Notes to Condensed Consolidated Financial Statements
December 31, 2018
(Unaudited)
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1.
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Basis of Presentation and Significant Accounting Policies
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Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Operating results for the
three
month period ended
December 31, 2018
are not necessarily indicative of the results that might be expected for the year ending
September 30, 2019
.
Financing Receivables
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
at
December 31, 2018
and
September 30, 2018
.
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
$292 thousand
and
$281 thousand
of receivables outstanding for long-term customer support contracts as of
December 31, 2018
and
September 30, 2018
, 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 receivable 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. As a result of the circumstances described, the entire allowance for losses on financing receivables of
$526 thousand
is considered attributable to this class of customer as of
December 31, 2018
.
Financing receivables consisted of the following (in thousands) as of:
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December 31, 2018
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September 30, 2018
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Customer support contracts, current and long-term, gross
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$
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292
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$
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281
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Product receivables, gross
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526
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526
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Allowance for losses on financing receivables
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(526
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)
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(526
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$
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292
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$
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281
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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 consists of the following (in thousands):
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December 31, 2018
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September 30, 2018
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Investment in sales-type lease
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$
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416
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$
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399
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$
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416
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$
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399
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Inventory Valuation
Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.
Inventory consists of the following (in thousands):
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December 31,
2018
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September 30, 2018
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Raw materials and supplies
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$
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433
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$
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358
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Finished goods
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977
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669
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$
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1,410
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$
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1,027
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Fair Value of Financial Instruments
The Company’s long-lived assets are nonfinancial assets that were acquired either as part of a business combination, individually or with a group of other assets. These nonfinancial assets were initially measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Fair value measurements of reporting units are estimated using an income approach involving discounted or undiscounted cash flow models 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 associated with the Company’s 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 Recurring Basis
The initial fair values of PFG debt and warrant debt (see Note 4) were based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). The 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):
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December 31, 2018
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Level 1
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Level 2
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Level 3
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Total Fair Value
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Derivative liability
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$
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—
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$
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2
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$
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—
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$
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2
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September 30, 2018
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Level 1
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Level 2
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Level 3
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Total Fair Value
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Derivative liability
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$
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—
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$
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14
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$
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—
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$
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14
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The gain or loss related to the fair value remeasurement on the derivative liability is included in the other income (expense) line on the Condensed Consolidated Statement of Operations.
Financial Liabilities Measured at Fair Value on a Nonrecurring Basis
Included below is a summary of the changes in our Level 3 fair value measurements (in thousands):
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PFG V Debt, Net of Discount
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Warrant Debt, PFG V
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Balance as of September 30, 2018
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$
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1,905
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$
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103
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Activity during the period:
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Disbursement of Tranche 2, net of discount
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471
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26
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Payments to PFG
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(83
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)
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—
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Amortization and accretion expense
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24
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4
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Balance as of December 31, 2018
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$
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2,317
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$
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133
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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, and capital lease obligations. The book values of cash and cash equivalents, accounts receivable, investment in sales-type lease, and accounts payable are considered to be representative of their respective fair values. 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
When legal proceedings are brought or claims are made against the Company and the outcome is uncertain, we are required to determine whether it is probable that an asset has been impaired or a liability has been incurred. If such impairment or liability is probable and the amount of loss can be reasonably estimated, the loss must be charged to earnings.
When it is considered probable that a loss has been incurred, but the amount of loss cannot be estimated, disclosure but not accrual of the probable loss is required. Disclosure of a loss contingency is also required when it is reasonably possible, but not probable, that a loss has been incurred and there is a possibility the loss could be material.
No legal contingencies were recorded or were required to be disclosed for the
three
months ended
December 31, 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:
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Three Months Ended
December 31,
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2018
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2017
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Expected life
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4.3 years
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4.4 years
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Risk-free interest rate
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2.93%
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1.79%
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Expected volatility
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60.19%
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63.49%
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Expected forfeiture rate
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13.51%
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12.53%
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Expected exercise factor
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1.2
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1.16
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Expected dividend yield
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0%
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0%
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A summary of option activity at
December 31, 2018
and changes during the
three
months then ended is presented below:
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Options
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Weighted-
Average
Exercise Price
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Weighted-
Average
Remaining
Contractual
Period in
Years
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Outstanding at October 1, 2018
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2,029,741
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$
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7.04
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5.0
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Granted
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197,850
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0.67
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9.8
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Exercised
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—
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—
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0.0
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Forfeited
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(52,032
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)
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4.50
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4.6
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Outstanding at December 31, 2018
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2,175,559
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6.52
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6.1
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Exercisable at December 31, 2018
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1,469,416
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4.8
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A summary of the status of the Company’s non-vested shares and changes during the
three
month period ended
December 31, 2018
is presented below:
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2018
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Non-vested Shares
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Shares
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Weighted-Average
Grant Date Fair
Value
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Non-vested at October 1, 2018
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680,720
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$
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1.46
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Granted
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197,850
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2.24
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Vested
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(147,842
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2.34
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Forfeited
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(24,585
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)
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1.31
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Non-vested at December 31, 2018
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706,143
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$
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0.90
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The weighted average grant date fair value of options granted during the
three
months ended
December 31, 2018
was
$2.18
. As of
December 31, 2018
, there was
$332 thousand
of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of
$250 thousand
. The cost is expected to be recognized over a weighted-average remaining life of
1.9
years.
Stock-based compensation recorded in the
three
months ended
December 31, 2018
was
$162 thousand
. Stock-based compensation recorded in the
three
months ended
December 31, 2017
was
$244 thousand
. There was
no
cash received from exercises under all stock option plans and warrants in either of the
three
months ended
December 31, 2018
or
2017
. There were no tax benefits realized for tax deductions from option exercises in either of the
three
month periods ended
December 31, 2018
or
2017
. The Company currently expects to satisfy share-based awards with registered shares available to be issued.
The Company also has an Employee Stock Purchase Plan (Purchase Plan) under which an aggregate of
200,000
common shares may be issued. A total of
39,514
shares are available to be issued under the plan, which includes
8,353
shares issued on January 4, 2019. The Company recorded stock compensation expense under this plan of
$1 thousand
for the
three
months ended
December 31, 2018
and
2017
, respectively.
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
2,012
and
2,678
shares of Preferred Stock, Series A were issued and outstanding as of
December 31, 2018
and
September 30, 2018
, respectively.
On November 7, 2017, the Company entered into an Agreement in which Mark Burish's right to convert shares of Series A Preferred Stock into common stock is waived until shareholder approval has been obtained. The right to vote said shares of Series A Preferred Stock to approve the issuance of the Series A Preferred Stock has also been waived.
On November 9, 2017, the Company sold to Mark Burish
$500 thousand
of shares of Preferred Stock, Series A, at
$762.85
per share. Mark Burish is a director of the Company and beneficially owns more than
5%
of the Company’s common stock. These Agreements were approved by the Special Committee of Disinterested Directors.
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, including related dividends.
On November 15, 2018,
718
shares of Preferred Stock, Series A were automatically converted by the Company into
169,741
shares of common stock. The amount of shares converted represents all preferred shares issued on November 9, 2017, including related dividends.
Per share computation
Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income (loss) attributable to common stockholders. The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:
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Three Months Ended
December 31,
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2018
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2017
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Denominator for basic net income (loss) per share - weighted average common shares
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5,100,684
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4,458,075
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Effect of dilutive options (treasury method)
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—
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54,747
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Denominator for diluted net income (loss) per share - adjusted weighted average common shares
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5,100,684
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4,512,822
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Options, warrants and convertible shares outstanding during each period, but not included in the computation of diluted net income (loss) per share because they are antidilutive
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2,545,719
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2,348,585
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Liquidity
At
December 31, 2018
, approximately
$1.4 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 Burish for $5.0 million in cash.
See Note 7 - 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 and there are no assurances that these will be on terms acceptable to the Company.
Assets recognized from the costs to obtain a contract with a customer
Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have determined to be the contract period, typically around 12 months. Assets recorded are included in current assets and other long-term assets. Amortization expense is recorded in sales and marketing expense within our condensed consolidated statement of operations. We calculate a quarterly average percentage based on actual commissions incurred on billings during the same period and apply that percentage to the respective periods’ unearned revenues to determine the capitalized commission amount by contract.
Revenue recognition - ASC 606
We generate revenues in the form of hardware sales of our Mediasite recorder and Mediasite related products, such as our server software and other software licenses and related customer support and services fees, including hosting, installations and training. Software license revenues include fees from sales of perpetual and term licenses. Maintenance and services revenues primarily consist of fees for maintenance services (including support and unspecified upgrades and enhancements when and if they are available), hosting, installation, training and other professional services.
In accordance with ASC Topic 606,
Revenue from Contracts with Customers
("ASC 606"), revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. To achieve this core principle, we apply the following five steps:
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1.
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Identify the contract with a customer.
A contract with a customer exists when: (1) we and the customer have approved the contract and both parties are committed to perform their respective obligations; (2) we can identify each party’s rights regarding the products or services to be transferred; (3) we can identify the payment terms for the products or services to be transferred; (4) the contract has commercial substance as our future cash flows are expected to change; and (5) it is probable that we will collect substantially all of the consideration to which we are entitled in exchange for the products or services. Any subsequent contract modifications are analyzed to determine the treatment of the contract modification as a separate contract, prospectively or through a cumulative catch-up adjustment.
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2.
|
Identify the performance obligations in the contract.
P
erformance obligations are promises to transfer a good or service to the customer. Performance obligations may be each individual promise in a contract, or may be groups of promises within a contract that significantly affect one another. To the extent a contract includes multiple promises, we must apply judgment to determine whether promises are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promises are accounted for as a combined performance obligation.
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3.
|
Determine the transaction price.
The transaction price is the total amount of consideration to which we expect to be entitled in exchange for transferring promised products and services to a customer.
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4.
|
Allocate the transaction price to performance obligations in the contract.
The allocation of the transaction price to performance obligations is generally done in proportion to their standalone selling prices (“SSP”). SSP is the price that
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we would sell a distinct product or service separately to a customer and is determined at contract inception. At times, there will be observable selling prices for our goods and services, such as for our mortgage servicing software platform. If SSP is not available through the analysis of observable inputs, this step is subject to significant judgment and additional analysis so that we can establish an estimated SSP. The estimated SSP considers all reasonably available information, including market conditions, demands, trends, our specific factors and information about the customer or class of customers. The adjusted market approach is generally used for new products or solutions or when observable inputs are not available or limited
.
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5.
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Recognize revenues when or as the company satisfies a performance obligation.
We recognize revenues when, or as, distinct performance obligations are satisfied by transferring control of the product or service to the customer. A performance obligation is considered transferred when the customer obtains control of the product or service. Transfer of control is typically evaluated from the customer's perspective. At contract inception, we determine whether we satisfy the performance obligation over time or at a point in time.Revenue is recognized when performance obligations are satisfied.
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Our contract payment terms are typically net 30 days. We assess collectability based on a number of factors including collection history and creditworthiness of the customer, and we may mitigate exposures to credit risk by requiring payments in advance. If we determine that collectability related to a contract is not probable, we may not record revenue until collectability becomes probable at a later date.
Our revenues are recorded based on the transaction price excluding amounts collected on behalf of third parties such as sales taxes, which are collected on behalf of and remitted to governmental authorities.
Nature of products and services
Certain software licenses are sold either on-premises or through term-based hosting agreements. These hosting arrangements provide customers with the same product functionality and differ mainly in the duration over which the customer benefits from the software. We deliver our software licenses electronically. Electronic delivery occurs when we provide the customer with access to the software and license key via a secure portal. Revenue from on-premises software licenses is generally recognized upfront at the point in time when the software is made available to the customer.
Our contracts with customers for on-premises software licenses include maintenance services and may also include training and/or professional services. Maintenance services agreements consist of fees for providing software updates on an if and when available basis and for providing technical support for software products for a specified term. We believe that our software updates and technical support each have the same pattern of transfer to the customer and are substantially the same. Therefore, we consider these updates and technical support to be a single distinct performance obligation. Revenues allocated to maintenance services are recognized ratably as the maintenance services are provided. Revenues related to training services are billed on a fixed fee basis and are recognized as the services are delivered. Payments received in advance of services performed are deferred and recognized when the related services are performed. Revenues related to professional services are billed on a time and materials basis and are recognized as the services are performed.
We also provide cloud-based subscriptions, which allow customers to access our software during a contractual period without taking possession of the software. We recognize revenue related to these cloud-based subscriptions ratably over the life of the subscription agreement beginning when the customer first has access to the software.
Judgments and estimates
Our contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately from one another sometimes requires judgment.
Judgment is required to determine standalone selling prices (“SSP”) for each distinct performance obligation. We typically have more than one SSP for each of our products and services based on customer stratification, which is based on the size of the customer, their geographic region and market segment. We use other comparable software license sales to determine SSPs for perpetual software licenses. For our cloud-based subscriptions and for maintenance services, training and professional services, SSPs are generally observable using standalone sales and/or renewals. Our on-premises term-based software licenses generally do not have directly observable inputs for determining SSP. Therefore, we determine SSP using other observable inputs including customer buying patterns, renewal rates, cumulative spend comparisons and other industry data.
We evaluate contracts that include options to purchase additional goods or services to determine whether or not the options give rise to a separate performance obligation that is material. If we determine the options are material, the revenue allocated to such options is not recognized until the option is exercised or the option expires.
Our revenue recognition accounting policy for ASC 605 is included in our Annual Report on Form 10-K for the year ended
September 30, 2018
, which was filed with the SEC on March 15, 2019. We applied the revenue recognition accounting policy for ASC 605 to our disclosures in Note 1, which include amounts presented for 2018.
Recent accounting pronouncements
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 June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", ("ASU 2016-13"). ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In 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 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 August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging Topic 815): Targeted Improvements to Accounting for Hedging Activities", ("ASU 2017-12"). This update was issued to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting", ("ASU 2018-07"). The standard addresses aspects of the accounting for nonemployee share-based payment transactions. The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently reviewing this guidance and its impact to the 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 adoption 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 August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", ("ASU 2018-15"). ASU 2018-15 align the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in ASU 2018-15 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606", ("ASU 2018-18"). ASU 2018-13 provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. The amendments in ASU 2018-18 are effective for all public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.
In December 2018, the FASB issued ASU 2018-20, "Leases (Topic 842): Narrow - Scope Improvements for Lessors", ("ASU 2018-20"). ASU 2018-20 provides amendments related to sales taxes and other similar taxes collected from lessees, lessor costs for lessor entities that have lease contracts that either require lessees to pay lessor costs directly to a third party or require lessees to reimburse lessors for costs paid by lessors directly to third parties and finally, the recognition of variable payments for contracts with lease and nonlease components. The amendments in ASU 2018-20 are effective for entities that have not adopted Topic 842 before the issuance of this Update are the same as the effective date and transition requirements in Update 2016-02. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.
In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements, ("ASU 2019-01"). ASU 2019-01 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing essential information about leasing transactions. The amendments in ASU 2019-01 amend Topic 842 and are effective date of those amendments is for fiscal years beginning December 15, 2019, and interim periods within those fiscal years for public business entities. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.
Accounting standards that have been issued but are not yet effective by the FASB or other standards-setting bodies that do not require adoption until a future date, which are not discussed above, are not expected to have a material impact on the Company’s financial statements upon adoption.
Recently adopted accounting pronouncements
Revenue Recognition (ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"))
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 related to revenue recognition and later issued additional ASUs including ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-14, all of which clarified certain aspects of ASU 2014-09, and together with ASU 2014-09, which we refer to collectively as the new revenue recognition standard.
On October 1, 2018, we adopted the new revenue recognition standard using the modified retrospective method. Under this method, we recognized the cumulative effect of applying the new revenue recognition standard to existing revenue contracts that were active as of the adoption date as an adjustment to the opening balance of accumulated deficit. Upon adoption, we recorded an adjustment of $
1.7 million
to our accumulated deficit. See Note 6 for additional detail.
The new revenue recognition standard materially impacts the timing of revenue recognition related to our on-premises term license agreements. Prior to our adoption of the new revenue recognition standard, we historically recognized revenue related to on-premises term license agreements ratably over the term of the licensing agreement. Under the new revenue recognition standard, revenue allocable to the license portion of the arrangement is recognized upon delivery of the license. Maintenance revenues related to on-premises term license agreements continue to be recognized ratably over the term of the licensing agreement. Under the new revenue recognition standard, we allocate total transaction price to performance obligations based on estimated standalone selling prices, which impacts the timing of revenue recognition depending on when each performance obligation is recognized. These impacts to the timing of revenue recognition also affect our deferred revenue balances.
The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our sales commissions expense. Prior to our adoption of the new revenue recognition standard, we
recognized sales commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of sales commissions expense each period. Upon adoption, we reduced our accumulated deficit by
$692 thousand
and recognized an offsetting asset for deferred sales commissions related to contracts that were not completed contracts prior to October 1, 2018.
For further discussion regarding the impacts of adopting the new revenue recognition standard, see Note 6.
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, and was adopted by the Company as of October 1, 2018. The implementation of this standard did not result in a material impact to its consolidated financial statements.
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, and was adopted by the Company as of October 1, 2018. The implementation of this standard did not result in a material impact to its consolidated 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, and was adopted by the Company as of October 1, 2018. The implementation of this standard did not result in a material impact to its consolidated financial statements.
2. Related Party Transactions
During the
three
months ended
December 31, 2018
, the Company incurred fees of
$46 thousand
to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of
$51 thousand
during the
three
months ended
December 31, 2017
. The Company had accrued liabilities for unbilled services of
$30 thousand
and
$60 thousand
at
December 31, 2018
and
September 30, 2018
, respectively, to the same law firm.
As of
December 31, 2018
and
September 30, 2018
, the Company had a loan outstanding to an executive totaling
$26 thousand
. The loan is collateralized by Company stock.
On November 7, 2017, the Company entered into an Agreement with Mr. Burish such that Mr. Burish waived his right to convert any of his holdings of Series A Preferred into common stock until shareholder approval has been obtained, and also to waive his right to vote his shares of Series A Preferred Stock to approve the issuance of the Series A Preferred Stock.
On November 9, 2017, the Company sold to Mark Burish
$500 thousand
of shares of Preferred Stock, Series A, at
$762.85
per share. Mark Burish is the Chair of the Company and beneficially owns more than
5%
of the Company’s common stock ("Burish"). All sales of Preferred Stock, Series A, were approved by a unanimous vote of the Special Committee of Independent and Disinterested Directors ("Disinterested Directors") finding the terms of the transaction fair and in the best interest of the Company and its stockholders.
The Disinterested Directors also approved the transactions between the Company and Burish whereby Burish entered into a Subscription Agreement (the “Subscription Agreement”), pursuant to which, (i) on January 19, 2018, Burish purchased a
10.75%
Convertible Secured Subordinated Promissory Note for
$500,000
in cash; and (ii) on February 15, 2018, Burish purchased an additional
10.75%
Convertible Secured Promissory Note for
$500,000
in cash (each, a “Note”, and collectively, the “Notes”).
On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply with rules and regulations of Nasdaq, the Notes were automatically converted into
1,902
shares of Series A Preferred stock. The
number of shares was determined by dividing the total principal and accrued interest due on each Note by
$542.13
(the “Conversion Rate”).
On April 16, 2018, the Company issued
232,558
shares of common stock to an affiliated party. The shares were issued at a 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.
On November 15, 2018,
718
shares of Preferred Stock, Series A were automatically converted by the Company into
169,741
shares of common stock. The amount of shares converted represents all preferred shares issued on November 9, 2017, including related dividends.
See Note 7 - Subsequent Events for additional information on subsequent transactions with the Burish.
Burish beneficially owns more than 5% of the Company’s common stock. The affiliated party beneficially owns more than 5% of the Company's common stock. All transactions with Burish and the affiliated party were approved by the Disinterested Directors.
3. Commitments
Inventory Purchase Commitments
The Company enters into open purchase obligations on a regular basis that represent commitments for the supply of Mediasite product. At
December 31, 2018
, the Company has an obligation to purchase
$1.2 million
of Mediasite product, which is not recorded on the Company’s Condensed Consolidated Balance Sheet.
Operating Leases
In November 2011, the Company occupied office space related to a lease agreement entered into on June 28, 2011. The initial 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
December 31, 2018
and
September 30, 2018
, the unamortized balance was
zero
and
$7 thousand
, respectively.
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
December 31, 2018
and
September 30, 2018
, the unamortized balance was
$69 thousand
and
$75 thousand
, respectively.
4. 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
7.50%
. 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 Dollars (
$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
December 31, 2018
, there was no balance outstanding on the term loan with Silicon Valley Bank. There was a balance of
$879 thousand
outstanding on the revolving line of credit with an effective interest rate of seven-and-one-half percent (
7.50%
). At
September 30, 2018
, there was no balance outstanding on the term loan with Silicon Valley Bank and a balance of
$621 thousand
was outstanding on the revolving line of credit. At
December 31, 2018
, there was a remaining amount of
$1.3 million
available under the line of credit facility for advances.
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
December 31, 2018
, the Company was not in compliance with the Minimum EBITDA covenant. The Company did not pursue a waiver with Silicon Valley Bank as the revolving line of credit matured on January 31, 2019, and was not renewed.
See Note 7 - Subsequent Events for additional information on the waiver from Partners for Growth V, L.P.
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
December 31, 2018
we had a balance of
$879 thousand
outstanding on this line of credit, which matured on
January 31, 2019
. The Company did not renew the line of credit prior to the maturity date and paid the outstanding balance on or before the maturity date.
On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement with Burish for $5.0 million in cash.
See Note 7 - 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 V, L.P.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2018 Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”), (the “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
December 31, 2018
, the estimated fair value of the derivative liability associated with the warrants issued in connection with the Loan and Security Agreement, was
$2 thousand
. The change in the fair value of the derivative liability for the three months ended
December 31, 2018
, was recorded as a gain of
$15 thousand
, included in the other income (expense).
The fair values of term debt and warrant debt are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). At
December 31, 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).
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
$2.3 million
and
$153 thousand
, respectively. The warrant debt of
$153 thousand
is treated together as a debt discount on the PFG V Debt and will be accreted to interest expense under the effective interest method over the
three
-year term of the PFG V Debt and the
five
-year term of the Warrant Debt. During the three months ended
December 31, 2018
, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of
$4 thousand
, as well as
$13 thousand
related to amortization of the debt discount. At
December 31, 2018
, the fair values of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were
$2.3 million
and
$133 thousand
, respectively. In addition, the Company agreed to pay PFG V a cash fee of up to
$150,000
payable upon maturity (the “back-end fee”), which will be earned ratably over the three year term of the PFG V loan. During the three months ended
December 31, 2018
, the Company recorded interest expense of
$13 thousand
associated with recognition of the back-end fee.
At
December 31, 2018
, a balance of
$2.3 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, 2018
, a balance of
$1.9 million
was outstanding with PFG V.
Other Indebtedness
At
December 31, 2018
, a balance of
$273 thousand
was outstanding on the line of credit with Mitsui Sumitomo Bank. At
September 30, 2018
, a balance of
$264 thousand
was outstanding on the line of credit. The credit facility is related to Mediasite K.K., and accrues interest at an annual rate of approximately one-and-one half percent (
1.5%
).
5. Income Taxes
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at
December 31, 2018
or
September 30, 2018
, and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the
three
months ended
December 31, 2018
or
2017
, respectively.
The Company’s tax rate differs from the expected tax rate each reporting period as a result of permanent differences, the valuation allowance, and international tax items.
The U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law on December 22, 2017. The TCJA included a number of changes to the U.S. corporate income tax including a reduction of the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017.
During the three months ended
December 31, 2017
, we recorded an income tax benefit of
$1.3 million
resulting from the application of TCJA to existing deferred tax balances based on reasonable estimates for those tax effects.
6. Revenue
We adopted the new revenue recognition accounting standard ASC 606 effective October 1, 2018 on a modified retrospective basis and applied the new standard only to contracts that were not completed contracts prior to October 1, 2018. See Note 1 for a description of our ASC 606 revenue recognition accounting policy. Financial results for reporting periods during fiscal 2019 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to fiscal 2019 have not been retroactively restated and are presented in conformity with amounts previously disclosed under ASC 605. This note includes additional information regarding the impacts from the adoption of the new revenue recognition standard on our financial results for the three months ended
December 31, 2018
. This includes the presentation of financial results during fiscal 2019 under ASC 605 for comparison to the prior year. Our revenue recognition accounting policy for ASC 605 is included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2018
, which was filed with the SEC on March 15, 2019.
Disaggregation of Revenues
The following table summarizes revenues from contracts with customers for the
three
months ended
December 31, 2018
, respectively, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOFO
|
SFI
|
MSKK
|
Eliminations
|
Total
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
$
|
812
|
|
$
|
139
|
|
$
|
9
|
|
$
|
(110
|
)
|
$
|
850
|
|
Software
|
642
|
|
115
|
|
198
|
|
(117
|
)
|
838
|
|
Shipping
|
62
|
|
1
|
|
—
|
|
—
|
|
63
|
|
|
|
|
|
|
|
Product and other total
|
1,516
|
|
255
|
|
207
|
|
(227
|
)
|
1,751
|
|
|
|
|
|
|
|
Support
|
1,987
|
|
189
|
|
247
|
|
(231
|
)
|
2,192
|
|
Hosting
|
1,054
|
|
149
|
|
353
|
|
—
|
|
1,556
|
|
Events
|
1,231
|
|
38
|
|
651
|
|
—
|
|
1,920
|
|
Installs & training
|
79
|
|
4
|
|
—
|
|
—
|
|
83
|
|
|
|
|
|
|
|
Services total
|
4,351
|
|
380
|
|
1,251
|
|
(231
|
)
|
5,751
|
|
|
|
|
|
|
|
Total revenue
|
$
|
5,867
|
|
$
|
635
|
|
$
|
1,458
|
|
$
|
(458
|
)
|
$
|
7,502
|
|
Effect of adopting ASC 606
Opening Balance Sheet Adjustment on October 1, 2018
As a result of applying the modified retrospective method to adopt ASC 606, the following amounts on our Condensed Consolidated Balance Sheet (Unaudited) were adjusted as of October 1, 2018 to reflect the cumulative effect adjustment to the opening balance of accumulated deficit (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
ASC 606 adoption
|
|
Adjusted
|
|
September 30, 2018
|
|
adjustments
|
|
October 1, 2018
|
Capitalized commissions, current
|
$
|
—
|
|
|
$
|
580
|
|
|
$
|
580
|
|
Total current assets
|
10,825
|
|
|
580
|
|
|
11,405
|
|
|
|
|
|
|
|
Capitalized commissions, long-term
|
—
|
|
|
112
|
|
|
112
|
|
Total assets
|
$
|
13,583
|
|
|
$
|
692
|
|
|
$
|
14,275
|
|
|
|
|
|
|
|
Accrued liabilities
|
1,609
|
|
|
2
|
|
|
1,611
|
|
Unearned revenue
|
11,645
|
|
|
(924
|
)
|
|
10,721
|
|
Total current liabilities
|
16,590
|
|
|
(922
|
)
|
|
15,668
|
|
|
|
|
|
|
|
Other long-term liabilities
|
202
|
|
|
(2
|
)
|
|
200
|
|
Long-term portion of unearned revenue
|
1,691
|
|
|
(75
|
)
|
|
1,616
|
|
Total liabilities
|
20,041
|
|
|
(999
|
)
|
|
19,042
|
|
|
|
|
|
|
|
Accumulated deficit
|
(207,419
|
)
|
|
1,691
|
|
|
(205,728
|
)
|
Total stockholders' equity (deficit)
|
(6,458
|
)
|
|
1,691
|
|
|
(4,767
|
)
|
Total liabilities and stockholders' equity (deficit)
|
$
|
13,583
|
|
|
$
|
692
|
|
|
$
|
14,275
|
|
Effect of ASC 606 as of and for the Three Months Ended
December 31, 2018
The following table summarizes the effect of adopting ASC 606 on our Condensed Consolidated Balance Sheet (Unaudited) as of
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts without
|
|
As reported
|
|
ASC 606 adoption
|
|
ASC 606 impact
|
|
December 31, 2018
|
|
impact
|
|
December 31, 2018
|
Capitalized commissions, current
|
$
|
509
|
|
|
$
|
(509
|
)
|
|
$
|
—
|
|
Total current assets
|
8,655
|
|
|
(509
|
)
|
|
8,146
|
|
|
|
|
|
|
|
Capitalized commissions, long-term
|
114
|
|
|
(114
|
)
|
|
—
|
|
Total assets
|
$
|
11,493
|
|
|
$
|
(623
|
)
|
|
$
|
10,870
|
|
|
|
|
|
|
|
Accrued liabilities
|
1,013
|
|
|
(2
|
)
|
|
1,011
|
|
Unearned revenue
|
9,009
|
|
|
798
|
|
|
9,807
|
|
Total current liabilities
|
13,844
|
|
|
796
|
|
|
14,640
|
|
|
|
|
|
|
|
Other long-term liabilities
|
186
|
|
|
2
|
|
|
188
|
|
Long-term portion of unearned revenue
|
2,168
|
|
|
74
|
|
|
2,242
|
|
Total liabilities
|
17,822
|
|
|
872
|
|
|
18,694
|
|
|
|
|
|
|
|
Accumulated deficit
|
(207,516
|
)
|
|
(1,495
|
)
|
|
(209,011
|
)
|
Total stockholders' equity (deficit)
|
(6,329
|
)
|
|
(1,495
|
)
|
|
(7,824
|
)
|
Total liabilities and stockholders' equity (deficit)
|
$
|
11,493
|
|
|
$
|
(623
|
)
|
|
$
|
10,870
|
|
The following table summarizes the effect of adopting ASC 606 on our Condensed Consolidated Statement of Operations (Unaudited) for the three months ended
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts without
|
|
As reported
|
|
ASC 606 adoption
|
|
ASC 606 impact
|
|
December 31, 2018
|
|
impact
|
|
December 31, 2018
|
Product and other revenue
|
$
|
1,751
|
|
|
$
|
126
|
|
|
$
|
1,877
|
|
Total revenue
|
7,502
|
|
|
126
|
|
|
7,628
|
|
|
|
|
|
|
|
Product and other cost of revenue
|
651
|
|
|
—
|
|
|
651
|
|
Total cost of revenue
|
1,842
|
|
|
—
|
|
|
1,842
|
|
|
|
|
|
|
|
Gross margin
|
5,660
|
|
|
126
|
|
|
5,786
|
|
|
|
|
|
|
|
Selling and marketing (operating expenses)
|
3,943
|
|
|
(70
|
)
|
|
3,873
|
|
Loss from operations
|
(1,654
|
)
|
|
196
|
|
|
(1,458
|
)
|
Loss before income taxes
|
(1,800
|
)
|
|
196
|
|
|
(1,604
|
)
|
Net loss
|
$
|
(1,788
|
)
|
|
$
|
196
|
|
|
$
|
(1,592
|
)
|
Net loss attributable to common stockholders
|
$
|
(1,841
|
)
|
|
$
|
196
|
|
|
$
|
(1,645
|
)
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
-basic
|
$
|
(0.36
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.32
|
)
|
-diluted
|
$
|
(0.36
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.32
|
)
|
The following table summarizes the effect of adopting ASC 606 on our Condensed Consolidated Statement of Cash Flow for the three months ended
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts without
|
|
As reported
|
|
ASC 606 adoption
|
|
ASC 606 impact
|
|
December 31, 2018
|
|
impact
|
|
December 31, 2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
$
|
(1,788
|
)
|
|
$
|
196
|
|
|
$
|
(1,592
|
)
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Capitalized commissions
|
70
|
|
|
(70
|
)
|
|
—
|
|
Unearned revenue
|
(1,183
|
)
|
|
(126
|
)
|
|
(1,309
|
)
|
Net cash used in operating activities
|
$
|
248
|
|
|
$
|
—
|
|
|
$
|
248
|
|
Transaction price allocated to future performance obligations
ASC 606 allows for the use of certain practical expedients, which we have elected and applied to measure our future performance obligations as of
December 31, 2018
.
As of
December 31, 2018
, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately
$3.6 million
in the next three months,
$9.0 million
in the next twelve months, and the remaining
$2.2 million
thereafter.
Disclosures related to our contracts with customers
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. We record assets for amounts related to performance obligations that are satisfied but not yet billed and/
or collected. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. These liabilities are classified as current and non-current unearned revenue.
Unearned revenues
Unearned revenues represent our obligation to transfer products or services to our client for which we have received consideration, or an amount of consideration is due, from the client. During the three months ended
December 31, 2018
, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was
$4.3 million
.
Assets recognized from the costs to obtain our contracts with customers
We recognize an asset for the incremental costs of obtaining a contract with a customer. We amortize these deferred costs proportionate with related revenues over the period of the contract. During the three months ended
December 31, 2018
, amortization expense recognized related to the amount included in the capitalized commissions at the beginning of the period was
$249 thousand
.
7. Subsequent Events
Initial Notes of the February 28, 2019 Note Purchase Agreement
On January 4, 2019, Sonic Foundry, Inc. and Burish entered into a Promissory Note (the "Promissory Note") pursuant to which Burish 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 Burish 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 Burish entered into a Promissory Note (the "February 14, 2019 Promissory Note") pursuant to which Burish purchased a
9.25%
Unsecured Promissory Note for
$1,000,000
in cash.
Interest accrued and outstanding principal on the February 14, 2019 Promissory Note 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 Burish with each share valued at
$1.30
per share.
The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
February 28, 2019 Note Purchase Agreement
On February 28, 2019, a Special Committee of Independent and Disinterested Directors ("Disinterested Directors") unanimously authorized us to enter into a Note Purchase Agreement (the "Note Purchase Agreement") with Burish. Following extended negotiations with an independent third party for a similar financing ("Independent Third-Party Financing") that was not consummated, the Disinterested Directors engaged in extensive deliberations and negotiations with its Chairman for an alternative financing. The Disinterested Directors approved the alternative financing on terms and conditions as set forth in the Note Purchase Agreement, which it believes is fair and superior to the Independent Third-Party Financing, and is in the best interest of the Company and its stockholders.
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").
The fourth tranche of
$1,000,000
was disbursed on March 13, 2019 and the fifth and final tranche of
$1,000,000
was disbursed on April 4, 2019.
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 these Subordinated Promissory Notes.
The Note Purchase Agreement requires compliance with the following financial covenants: (i) Minimum Coverage Ratio, 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), as of the last day of any calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be greater 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.
On April 25, 2019, Mr. Burish exercised his warrant to purchase
728,155
shares of common stock of the Company at an exercise price of
$1.18
per share.
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; and modified the existing financial covenants as follows: (i) Minimum Coverage Ratio, as of the last day of each month on or after the closing date, 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 greater than
$13,000,000
; and modifies the negative covenants to be as follows: (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 were unchanged.