REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors
Sonic Foundry, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sonic Foundry, Inc. and Subsidiaries (the "Company") as of
September 30, 2018
and
2017
, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the two years in the period ended
September 30, 2018
, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
September 30, 2018
and
2017
, and the results of its operations and its cash flows for each of the two years in the period ended
September 30, 2018
, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2014.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
Madison, Wisconsin
March 15, 2019
Sonic Foundry, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,189
|
|
|
$
|
1,211
|
|
|
Accounts receivable, net of allowances of $524 and $375
|
7,418
|
|
|
7,903
|
|
|
Financing receivables, current, net of allowances of $526 and $200
|
100
|
|
|
925
|
|
|
Inventories
|
1,027
|
|
|
986
|
|
|
Investment in sales-type lease, current
|
150
|
|
|
148
|
|
|
Prepaid expenses and other current assets
|
941
|
|
|
1,085
|
|
|
Total current assets
|
10,825
|
|
|
12,258
|
|
|
Property and equipment:
|
|
|
|
|
Leasehold improvements
|
1,105
|
|
|
1,041
|
|
|
Computer equipment
|
5,718
|
|
|
6,101
|
|
|
Furniture and fixtures
|
1,099
|
|
|
789
|
|
|
Total property and equipment
|
7,922
|
|
|
7,931
|
|
|
Less accumulated depreciation and amortization
|
6,009
|
|
|
6,181
|
|
|
Property and equipment, net
|
1,913
|
|
|
1,750
|
|
|
Other assets:
|
|
|
|
|
Goodwill
|
—
|
|
|
10,455
|
|
|
Customer relationships, net of amortization of $1,256 and $990
|
—
|
|
|
1,505
|
|
|
Product rights, net of amortization of $534 and $411
|
—
|
|
|
261
|
|
|
Financing receivables, long-term
|
181
|
|
|
1,310
|
|
|
Investment in sales-type lease, long-term
|
249
|
|
|
407
|
|
|
Other long-term assets
|
415
|
|
|
410
|
|
|
Total assets
|
$
|
13,583
|
|
|
$
|
28,356
|
|
|
Liabilities and stockholders’ equity (deficit)
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Revolving lines of credit
|
$
|
885
|
|
|
$
|
2,065
|
|
|
Accounts payable
|
1,610
|
|
|
1,314
|
|
|
Accrued liabilities
|
1,609
|
|
|
1,387
|
|
|
Unearned revenue
|
11,645
|
|
|
11,332
|
|
|
Current portion of capital lease and financing arrangements
|
248
|
|
|
256
|
|
|
Current portion of notes payable and warrant debt, net of discounts
|
593
|
|
|
737
|
|
|
Total current liabilities
|
16,590
|
|
|
17,091
|
|
|
Long-term portion of unearned revenue
|
1,691
|
|
|
2,970
|
|
|
Long-term portion of capital lease and financing arrangements
|
187
|
|
|
244
|
|
|
Long-term portion of notes payable and warrant debt, net of discounts
|
1,357
|
|
|
123
|
|
|
Derivative liability, at fair value
|
14
|
|
|
12
|
|
|
Other liabilities
|
202
|
|
|
372
|
|
|
Deferred tax liability
|
—
|
|
|
4,426
|
|
|
Total liabilities
|
20,041
|
|
|
25,238
|
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
Preferred stock, $.01 par value, authorized 500,000 shares; none issued
|
—
|
|
|
—
|
|
|
9% Preferred stock, Series A, voting, cumulative, convertible, $.01 par value (liquidation preference of $1,000 per share), authorized 4,500 shares; 2,678 and 1,510 shares issued and outstanding, respectively, at amounts paid in
|
1,651
|
|
|
1,280
|
|
|
5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 1,000,000 shares, none issued
|
—
|
|
|
—
|
|
Sonic Foundry, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, authorized 10,000,000 shares; 5,113,400 and 4,470,791 shares issued and 5,100,684 and 4,458,075 shares outstanding
|
51
|
|
|
45
|
|
|
Additional paid-in capital
|
200,130
|
|
|
197,836
|
|
|
Accumulated deficit
|
(207,419
|
)
|
|
(195,253
|
)
|
|
Accumulated other comprehensive loss
|
(676
|
)
|
|
(595
|
)
|
|
Receivable for common stock issued
|
(26
|
)
|
|
(26
|
)
|
|
Treasury stock, at cost, 12,716 shares
|
(169
|
)
|
|
(169
|
)
|
|
Total stockholders’ equity (deficit)
|
(6,458
|
)
|
|
3,118
|
|
|
Total liabilities and stockholders’ equity (deficit)
|
$
|
13,583
|
|
|
$
|
28,356
|
|
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,
|
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
Product and other
|
$
|
12,311
|
|
|
$
|
14,883
|
|
|
Services
|
22,233
|
|
|
21,117
|
|
|
Total revenue
|
34,544
|
|
|
36,000
|
|
|
Cost of revenue:
|
|
|
|
|
Product and other
|
5,231
|
|
|
6,097
|
|
|
Services
|
4,425
|
|
|
3,770
|
|
|
Total cost of revenue
|
9,656
|
|
|
9,867
|
|
|
Gross margin
|
24,888
|
|
|
26,133
|
|
|
Operating expenses:
|
|
|
|
|
Selling and marketing
|
15,622
|
|
|
16,912
|
|
|
General and administrative
|
6,354
|
|
|
5,941
|
|
|
Product development
|
7,142
|
|
|
7,238
|
|
|
Impairment of goodwill and intangible assets
|
11,809
|
|
|
600
|
|
|
Total operating expenses
|
40,927
|
|
|
30,691
|
|
|
Loss from operations
|
(16,039
|
)
|
|
(4,558
|
)
|
|
Non-operating income (expenses):
|
|
|
|
|
Interest expense, net
|
(601
|
)
|
|
(495
|
)
|
|
Other income (expense), net
|
142
|
|
|
(65
|
)
|
|
Total non-operating expenses
|
(459
|
)
|
|
(560
|
)
|
|
Loss before income taxes
|
(16,498
|
)
|
|
(5,118
|
)
|
|
Income tax benefit
|
4,332
|
|
|
79
|
|
|
Net loss
|
$
|
(12,166
|
)
|
|
$
|
(5,039
|
)
|
|
Dividends on preferred stock
|
(257
|
)
|
|
(169
|
)
|
|
Net loss attributable to common stockholders
|
$
|
(12,423
|
)
|
|
$
|
(5,208
|
)
|
|
Loss per common share:
|
|
|
|
|
Basic net loss per common share
|
$
|
(2.67
|
)
|
|
$
|
(1.17
|
)
|
|
Diluted net loss per common share
|
$
|
(2.67
|
)
|
|
$
|
(1.17
|
)
|
|
Weighted average common shares – Basic
|
4,655,520
|
|
|
4,436,333
|
|
|
– Diluted
|
4,655,520
|
|
|
4,436,333
|
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2018
|
|
2017
|
|
Net loss
|
$
|
(12,166
|
)
|
|
$
|
(5,039
|
)
|
|
Foreign currency translation adjustment
|
(81
|
)
|
|
(412
|
)
|
|
Comprehensive loss
|
$
|
(12,247
|
)
|
|
$
|
(5,451
|
)
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
Common
stock
|
|
Additional
paid-in
capital
|
|
Accumulated
deficit
|
|
Accumulated
other
comprehensive
loss
|
|
Receivable
for
common
stock issued
|
|
Treasury
stock
|
|
Total
|
|
Balance, September 30, 2016
|
—
|
|
|
$
|
44
|
|
|
$
|
197,064
|
|
|
$
|
(190,214
|
)
|
|
$
|
(183
|
)
|
|
$
|
(26
|
)
|
|
$
|
(169
|
)
|
|
$
|
6,516
|
|
|
Stock compensation
|
—
|
|
|
—
|
|
|
754
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
754
|
|
|
Issuance of preferred stock
|
1,250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,250
|
|
|
Issuance of common stock
|
—
|
|
|
1
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
Preferred stock dividends
|
30
|
|
|
—
|
|
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(412
|
)
|
|
—
|
|
|
—
|
|
|
(412
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,039
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,039
|
)
|
|
Balance, September 30, 2017
|
1,280
|
|
|
$
|
45
|
|
|
$
|
197,836
|
|
|
$
|
(195,253
|
)
|
|
$
|
(595
|
)
|
|
$
|
(26
|
)
|
|
$
|
(169
|
)
|
|
$
|
3,118
|
|
|
Stock compensation
|
—
|
|
|
—
|
|
|
476
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
476
|
|
|
Issuance of preferred stock
|
1,531
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,531
|
|
|
Conversion of preferred stock
|
(1,390
|
)
|
|
4
|
|
|
1,386
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock
|
—
|
|
|
2
|
|
|
592
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
594
|
|
|
Beneficial conversion feature on convertible debt
|
—
|
|
|
—
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70
|
|
|
Preferred stock dividends
|
230
|
|
|
—
|
|
|
(230
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,166
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,166
|
)
|
|
Balance, September 30, 2018
|
$
|
1,651
|
|
|
$
|
51
|
|
|
$
|
200,130
|
|
|
$
|
(207,419
|
)
|
|
$
|
(676
|
)
|
|
$
|
(26
|
)
|
|
$
|
(169
|
)
|
|
$
|
(6,458
|
)
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
2018
|
|
2017
|
|
Operating activities
|
|
|
|
|
Net loss
|
$
|
(12,166
|
)
|
|
$
|
(5,039
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
Amortization of other intangibles
|
621
|
|
|
555
|
|
|
Depreciation and amortization of property and equipment
|
1,118
|
|
|
1,422
|
|
|
Impairment of goodwill and intangible assets
|
11,809
|
|
|
600
|
|
|
Loss on sale of fixed assets
|
—
|
|
|
8
|
|
|
Provision for doubtful accounts - including financing receivables
|
475
|
|
|
349
|
|
|
Deferred taxes
|
(4,450
|
)
|
|
(103
|
)
|
|
Stock-based compensation expense related to stock options and warrants
|
476
|
|
|
622
|
|
|
Conversion of accrued interest to preferred stock
|
31
|
|
|
—
|
|
|
Beneficial conversion feature recognized on debt converted to preferred stock
|
70
|
|
|
—
|
|
|
Remeasurement gain on subordinated debt
|
—
|
|
|
(6
|
)
|
|
Remeasurement gain on derivative liability
|
(28
|
)
|
|
(55
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
348
|
|
|
1,613
|
|
|
Financing receivables
|
1,630
|
|
|
(558
|
)
|
|
Inventories
|
(41
|
)
|
|
904
|
|
|
Prepaid expenses and other current assets
|
290
|
|
|
89
|
|
|
Accounts payable and accrued liabilities
|
268
|
|
|
(109
|
)
|
|
Other long-term liabilities
|
(169
|
)
|
|
129
|
|
|
Unearned revenue
|
(920
|
)
|
|
250
|
|
|
Net cash provided by (used in) operating activities
|
(638
|
)
|
|
671
|
|
|
Investing activities
|
|
|
|
|
Purchases of property and equipment
|
(840
|
)
|
|
(839
|
)
|
|
Net cash used in investing activities
|
(840
|
)
|
|
(839
|
)
|
|
Financing activities
|
|
|
|
|
Proceeds from notes payable
|
3,000
|
|
|
—
|
|
|
Proceeds from lines of credit
|
22,236
|
|
|
23,257
|
|
|
Payments on notes payable
|
(815
|
)
|
|
(1,727
|
)
|
|
Payments on lines of credit
|
(23,422
|
)
|
|
(22,928
|
)
|
|
Payments of debt issuance costs
|
(97
|
)
|
|
(26
|
)
|
|
Payments to settle put on term debt
|
(200
|
)
|
|
—
|
|
|
Proceeds from issuance of preferred stock and common stock
|
1,094
|
|
|
1,298
|
|
|
Payments on capital lease and financing arrangements
|
(298
|
)
|
|
(348
|
)
|
|
Net cash provided by (used in) financing activities
|
1,498
|
|
|
(474
|
)
|
|
Changes in cash and cash equivalents due to changes in foreign currency
|
(42
|
)
|
|
59
|
|
|
Net decrease in cash and cash equivalents
|
(22
|
)
|
|
(583
|
)
|
|
Cash and cash equivalents at beginning of year
|
1,211
|
|
|
1,794
|
|
|
Cash and cash equivalents at end of year
|
$
|
1,189
|
|
|
$
|
1,211
|
|
|
Supplemental cash flow information:
|
|
|
|
|
Interest paid
|
$
|
409
|
|
|
$
|
505
|
|
|
Income taxes paid, foreign
|
370
|
|
|
111
|
|
|
Non-cash financing and investing activities:
|
|
|
|
Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment financed by capital lease or accounts payable
|
460
|
|
|
341
|
|
|
Debt discount
|
127
|
|
|
—
|
|
|
Stock issued for board of director's fees
|
—
|
|
|
133
|
|
|
Deemed dividend for beneficial conversion feature of preferred stock
|
28
|
|
|
139
|
|
|
Preferred stock dividend paid in additional shares
|
230
|
|
|
30
|
|
|
Subordinated note payable converted to preferred stock
|
1,000
|
|
|
—
|
|
See accompanying notes to the consolidated financial statements.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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.
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 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
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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.
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.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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, 2018
, of the
$1.2 million
in cash and cash equivalents,
$118 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
$1.1 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 and financing receivables was
$1.0 million
at
September 30, 2018
and
$575 thousand
at
September 30, 2017
.
We had billings for Mediasite product and support services as a percentage of total billings to one distributor of approximately
6%
in
2018
and
11%
in
2017
and to a second distributor of approximately
11%
in
2018
and
15%
in
2017
. At
September 30, 2018
and
2017
, these two distributors represented
28%
and
23%
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, 2018
and
2017
, this supplier represented
29%
and
27%
, 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, 2018
, of the
$1.2 million
aggregate cash and cash equivalents held by the Company, the amount of cash and cash equivalents held by our foreign subsidiaries was
$1.1 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 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.
Financing Receivables
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
Financing receivables consist of customer receivables resulting from the sale of the Company's products and services, primarily software and long-term customer support contracts, and are presented net of allowance for losses. The Company has a single portfolio consisting of fixed-term receivables, which is further segregated into two classes based on products, customer type, and credit risk evaluation.
The Company generally determines its allowance for losses on financing receivables at the customer class level by considering a number of factors, including the length of time financing receivable are past due, historical and anticipated experience, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company writes-off financing receivables when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for financing receivable losses. Interest is not accrued on past due receivables. There was an allowance of
$526 thousand
and
$200 thousand
at
September 30, 2018
and
2017
, respectively.
The Company's financing receivables are aggregated into the following categories:
Long-term customer support contracts: These contracts are typically entered into in conjunction with sale-type lease arrangements, over the life of which the Company agrees to provide support services similar to those offered within Mediasite Customer Care plans. Contract terms range from
3
-
5
years, and payments are generally due from the customer annually on the contract anniversary. There was
$281 thousand
and
$384 thousand
of receivables outstanding for long-term customer support contracts as of
September 30, 2018
and
2017
, respectively. All amounts due were current as of the balance sheet date and there are no credit losses expected to be incurred related to long-term support contracts.
Product receivables: Amounts due primarily represent sales of perpetual software licenses to a single international distributor on invoices outstanding for product delivered from March 2016 through June 2017. There was
$2.1 million
receivable as of
September 30, 2017
,
$1.5 million
of which was deferred for revenue recognition purposes due to a history of delayed payment. As of
September 30, 2018
, the deferred balance related to this receivable was zero as it was fully allowed for as a loss. The Company delivered
$901 thousand
of product to this customer and received payment of
$726 thousand
in fiscal
2017
. As a result of the circumstances described, the entire allowance for losses on financing receivables of
$526 thousand
is considered attributable to this class of customer as of
September 30, 2018
.
Financing receivables consisted of the following (in thousands) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
September 30, 2017
|
|
Customer support contracts, current and long-term, gross
|
$
|
281
|
|
|
$
|
384
|
|
|
Product receivables, gross
|
526
|
|
|
2,051
|
|
|
Allowance for losses on financing receivables
|
(526
|
)
|
|
(200
|
)
|
|
|
$
|
281
|
|
|
$
|
2,235
|
|
Investment in Sales-Type Lease
The Company has entered into sales-type lease arrangements with certain customers, consisting of recorders leased with terms ranging from
3
-
5
years. All amounts due are current as of the balance sheet date.
Investment in sales-type leases consisted of the following (in thousands) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
September 30, 2017
|
|
Investment in sales-type lease
|
$
|
399
|
|
|
$
|
555
|
|
|
|
$
|
399
|
|
|
$
|
555
|
|
Inventory Valuation
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
Raw materials and supplies
|
$
|
358
|
|
|
$
|
156
|
|
|
Finished goods
|
669
|
|
|
830
|
|
|
|
$
|
1,027
|
|
|
$
|
986
|
|
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. There was no amortization expense in either of the years ending
September 30, 2018
or
2017
, respectively. The gross amount of capitalized external and internal development costs was
$533 thousand
at
September 30, 2018
and
2017
. There were no software development efforts that qualified for capitalization for the years ended
September 30, 2018
or
2017
, 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
|
3 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, the Company compares the estimated fair value of the reporting unit to which goodwill is allocated to its carrying value. The amount of impairment, if any, is equal to the amount by which the carrying value of the reporting unit exceeds its fair value.
For purposes of the fiscal
2018
and
2017
tests, goodwill balances are evaluated within three separate reporting units. In fiscal
2018
, we performed a quantitative analysis and determined that the fair value of all three of the Company's reporting units is less than its carrying value. The Company recognized an impairment charge of
$10.4 million
, or the remaining balance of goodwill, as of
September 30, 2018
. In fiscal
2017
, we performed a quantitative analysis and determined that the fair value of one of the Company's reporting units is less than its carrying value, and that the fair value of the remaining reporting units is greater than their respective carrying values. The Company recognized an impairment charge of
$600 thousand
as of
September 30, 2017
.
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 year ended
September 30, 2018
, it was determined that changes in circumstances were present, primarily the decline in the Company's market capitalization during the fiscal year. For the year ended
September 30, 2018
, the Company determined that intangible assets, consisting of customer relationships and product rights, were impaired and recognized an impairment charge of
$1.4 million
. For the year ended
September 30, 2017
, it was determined that changes in circumstances were present, primarily the decline in the Company's market capitalization during the fiscal year and past performance. However,
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
after performing analysis of undiscounted cash flows attributable to our long-lived assets along with other relevant factors, such as the continued use of the assets, it was determined that there was
no
impairment of long-lived and intangible assets other than goodwill. Key assumptions utilized in the analysis of undiscounted cash flows for each asset or asset group being tested included 1) whether cash flows were attributable solely to the asset or group, or to an entire reporting unit; and 2) the useful lives of the asset or asset group. Forecasts used in the analysis were also consistent with those used in determining fair value of reporting units during goodwill impairment testing.
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
$451 thousand
and
$479 thousand
for years ended
September 30, 2018
and
2017
, 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, 2018
and
2017
, 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 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
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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 and the public company guideline method 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, 2018
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
Derivative liability
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
Derivative liability
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Included below is a summary of the changes in our Level 3 fair value measurements (in thousands):
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFG IV Debt, Net
of Discount
|
|
Warrant
Debt, PFG IV
|
|
PFG V Debt, Net of Discount
|
|
Warrant Debt, PFG V
|
|
Balance as of September 30, 2017
|
$
|
491
|
|
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Activity during the period:
|
|
|
|
|
|
|
|
|
Disbursement of Tranche 1, net of discount
|
|
|
|
|
1,873
|
|
|
97
|
|
|
Payments to PFG
|
(538
|
)
|
|
(200
|
)
|
|
—
|
|
|
—
|
|
|
Change in fair value
|
47
|
|
|
77
|
|
|
32
|
|
|
6
|
|
|
Balance as of September 30, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,905
|
|
|
$
|
103
|
|
Financial Instruments Not Measured at Fair Value
The Company’s other financial instruments consist primarily of cash and cash equivalents, accounts receivable, investment in sales-type lease, financing receivables, accounts payable and debt instruments, excluding the PFG debt. The book values of cash and cash equivalents, accounts receivable, investment in sales-type lease, 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. In Q4-
2018
, product rights were determined to be fully impaired and fully written off. See Note 8, Goodwill and Other Intangible Assets, for additional information on the impairment.
No
legal contingencies were recorded for either of the years ended
September 30, 2018
or
2017
, 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, 2018
|
|
|
|
|
|
|
|
|
Years Ending September 30,
|
|
|
2018
|
|
2017
|
|
Expected life
|
4.3 - 4.4 years
|
|
4.7 - 4.9 years
|
|
Risk-free interest rate
|
1.79%-2.75%
|
|
1.08%-1.51%
|
|
Expected volatility
|
60.62%-63.49%
|
|
56.98%-62.21%
|
|
Expected forfeiture rate
|
12.53%-14.58%
|
|
10.17%-11.72%
|
|
Expected exercise factor
|
1.00-1.17
|
|
1.29-1.35
|
|
Expected dividend yield
|
—%
|
|
—%
|
Common Stock Warrants
On April 16, 2018, the Company issued
232,558
shares of common stock to an affiliated party. The shares were issued at a price of
$2.15
per share, representing the closing price on April 13, 2018. On April 16, 2018, the closing price of the Company’s common stock was
$2.18
per share. The affiliated party also received warrants to purchase
232,558
shares of common stock at an exercise price of
$2.50
per share, respectively, which expire on April 16, 2025.
Preferred stock and dividends
In May 2017, the Company created a new series of preferred stock entitled "
9%
Cumulative Voting Convertible Preferred Stock, Series A" (the "Preferred Stock, Series A"). One thousand shares were authorized with a stated value and liquidation preference of
$1,000
per share. In August 2017,
1,500
additional shares were authorized for an aggregated total of
2,500
shares. In May 2018,
2,000
additional shares were authorized for an aggregated total of
4,500
shares. Holders of the Preferred Stock, Series A will receive monthly dividends at an annual rate of
9%
, payable in additional shares of Preferred Stock, Series A. Dividends declared on the preferred stock are earned monthly as additional shares and accounted for as a reduction to paid-in capital since the Company is currently in an accumulated deficit position. Each share of Preferred Stock, Series A is convertible into that number of shares of common stock determined by dividing
$4.23
into the liquidation amount. A total of
2,678
and
1,510
shares of Preferred Stock, Series A were issued and outstanding as of
September 30, 2018
and
2017
, respectively.
The Company considered relevant guidance when accounting for the issuance of preferred stock, and determined that the preferred shares meet the criteria for equity classification. Dividends accrued on preferred shares will be shown as a reduction to net income (or an increase in net loss) for purposes of calculating earnings per share.
On May 17, 2018,
$1.0 million
of subordinated convertible debt was fully converted into
1,902
shares of Preferred Stock, Series A, following approval by the stockholders of the Company of the conversion sufficient to comply with rules and regulations of NASDAQ. See Note 4 related to accounting for the conversion.
On June 8, 2018,
905
shares of Preferred Stock, Series A were automatically converted by the Company into
213,437
shares of common stock. The amount of shares converted represents all preferred shares issued on May 30, 2017 and June 8, 2017, including related dividends.
On August 23, 2018,
717
shares of Preferred Stock, Series A were automatically converted by the Company into
169,485
shares of common stock. The amount of shares converted represents all preferred shares issued on August 23, 2017.
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:
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Years Ending
September 30,
|
|
|
2018
|
|
2017
|
|
Denominator for basic earnings (loss) per share
|
|
|
|
|
-weighted average common shares
|
4,655,520
|
|
|
4,436,333
|
|
|
Effect of dilutive options and warrants (treasury method)
|
—
|
|
|
—
|
|
|
Denominator for diluted earnings (loss) per share
|
|
|
|
|
-adjusted weighted average common shares
|
4,655,520
|
|
|
4,436,333
|
|
|
Options and warrants outstanding during each year, but not included in the computation of diluted earnings (loss) per share because they are antidilutive
|
2,399,901
|
|
|
1,940,245
|
|
Liquidity
At
September 30, 2018
approximately
$1.1 million
of cash and cash equivalents was held by the Company’s foreign subsidiaries.
On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement with a director of the Company for
$5.0 million
in cash.
See Note 14 - Subsequent Events for additional information on this transaction.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next twelve months. We will likely evaluate operating and capital leases opportunities to finance equipment purchases in the future and anticipate utilizing proceeds from the recent note purchase agreement to support working capital needs. We may also seek additional equity financing, or issue additional shares previously registered in our available shelf registration and there are no assurances that these will be on terms acceptable to the Company.
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 Expedients" ("ASU 2016-12"). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09.
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 adopted this standard as of October 1, 2017, and it did not have a material impact on the Company's financial position or results of operations.
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 adopted this standard as of October 1, 2017, and it did not have a material impact on the Company's financial position or results of operations.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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 2016-06, "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 adopted this standard as of October 1, 2017, and it did not have a material impact on the Company's financial position or results of operations.
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 adopted this standard as of October 1, 2017, and it did not have a material impact on the Company's financial position or results of operations.
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): Intra-Entity Transfers of Assets Other Than Inventory", ("ASU 2016-16"). ASU 2016-16 improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The amendments in this update are effective for fiscal years 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.
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718)", ("ASU 2017-09"). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in ASU 2017-09 are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)", ("ASU 2017-11"). This update was issued to address complexities in accounting for certain equity-linked financial instruments containing down round features. The amendment changes the classification analysis of these
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
financial instruments (or embedded features) so that equity classification is no longer precluded. The amendments in ASU 2017-11 are effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases", ("ASU 2018-10"). The standard clarifies certain topics related to previously issued Topic 842. The amendments in ASU 2018-10 are not yet effective, but early adopton is permitted. For entities that have not yet adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. The Company is currently evaluating this guidance and its impact to the financial statements.
In August 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements", ("ASU 2018-11"). The ASU is intended to reduce costs and ease implementation of the leases standard for financial statement preparers. ASU 2018-11 provides a new transition method and a practical expedient for separating components of a contract. For entities that have not adopted Topic 842 before the issuance of this ASU, the effective date and transition requirements for the amendments in this update related to separating components of a contract are the same as the effective date and transition requirements in ASU 2016-02. The Company is currently evaluating this guidance and its impact to the financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements", ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606", ("ASU 2018-18"). ASU 2018-18 provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently reviewing 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.
New Accounting Pronouncements Not Yet Effective
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method).
The Company will adopt the new standard, effective October 1, 2018, using the modified retrospective method applied to those contracts which were not substantially completed as of October 1, 2018. The most significant impact of the standard on the Company's financial statements relates to multi-year software licenses for certain customers which will accelerate the recognition of revenue. We expect to recognize an adjustment to retained earnings reflecting the cumulative impact for the accounting changes related to multi-year software licenses and contract acquisition costs upon adoption of these new standards.
There are also certain considerations related to internal control over financial reporting that are associated with implementing Topic 606. We are evaluating our internal control framework over revenue recognition to identify any changes that may need to be made in response to the new guidance. We will have completed the design and implementation of the appropriate controls to obtain and disclose the information required under Topic 606 in our first quarter of 2019. In addition, disclosure requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the current guidance.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
2. Commitments
Capital Lease and Financing Agreements
The Company leases certain equipment under capital lease and financing agreements expiring through
January 2022
. Capital leases that are currently outstanding on equipment included in fixed assets have a cost of
$1.3 million
and accumulated depreciation of
$892 thousand
at
September 30, 2018
. Minimum lease payments, including principal and interest, are summarized in the table below.
|
|
|
|
|
|
|
|
Fiscal Year (in thousands)
|
Capital
|
|
2019
|
$
|
265
|
|
|
2020
|
143
|
|
|
2021
|
48
|
|
|
2022
|
2
|
|
|
Total payments
|
458
|
|
|
Less interest
|
(25
|
)
|
|
Total
|
$
|
433
|
|
Operating Leases
The Company leases certain facilities and equipment under operating lease agreements expiring at various times through
December 31, 2022
. Total rent expense on all operating leases was approximately
$1.2 million
and
$1.3 million
for the years ended
September 30, 2018
and
2017
, respectively.
In November 2011, the Company occupied office space related to a lease agreement entered into on June 28, 2011. The inital lease term was from
November 2011 through December 2018
and in Q3
2018
, the lease was extended for three years through
December 31, 2021
. There are two additional three year extensions included in the initial lease agreement. 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, 2018
, the unamortized balance was
$7 thousand
.
In October 2016, the Company also occupied office space related to a lease agreement entered into on August 1, 2016. The lease term is from October 2016 through December 2020. The lease includes five months of free rent of
$130 thousand
that was recorded as a deferred rent liability and is being amortized as a credit to rent expense on a straight-line basis over the lease term. At
September 30, 2018
and
2017
, the unamortized balance was
$75 thousand
and
$110 thousand
, respectively.
The following is a schedule by year of future minimum lease payments under operating leases:
|
|
|
|
|
|
|
|
Fiscal Year (in thousands)
|
Operating
|
|
2019
|
$
|
1,248
|
|
|
2020
|
1,252
|
|
|
2021
|
912
|
|
|
2022
|
202
|
|
|
Total
|
$
|
3,614
|
|
Other Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At
September 30, 2018
, the Company has an obligation to purchase
$745 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
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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 the Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated June 27, 2011, as amended by the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth Amendments, dated May 31, 2013, January 10, 2014, March 31, 2014, January 27, 2015, May 13, 2015, October 5, 2015,February 8, 2016, December 9, 2016, March 22, 2017, and May 10, 2017 (the Second Amended and Restated Loan Agreement, as amended by the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth 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 two percent (
2.00%
), which currently equates to
7.25%
. 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, 2019
. 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 accrued interest at the variable per annum rate equal to the Prime Rate (as defined) plus two and three-quarters percent, and was to be repaid in 36 equal monthly principal payments, beginning in February 2015. The Second Amended and Restated Loan Agreement also requires Sonic Foundry to comply with certain financial covenants, including (i) a liquidity financial covenant, which requires minimum Liquidity (as defined), tested with respect to the Company only, on a monthly basis, of at least
1.60
:1.00 for each month-end that is not the last day of a fiscal quarter, and
1.75
:1.00 for each month-end that is the last day of a fiscal quarter, and (ii) a covenant that requires the Company to achieve, commencing with the period ending September 30, 2017, and continuing each quarterly period thereafter, measured as of the last day of each fiscal quarter, on a trailing six (6) month basis ending as of the date of measurement, (a) EBITDA (negative EBITDA) plus (b) the net change in Deferred Revenue (as defined) during such measurement period, of at least Zero Dollar (
$0.00
). Collections from accounts receivable are directly applied to the outstanding obligations under the revolving line of credit.
On December 22, 2017, the Company entered into an Eleventh Amendment to the Second Amended and Restated Loan and Security Agreement (the “Eleventh Amendment”) with Silicon Valley Bank. Under the Eleventh Amendment: the Minimum EBITDA covenant was modified to require Minimum EBITDA (as defined) plus the net change in Deferred Revenue, (i) for the period ending December 31, 2017, measured on a trailing three (3) month basis, to be no less than negative (
$1,900,000
); (ii) for the quarterly period ending March 31, 2018, measured on a trailing three (3) month basis, to be no less than
Zero
Dollars, and (iii) for the quarterly period ending June 30, 2018, and each quarterly period thereafter, in each case measured on a trailing six month basis, to be no less than
Zero
Dollars.
On May 11, 2018, the Company entered into a Twelfth Amendment to the Second Amended and Restated Loan and Security Agreement (the “Twelfth Amendment”) with Silicon Valley Bank, which waived the minimum EBITDA covenant as defined under the Eleventh Amendment. Under the Twelfth Amendment: the Minimum EBITDA covenant was modified to require Minimum EBITDA (as defined) plus the net change in Deferred Revenue, (i) for the quarterly period ending June 30, 2018, measured on a trailing six (6) month basis, to be no less than negative (
$1,100,000
); (ii) for the quarterly period ending September 30, 2018, measured on a trailing six (6) month basis, to be no less than
$500,000
, and (iii) for the quarterly period ending December 31, 2018, measured on a trailing six (6) month basis, to be no less than negative (
$250,000
), and (iv) for the quarterly period ending March 31, 2019, measured on a trailing three (3) month basis, to be no less than negative (
$250,000
). The Twelfth Amendment also requires Sonic Foundry to comply with certain financial covenants, including (i) funding of tranche 1 of the PFG V note in the amount of
$2,000,000
prior to June 30, 2018, and (ii) funding of tranche 2 of the PFG V note in the amount of
$500,000
prior to December 31, 2018.
At
September 30, 2018
, there was no balance outstanding on the term loan with Silicon Valley Bank. There was a balance of
$621 thousand
outstanding on the revolving line of credit with an effective interest rate of seven-and-one-quarter percent (
7.25%
). At
September 30, 2017
, a balance of
$278 thousand
was outstanding on the term loans with Silicon Valley Bank and a balance of
$1.6 million
was outstanding on the revolving line of credit. At
September 30, 2018
, there was a remaining amount of
$3.4 million
available under the line of credit facility for advances.
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
The Second Amended and Restated 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, 2018
, the Company was in compliance with all financial covenants.
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.
Historically, the Company has relied on the ability to draw proceeds as needed from its revolving line of credit with Silicon Valley Bank to fund operations. At
September 30, 2018
, we had a balance of
$621 thousand
outstanding on this line of credit, which matured on
January 31, 2019
and was paid in full. The Company did not renew the line of credit.
On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement with a director of the Company for
$5.0 million
in cash.
See Note 14 - Subsequent Events for additional information on this transaction.
The Company used the proceeds from the notes issued under the Note Purchase Agreement to replace the revolving line of credit with Silicon Valley Bank, which matured on January 31, 2019.
Partners for Growth IV, L.P.
On May 13, 2015, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2015 Loan and Security Agreement”) with Partners for Growth IV, L.P. (“PFG”), (the “Loan and Security Agreement”).
The 2015 Loan and Security Agreement provided for a Term Loan in the amount of
$2,000,000
, which was 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 bore 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 was due in
30
equal monthly principal installments, plus accrued interest, continuing until
May 1, 2018
, when the principal balance was paid in full. Tranche 2 of the Term Loan was payable in
29
equal monthly principal installments, plus accrued interest, beginning January 1, 2015 and continued until May 1, 2018.
Coincident with execution of the 2015 Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”) with PFG IV. Pursuant to the terms of the Warrant, the Company issued to PFG IV 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 IV 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 IV 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 could have been settled for cash in the event of acquisition of the company, any liquidation of the company, or expiration of the warrant. The Company 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
$80 thousand
at the time of issuance. The derivative had a fair value of
$136 thousand
. The conversion feature is an embedded derivative; thus, for accounting purposes, the conversion feature is bifurcated and accounted for separately from the PFG IV Debt and Warrant Debt as a derivative liability measured at fair value at each reporting period. The warrants were settled for cash in the amount of
$200 thousand
in May 2018 upon entering into a new loan agreement with PFG V.
On December 28, 2017, the Company and PFG IV entered into a Modification No. 4 to the 2015 Loan and Security Agreement (“Modification No. 4”). Modification No. 4: the Minimum EBITDA covenant was modified to require Minimum EBITDA (as
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
defined) plus the net change in Deferred Revenue (i) for the period ending December 31, 2017, measured on a trailing three (3) month basis, to be no less than negative (
$1,900,000
); (ii) for the quarterly period ending March 31, 2018, measured on a trailing three (3) month basis, to be no less than
Zero
Dollars, and (iii) for the quarterly period ending June 30, 2018, and each quarterly period thereafter, in each case measured on a trailing six month basis, to be no less than
Zero
Dollars.
At
September 30, 2018
, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2015 Loan and Security Agreement, was
zero
as a result of the
$200 thousand
cash settlement in May 2018, compared to
$12 thousand
at
September 30, 2017
. The change in the fair value of the derivative liability during fiscal
2018
was recorded as a gain of
$12 thousand
included in other income (expense).
The proceeds from the 2015 Loan and Security Agreement were allocated between the PFG IV 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
$1.8 million
and
$216 thousand
, respectively. The conversion feature of
$216 thousand
is treated together as a debt discount on the PFG IV Debt and was accreted to interest expense under the effective interest method over the
three
-year term of the PFG IV Debt and the
five
-year term of the Warrant Debt. For fiscal
2018
, the Company recorded accretion of discount expense associated with the warrants issued with the PFG IV loan of
$77 thousand
as well as
$47 thousand
related to amortization of the debt discount. For fiscal
2017
, the Company recorded accretion of discount expense associated with the warrants issued with the PFG IV loan of
$21 thousand
as well as
$73 thousand
related to amortization of the debt discount. At
September 30, 2018
, the fair values of the PFG IV Debt and Warrant Debt (inclusive of its conversion feature) were each zero, as the PFG IV Debt was paid in full as of May 1, 2018 and the Warrant Debt was settled on May 14, 2018.
At
September 30, 2018
, there was
no
balance outstanding on the term debt with PFG IV. At
September 30, 2017
, a balance of
$491 thousand
with outstanding on the term debt with PFG IV, net of discount.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2018 Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”), (the “Loan and Security Agreement”).
The 2018 Loan and Security Agreement provides for a Term Loan in the amount of
$2,500,000
, which was disbursed in two (2) Tranches as follows: Tranche 1 was disbursed on May 14, 2018 in the amount of
$2,000,000
; and Tranche 2 in the amount of
$500,000
, was disbursed on November 8, 2018.
Each tranche of the Term Loan bears interest at
10.75%
per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of
$150,000
.
The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal to
1%
of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.
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.
Coincident with execution of the 2018 Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”) with PFG V. Pursuant to the terms of the Warrant, the Company issued to PFG V a warrant to purchase up to
66,000
shares of common stock of the Company at an exercise price of
$2.57
per share, subject to certain adjustments. Pursuant to the Warrant, PFG V is also entitled, under certain conditions, to require the Company to exchange the Warrant for the sum of
$250,000
.
At
September 30, 2018
, the estimated fair value of the derivative liability associated with the warrants issued in connection with the Loan and Security Agreement, was
$14 thousand
. The change in the fair value of the derivative liability during fiscal
2018
was recorded as a gain of
$14 thousand
, included in the other income (expense).
The proceeds from the Loan and Security Agreement were allocated between the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair value on the date of issuance which resulted in carrying values of
$1.9 million
and
$127 thousand
, respectively. The warrant debt of
$127 thousand
is treated together as a debt discount on the PFG V
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
Debt and will be accreted to interest expense under the effective interest method over the
three
-year term of the PFG V Debt and the
five
-year term of the Warrant Debt. During fiscal
2018
, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of
$6 thousand
, as well as
$17 thousand
related to amortization of the debt discount. At
September 30, 2018
, the fair values of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were
$1.9 million
and
$117 thousand
, respectively. In addition, the Company agreed to pay PFG V a cash fee of up to
$150,000
payable upon maturity (the “back-end fee”), which will be earned ratably over the three year term of the PFG V loan. During fiscal
2018
, the Company recorded interest expense of
$19 thousand
associated with recognition of the back-end fee.
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
September 30, 2018
, 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).
At
September 30, 2018
, a gross balance of
$1.9 million
was outstanding on the term debt with PFG V, net of discount, with an effective interest rate of ten-and-three-quarters percent (
10.75%
). At
September 30, 2017
, there was no balance outstanding with PFG V.
See Note 14 - Subsequent Events for additional information related to PFG.
Other Indebtedness
At
September 30, 2018
, a balance of
$264 thousand
was outstanding on the line of credit with Mitsui Sumitomo Bank. At
September 30, 2017
, a balance of
$417 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%
).
On January 19, 2018, the Company and a director entered into a Subscription Agreement (the “Subscription Agreement”)’ Pursuant to the Subscription Agreement, (i) on January 19, 2018, the director purchased a
10.75%
Convertible Secured Subordinated Promissory Note for
$500,000
in cash; and (ii) on February 15, 2018, the director purchased an additional
10.75%
Convertible Secured Subordinated Promissory Note for
$500,000
in cash (each, a “Note”, and collectively, the “Notes”).
On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply with rules and regulations of NASDAQ and the Securities and Exchange Commission, the Notes were automatically converted into
1,902
shares of Series A Preferred stock. The number of shares was determined by dividing the total principal and accrued interest due on each Note by
$542.13
(the “Conversion Rate”).
At
September 30, 2018
, there was
no
balance outstanding on the Notes.
In the year ended
September 30, 2018
, no foreign currency gain or loss was realized related to re-measurement of the subordinated notes payable related to the Company’s foreign subsidiaries. In the year ended
September 30, 2017
, a foreign currency gain of
$6 thousand
was recorded related to the remeasurement.
The annual principal payments on the note payable to PFG V are as follows:
|
|
|
|
|
|
|
|
Fiscal Year (in thousands)
|
|
|
2019
|
$
|
667
|
|
|
2020
|
800
|
|
|
2021
|
533
|
|
|
Total
|
$
|
2,000
|
|
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, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
Accrued compensation
|
$
|
972
|
|
|
$
|
871
|
|
|
Accrued expenses
|
359
|
|
|
211
|
|
|
Accrued interest & taxes
|
223
|
|
|
288
|
|
|
Other accrued liabilities
|
55
|
|
|
17
|
|
|
Total
|
$
|
1,609
|
|
|
$
|
1,387
|
|
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.
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
. On March 7, 2017, Stockholders approved an amendment to increase the number of shares of common stock subject to the 2009 Plan by
900,000
to an aggregated total of
2,700,000
shares of common stock. Stockholders also approved an increase in the number of shares for the directors' stock option plan of
50,000
. The Company maintains a directors’ stock option plan under which options may be issued to purchase up to an aggregate of
150,000
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, 2016
|
366,889
|
|
|
6,500
|
|
|
Stockholder approval to increase shares
|
900,000
|
|
|
50,000
|
|
|
Options granted
|
(312,020
|
)
|
|
(8,500
|
)
|
|
Options forfeited
|
53,521
|
|
|
—
|
|
|
Shares available for grant at September 30, 2017
|
1,008,390
|
|
|
48,000
|
|
|
Options granted
|
(398,749
|
)
|
|
(14,500
|
)
|
|
Options forfeited
|
86,118
|
|
|
10,000
|
|
|
Shares available for grant at September 30, 2018
|
695,759
|
|
|
43,500
|
|
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, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at beginning of year
|
1,805,443
|
|
|
$
|
8.33
|
|
|
1,602,822
|
|
|
$
|
9.51
|
|
|
Granted
|
413,249
|
|
|
2.49
|
|
|
320,520
|
|
|
4.73
|
|
|
Exercised
|
(14,332
|
)
|
|
4.75
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
(174,619
|
)
|
|
9.82
|
|
|
(117,899
|
)
|
|
14.62
|
|
|
Outstanding at end of year
|
2,029,741
|
|
|
$
|
7.04
|
|
|
1,805,443
|
|
|
$
|
8.33
|
|
|
Exercisable at end of year
|
1,349,021
|
|
|
|
|
1,260,609
|
|
|
|
|
Weighted average fair value of options granted during the year
|
$
|
0.95
|
|
|
|
|
$
|
1.82
|
|
|
|
The options outstanding at
September 30, 2018
have been segregated into three ranges for additional disclosure as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Prices
|
Options
Outstanding
at
September 30,
2018
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Options
Exercisable at
September 30,
2018
|
|
Weighted
Average
Exercise
Price
|
|
$2.18 to $4.88
|
680,427
|
|
|
8.87
|
|
$
|
3.39
|
|
|
97,343
|
|
|
$
|
4.72
|
|
|
5.00 to 9.81
|
1,104,389
|
|
|
4.84
|
|
8.20
|
|
|
1,024,813
|
|
|
8.26
|
|
|
10.00 to 15.21
|
244,925
|
|
|
4.26
|
|
11.93
|
|
|
226,865
|
|
|
12.06
|
|
|
|
2,029,741
|
|
|
|
|
|
|
1,349,021
|
|
|
|
As of
September 30, 2018
, there was
$475 thousand
of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation costs of
$359 thousand
. The cost is expected to be recognized over a weighted-average life of
1.9
years.
A summary of the status of the Company’s non-vested shares under all plans at
September 30, 2018
and for the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Non-vested shares at October 1, 2017
|
544,834
|
|
|
$
|
2.42
|
|
|
Granted
|
413,249
|
|
|
0.95
|
|
|
Vested
|
(258,938
|
)
|
|
2.47
|
|
|
Forfeited
|
(18,425
|
)
|
|
1.73
|
|
|
Non-vested shares at September 30, 2018
|
680,720
|
|
|
$
|
1.46
|
|
Stock-based compensation recorded in the year ended
September 30, 2018
was
$477 thousand
. Stock-based compensation recorded in the year ended
September 30, 2017
was
$611 thousand
. There was
no
cash received from exercises under all stock options plans and warrants for the years ended
September 30, 2018
or
2017
. There were
no
tax benefits realized for tax deductions from option exercises for the years ended
September 30, 2018
and
2017
. 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
200,000
common shares may be issued. The Stockholders approved an amendment to increase the number of shares of common stock subject to the plan from
150,000
to
200,000
at the Company’s annual meeting in March 2017. All employees who have completed
90
days of employment with the Company on the first day of each offering period and customarily work twenty hours per week or more are
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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
47,867
shares are available to be issued under the plan. There were
12,794
and
13,046
shares purchased by employees during fiscal
2018
and
2017
, respectively. The Company recorded stock compensation expense under this plan of
$8 thousand
and
$12 thousand
during fiscal
2018
and
2017
, respectively. Cash received from issuance of stock under this plan was
$27 thousand
and
$48 thousand
during fiscal
2018
and
2017
, respectively.
At
September 30, 2018
, we had
370 thousand
outstanding warrants and
2.0 million
of outstanding stock options granted under our stock option plans,
1.7 million
of which are immediately exercisable.
6. Income Taxes
Benefit for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2018
|
|
2017
|
|
Current income tax expense (benefit)
|
$
|
—
|
|
|
$
|
—
|
|
|
Current income tax expense foreign
|
$
|
101
|
|
|
$
|
17
|
|
|
Deferred income tax benefit
|
(4,433
|
)
|
|
(96
|
)
|
|
Benefit for income taxes
|
$
|
(4,332
|
)
|
|
$
|
(79
|
)
|
U.S. and foreign components of loss before income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2018
|
|
2017
|
|
U.S.
|
$
|
(16,934
|
)
|
|
$
|
(5,225
|
)
|
|
Foreign
|
436
|
|
|
107
|
|
|
Loss before income taxes
|
$
|
(16,498
|
)
|
|
$
|
(5,118
|
)
|
The reconciliation of income tax expense (benefit) computed at the appropriate country specific rate to income tax benefit is as follows (in thousands):
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2018
|
|
2017
|
|
Income tax benefit at statutory rate
|
$
|
(4,111
|
)
|
|
$
|
(1,800
|
)
|
|
State income tax benefit
|
(823
|
)
|
|
(192
|
)
|
|
Foreign tax activity
|
101
|
|
|
41
|
|
|
R&D tax credit expiration
|
—
|
|
|
—
|
|
|
Permanent differences, net
|
771
|
|
|
469
|
|
|
Adjustment of temporary differences to income tax returns
|
—
|
|
|
—
|
|
|
Change in valuation allowance
|
1,285
|
|
|
1,403
|
|
|
Tax rate change
|
(1,545
|
)
|
|
—
|
|
|
Other
|
(10
|
)
|
|
—
|
|
|
Income tax benefit
|
$
|
(4,332
|
)
|
|
$
|
(79
|
)
|
The significant components of the deferred tax accounts recognized for financial reporting purposes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss and other carryforwards
|
$
|
24,262
|
|
|
$
|
35,529
|
|
|
Common stock options
|
919
|
|
|
1,246
|
|
|
Unearned revenue
|
510
|
|
|
520
|
|
|
Other
|
369
|
|
|
650
|
|
|
Total deferred tax assets
|
26,060
|
|
|
37,945
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Other
|
(103
|
)
|
|
(146
|
)
|
|
Total deferred tax liabilities
|
(103
|
)
|
|
(146
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
25,957
|
|
|
37,799
|
|
|
Valuation allowance
|
(25,881
|
)
|
|
(37,702
|
)
|
|
Equity gains on investment in Mediasite KK
|
—
|
|
|
(916
|
)
|
|
Customer relationships
|
—
|
|
|
(570
|
)
|
|
Goodwill amortization
|
—
|
|
|
(2,940
|
)
|
|
Net deferred tax asset (liability) for goodwill and intangible assets amortization
|
$
|
76
|
|
|
$
|
(4,329
|
)
|
The Company has a
$76 thousand
and
$97 thousand
deferred tax asset at
September 30, 2018
and
2017
, respectively, recorded within the prepaid expenses and other current assets and other long-term assets lines on the consolidated balance sheet and is primarily related to net operating losses of MSKK.
At
September 30, 2018
, the Company had net operating loss carryforwards of approximately
$102 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
2038
. For state tax purposes, the carryforwards expire in varying amounts between
2018
and
2038
. 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
2018
and
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
fiscal
2017
, 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, 2018
, 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. At
September 30, 2018
, unremitted earnings of
$1.0 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.
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
$0 thousand
at
September 30, 2018
and
$4.4 million
at
September 30, 2017
, respectively. The remaining balance of the deferred tax liability related to goodwill was fully written off as of
September 30, 2018
as a result of the impairment. 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.
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, 2018
or
September 30, 2017
and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the years ended
September 30, 2018
or
2017
.
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.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act, which is generally effective for tax years beginning on January 1, 2018, makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum tax (AMT); (3) bonus depreciation that will allow for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction; (6) the creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries and imposing a one-time repatriation tax on deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the Transition Tax); (8) a new provision designed to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); and (9) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017.
Shortly after enactment, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") which provided US GAAP guidance on the accounting for the Act's impact at December 31, 2017. A reporting entity may recognize provisional amounts, where the necessary information is not available, prepared or analyzed (including computations) in reasonable detail or where additional guidance is needed from the taxing authority to determine the appropriate application of the Act. A reporting entity's provisional impact analysis may be adjusted within the 12-month measurement period provided for under SAB 118.
The reduction in the corporate tax rate to 21 percent due to the Tax Act is effective January 1, 2018. Consequently, the Company has recorded a decrease related to the net deferred tax assets of approximately
$1.5 million
with a corresponding net adjustment to the valuation allowance of approximately
$1.5 million
for the year ended
September 30, 2018
.
7. Savings Plan
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
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
$365 thousand
and
$321 thousand
during the years ended
September 30, 2018
and
2017
, respectively. The Company made
no
additional discretionary contributions during
2018
and
2017
.
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. For purposes of the test, goodwill on the Company’s books is evaluated within
three
separate reporting units.
The fair values of the reporting units were initially measured as of July 1,
2018
, in accordance with annual testing procedures. Goodwill related to all
three
reporting units, Sonic Foundry (Mediasite), Sonic Foundry International and Mediasite KK, was found to be impaired. The Company recognized an impairment loss of
$10.4 million
, or the remaining balance of goodwill, as of July 1,
2018
. This non-cash loss was primarily due to the fall in the Company's stock price and the decrease of the Company's market capitalization as well as past performance, which was deemed to have negatively impacted all
three
of the Company's reporting units. As a consequence, management forecasts were revised and additional risk factors were applied. The fair value of the
three
reporting units was estimated using a combination of market comparables (level 1 inputs) and expected present value of future cash flows (level 3 inputs).
In fiscal
2017
, the fair values of the reporting units were measured as of July 1,
2017
, in accordance with annual testing procedures, and were reevaluated at the end of Q4
2017
as a result of the decline in the Company's stock price during the quarter. Goodwill related to the Sonic Foundry (Mediasite) and Sonic Foundry International reporting units was found not to be impaired, however, the Company recognized an impairment loss of
$600 thousand
for goodwill related to the Mediasite KK reporting unit as of
September 30, 2017
. This non-cash loss was primarily due to delays in expected growth related to partner relationships in Japan, resulting in revenues and operating cash flows being lower than expected for the reporting unit in fiscal
2017
. As a consequence, management forecasts were revised and additional risk factors were applied. The fair value of the Mediasite KK reporting unit was estimated using a combination of market comparables (level 1 inputs) and expected present value of future cash flows (level 3 inputs). The Sonic Foundry (Mediasite) reporting unit, to which
$7.6 million
of goodwill is allocated, had a negative carrying amount on
September 30, 2017
. This reporting unit is considered to be an operating segment on its own and is not part of any other reportable segment.
See
Fair Value of Financial Instruments
section in Note 1 for additional discussion regarding fair value measurement of reporting units.
The changes in the carrying amount of goodwill for the years ended
September 30, 2018
and
2017
, respectively, are as follows:
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
$
|
11,310
|
|
|
Accumulated impairment losses
|
(600
|
)
|
|
Foreign currency translation adjustment
|
(255
|
)
|
|
Balance as of September 30, 2017
|
10,455
|
|
|
Accumulated impairment losses
|
(10,423
|
)
|
|
Foreign currency translation adjustment
|
(32
|
)
|
|
Balance as of September 30, 2018
|
$
|
—
|
|
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 year ended
September 30, 2018
, it was determined that changes in circumstances were present, primarily the decline in the Company's market capitalization during the fiscal year and past performance. For the year ended
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
September 30, 2018
, the Company determined that intangible assets, consisting of customer relationships and product rights, were impaired and recognized an impairment charge of
$1.4 million
. For the year ended
September 30, 2017
, it was determined that changes in circumstances were present, primarily the decline in the Company's market capitalization during the fiscal year. However, after performing analysis of undiscounted cash flows attributable to the Company's long-lived assets along with other relevant factors, such as the continued use of the assets, it was determined that there was
no
impairment of long-lived and intangible assets other than goodwill. Key assumptions utilized in the analysis of undiscounted cash flows for each asset or asset group being tested included 1) whether cash flows were attributable solely to the asset or group, or to an entire reporting unit; and 2) the useful lives of the asset or asset group. Forecasts used in the analysis were also consistent with those used in determining fair value of reporting units during goodwill impairment testing.
The following tables present details of the Company’s total intangible assets that are being amortized at
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Life
(years)
|
|
Gross, Net of Impairment
|
|
Accumulated
Amortization at
September 30,
2018
|
|
Balance at September 30,
2018
|
|
Amortizable:
|
|
|
|
|
|
|
|
|
Customer relationships
|
10
|
|
$
|
1,256
|
|
|
$
|
1,256
|
|
|
$
|
—
|
|
|
Software development costs
|
3
|
|
533
|
|
|
533
|
|
|
—
|
|
|
Product rights
|
6
|
|
534
|
|
|
534
|
|
|
—
|
|
|
Total
|
|
|
$
|
2,323
|
|
|
$
|
2,323
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Life
(years)
|
|
Gross
|
|
Accumulated
Amortization at
September 30,
2017
|
|
Balance at
September 30,
2017
|
|
Amortizable:
|
|
|
|
|
|
|
|
|
Customer relationships
|
10
|
|
$
|
2,495
|
|
|
$
|
990
|
|
|
$
|
1,505
|
|
|
Software development costs
|
3
|
|
533
|
|
|
533
|
|
|
—
|
|
|
Product rights
|
6
|
|
672
|
|
|
411
|
|
|
261
|
|
|
Total
|
|
|
$
|
3,700
|
|
|
$
|
1,934
|
|
|
$
|
1,766
|
|
9. Related-Party Transactions
The Company incurred fees of
$212 thousand
and
$143 thousand
during the years ended
September 30, 2018
and
2017
, 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
$60 thousand
and
$55 thousand
at
September 30, 2018
and
2017
, respectively.
As of
September 30, 2018
and
2017
, the Company had a loan outstanding to an executive totaling
$26 thousand
. The loan is collateralized by Company stock.
On January 19, 2018, the Company and a director entered into a Subscription Agreement (the “Subscription Agreement”). Pursuant to the Subscription Agreement, (i) on January 19, 2018, the director purchased a
10.75%
Convertible Secured Subordinated Promissory Note for
$500,000
in cash; and (ii) on February 15, 2018, the director purchased an additional
10.75%
Convertible Secured Promissory Note for
$500,000
in cash (each, a “Note”, and collectively, the “Notes”).
On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply with rules and regulations of NASDAQ, the Notes were automatically converted into
1,902
shares of Series A Preferred stock. The
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
number of shares was determined by dividing the total principal and accrued interest due on each Note by
$542.13
(the “Conversion Rate”).
On April 16, 2018, the Company issued
232,558
shares of common stock to an affiliated party. The shares were issued at a price of
$2.15
per share, representing the closing price on April 13, 2018. On April 16, 2018, the closing price of the Company’s common stock was
$2.18
per share. The affiliated party also received warrants to purchase
232,558
shares of common stock at an exercise price of
$2.50
per share, respectively, which expire on April 16, 2025.
See Note 14 - Subsequent Events for additional information on subsequent transactions with a director of the Company.
Both the director of the Company and the affiliated party beneficially own more than 5% of the Company's common stock.
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, 2018
.
The following summarizes revenue by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
2018
|
|
2017
|
|
United States
|
$
|
21,152
|
|
|
$
|
21,476
|
|
|
Europe and Middle East
|
4,482
|
|
|
4,720
|
|
|
Asia
|
7,418
|
|
|
8,267
|
|
|
Other
|
1,492
|
|
|
1,537
|
|
|
Total
|
$
|
34,544
|
|
|
$
|
36,000
|
|
11. Customer Concentration
In the fiscal year ended
September 30, 2018
and
2017
, two distributors represented
17%
and
26%
of total revenue, respectively. At
September 30, 2018
and
2017
, these two distributors represented
28%
and
23%
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, 2018
, 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, 2018
and
2017
. 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, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data
|
|
(in thousands except per share data)
|
Q4-’18
|
|
Q3-’18
|
|
Q2-’18
|
|
Q1-’18
|
|
Q4-’17
|
|
Q3-’17
|
|
Q2-’17
|
|
Q1-’17
|
|
Revenue
|
$
|
8,490
|
|
|
$
|
8,699
|
|
|
$
|
8,460
|
|
|
$
|
8,895
|
|
|
$
|
8,300
|
|
|
$
|
9,833
|
|
|
$
|
8,560
|
|
|
$
|
9,307
|
|
|
Gross margin
|
6,095
|
|
|
6,395
|
|
|
5,929
|
|
|
6,470
|
|
|
6,113
|
|
|
7,247
|
|
|
6,064
|
|
|
6,709
|
|
|
Loss from operations
|
(12,900
|
)
|
|
(914
|
)
|
|
(1,259
|
)
|
|
(966
|
)
|
|
(1,411
|
)
|
|
(371
|
)
|
|
(1,274
|
)
|
|
(1,502
|
)
|
|
Net income (loss)
|
(10,018
|
)
|
|
(1,020
|
)
|
|
(1,449
|
)
|
|
320
|
|
|
(1,585
|
)
|
|
(489
|
)
|
|
(1,456
|
)
|
|
(1,509
|
)
|
|
Basic and diluted net income (loss) per share
|
$
|
(2.01
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.37
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.34
|
)
|
14. Subsequent Events
In connection with the Loan and Security Agreement with Partners for Growth V, L.P. entered into on May 11, 2018, Tranche 2 of the Term Loan, in the amount of
$500,000
, was disbursed on November 8, 2018.
On November 15, 2018,
718
shares of Preferred Stock, Series A were automatically converted by the Company into
169,741
shares of common stock. The amount of shares converted represents all preferred shares issued on November 9, 2017.
Initial Notes of the February 28, 2019 Note Purchase Agreement
On January 4, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "Promissory Note") pursuant to which the director purchased a
9.25%
Unsecured Promissory Note for
$1,000,000
in cash.
Interest accrued and outstanding principal on the Promissory Note is due and payable on January 4, 2020.
The Promissory Note may be prepaid at any time without penalty.
The Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
On January 31, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "January 31, 2019 Promissory Note") pursuant to which the director purchased a
9.25%
Unsecured Promissory Note for
$1,000,000
in cash.
Interest accrued and outstanding principal on the January 31, 2019 Promissory Note is due and payable on January 31, 2020.
The January 31, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to the director, with each share valued at
$1.30
per share.
The January 31, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
On February 14, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "February 14, 2019 Promissory Note") pursuant to which the director purchased a
9.25%
Unsecured Promissory Note for
$1,000,000
in cash.
Interest accrued and outstanding principal on the February 14, 2019 Promissory Note is due and payable on February 14, 2020.
The February 14, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to the director, with each share valued at
$1.30
per share.
The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
February 28, 2019 Note Purchase Agreement
On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Mr. Mark Burish ("Mr. Burish").
The Note Purchase Agreement provides for subordinated secured promissory notes (the "Subordinated Promissory Notes") in an aggregate original principal amount of up to
$5,000,000
. Mr. Burish will acquire from the Company (a) on the initial closing date, the notes in an aggregate principal amount of
$3,000,000
(the "Initial Notes") and (b) two additional tranches, each in the amount of
$1,000,000
and payable at any time prior to the first anniversary of the Agreement (the "Additional Notes" and together with the Initial Notes, collectively, the "Purchase Price"). The Initial Notes were previously disbursed in January and February of 2019, as detailed above (the Promissory Note, the January 31st, 2019 Promissory Note, and the February 14, 2019 Promissory Note, collectively referred to as the "Initial Notes").
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018
The Subordinated Promissory Notes accrue interest at the variable per annum rate equal to the Prime Rate (as defined) plus four percent (
4.00%
). The outstanding principal balance of the Subordinated Promissory Notes, plus all unpaid accrued interest, plus all outstanding and unpaid obligations, shall be due and payable on February 28, 2024 (the "Maturity Date"). Principal installments of
$100,000
are payable on the last day of each month end beginning with the month ending August 31, 2020, and continuing through the Maturity Date.
The principal of the Subordinated Promissory Notes may be prepaid at any time in whole or in part, by payment of an amount equal to the unpaid principal balance to be pre-paid, plus all unpaid interest accrued thereon through the prepayment date, plus all outstanding and unpaid fees and expenses payable through the prepayment date.
At each anniversary of the Closing, an administration fee will be payable to Mr. Burish equal to 0.5% of the purchase price less principal payments made.
The Subordinated Promissory Notes are collateralized by substantially all the Company's assets, including intellectual property, subject to the rights of Partners for Growth V, L.P., which shall be senior to the Subordinated Promissory Notes.
The Note Purchase Agreement requires compliance with the following financial covenants: (i) Minimum Coverage Ratio, which requires, as of the last day of each month on or after the closing date, the Minimum Coverage Ratio (as defined) to be equal to or greater than (x)
0.7
:1.00 for the December through May calendar months, (y)
0.9
:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), as of the last day of any calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be less than
$13,000,000
.
The Note Purchase Agreement dated February 28, 2019 is subordinated to the existing PFG loan.
The Company used the proceeds from the notes issued under the Note Purchase Agreement to replace the revolving line of credit with Silicon Valley Bank, which matured on January 31, 2019.
February 28, 2019 Warrant
Coincident with execution of the Note Purchase Agreement, the Company entered into a Warrant Agreement ("Warrant") with Mr. Burish. Pursuant to the terms of the Warrant, the Company issued to Mr. Burish a warrant to purchase up to
728,155
shares of common stock of the Company at an exercise price of
$1.18
per share, subject to certain adjustments.
Partners for Growth V, L.P.
On March 11, 2019, Sonic Foundry, Inc. entered into a Consent, Waiver & Modification to the Loan and Security Agreement dated May 11, 2018 (the "Modification") with Partners for Growth V, L.P. ("PFG"). Under the Modification: PFG waived the Company's default on the Minimum EBITDA financial covenant for the quarterly reporting period ending December 31, 2018; modified the existing financial covenants to be as follows: (i) Minimum Coverage Ratio (as defined), which requires, as of the last day of each month on or after the closing date, to be equal to or greater than (x)
0.7
: 1.00 for the December through May calendar months, (y)
0.9
:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), which requires, as of the last day of each calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be less than
$13,000,000
; and modified the negative covenants to be as follows: the Company (x) shall not cause or permit (a) Japanese subsidiary indebtedness under its revolving line of credit facility to exceed at any time
$1,000,000
outstanding, or (b) aggregate subsidiary indebtedness to exceed
$1,200,000
at any time.
Under the Modification, the Company is required to draw the next tranche of $1,000,000 in proceeds on the Note Purchase Agreement (detailed above) on or before March 31, 2019 as well as the final tranche of $1,000,000 in proceeds on or before April 30, 2019.
The Modification acknowledges that Silicon Valley Bank, the named "Senior Lender" in the May 11, 2018 Loan Agreement has been repaid and the related senior loan documents terminated.
The existing terms of the PFG loan in terms of amortization, interest rate, payment schedule and maturity date are unchanged.