investing activities
|
|
|
|
Purchases of property and equipment
|
(339
|
)
|
|
(722
|
)
|
Net cash used in investing activities
|
(339
|
)
|
|
(722
|
)
|
Financing activities
|
|
|
|
Proceeds from notes payable
|
500
|
|
|
2,336
|
|
Proceeds from line of credit
|
17,845
|
|
|
8,535
|
|
Payments on notes payable
|
(1,693
|
)
|
|
(2,894
|
)
|
Payments on line of credit
|
(17,958
|
)
|
|
(6,727
|
)
|
Payment of debt issuance costs
|
(36
|
)
|
|
(122
|
)
|
Proceeds from issuance of common stock and warrants
|
66
|
|
|
710
|
|
Proceeds from exercise of common stock options
|
—
|
|
|
41
|
|
Payments on capital lease and financing arrangements
|
(278
|
)
|
|
(252
|
)
|
Net cash provided by (used in) financing activities
|
(1,554
|
)
|
|
1,627
|
|
Changes in cash and cash equivalents due to changes in foreign currency
|
(5
|
)
|
|
(147
|
)
|
Net decrease in cash and cash equivalents
|
(182
|
)
|
|
(2,368
|
)
|
Cash and cash equivalents at beginning of period
|
1,976
|
|
|
4,344
|
|
Cash and cash equivalents at end of period
|
$
|
1,794
|
|
|
$
|
1,976
|
|
Supplemental cash flow information:
|
|
|
|
Interest paid
|
$
|
529
|
|
|
$
|
424
|
|
Income taxes paid, foreign
|
27
|
|
|
31
|
|
Non-cash financing and investing activities:
|
|
|
|
Property and equipment financed by capital lease or accounts payable
|
402
|
|
|
292
|
|
Debt discount
|
16
|
|
|
179
|
|
Stock issued for board of director's fees
|
164
|
|
|
—
|
|
Warrants issued for investor relations services
|
14
|
|
|
—
|
|
Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
1. Basis of Presentation and Significant Accounting Policies
Business
Sonic Foundry, Inc. (the Company) is in the business of providing enterprise solutions and services for the web communications market.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Sonic Foundry Media Systems, Inc., Sonic Foundry International B.V. (formerly Media Mission B.V.) and Mediasite K.K. All significant intercompany transactions and balances have been eliminated. The name change for the subsidiary formerly known as Media Mission B.V. occurred in October 2016.
Prior to January 2014, the Company owned approximately
26%
of Mediasite KK and accounted for its investment under the equity method of accounting. On January 14, 2014, the Company purchased the remaining
74%
of Mediasite KK.
Reclassifications
Reclassifications have been made to the
September 30, 2015
financial statements to conform to the
September 30, 2016
presentation. These reclassifications had no effect on the Company’s net loss or stockholders’ equity as previously reported.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the period. Actual results could differ from those estimates.
Revenue Recognition
General
Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectability is reasonably assured. Revenue is deferred when undelivered products or services are essential to the functionality of delivered products, customer acceptance is uncertain, significant obligations remain, or the fair value of undelivered elements is unknown. Typically, the Company does not offer customers the right to return product, other than for exchange or repair pursuant to a warranty or stock rotation. The Company’s policy is to reduce revenue if it incurs an obligation for price rebates or other such programs during the period the obligation is reasonably estimated to occur. The following policies apply to the Company’s major categories of revenue transactions.
Products
Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the customer or upon customer acceptance if non-delivered products or services are essential to the functionality of delivered products. Under the terms and conditions of the sale, this occurs at the time of shipment to the customer. Product revenue currently represents sales of our Mediasite recorder and Mediasite related products such as our server software and other software licenses. If a license is time-based, the revenue is recognized over the term of the license agreement.
Services
The Company sells support and content hosting contracts to our customers, typically one year in length, and records the related revenue ratably over the contractual period. Our support contracts cover phone and electronic technical support availability over and above the level provided by our distributors, software upgrades on a when and if available basis, advance hardware replacement and an extension of the standard hardware warranty from
90
days to
one
year. The manufacturers the Company contracts with to build the units provide a limited one-year warranty on the hardware. The Company also sells installation, training, event webcasting, and customer content hosting services. Revenue for those services is recognized when performed in the case of installation, training
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
and event webcasting services. Occasionally, the Company will sell customization services to enhance the server software. Revenue from those services is recognized when performed, if perfunctory, or under contract accounting. Service amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue until the revenue recognition criteria are met.
Revenue Arrangements that Include Multiple Elements
Sales of software, with or without installation, training, and post customer support fall within the scope of the software revenue recognition rules. Under the software revenue recognition rules, the fee from a multiple-deliverable arrangement is allocated to each of the undelivered elements based upon vendor-specific objective evidence (VSOE), which is limited to the price charged when the same deliverable is sold separately, with the residual value from the arrangement allocated to the delivered element. The portion of the fee that is allocated to each deliverable is then recognized as revenue when the criteria for revenue recognition are met with respect to that deliverable. If VSOE does not exist for all of the undelivered elements, then all revenue from the arrangement is typically deferred until all elements have been delivered to the customer.
In the case of the Company’s hardware products with embedded software, the Company has determined that the hardware and software components function together to deliver the product’s essential functionality, and therefore, the revenue from the sale of these products is accounted for under the revenue recognition rules for tangible products whereby the fee from a multiple-deliverable arrangement is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. A delivered item that does not qualify as a separate unit of accounting is combined with the other undelivered items in the arrangement and revenue is recognized for those combined deliverables as a single unit of accounting. The selling price used for each deliverable is based upon VSOE if available, from third-party evidence (TPE) if VSOE is not available, and best estimate of selling price (ESP) if neither VSOE nor TPE are available. TPE is the price of the Company’s or any competitor’s largely interchangeable products or services in stand-alone sales to similarly situated customers. ESP is the price at which the Company would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors. All revenue arrangements, excluding the sale of all software-only products and associated services, have been accounted for under this guidance.
The selling prices used in the relative selling price allocation method are as follows: (1)the Company’s products and services are based upon VSOE and (2) hardware products with embedded software, for which VSOE does not exist, are based upon ESP. The Company does not believe TPE exists for any of these products and services because they are differentiated from competing products and services in terms of functionality and performance and there are no competing products or services that are largely interchangeable. Management establishes ESP for hardware products with embedded software using a cost plus margin approach with consideration for market conditions, such as the impact of competition and geographic considerations, and entity-specific factors, such as the cost of the product and the Company’s profit objectives. Management believes that ESP is reflective of reasonable pricing of that deliverable as if priced on a stand-alone basis. When a sales transaction includes deliverables that are divided between Accounting Standards Codification (ASC) Topic 605 and ASC Subtopic 985-605, the Company allocates the selling price using the relative selling price method whereas value is allocated using an ESP for software developed using a percent of list price approach. The other deliverables are valued using ESP or VSOE as previously discussed.
While the pricing model, currently in use, captures all critical variables, unforeseen changes due to external market forces may result in a revision of the inputs. These modifications may result in the consideration allocation differing from the one presently in use. Absent a significant change in the pricing inputs or the way in which the industry structures its transactions, future changes in the pricing model are not expected to materially affect our allocation of arrangement consideration.
Management has established VSOE for hosting services. Billings for hosting are spread ratably over the term of the hosting agreement, with the typical hosting agreement having a term of
1 year
, with renewal on an annual basis. The Company sells most hosting contracts without the inclusion of products. When the hosting arrangement is sold in conjunction with product, the product revenue is recognized immediately while the remaining hosting revenue is spread ratably over the term of the hosting agreement. The selling price is allocated between these elements using the relative selling price method. The Company uses ESP for development of the selling price for hardware products with embedded software.
The Company also offers hosting services bundled with events services. The Company uses VSOE to establish relative selling prices for its events services. The Company recognizes events revenue when the event takes place and recognizes the hosting revenue over the term of the hosting agreement. The total amount of the arrangement is allocated to each element based on the relative selling price method.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
Reserves
The Company reserves for stock rotations, price adjustments, rebates, and sales incentives to reduce revenue and accounts receivable for these and other credits granted to customers. Such reserves are recorded at the time of sale and are calculated based on historical information (such as rates of product stock rotations) and the specific terms of sales programs, taking into account any other known information about likely customer behavior. If actual customer behavior differs from our expectations, it may compromise our ability to recognize revenue to these distributors at the time of shipment. Also, if the Company determines that it can no longer accurately estimate amounts for stock rotations and sales incentives, the Company would not be able to recognize revenue until resellers sell the inventory to the final end user.
Shipping and Handling
The Company’s shipping and handling costs billed to customers are included in other revenue. Costs related to shipping and handling are included in cost of revenue and are recorded at the time of shipment to the customer.
Concentration of Credit Risk and Other Risks and Uncertainties
As of
September 30, 2016
, of the
$1.8 million
in cash and cash equivalents,
$185 thousand
is deposited with
2
major U.S. financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on such amounts and believes that it is not exposed to any significant credit risk on these balances. The remaining
$1.6 million
of cash and cash equivalents is held by our foreign subsidiaries in financial institutions in Japan and the Netherlands and held in their local currency. The cash held in foreign financial institutions is not guaranteed.
We assess the realization of our receivables by performing ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. Our reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. Allowance for doubtful accounts for accounts receivable was
$225,000
at
September 30, 2016
and
$150,000
at
September 30, 2015
.
We had billings for Mediasite product and support services as a percentage of total billings to one distributor of approximately
14%
in
2016
and
10%
in
2015
and to a second distributor of approximately
13%
in
2016
and
12%
in
2015
. At
September 30, 2016
and
2015
, these two distributors represented
28%
and
22%
of total accounts receivable, respectively.
Currently all of our product inventory purchases are from one third-party contract manufacturer. Although we believe there are multiple sources of supply from other contract manufacturers as well as multiple suppliers of component parts required by the contract manufacturers, a disruption of supply of component parts or completed products, even if short term, would have a material negative impact on our revenues. At
September 30, 2016
and
2015
, this supplier represented
40%
and
49%
, respectively, of total accounts payable. We also license technology from third parties that is embedded in our software. We believe there are alternative sources of similar licensed technology from other third parties that we could also embed in our software, although it could create potential programming related issues that might require engineering resources.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three months
or less to be cash equivalents. As of
September 30, 2016
, of the
$1.8 million
aggregate cash and cash equivalents held by the Company, the amount of cash and cash equivalents held by our foreign subsidiaries was
$1.6 million
. If the funds held by our foreign subsidiaries were needed for our operations in the United States, the repatriation of some of these funds to the United States could require payment of additional U.S. taxes.
Trade Accounts Receivable
The majority of the Company’s accounts receivable are due from entities in, or distributors or value added resellers to, the education, corporate and government sectors. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are typically due within
30
days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered to be past
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Interest is not accrued on past due receivables.
Inventory Valuation
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 market, with cost determined on a first-in, first-out basis.
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
Raw materials and supplies
|
$
|
149
|
|
|
$
|
254
|
|
Finished goods
|
1,755
|
|
|
2,131
|
|
|
$
|
1,904
|
|
|
$
|
2,385
|
|
Capitalized Software Development Costs
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. Typically the period between achieving technological feasibility of the Company’s products and the general availability of the products has been short. Consequently, software development costs qualifying for capitalization are typically immaterial and are generally expensed to research and development costs. During 2013, the Company’s My Mediasite product release required software capitalization since there was a longer period between technological feasibility and the general availability of the product. Upon product release, the amortization of software development costs is determined annually as the greater of the amount computed using the ratio of current gross revenues for the products to their total of current and anticipated future gross revenues or the straight-line method over the estimated economic life of the products, expected to be
three years
. Amortization expense of software development costs of
$104 thousand
and
$178 thousand
is included in Cost of Revenue – Product for each of the years ending
September 30, 2016
and
2015
, respectively. The gross amount of capitalized external and internal development costs was
$533 thousand
at
September 30, 2016
and
2015
. There were no software development efforts that qualified for capitalization for the years ended
September 30, 2016
or
2015
, respectively.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the straight-line method for financial reporting purposes. The estimated useful lives used to calculate depreciation are as follows:
|
|
|
|
Years
|
Leasehold improvements
|
5 to 10 years
|
Computer equipment
|
3 to 5 years
|
Furniture and fixtures
|
5 to 7 years
|
Impairment of Long-Lived Assets
Goodwill has an indefinite useful life and is recorded at cost and not amortized but, instead, tested at least annually for impairment. We assess the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair value of these assets is less than the carrying value. If a qualitative assessment is used and the Company determines that the fair value of goodwill is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative impairment test will be performed. If goodwill is quantitatively assessed for impairment, a two-step approach is applied. First, the Company compares the estimated fair value of the goodwill to its carrying value. The second step, if necessary, measures the amount of impairment, if any, by comparing the implied fair value of goodwill to its carrying value.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
In fiscal
2016
and
2015
, we performed the two-step goodwill test and determined that the fair value of goodwill is more than the carrying value. For purposes of the fiscal
2016
and
2015
tests, goodwill balances are evaluated within three separate reporting units. The Company has recognized no impairment charges as of
September 30, 2016
or as of
September 30, 2015
.
If we had determined that the fair value of goodwill was less than its carrying value, based upon the annual test or the existence of one or more indicators of impairment, we would then measure impairment based on a comparison of the implied fair value of goodwill with the carrying amount of goodwill. To the extent the carrying amount of goodwill is greater than the implied fair value of goodwill, we would record an impairment charge for the difference.
Long-lived assets and intangible assets other than goodwill are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. For the years ended
September 30, 2016
and
2015
, no events or changes in circumstances occurred that required this analysis.
Comprehensive Loss
Comprehensive loss includes disclosure of financial information that historically has not been recognized in the calculation of net income. Our comprehensive loss encompasses net loss and foreign currency translation adjustments. Assets and liabilities of international operations that have a functional currency that is not in U.S. dollars are translated into U.S. dollars at year-end exchange rates, and revenue and expense items are translated using weighted average exchange rates. Any adjustments arising on translation are included in shareholders’ equity as an element of accumulated other comprehensive loss.
Advertising Expense
Advertising costs included in selling and marketing, are expensed when the advertising first takes place. Advertising expense was
$403 thousand
and
$655 thousand
for years ended
September 30, 2016
and
2015
, respectively.
Research and Development Costs
Research and development costs are expensed in the period incurred, unless they meet the criteria for capitalized software development costs.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. We do not provide for U.S. income taxes on the undistributed earnings of our foreign subsidiaries, which we consider to be permanently invested outside of the U.S.
We make judgments regarding the realizability of our deferred tax assets. The balance sheet carrying value of our net deferred tax assets is based on whether we believe that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets after consideration of all available evidence. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Generally, cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.
As of
September 30, 2016
and
2015
, valuation allowances have been established for all U.S. and for certain foreign deferred tax assets which we believe do not meet the “more likely than not” criteria for recognition.
The Company also accounts for the uncertainty in income taxes related to the recognition and measurement of a tax position and measurement of a tax position taken or expected to be taken in an income tax return. The Company follows the applicable accounting
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure related to the uncertainty in income tax positions.
Fair Value of Financial Instruments
Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s goodwill, intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part of a business combination, individually or with a group of other assets. These nonfinancial assets were initially measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Fair value measurements of reporting units are estimated using an income approach involving discounted or undiscounted cash flow models that contain certain Level 3 inputs requiring management judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, working capital requirements, and new product introductions. Fair value measurements of the reporting units associated with the Company’s goodwill balances are estimated at least annually at the beginning of the fourth quarter of each fiscal year for purposes of impairment testing. Fair value measurements associated with the Company’s intangible assets and other long-lived assets are estimated when events or changes in circumstances such as market value, asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable.
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 a Recurring Basis
The initial fair values of PFG debt and warrant debt (see Note 3) were based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). The fair value of the bifurcated conversion feature represented by the warrant derivative liability, which is measured at fair value on a recurring basis is 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
Derivative liability
|
$
|
—
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
PFG debt, net of discount
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,347
|
|
|
$
|
1,347
|
|
Warrant debt
|
—
|
|
|
—
|
|
|
63
|
|
|
63
|
|
Derivative liability
|
—
|
|
|
109
|
|
|
—
|
|
|
109
|
|
|
$
|
—
|
|
|
$
|
109
|
|
|
$
|
1,410
|
|
|
$
|
1,519
|
|
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
Included below is a summary of the changes in our Level 3 fair value measurements (in thousands):
|
|
|
|
|
|
|
|
|
|
PFG Debt, net
of discount
|
|
Warrant
Debt
|
Balance as of September 30, 2015
|
$
|
1,347
|
|
|
$
|
63
|
|
Activity during the period:
|
|
|
|
Disbursement of Tranche 2, net of discount
|
462
|
|
|
22
|
|
Payments to PFG
|
(655
|
)
|
|
—
|
|
Change in fair value
|
71
|
|
|
17
|
|
Balance as of September 30, 2016
|
$
|
1,225
|
|
|
$
|
102
|
|
Financial Instruments Not Measured at Fair Value
The Company’s other financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and debt instruments, excluding the PFG debt. The book values of cash and cash equivalents, accounts receivable, debt (excluding the PFG debt) and accounts payable are considered to be representative of their respective fair values. The carrying value of capital lease obligations and debt (excluding the PFG 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
In June 2014, the Company entered into a settlement agreement with Astute Technology, LLC (“Astute”). The key terms of the agreement were: 1) a grant of a non-revocable license of Astute patents to the Company; 2) a grant of a fully paid, non-refundable license of certain Sonic Foundry patents to Astute; 3) both Astute and our customer agreed to identify three meetings they currently capture that the other party will not seek or respond to any request for proposal; and 4) a payment of
$1.35 million
to Astute. Pursuant to the settlement agreement, the payments were made in three equal amounts with the first paid in June 2014, the second paid in October 2014 and the final installment paid in March 2015. The Company contributed
$1.1 million
of the
$1.35 million
payable to Astute with our customer paying the residual amount. Of the
$1.1 million
,
$428 thousand
related to prior use and was recorded as a charge to income during fiscal 2014. The remaining
$672 thousand
was recorded as a product right asset, which is being amortized, on a straight-line basis, over the remaining life of the patents, through 2020. Future amounts due to Astute were accrued for as of the time of settlement.
No
legal contingencies were recorded for the either of the years ended
September 30, 2016
or
2015
, respectively.
Stock-Based Compensation
The Company uses a lattice valuation model to account for all employee stock options granted. The lattice valuation model is a more flexible analysis to value options because of its ability to incorporate inputs that change over time, such as actual exercise behavior of option holders. The Company uses historical data to estimate the option exercise and employee departure behavior in the lattice valuation model. Expected volatility is based on historical volatility of the Company’s stock. The Company considers all employees to have similar exercise behavior and therefore has not identified separate homogeneous groups for valuation. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is based on the U.S. Treasury yields in effect at the time of grant. Forfeitures are based on actual behavior patterns. The expected exercise factor and forfeiture rates are calculated using historical exercise and forfeiture activity for the previous three years.
The fair value of each option grant is estimated using the assumptions in the following table:
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
|
|
|
|
|
|
Years Ending September 30,
|
|
2016
|
|
2015
|
Expected life
|
4.9 – 5.0 years
|
|
4.8 – 5.0 years
|
Risk-free interest rate
|
0.84%-1.23%
|
|
0.96%-1.05%
|
Expected volatility
|
53.8%-57.2%
|
|
45.5%-50.0%
|
Expected forfeiture rate
|
10.3 %-11.8%
|
|
10.7 %-12.0%
|
Expected exercise factor
|
1.35-1.44
|
|
1.40-1.43
|
Expected dividend yield
|
—%
|
|
—%
|
Common Stock Warrants
On December 22, 2014, the company issued
74,802
warrants to two individuals, one of which is the Chairman of the Company’s Board of Directors, in combination with the sale of a like number of shares of common stock. These warrants were immediately exercisable, expire
five years
after the date of issuance and have an exercise price of
$14.00
. The remaining contractual life of these outstanding warrants as of
September 30, 2016
was
3.23
years. The fair value of the warrants was determined using the lattice model and the same inputs as those used for valuing the Company’s stock option fair value. The fair value of the warrants was
$133 thousand
at the date of issuance. The Company determined that the warrants are freestanding and do not fall within the scope of ASC 480 or ASC 815. The warrants were recorded in conjunction with the stock issued.
See Note 3, Credit Arrangements for disclosures on additional warrants issued during fiscal
2015
.
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). The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:
|
|
|
|
|
|
|
|
Years Ending
September 30,
|
|
2016
|
|
2015
|
Denominator for basic earnings (loss) per share
|
|
|
|
-weighted average common shares
|
4,389,421
|
|
|
4,332,576
|
|
Effect of dilutive options and warrants (treasury method)
|
—
|
|
|
—
|
|
Denominator for diluted earnings (loss) per share
|
|
|
|
-adjusted weighted average common shares
|
4,389,421
|
|
|
4,332,576
|
|
Options and warrants outstanding during each year, but not included in the computation of diluted earnings (loss) per share because they are antidilutive
|
1,737,624
|
|
|
1,560,211
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The FASB subsequently issued a one-year deferral of the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, the guidance is effective for annual reporting periods beginning after December 15, 2017. Subsequently, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations" ("ASU 2016-08"); ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10"); and ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
Expedients" ("ASU 2016-12"). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09. We are currently evaluating the timing of adopting and the related impact, if any, it may have on our financial statements.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which amends the current presentation of debt issuance costs in the financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of as an asset. The amendments are to be applied retrospectively and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, but early adoption is permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”). The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license. The amendments in ASU 2015-05 are effective for fiscal years beginning after December 15, 2015, and interim periods within those years. Early adoption is permitted. The guidance may be applied either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company does not believe the implementation of this standard will result in a material impact to its financial statements.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330)" ("ASU 2015-11"). The amendments in ASU 2015-11 require an entity to measure inventory at the lower of cost and net realizable value. The amendments in ASU 2015-11 are effective for fiscal years beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not believe the implementation of this standard will result in a material impact to its financial statements.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805)" ("ASU 2015-16"). ASU 2015-16 simplifies the accounting for measurement-period adjustments. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of the ASU with earlier application permitted for financial statements that have not been issued. The Company is currently evaluating this guidance, but it does not have an impact on previous acquisitions.
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740)", ("ASU 2015-17"). ASU 2015-17 simplifies the presentation of deferred income taxes. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, including interims periods within those annual periods. The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company does not believe the implementation of this standard will result in a material impact to its financial statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10)", ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist at the date of the adoption. The Company is currently evaluating this guidance and its impact to the financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", ("ASU 2016-02"). ASU 2016-02 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public entities. Early application of the amendment is permitted. The Company is currently reviewing this guidance and its impact to the financial statements.
In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815)", ("ASU 2016-05"). ASU 2016-05 clarifies the effect of novation related to a derivative instrument. The amendments in ASU 2016-05 are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has the option to apply the amendments in ASU
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
2016-05 on either a prospective or a modified retrospective basis. The Company is currently evaluating this guidance and its impact to the financial statements.
In March 2016, the FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815)", ("ASU 2016-06"). ASU 2016-06 clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The amendments in ASU 2016-06 are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Entities should apply the amendments on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company is currently evaluating this guidance and its impact to the financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718)", ("ASU 2016-09"). ASU 2016-09 simplifies the accounting for share-based payment transactions. The amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating this guidance and its impact to the financial statements.
In May 2016, the FASB issued ASU 2016-11, "Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)", ("ASU 2016-11"). ASU 2016-11 rescinds SEC paragraphs pursuant to the SEC Staff Announcement, "Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606", and the SEC Staff Announcement, "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity", announced at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. The effective dates in ASU 2016-11 coincide with the effective dates of Topic 606 (ASU 2014-09) and ASU 2014-16. The Company is currently evaluating the impact of adopting ASU 2014-09 and related amendments, such as ASU 2016-11, to determine the impact, if any, it may have on our financial statements. The Company previously reviewed ASU 2014-16 and determined that is it not applicable.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)", ("ASU 2016-15"). ASU 2016-15 addresses classification of certain cash receipts and cash payments within the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods with those fiscal years. The Company is currently evaluating this guidance and its impact to the financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740)", ("ASU 2016-16"). ASU 2016-16 prohibits the recognition of current and deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. The amendment in ASU 2016-16 are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating this 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.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
2. Commitments
The Company leases certain equipment under capital lease and financing agreements expiring through
January 2022
. Such leases are included in fixed assets with a cost of
$1.3 million
and accumulated depreciation of
$827 thousand
at
September 30, 2016
. Minimum lease payments, including principal and interest, are summarized in the table below.
|
|
|
|
|
Fiscal Year (in thousands)
|
Capital
|
2017
|
$
|
307
|
|
2018
|
156
|
|
2019
|
58
|
|
2020
|
14
|
|
2021
|
13
|
|
Thereafter
|
3
|
|
Total payments
|
551
|
|
Less interest
|
(37
|
)
|
Total
|
$
|
514
|
|
The Company leases certain facilities and equipment under operating lease agreements expiring at various times through
December 31, 2020
. Total rent expense on all operating leases was approximately
$1.6 million
and
$1.1 million
for the years ended
September 30, 2016
and
2015
, respectively.
In November 2011, the Company occupied office space related to a lease agreement entered into on June 28, 2011. The lease term is from
November 2011 through December 2018
. The lease includes a tenant improvement allowance of
$613 thousand
that was recorded as a leasehold improvement liability and is being amortized as a credit to rent expense on a straight-line basis over the lease term. At
September 30, 2016
, the unamortized balance was
$182 thousand
.
The following is a schedule by year of future minimum lease payments under operating leases:
|
|
|
|
|
Fiscal Year (in thousands)
|
Operating
|
2017
|
$
|
1,341
|
|
2018
|
1,287
|
|
2019
|
714
|
|
2020
|
526
|
|
2021
|
132
|
|
Thereafter
|
—
|
|
Total
|
$
|
4,000
|
|
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At
September 30, 2016
, the Company has an obligation to purchase
$782 thousand
of Mediasite product, which is not recorded on the Company’s Consolidated Balance Sheet.
The Company enters into license agreements that generally provide indemnification against intellectual property claims for its customers as well as indemnification agreements with certain service providers, landlords and other parties in the normal course of business. The Company has not incurred any material costs as a result of such indemnifications, or accrued any liabilities related to such obligations in the consolidated financial statements, except as noted above related to Astute (Note 1).
3. Credit Arrangements
Silicon Valley Bank
The Company and its wholly owned subsidiary, Sonic Foundry Media Systems, Inc. (the “Companies”) entered into that certain Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated as of June 27, 2011, as amended
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
by those certain First, Second, Third, Fourth, and Fifth Amendments, dated as of May 31, 2013, January 10, 2014, March 31, 2014, January 27, 2015, and May 13, 2015 (the Second Amended and Restated Loan Agreement, as amended by the First, Second, Third, Fourth and Fifth Amendments, collectively, the “Second Amended and Restated Loan Agreement”). The Second Amended and Restated Loan Agreement provides for a revolving line of credit in the maximum principal amount of
$4,000,000
. Interest accrues on the revolving line of credit at the variable per annum rate equal to the Prime Rate (as defined) plus one and-one quarter percent (
1.25%
) which currently equates to
4.75%
. The Second Amended and Restated Loan Agreement provides for an advance rate on domestic receivables of
80%
, and an advance rate on foreign receivables of
75%
of the lesser of (x) Foreign Eligible Accounts (as defined) or (y)
$1,000,000
. The maturity date of the revolving credit facility is
January 31, 2017
. Under the Second Amended and Restated Loan Agreement, a term loan was entered into on January 27, 2015 in the original principal amount of
$2,500,000
which accrues interest at the variable per annum rate equal to the Prime Rate (as defined) plus two and three-quarters percent (
2.75%
) (which currently equates to an interest rate of
6.25%
) and is to be repaid in 36 equal monthly principal payments, beginning in February 2015. The Second Amended and Restated Loan Agreement also required Sonic Foundry to comply with certain financial covenants, including (i) a liquidity financial covenant, which required minimum Liquidity (as defined), tested with respect to the Company only (excluding the subsidiaries) of at least (x)
1.35
:
1.00
for each month-end that was not the last day of a fiscal quarter, and (y)
1.50
:
1.00
for each month-end that was the last day of a fiscal quarter, and (ii) a covenant that required the Debt Service Coverage Ratio (as defined) to be at or greater than
1.0
:
1
for the quarter ending June 30, 2015,
1.25
:
1
for the quarter ending September 30, 2015 and
1.50
:
1
for the quarter ending December 31, 2015 and thereafter (with the change in the deferred revenue included in the numerator of the ratio).
On October 5, 2015, the Companies entered into a Sixth Amendment to the Second Amended and Restated Loan and Security Agreement (the “Sixth Amendment”), with Silicon Valley Bank. Under the Sixth Amendment: (i) the Liquidity covenant was modified to require minimum Liquidity (as defined) with respect to the Company only, on a monthly basis, of at least
1.5
:
1.0
at the last day of each month, replacing the previous Liquidity requirement of
1.35
:
1.0
for each month-end that is not the last day of a fiscal quarter, and
1.5
:
1.0
for each month-end that is the last day of a fiscal quarter, and (ii) the Minimum Debt Service covenant was replaced with a requirement to maintain, commencing September 30, 2015, a Minimum EBITDA, as defined, on a trailing six month period, of at least
$1.00
plus the net change in Deferred Revenue, as defined, with such covenant measured as of the last day of each fiscal quarter.
On February 8, 2016, the Companies entered into a Seventh Amendment to the Second Amended and Restated Loan and Security Agreement (the "Seventh Amendment") with Silicon Valley Bank. The Seventh Amendment: (i) waived existing default under the Second Amended Agreement by virtue of the Company's failure to comply with the minimum EBITDA financial covenant for the compliance period ended December 31, 2015 and (ii) updated the definition of eligible foreign accounts to include additional countries.
On December 9, 2016, the Companies entered into an Eighth Amendment to the Second Amended and Restated Loan and Security Agreement (the "Eighth Amendment") with Silicon Valley Bank. The Eighth Amendment: (i) extends the revolving line of credit maturity date to
January 31, 2019
, (ii) increases maximum subsidiary indebtedness allowable to
$1,000,000
outstanding at any one time and (iii) provides for a "streamline period", during which bank reporting is due monthly when a streamline period is in effect and weekly when a streamline period is not in effect.
At
September 30, 2016
, a balance of
$1.1 million
was outstanding on the term loans with Silicon Valley Bank, with an effective interest rate of six-and-one-quarter percent (
6.25%
). At
September 30, 2016
, a balance of
$1.6 million
was outstanding on the revolving line of credit with Silicon Valley Bank, with an effective interest rate of four-and-three-quarters percent (
4.75%
). At
September 30, 2015
, a balance of
$1.9 million
was outstanding on the term loans with Silicon Valley Bank and a balance of
$1.4 million
was outstanding on the revolving line of credit. At
September 30, 2016
, there was a remaining amount of
$2.3 million
available under the line of credit facility for advances.
The Second Amended Agreement, as amended, contains events of default that include, among others, non-payment of principal or interest, inaccuracy of any representation or warranty, violation of covenants, bankruptcy and insolvency events, material judgments, cross defaults to certain other indebtedness, and material adverse changes. The occurrence of an event of default could result in the acceleration of the Companies’ obligations under the Second Amended Agreement, as amended. At
September 30, 2016
, the Company was in compliance with all covenants in the Second Amended Agreement, as amended.
Pursuant to the Second Amended Agreement, as amended, the Companies pledged as collateral to Silicon Valley Bank substantially all non-intellectual property business assets. The Companies also entered into an Intellectual Property Security Agreement with respect to intellectual property assets.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
Partners for Growth IV, L.P.
On May 13, 2015, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Partners for Growth IV, L.P. (“PFG”), (the “Loan and Security Agreement”).
The Loan and Security Agreement provides for a Term Loan in the amount of
$2,000,000
, which can be disbursed in two (2) Tranches as follows: Tranche 1 was drawn in the amount of
$1,500,000
shortly after execution thereof; and Tranche 2 in the amount of
$500,000
, was drawn on December 15, 2015.
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, 2015. Beginning on December 1, 2015, principal is due in
30
equal monthly principal installments, plus accrued interest, continuing until
May 1, 2018
, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable in 29 equal monthly principal installments, plus accrued interest, beginning January 1, 2015 and continuing until May 1, 2018.
The principal of the Term Loan may be prepaid at any time after May 13, 2016 without a prepayment fee.
Coincident with execution of the Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”) with PFG. Pursuant to the terms of the Warrant, the Company issued to PFG a warrant to purchase up to
50,000
shares of common stock of the Company at an exercise price of
$9.66
per share, subject to certain adjustments, of which
37,500
were exercisable with the disbursement of Tranche 1 and
12,500
became exercisable with the disbursement under Tranche 2. Pursuant to the Warrant, PFG is also entitled, under certain conditions, to require the Company to exchange the Warrant for the sum of
$200,000
. Each warrant issued has an exercise term of
5
years from the date of issuance. On August 12, 2015, the Company and PFG entered into a waiver agreement to waive a then existing covenant default and to change the exercise price of the aforementioned warrants from
$9.66
per share to
$6.80
per share.
The warrants can be settled for cash in the event of acquisition of the company, any liquidation of the company, or expiration of the warrant. The Company has determined the cash payment date to be the expiration date (
May 14, 2020
). Due to the fixed payment amount on the expiration date, the warrant structure is in substance a debt arrangement (the “Warrant Debt”) with a
zero
interest rate, a fixed maturity date and a feature that makes the debt convertible to common stock. The Warrant Debt had a fair value of
$58 thousand
. The derivative had a fair value of
$120 thousand
. The conversion feature is an embedded derivative; thus, for accounting purposes, the conversion feature is bifurcated and accounted for separately from the PFG Debt and Warrant Debt as a derivative liability measured at fair value at each reporting period.
As of
September 30, 2016
, the estimated fair value of the derivative liability associated with the warrants issued in connection with the Loan and Security Agreement, was
$67 thousand
. The change in the fair value of the derivative liability between the issuance date and
September 30, 2016
, was recorded as a gain of
$69 thousand
included in the other income (expense).
The proceeds from the Loan and Security Agreement were allocated between the PFG Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair value on the date of issuance which resulted in initial carrying values of
$1.322 million
and
$178 thousand
, respectively. The conversion feature of
$178 thousand
is treated together as a debt discount on the PFG Debt and will be accreted to interest expense under the effective interest method over the
three
-year term of the PFG Debt and the
five
-year term of the Warrant Debt. For fiscal
2016
, the Company recorded accretion of discount expenses associated with the warrants issued with the PFG loan of
$17 thousand
as well as
$71 thousand
related to amortization of the debt discount. For fiscal
2015
, the Company recorded accretion of discount expense associated with the warrants issued with the PFG loan of
$5 thousand
as well as
$22 thousand
related to amortization of the debt discount.
The fair values of term debt and warrant debt are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). At December 14, 2015, the carrying amounts of the Company’s term debt and warrant debt totaled
$1.322 million
and
$178 thousand
, respectively. At December 14, 2015, the Company’s term debt and warrant debt were recorded at fair value. At
September 30, 2016
, the derivative liability was remeasured at fair value. The fair value of the bifurcated conversion feature represented by the warrant derivative liability is 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 previously for share-based compensation which were generally observable (Level 2).
On October 5, 2015, the Company and PFG entered into a Modification No. 1 to the Loan and Security Agreement (“Modification No. 1”). Under Modification No. 1: (i) the Liquidity covenant was modified to require minimum Liquidity (as defined) with respect
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
to the Company only, on a monthly basis, of at least
1.5
:
1.0
at the last day of each month, replacing the previous Liquidity requirement of
1.35
:
1.0
for each month-end that is not the last day of a fiscal quarter, and
1.5
:
1.0
for each month-end that is the last day of a fiscal quarter, and (ii) the Minimum Debt Service covenant was replaced with a requirement to maintain, commencing September 30, 2015, a Minimum EBITDA, as defined, on a trailing six month period, of at least
$1.00
plus the net change in Deferred Revenue, as defined, with such covenant measured as of the last day of each fiscal quarter.
At
September 30, 2016
, a balance of
$1.3 million
was outstanding on the term debt with PFG, with an effective interest rate of ten-and-three-quarters percent (
10.75%
). At
September 30, 2015
, a balance of
$1.5 million
with outstanding on the term debt with PFG.
The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property, subject to a first lien held by Silicon Valley Bank, The Term Loan requires compliance with the same financial covenants as set forth in the loan from Silicon Valley Bank. At
September 30, 2016
, the Company was in compliance with all covenants in the Loan and Security Agreement, as amended.
Other Indebtedness
At
September 30, 2016
,
no
balance was outstanding on the notes payable to Mitsui Sumitomo Bank. The outstanding balance was
$25 thousand
at
September 30, 2015
. At
September 30, 2016
, a balance of
$198 thousand
was outstanding on the line of credit with Mitsui Sumitomo Bank. At
September 30, 2015
, a balance of
$418 thousand
was outstanding on the line of credit. The notes and credit facility are both related to Mediasite K.K., and both accrue an annual interest rate of approximately one-and-one half percent (
1.575%
).
At
September 30, 2016
, a balance of
$93 thousand
was outstanding on the subordinated note payable related to the acquisition of Sonic Foundry International, with an annual interest rate of six-and-one half percent (
6.5%
). The outstanding balance was
$278 thousand
at
September 30, 2015
.
At
September 30, 2016
and
2015
,
no
balance was outstanding on the subordinated payable related to the acquisition of Mediasite KK after paying off the outstanding balance in January 2015.
In the
twelve
months ended
September 30, 2016
, a foreign currency gain of
$3 thousand
was realized related to re-measurement of the subordinated notes payable related to the Company’s foreign subsidiaries. In the
twelve
months ended
September 30, 2015
, a foreign currency gain of
$202 thousand
was recorded related to the remeasurement.
The annual principal payments on the notes payable to SVB and PFG are as follows:
|
|
|
|
|
Fiscal Year (in thousands)
|
|
2017
|
$
|
1,640
|
|
2018
|
816
|
|
Less warrant debt & discount
|
(18
|
)
|
Total
|
$
|
2,438
|
|
The annual principal payments on the subordinated notes payable related to the acquisition of Sonic Foundry International are as follows:
|
|
|
|
|
Fiscal Year (in thousands)
|
|
2017
|
$
|
93
|
|
Total
|
$
|
93
|
|
4. Accrued Liabilities
Accrued liabilities consists of the following (in thousands):
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
Accrued compensation
|
$
|
1,258
|
|
|
$
|
1,166
|
|
Accrued expenses
|
365
|
|
|
221
|
|
Accrued interest & taxes
|
257
|
|
|
186
|
|
Other accrued liabilities
|
3
|
|
|
93
|
|
Total
|
$
|
1,883
|
|
|
$
|
1,666
|
|
The Company accrues expenses as they are incurred. Accrued compensation includes wages, vacation, commissions and bonuses. Accrued expenses is mainly related to stock compensation, professional fees and amounts owed to suppliers. Other accrued liabilities is made up of employee-related expenses. At
September 30, 2015
, other accrued liabilities included
$87 thousand
in dividends payable to the sellers and current employees of its wholly owned subsidiary, Sonic Foundry International B.V. These amounts were accrued prior to the Company’s acquisition. At
September 30, 2016
,
no
balance was outstanding as the dividends were paid in full in fiscal
2016
.
5. Stock Options and Employee Stock Purchase Plan
On March 5, 2009, Stockholders approved adoption of the 2009 Stock Incentive Plan (the “2009 Plan”). The 2009 Plan, beginning October 1, 2009, replaced two former employee stock option plans that terminated coincident with the effectiveness of the 2009 Plan. On March 7, 2012, Stockholders approved an amendment to increase the number of shares of common stock subject to this plan by
600,000
and to increase the number of shares for the directors’ stock option plan by
50,000
shares. On March 6, 2014, Stockholders approved an amendment to increase the number of shares of common stock subject to the 2009 Plan by
800,000
to an aggregated total of
1,800,000
shares of common stock. The Company maintains a directors’ stock option plan under which options may be issued to purchase up to an aggregate of
100,000
shares of common stock. Each non-employee director, who is re-elected or who continues as a member of the board of directors on each annual meeting date and on each subsequent meeting of Stockholders, will be granted options to purchase
2,000
shares of common stock under the directors’ plan, or at other times or amounts at the discretion of the Board of Directors.
Each option entitles the holder to purchase
one
share of common stock at the specified option price. The exercise price of each option granted under the plans was set at the fair market value of the Company’s common stock at the respective grant date. Options vest at various intervals and expire at the earlier of termination of employment, discontinuance of service on the board of directors,
ten years
from the grant date or at such times as are set by the Company at the date of grant.
The Company has applied a graded (tranche-by-tranche) attribution method and expenses share-based compensation on an accelerated basis over the vesting period of the share award, net of estimated forfeitures.
The number of shares available for grant under these stockholder approved plans at
September 30,
is as follows:
|
|
|
|
|
|
|
|
Qualified
Employee
Stock Option
Plans
|
|
Director
Stock Option
Plans
|
Shares available for grant at September 30, 2014
|
853,766
|
|
|
19,500
|
|
Options granted
|
(307,119
|
)
|
|
(10,500
|
)
|
Options forfeited
|
39,384
|
|
|
8,000
|
|
Shares available for grant at September 30, 2015
|
586,031
|
|
|
17,000
|
|
Options granted
|
(233,381
|
)
|
|
(10,500
|
)
|
Options forfeited
|
14,239
|
|
|
—
|
|
Shares available for grant at September 30, 2016
|
366,889
|
|
|
6,500
|
|
The following table summarizes information with respect to outstanding stock options under all plans:
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding at beginning of year
|
1,449,409
|
|
|
$
|
10.03
|
|
|
1,240,941
|
|
|
$
|
10.31
|
|
Granted
|
243,881
|
|
|
7.16
|
|
|
317,619
|
|
|
9.22
|
|
Exercised
|
(2,968
|
)
|
|
6.74
|
|
|
(11,117
|
)
|
|
7.27
|
|
Forfeited
|
(87,500
|
)
|
|
11.02
|
|
|
(98,034
|
)
|
|
11.27
|
|
Outstanding at end of year
|
1,602,822
|
|
|
$
|
9.51
|
|
|
1,449,409
|
|
|
$
|
10.03
|
|
Exercisable at end of year
|
1,062,837
|
|
|
|
|
885,777
|
|
|
|
Weighted average fair value of options granted during the year
|
$
|
2.62
|
|
|
|
|
$
|
3.18
|
|
|
|
The options outstanding at
September 30, 2016
have been segregated into three ranges for additional disclosure as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise Prices
|
Options
Outstanding
at
September 30,
2016
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Options
Exercisable at
September 30,
2016
|
|
Weighted
Average
Exercise
Price
|
$ 4.50 to $9.87
|
1,245,264
|
|
|
6.70
|
|
$
|
8.17
|
|
|
773,336
|
|
|
$
|
8.15
|
|
10.00 to 15.50
|
330,900
|
|
|
5.49
|
|
12.33
|
|
|
262,843
|
|
|
12.79
|
|
21.40 to 46.90
|
26,658
|
|
|
0.38
|
|
37.18
|
|
|
26,658
|
|
|
37.18
|
|
|
1,602,822
|
|
|
|
|
|
|
1,062,837
|
|
|
|
As of
September 30, 2016
, there was
$696 thousand
of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation costs of
$562 thousand
. The cost is expected to be recognized over a weighted-average life of
1.6
years.
A summary of the status of the Company’s non-vested shares under all plans at
September 30, 2016
and for the year then ended is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Non-vested shares at October 1, 2015
|
563,632
|
|
|
$
|
4.46
|
|
Granted
|
243,881
|
|
|
2.72
|
|
Vested
|
(253,304
|
)
|
|
3.45
|
|
Forfeited
|
(14,224
|
)
|
|
3.34
|
|
Non-vested shares at September 30, 2016
|
539,985
|
|
|
$
|
3.21
|
|
Stock-based compensation recorded in the year ended
September 30, 2016
was
$847 thousand
. Stock-based compensation recorded in the year ended
September 30, 2015
was
$963 thousand
. There was
no
cash received from exercises under all stock options plans and warrants for the year ended
September 30, 2016
. Cash received from exercises under all stock option plans and warrants for the years ended
September 30, 2015
was
$41 thousand
. There were
no
tax benefits realized for tax deductions from option exercises for the years ended
September 30, 2016
and
2015
. The Company currently expects to satisfy stock-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
150,000
common shares may be issued. The Shareholders approved an amendment to increase the number of shares of common stock subject to the plan from
100,000
to
150,000
at the Company’s annual meeting in March 2014. All employees who have completed
90
days of
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
employment with the Company on the first day of each offering period and customarily work twenty hours per week or more are eligible to participate in the Purchase Plan. An employee who, after the grant of an option to purchase, would hold common stock and/or hold outstanding options to purchase stock possessing
5%
or more of the total combined voting power or value of the Company will not be eligible to participate. Eligible employees may make contributions through payroll deductions of up to
10%
of their compensation. No participant in the Purchase Plan is permitted to purchase common stock under the Purchase Plan if such option would permit his or her rights to purchase stock under the Purchase Plan to accrue at a rate that exceeds
$25,000
of the fair market value of such shares, or that exceeds
1,000
shares, for each calendar year. The Company makes a bi-annual offering to eligible employees of options to purchase shares of common stock under the Purchase Plan on the first trading day of January and July. Each offering period is for a period of
6 months
from the date of the offering, and each eligible employee as of the date of offering is entitled to purchase shares of common stock at a purchase price equal to the lower of
85%
of the fair market value of common stock on the first or last trading day of the offering period. A total of
23,708
shares are available to be issued under the plan. There were
14,708
and
14,067
shares purchased by employees during fiscal
2016
and
2015
, respectively. The Company recorded stock compensation expense under this plan of
$19
and
$22
thousand during fiscal
2016
and
2015
, respectively. Cash received from issuance of stock under this plan was
$66
and
$85 thousand
during fiscal
2016
and
2015
, respectively.
6. Income Taxes
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
Current tax expense U.S.
|
$
|
136
|
|
|
$
|
137
|
|
Current tax expense (benefit) foreign
|
133
|
|
|
(30
|
)
|
Deferred income tax expense
|
—
|
|
|
—
|
|
Provision for income taxes
|
$
|
269
|
|
|
$
|
107
|
|
U.S. and foreign components of income (loss) before income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
U.S.
|
$
|
(3,504
|
)
|
|
$
|
(4,122
|
)
|
Foreign
|
456
|
|
|
(296
|
)
|
Income (loss) before income taxes
|
$
|
(3,048
|
)
|
|
$
|
(4,418
|
)
|
The reconciliation of income tax expense (benefit) computed at the appropriate country specific rate to income tax expense (benefit) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
2016
|
|
2015
|
Income tax expense (benefit) at statutory rate
|
$
|
(1,036
|
)
|
|
$
|
(1,502
|
)
|
State income tax expense (benefit)
|
(130
|
)
|
|
(131
|
)
|
Foreign tax activity
|
9
|
|
|
56
|
|
R&D tax credit expiration
|
—
|
|
|
—
|
|
Permanent differences, net
|
274
|
|
|
523
|
|
Adjustment of temporary differences to income tax returns
|
—
|
|
|
189
|
|
Change in valuation allowance
|
1,152
|
|
|
972
|
|
Income tax expense
|
$
|
269
|
|
|
$
|
107
|
|
The significant components of the deferred tax accounts recognized for financial reporting purposes are as follows (in thousands):
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Net operating loss and other carryforwards
|
$
|
34,563
|
|
|
$
|
36,492
|
|
Common stock options
|
1,134
|
|
|
961
|
|
Unearned revenue
|
389
|
|
|
439
|
|
Other
|
423
|
|
|
63
|
|
Total deferred tax assets
|
36,509
|
|
|
37,955
|
|
Deferred tax liabilities:
|
|
|
|
Fixed assets
|
—
|
|
|
(149
|
)
|
Other
|
(144
|
)
|
|
(157
|
)
|
Total deferred tax liabilities
|
(144
|
)
|
|
(306
|
)
|
|
|
|
|
Net deferred tax asset
|
36,365
|
|
|
37,649
|
|
Valuation allowance
|
(36,299
|
)
|
|
(37,525
|
)
|
Equity gains on investment in Mediasite KK
|
(916
|
)
|
|
(916
|
)
|
Customer relationships
|
(718
|
)
|
|
(716
|
)
|
Goodwill amortization
|
(2,930
|
)
|
|
(2,690
|
)
|
Net deferred tax liability for goodwill and intangible assets amortization
|
$
|
(4,498
|
)
|
|
$
|
(4,198
|
)
|
The Company has a
$66 thousand
and
$124 thousand
deferred tax asset at
September 30, 2016
and
2015
, respectively, recorded within the prepaid expenses and other current assets line on the consolidated balance sheet and is primarily related to net operating losses of MSKK.
At
September 30, 2016
, the Company had net operating loss carryforwards of approximately
$95 million
for U.S. Federal and
$43 million
for state tax purposes. For Federal tax purposes, the carryforwards expire in varying amounts between
2019
and
2036
. For state tax purposes, the carryforwards expire in varying amounts between
2016
and
2035
. Utilization of the Company’s net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. In addition, the Company has research and development tax credit carryforwards of approximately
$418 thousand
, which expire in varying amounts between
2019
and
2020
.
The Company maintains an additional paid-in-capital (APIC) pool which represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its consolidated statements of income. For fiscal
2016
and fiscal
2015
, the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations. At
September 30, 2016
, the Company has
$1.1 million
of net operating loss carry forwards for which a benefit would be recorded in APIC when realized.
Earnings of the Company’s foreign subsidiaries are generally subject to U.S. taxation upon repatriation to the U.S. and the Company’s tax provision reflects the related incremental U.S. tax except for certain foreign subsidiaries whose unremitted earnings are considered to be indefinitely reinvested.
No
deferred tax liability has been recognized with regard to the remittance of such earnings after MSKK and Sonic Foundry International BV acquisitions were completed. Because of the availability of U.S. foreign tax credits, it is likely
no
U.S. tax would be due if such earnings were repatriated. At
September 30, 2016
, unremitted earnings of
$1.4 million
for foreign subsidiaries were deemed to be indefinitely reinvested.
Beginning with an acquisition in fiscal year 2002, the Company has amortized Goodwill for tax purposes over a
15
year life. Tax amortization is not applicable to the goodwill from the foreign acquisitions that took place during fiscal 2014 since the foreign goodwill is non-deductible for US federal tax purposes.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
The difference between the book and tax balance of certain of the company’s goodwill creates a deferred tax liability and an annual tax expense. Because of the long term nature of the goodwill timing difference, tax planning strategies cannot be utilized with respect to the deferred tax liability. The Company’s tax rate differs from the expected tax rate each reporting period as a result of the aforementioned items. The balance of the Deferred Tax Liability was
$4.6 million
at
September 30, 2016
and
$4.3 million
at
September 30, 2015
, respectively. The Company recorded a deferred tax liability related to the Customer Relationship intangibles value acquired as part of the purchase of Sonic Foundry International BV and Mediasite KK. The Company also recorded tax expense related to the “step-up” gain on its original equity investment in Mediasite KK. The Company has some other temporary differences related to its Mediasite KK subsidiary.
In accordance with accounting guidance for uncertainty in income taxes, the Company has concluded that a reserve for income tax contingencies is not necessary. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had
no
accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at
September 30, 2016
or
September 30, 2015
and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the twelve month periods ended
September 30, 2016
or
2015
.
The Company is subject to taxation in the U.S., Netherlands, Japan and various state jurisdictions. All of the Company’s tax years are subject to examination by the U.S., Dutch, Japanese and state tax authorities due to the carryforward of unutilized net operating losses.
7. Savings Plan
The Company’s defined contribution 401(k) savings plan covers substantially all employees meeting certain minimum eligibility requirements. Participating employees can elect to defer a portion of their compensation and contribute it to the plan on a pretax basis. The Company may also match certain amounts and/or provide additional discretionary contributions, as defined. The Company made matching contributions of
$426 thousand
and
$402 thousand
during the years ended
September 30, 2016
and
2015
, respectively. The Company made
no
additional discretionary contributions during
2016
and
2015
.
8. Goodwill and Other Intangible Assets
Goodwill and intangible assets that have indefinite useful lives are recorded at cost and are not amortized but, instead, tested at least annually for impairment. The Company assesses the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair value of these assets is less than the carrying value.
The Company performs annual goodwill impairment test as of July 1, and tested goodwill recognized in connection with the acquisitions of Mediasite, Sonic Foundry International and Mediasite KK and determined it was not impaired. For purposes of the test, goodwill on the Company’s books is evaluated within
three
separate reporting units.
The changes in the carrying amount of goodwill for the years ended
September 30, 2016
and
2015
, respectively, are as follows:
|
|
|
|
|
Balance as of September 30, 2014
|
$
|
11,185
|
|
Foreign currency translation adjustment
|
(332
|
)
|
Balance as of September 30, 2015
|
10,853
|
|
Foreign currency translation adjustment
|
457
|
|
Balance as of September 30, 2016
|
$
|
11,310
|
|
The following tables present details of the Company’s total intangible assets at
September 30, 2016
and
2015
:
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Life
(years)
|
|
Gross
|
|
Accumulated
Amortization at
September 30,
2016
|
|
Balance at
September 30,
2016
|
Amortizable:
|
|
|
|
|
|
|
|
Loan origination fees
|
3
|
|
$
|
312
|
|
|
$
|
236
|
|
|
$
|
76
|
|
Customer relationships
|
10
|
|
2,605
|
|
|
723
|
|
|
1,882
|
|
Software development costs
|
3
|
|
533
|
|
|
533
|
|
|
—
|
|
Product rights
|
6
|
|
672
|
|
|
287
|
|
|
385
|
|
|
|
|
4,122
|
|
|
1,779
|
|
|
2,343
|
|
Non-amortizable goodwill
|
|
|
11,310
|
|
|
—
|
|
|
11,310
|
|
Total
|
|
|
$
|
15,432
|
|
|
$
|
1,779
|
|
|
$
|
13,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Life
(years)
|
|
Gross
|
|
Accumulated
Amortization at
September 30,
2015
|
|
Balance at
September 30,
2015
|
Amortizable:
|
|
|
|
|
|
|
|
Loan origination fees
|
3
|
|
$
|
302
|
|
|
$
|
190
|
|
|
$
|
112
|
|
Customer relationships
|
10
|
|
2,329
|
|
|
457
|
|
|
1,872
|
|
Software development costs
|
3
|
|
533
|
|
|
429
|
|
|
104
|
|
Product rights
|
6
|
|
672
|
|
|
164
|
|
|
508
|
|
|
|
|
3,836
|
|
|
1,240
|
|
|
2,596
|
|
Non-amortizable goodwill
|
|
|
10,853
|
|
|
—
|
|
|
10,853
|
|
Total
|
|
|
$
|
14,689
|
|
|
$
|
1,240
|
|
|
$
|
13,449
|
|
Estimated amortization expense for each of the five subsequent fiscal years is expected to be (in thousands):
|
|
|
|
|
Fiscal Year (in thousands)
|
|
2017
|
$
|
449
|
|
2018
|
406
|
|
2019
|
362
|
|
2020
|
302
|
|
2021
|
273
|
|
Thereafter
|
551
|
|
Total
|
$
|
2,343
|
|
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
9. Related-Party Transactions
The Company incurred fees of
$126 thousand
and
$122 thousand
during the years ended
September 30, 2016
and
2015
, respectively, to a law firm whose partner is a director and stockholder of the Company. The Company had accrued liabilities for unbilled services to the same law firm of
$45
and
$25 thousand
at
September 30, 2016
and
2015
, respectively.
As of
September 30, 2016
and
2015
, the Company had a loan outstanding to an executive totaling
$26 thousand
. The loan is collateralized by Company stock.
On December 22, 2014, the company issued
74,802
warrants to
two
individuals in combination with the sale of a like number of shares of common stock, one of which is the Chairman of the Company’s Board of Directors. These warrants were immediately exercisable, expire
5 years
after the date of issuance and have an exercise price of
$14.00
.
As of
September 30, 2016
, the Company had
no
outstanding balance related to management fees and dividends payable to the sellers of and current employees of its wholly-owned subsidiary, Sonic Foundry International B.V. The outstanding balance was
$114 thousand
at
September 30, 2015
.
10. Segment Information
We have determined that in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280-10,
Segment Reporting
, we operate in
three
operating segments, however these segments meet the criteria for aggregation for reporting purposes as
one
reporting segment as of
September 30, 2016
.
The following summarizes revenue by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
2016
|
|
2015
|
United States
|
$
|
22,686
|
|
|
$
|
20,396
|
|
Europe and Middle East
|
4,843
|
|
|
7,594
|
|
Asia
|
8,760
|
|
|
6,518
|
|
Other
|
1,686
|
|
|
1,951
|
|
Total
|
$
|
37,975
|
|
|
$
|
36,459
|
|
11. Customer Concentration
In the fiscal year ended
September 30, 2016
and
2015
, two distributors represented
27%
and
22%
of total revenue, respectively. At
September 30, 2016
and
2015
, these two distributors represented
28%
and
22%
of total accounts receivable, respectively.
12. Legal Proceedings
From time to time, the Company is subject to legal proceedings or claims arising from its normal course of operations. The Company accrues for costs related to loss contingencies when such costs are probable and reasonably estimable. As of
September 30, 2016
, the Company is not aware of any material pending legal proceedings or threatened litigation that would have a material adverse effect on the Company’s financial condition or results of operations.
13. Quarterly Financial Data (unaudited)
The following table sets forth selected quarterly financial information for the years ended
September 30, 2016
and
2015
. The operating results are not necessarily indicative of results for any future period.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data
|
(in thousands except per share data)
|
Q4-’16
|
|
Q3-’16
|
|
Q2-’16
|
|
Q1-’16
|
|
Q4-’15
|
|
Q3-’15
|
|
Q2-’15
|
|
Q1-’15
|
Revenue
|
$
|
9,455
|
|
|
$
|
9,817
|
|
|
$
|
9,612
|
|
|
$
|
9,091
|
|
|
$
|
9,056
|
|
|
$
|
10,556
|
|
|
$
|
8,106
|
|
|
$
|
8,741
|
|
Gross margin
|
7,102
|
|
|
7,235
|
|
|
7,273
|
|
|
6,380
|
|
|
6,450
|
|
|
7,088
|
|
|
6,216
|
|
|
6,070
|
|
Income (loss) from operations
|
(493
|
)
|
|
(452
|
)
|
|
(214
|
)
|
|
(1,117
|
)
|
|
(908
|
)
|
|
(885
|
)
|
|
(1,072
|
)
|
|
(1,227
|
)
|
Net income (loss)
|
(847
|
)
|
|
(552
|
)
|
|
(711
|
)
|
|
(1,207
|
)
|
|
(1,222
|
)
|
|
(921
|
)
|
|
(1,350
|
)
|
|
(1,032
|
)
|
Basic and diluted net income (loss) per share
|
$
|
(0.19
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.24
|
)
|
14. Subsequent Events
On December 9, 2016, the Companies entered into an Eighth Amendment to the Second Amended and Restated Loan and Security Agreement (the "Eighth Amendment") with Silicon Valley Bank. The Eighth Amendment: (i) extends the revolving line of credit maturity date to
January 31, 2019
, (ii) increases maximum subsidiary indebtedness allowable to
$1,000,000
outstanding at any one time and (iii) provides for a "streamline period", during which bank reporting is due monthly when a streamline period is in effect and weekly when a streamline period is not in effect.