Notes to Condensed Consolidated Financial Statements
March 31, 2020
(Unaudited)
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1.
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Basis of Presentation and Significant Accounting Policies
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Financial Statements
The accompanying condensed consolidated financial statements are unaudited and have been prepared on a basis substantially consistent with the Company's audited financial statements as of and for the year ended September 30, 2019 included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. Operating results for the six month period ended March 31, 2020 are not necessarily indicative of the results that might be expected for the year ending September 30, 2020.
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 type of product and lease.
Amounts receivable of $526 thousand at September 30, 2019 primarily represents sales of perpetual software licenses to a single international distributor on invoices outstanding for product delivered from March 2016 through June 2017.
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 receivables 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 September 30, 2019.
During the period ended March 31, 2020 it was determined that the financing receivable would not be collected. Therefore, both the financing receivable of $526 thousand and the corresponding reserve of $526 thousand were written off.
Investment in Sales-Type Lease
The Company has entered into sales-type lease arrangements with certain customers, consisting of recorders leased with terms ranging from 3-5 years.
Investment in sales-type leases consists of the following (in thousands) as of March 31, 2020:
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Investment in sales-type lease, gross:
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2020
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$
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13
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2021
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147
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2022
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13
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Gross investment in sales-type lease
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173
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Less: Unearned income
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3
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Total investment in sales-type lease
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$
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170
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Current portion of total investment in sales-type lease
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$
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11
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Long-term portion of total investment in sales-type lease
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159
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$
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170
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Inventory
Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. An obsolescence reserve has been established to account for slow moving inventory.
Inventory consists of the following (in thousands):
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March 31,
2020
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September 30, 2019
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Raw materials and supplies
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$
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230
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$
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163
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Finished goods
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402
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395
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Less: Obsolescence reserve
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(30
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)
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—
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$
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602
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$
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558
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Asset Retirement Obligation
An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is recognized as a liability in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-term asset. The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset. As of March 31, 2020 and September 30, 2019, the Company has recorded a liability of $130 thousand and $129 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. Asset retirement obligations are included in other-long term liabilities on the condensed consolidated balance sheets.
Fair Value of Financial Instruments
In determining the fair value of financial assets and liabilities, the Company currently utilizes market data or other assumptions that it believes market participants would use in pricing the asset or liability in the principal or most advantageous market, and adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to the Company at the measurement date.
Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.
Financial Liabilities Measured at Fair Value on Recurring Basis
The fair value of the bifurcated conversion feature represented by the warrant derivative liability associated with the PFG debt is measured at fair value on a recurring basis based on a Black Scholes option pricing model with assumptions for stock price, exercise price, volatility, expected term, risk free interest rate and dividend yield similar to those described for share-based compensation which were generally observable (Level 2).
Financial liabilities measured at fair value on a recurring basis are summarized below (in thousands):
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March 31, 2020
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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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72
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$
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—
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$
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72
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September 30, 2019
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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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9
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$
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—
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$
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9
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The gain or loss related to the fair value remeasurement on the derivative liability is included in the other (expense) line on the condensed consolidated statements of operations.
Financial Liabilities Measured at Fair Value on a Nonrecurring Basis
The initial fair values of PFG debt and warrant debt (see Note 4) were based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3).
The Mr. Mark Burish ("Mr. Burish") warrant was measured at fair value using a Black Scholes model and the remaining fair value was allocated to the related Mr. Burish note purchase agreement (see Note 4) which management believes materially approximates the fair value based on calculating the present value of expected future cash flows (Level 3). The non-recurring fair value measurements were performed as of the date of issuance of the note purchase agreement and warrant. The discount is being amortized over the life of the related debt.
Financial Instruments Not Measured at Fair Value
The Company's other financial instruments consist primarily of cash and cash equivalents, accounts receivable, investment in sales-type lease, financing receivables, accounts payable and debt instruments and capital lease obligations. The book values of cash and cash equivalents, accounts receivable, investment in sales-type lease, and accounts payable are considered to be representative of their respective fair values due their short term nature. The carrying value of debt including the current portion, approximates fair market value as the variable and fixed rate approximates the current market rate of interest available to the Company.
Legal Contingencies
When legal proceedings are brought or claims are made against the Company and the outcome is uncertain, we are required to determine whether it is probable that an asset has been impaired or a liability has been incurred. If such impairment or liability is probable and the amount of loss can be reasonably estimated, the loss must be charged to earnings.
No legal contingencies were recorded or were required to be disclosed for the three or six months ended March 31, 2020 or 2019.
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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Six Months Ended
March 31,
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2020
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2019
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Expected life
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4.5 years
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4.3 years
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Risk-free interest rate
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1.41% - 1.63%
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2.48% - 2.93%
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Expected volatility
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72.40% - 73.46%
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60.19% - 66.05%
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Expected forfeiture rate
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15.05% - 15.38%
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13.51% - 14.76%
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Expected exercise factor
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1.2
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1.2
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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 March 31, 2020 and changes during the six 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, 2019
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1,654,429
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$
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5.62
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4.9
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Granted
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184,750
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1.18
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9.6
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Exercised
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(1,000
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0.66
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8.7
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Forfeited
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(54,700
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4.07
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4.3
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Outstanding at March 31, 2020
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1,783,479
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5.20
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4.9
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Exercisable at March 31, 2020
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1,416,998
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6.21
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3.8
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A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 2020 is presented below:
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Non-vested Options
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Options
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Weighted-Average
Grant Date Fair
Value
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Non-vested at October 1, 2019
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357,114
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$
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0.77
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Granted
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184,750
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0.51
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Vested
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(153,049
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)
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0.97
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Forfeited
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(22,334
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)
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0.55
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Non-vested at March 31, 2020
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366,481
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$
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0.57
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The weighted average grant date fair value of options granted during the six months ended March 31, 2020 was $0.51. As of March 31, 2020, there was $131 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $95 thousand. The cost is expected to be recognized over a weighted-average remaining life of 2.2 years.
Stock-based compensation recorded in the three and six months ended March 31, 2020 was $34 thousand and $86 thousand. Stock-based compensation recorded in the three and six months ended March 31, 2019 was $57 thousand and $219 thousand. There was $1 thousand in cash received from exercises under all stock option plans and warrants during the three and six months ended March 31, 2020 and zero during the same periods in 2019. There were no tax benefits realized for tax deductions from option exercises in either of the three and six month periods ended March 31, 2020 or 2019. 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 23,007 shares are available to be issued under the plan. The Company recorded stock compensation expense under this plan of $1 thousand for each of the three and six month periods ended March 31, 2020 and 2019.
Preferred Stock and Dividends
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 common share.
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
March 31,
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Six Months Ended March 31,
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2020
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2019
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2020
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2019
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Denominator for basic net income (loss) per share - weighted average common shares
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6,785,180
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5,278,500
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6,760,779
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5,232,449
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Effect of dilutive options (treasury method)
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148,047
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—
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—
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—
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Denominator for diluted net income (loss) per share - adjusted weighted average common shares
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6,933,227
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5,278,500
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6,760,779
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5,232,449
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Options, warrants and convertible shares outstanding during each period, but not included in the computation of diluted net loss per share because they are antidilutive
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1,933,990
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2,076,083
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2,082,037
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2,076,083
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Liquidity
At March 31, 2020, approximately $1.5 million of cash and cash equivalents was held by the Company's foreign subsidiaries.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next twelve months. We will likely evaluate lease opportunities to finance equipment purchases in the future and anticipate continuing to utilize proceeds from the note purchase agreement to support working capital needs. We may also seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements", ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the ASU will have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", ("ASU 2018-15"). ASU 2018-15 aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in ASU 2018-15 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606", ("ASU 2018-18"). ASU 2018-18 provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. The amendments in ASU 2018-18 are effective for all public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 326, for entities that have adopted ASU 2016-13,
the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within fiscal those fiscal years. Early adoption is permitted in any interim period after issuance as long as the entity has adopted the amendments in ASU 2016-13. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)", ("ASU 2019-08"). This ASU requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. For entities that have not yet adopted the amendments in ASU 2018-07, the amendments in this Update are effective for public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the guidance and its impact to the financial statements.
In November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)", ("ASU 2019-10"). This ASU addressed effective dates of the aforementioned major Accounting Standards Updates as a result of the challenges implementation of major standards poses for private companies, smaller reporting companies, and not-for-profit organizations. ASU 2019-10 is a major update which would first be effective for bucket-one entities, which are public entities that are Securities and Exchange Commission ("SEC") filers, excluding entities eligible to be smaller reporting companies under the SEC's definition. The Company does qualify as a smaller reporting company under the SEC's definition. Financial Instruments - Credit Losses (Topic 326) is currently not effective for any entities; ASU 2019-10 changes the effective date of this update for all other public companies (including smaller reporting companies) to be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because Derivatives and Hedging (Topic 815) and Leases (Topic 842) are already effective for public business entities the Board retained the effective date for those entities, including smaller reporting companies.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", ("ASU 2019-12"). The amendments in this ASU affect entities within the scope of Topic 740. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for public entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. An entity that elects early adoption much adopt all the amendments in the same period. The Company is currently evaluating the guidance and its impact to the financial statements.
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)", ("ASU 2020-01"). The amendments in this ASU affect all entities that apply the guidance in Topics 321, 323, and 815 and either (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. For public business entities, the amendments in this ASU are effective for fiscal year beginning after December 15, 2020, and interim periods with those fiscal years. The amendments in this ASU should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. The Company is currently evaluating the guidance and its impact to the financial statements.
Accounting standards that have been issued but are not yet effective by the FASB or other standards-setting bodies that do not require adoption until a future date, which are not discussed above, are not expected to have a material impact on the Company’s financial statements upon adoption.
Recently Adopted Accounting Pronouncements
Leases (ASC Topic 842, Leases ("ASC 842"))
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", ("ASU 2016-02") as well as several other related updates which were codified as ASC 842. On October 1, 2019, we adopted this update using the modified retrospective method through a cumulative-effect adjustment. The reported results for the three and six months ended March 31, 2020 reflect the application of Topic 842, while the comparative information has not been restated and continues to be reported under the related lease accounting standards in effect for those periods. The adoption of this update represents a change in accounting principle and resulted in the recognition of right-of-use assets and lease liabilities of $2.5 million on October 1, 2019. We elected the package of practical expedients, which permits us to leverage our prior conclusions about lease identification, lease classification and initial direct costs incurred. We also elected the practical expedient to combine lease and non-lease components when determining the value
of right-of-use assets and lease liabilities. The primary effect of adopting this update relates to the recognition of our operating leases on our condensed consolidated balance sheets and providing additional disclosures about our leasing activities. Leases previously designated as capital leases are now identified as finance leases and continue to be reported on the condensed consolidated balance sheets. Leases previously identified as sales-type leases, where the Company is a lessor, continue to be reported on the condensed consolidated balance sheets. Refer to Note 3 - Commitments for additional disclosures related to our leasing activities.
Other Accounting Pronouncements
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, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging Topic 815): Targeted Improvements to Accounting for Hedging Activities", ("ASU 2017-12"). This update was issued to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting", ("ASU 2018-07"). The standard addresses aspects of the accounting for nonemployee share-based payment transactions. The amendments in ASU 2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, and was adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ("ASU 2019-04"). ASU 2019-04 identifies certain areas that need clarification and correction in each of these Topics. For Topic 815, for entities that have not yet adopted ASU 2017-12 as of the issuance date of this ASU, the effective dates and transition requirements for the amendments to Topic 815 are the same as the effective dates and transition requirements in ASU 2017-12. The amendments for Topic 815 in ASU 2019-04 were adopted by the Company as of October 1, 2019. The implementation of this standard did not result in a material impact to its consolidated financial statements.
2. Related Party Transactions
During the three and six months ended March 31, 2020, the Company incurred fees of $148 thousand and $258 thousand to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $85 thousand and $131 thousand during the three and six months ended March 31, 2019. The Company had accrued liabilities for unbilled services of $0 thousand and $30 thousand at March 31, 2020 and September 30, 2019, respectively, to the same law firm.
On November 9, 2017, the Company sold to Mark Burish $500 thousand of Preferred Stock, Series A, at $762.85 per share. Mark Burish is a director of the Company and beneficially owns more than 5% of the Company’s common stock.
On November 17, 2017, the Company entered into an Agreement in which Mr. Burish's right to convert shares of Preferred Stock, Series A, into common stock was waived until shareholder approval for the issuance of Preferred Stock, Series A had been obtained. The right to vote said shares of Preferred Stock, Series A was also waived pending shareholder approval of the issuance. Shareholder approval was obtained on May 17, 2018.
On January 19, 2018, the Company and Mr. Burish entered into a Subscription Agreement (the "Subscription Agreement"). Pursuant to the Subscription Agreement, (i) on January 19, 2018, Mr. Burish purchased a 10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash; and (ii) on February 15, 2018, the director purchased an additional 10.75% Convertible Secured Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the “Notes”).
On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply with rules and regulations of NASDAQ, the Notes were automatically converted into 1,902 shares of Series A Preferred stock. The number of shares was determined by dividing the total principal and accrued interest due on each Note by $542.13 (the “Conversion Rate”).
On April 16, 2018, the Company issued 232,558 shares of common stock to an affiliated party. The shares were issued at a 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 which expire on April 16, 2025.
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.
On November 15, 2018, 718 shares of Preferred Stock, Series A were automatically converted by the Company into 169,741 shares of common stock. The amount of shares converted represents all preferred shares issued on November 9, 2017, including related dividends.
On April 25, 2019, Mr. Burish exercised his warrant to purchase 728,155 shares of common stock of the Company at an exercise price of $1.18 per share, which was entered into coincident with the execution of the Note Purchase Agreement on February 28, 2019.
On May 17, 2019, 2,080 shares of Preferred Stock Series A were automatically converted by the Company into 491,753 shares of common stock. The amount of shares converted represents all preferred shares issued on May 17, 2018, including related dividends.
The Company has also been provided with debt financing from Mr. Burish. See Note 4 - Credit Arrangements for additional information on the Warrant issued to, and Note Purchase Agreements, with Mr. Burish as well as accrued interest and the related anniversary fee on the Notes.
Mr. Burish beneficially owns more than 5% of the Company’s common stock. Mr. Burish also serves as the Chairman of the Board of Directors. An affiliated party beneficially owns more than 5% of the Company's common stock. All transactions with Mr. Burish and with the affiliated party were approved by a special committee of disinterested and independent directors.
3. Commitments
Inventory Purchase Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At March 31, 2020, the Company has an obligation to purchase $319 thousand of Mediasite product, which is not recorded on the Company’s condensed consolidated balance sheet.
Leases
The Company has operating leases for corporate office space with various expiration dates. Our leases have remaining lease terms of up to three years, some of which include escalation clauses, renewal options for up to twelve years or termination options within one year.
We determine if an arrangement is a lease upon contract inception. The Company has both operating and finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments according to the arrangement.
A contract contains a lease if the contract conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.
Lease right-of-use assets and lease liabilities are recognized as of the commencement date based on the present value of the lease payments over the lease term. The lease right-of-use asset is reduced for tenant incentives and excludes any initial direct costs incurred. We use the implicit rate when it is readily determinable. Otherwise, the present value of future minimum lease payments is determined using the Company's incremental borrowing rate. The incremental borrowing rate is based on the interest rate of the Company's most recent borrowing.
The lease term we use for the valuation of our right-of-use assets and lease liabilities may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense is recognized on a straight-line basis over the expected lease term for operating leases. Amortization expense of the right-of-use asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental interest rate.
Right-of-use assets and lease liabilities are recognized for our leases. Right-of-use assets under finance leases are included in property and equipment on the condensed consolidated balance sheets.
We have operating lease arrangements with lease and non-lease components. The non-lease components in our arrangements are not significant when compared to the lease components. For all operating leases, we account for the lease and non-lease components as a single component.
As of March 31, 2020, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2020 (remaining)
|
$
|
688
|
|
|
$
|
88
|
|
2021
|
1,026
|
|
|
128
|
|
2022
|
292
|
|
|
79
|
|
2023
|
94
|
|
|
8
|
|
2024
|
102
|
|
|
5
|
|
Thereafter
|
101
|
|
|
—
|
|
Total
|
2,303
|
|
|
308
|
|
Less: imputed interest
|
(303
|
)
|
|
(23
|
)
|
Total
|
$
|
2,000
|
|
|
$
|
285
|
|
Effect of Adopting ASC 842
Opening Balance Sheet Adjustment on October 1, 2019
As a result of applying the modified retrospective method to adopt ASC 842, the following amounts on our condensed consolidated balance sheet were adjusted as of October 1, 2019 to reflect the cumulative effect adjustment to the opening balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
ASC 842 adoption
|
|
Adjusted
|
|
September 30, 2019
|
|
adjustments
|
|
October 1, 2019
|
Right-of-use assets under operating leases
|
—
|
|
|
2,533
|
|
|
2,533
|
|
Total assets
|
$
|
15,180
|
|
|
$
|
2,533
|
|
|
$
|
17,713
|
|
|
|
|
|
|
|
Current portion of operating lease obligations
|
$
|
—
|
|
|
$
|
1,314
|
|
|
$
|
1,314
|
|
Accrued liabilities
|
2,216
|
|
|
(44
|
)
|
|
2,172
|
|
Total current liabilities
|
13,831
|
|
|
1,270
|
|
|
15,101
|
|
|
|
|
|
|
|
Long-term portion of operating lease obligations
|
—
|
|
|
1,263
|
|
|
1,263
|
|
Total liabilities
|
$
|
21,433
|
|
|
$
|
2,533
|
|
|
$
|
23,966
|
|
Supplemental information related to leases is as follows (in thousands, except lease term and discount rate):
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2020
|
Operating lease costs
|
|
$
|
662
|
|
Variable operating lease costs
|
|
29
|
|
Total operating lease cost
|
|
$
|
691
|
|
|
|
|
Finance lease cost:
|
|
|
Amortization of right-of-use assets
|
|
$
|
106
|
|
Interest on lease liabilities
|
|
12
|
|
Total finance lease cost
|
|
$
|
118
|
|
Variable lease costs include operating costs for U.S. office lease based on square footage and Consumer Price Index ("CPI") rent escalation and related VAT for office lease in the Netherlands.
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash outflows for operating leases
|
|
$
|
679
|
|
Operating cash outflows for finance leases
|
|
12
|
|
Financing cash outflows for finance leases
|
|
123
|
|
Other information related to leases was as follows:
|
|
|
|
|
|
|
March 31, 2020
|
Weighted average remaining lease term (in years)
|
|
|
|
Operating leases
|
|
2.6
|
|
Finance leases
|
|
2.3
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
|
11.82
|
%
|
Finance leases
|
|
7.14
|
%
|
4. Credit Arrangements
Partners for Growth V, L.P.
On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2018 Loan and Security Agreement”) with Partners for Growth V, L.P. (“PFG V”).
The 2018 Loan and Security Agreement provides for a Term Loan ("Term Loan") in the amount of $2,500,000, which was disbursed in two (2) Tranches as follows: Tranche 1 was disbursed on May 14, 2018 in the amount of $2,000,000; and Tranche 2 in the amount of $500,000, was disbursed on November 8, 2018.
Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000.
The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal to 1% 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.
Coincident with execution of the 2018 Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”) with PFG V. Pursuant to the terms of the Warrant, the Company issued to PFG V a warrant to purchase up to 66,000 shares of common stock of the Company at an exercise price of $2.57 per share, subject to certain adjustments. Pursuant to the Warrant, PFG V is also entitled, under certain conditions, to require the Company to exchange the Warrant for the sum of $250,000. All warrants issued in connection with PFG V expire on May 11, 2023.
At March 31, 2020, and September 30, 2019, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $72 thousand and $9 thousand, respectively. Included in other expense, the remeasurement loss on the derivative liability during the three and six months ended March 31, 2020 was $61 thousand and $63 thousand, respectively, compared to a remeasurement loss of $8 thousand and a remeasurement gain of $15 thousand during the three and six months ended March 31, 2019.
The proceeds from the 2018 Loan and Security Agreement were allocated between the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) based on their relative fair value on the date of issuance which resulted in carrying values of $2.3 million and $156 thousand, respectively. The warrant debt of $156 thousand is treated together as a debt discount on the PFG V Debt and will 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 and six months ended March 31, 2020, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $6 thousand and $11 thousand compared to $5 thousand and $9 thousand in the same periods last year. In addition, $14 thousand and $28 thousand amortization of the debt discount was recorded in the current three month and six month period compared to $13 thousand and $27 thousand in the prior year. At March 31, 2020, the carrying value of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $1.2 million and $160 thousand, respectively. In addition, the Company agreed to pay PFG V a cash fee of up to $150,000 payable upon maturity (the “back-end fee”), which will be earned ratably over the three year term of the PFG V loan. During the three and six months ended March 31, 2020, the Company recorded interest expense of $13 thousand and $25 thousand, associated with recognition of the back-end fee compared to $13 thousand and $25 thousand during the three and six months ended March 31, 2019.
The non-cash effective interest expense is calculated on the net balance of the PFG V Debt, debt discount, back-end fee and related loan origination fees, on a monthly basis. During the three and six months ended March 31, 2020, we recorded $3 thousand of gain and $1 thousand of non-cash interest expense related to the effective interest rate on the PFG V loan.
On March 11, 2019, Sonic Foundry, Inc. entered into a Consent, Waiver & Modification to the 2018 Loan and Security Agreement dated May 11, 2018 (the "Modification") with Partners for Growth V, L.P. ("PFG"). Under the Modification: PFG waived the Company's default on the Minimum EBITDA financial covenant for the quarterly reporting period ending December 31, 2018; modified the existing financial covenants to be as follows: (i) Minimum Coverage Ratio (as defined), which requires, as of the last day of each month on or after the closing date, to be equal to or greater than (x) 0.7: 1.00 for the December through May calendar months, and (y) 0.9:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), which requires, as of the last day of each calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be no less than $13,000,000; and modified the negative covenants to be as follows: the Company (x) shall not cause or permit (a) Japanese subsidiary indebtedness under its revolving line of credit facility to exceed at any time $1,000,000 outstanding, or (b) aggregate subsidiary indebtedness to exceed $1,200,000 at any time. At March 31, 2020, the Company was in compliance with all covenants per the 2018 Loan and Security Agreement, as modified.
Under the Modification, the Company was required to draw the next tranche of $1,000,000 in proceeds on the Note Purchase Agreement (detailed below) 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 Company met this requirement as all tranches were fully drawn prior to April 30, 2019.
The existing terms of the PFG loan in terms of amortization, interest rate, payment schedule and maturity date are unchanged.
At March 31, 2020, a gross balance of $1.2 million was outstanding on the term debt with PFG V with an effective interest rate of sixteen-and-six-tenths percent (16.60%). At September 30, 2019, a gross balance of $1.7 million was outstanding with PFG V.
Initial Notes of the February 28, 2019 Note Purchase Agreement
On January 4, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the Promissory Note was due and payable on January 4, 2020. The Promissory Note may be prepaid at any time without penalty. The Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
On January 31, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "January 31, 2019 Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the January 31, 2019 Promissory Note was due and payable on January 31, 2020. The January 31, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to Mr. Burish, with each share valued at $1.30 per share. The January 31, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
On February 14, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "February 14, 2019 Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the February 14, 2019 Promissory Note was due and payable on February 14, 2020. The February 14, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to Mr. Burish with each share valued at $1.30 per share. The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
February 28, 2019 Note Purchase Agreement
On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Mr. Burish.
The Note Purchase Agreement 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 was disbursed on March 13, 2019 and the fifth and final tranche 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 ("anniversary 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 no less than $13,000,000. At March 31, 2020, the Company was in compliance with all covenants per the Note Purchase Agreement.
The Note Purchase Agreement dated February 28, 2019 is subordinated to the existing PFG loan.
The Company used the proceeds from the notes issued under the Note Purchase Agreement to replace the revolving line of credit with Silicon Valley Bank, which matured on January 31, 2019.
The proceeds from the Note Purchase Agreement were allocated between the Subordinated Promissory Notes and the Warrant debt based on their relative fair value on the date of issuance. The warrant debt of $674 thousand is treated together as a debt
discount on the Subordinated Notes Payable and will be accreted to interest expense under the effective interest rate method over the five-year term of the Subordinated Notes Payable. During the three and six months ended March 31, 2020, the Company recorded accretion of discount expense associated with the Subordinated Promissory Notes of $33 thousand and $67 thousand compared to the three and six months ended March 31, 2019 of $13 thousand and $13 thousand.
During the three and six months ended March 31, 2020, the Company recorded an accrued anniversary fee associated with the Subordinated Promissory Notes of $6 thousand and $12 thousand. There was no accrued anniversary fee for the prior periods.
The non-cash effective interest expense is calculated on the net balance of the Subordinated Promissory Notes, Warrant, and related loan origination fees, on a monthly basis. During the three and six months ended March 31, 2020, we recorded $13 thousand and $2 thousand of non-cash interest benefit related to the effective interest rate on the Subordinated Promissory Notes.
At March 31, 2020, a gross principal balance of $5.0 million was outstanding on the Subordinated Promissory Notes, with an effective interest rate of twelve-and-four-tenths percent (12.4%). At September 30, 2019, a gross principal balance of $5.0 million was outstanding on the Subordinated Promissory Notes.
Accrued interest on the Subordinated Promissory Notes was paid through March 31, 2019, but has been deferred since that date. In April 2019 it was informally agreed between the Company and Mr. Burish that the interest would be deferred. On November 22, 2019, the Company entered into a Note Modification Agreement to formalize the deferment of the accrued interest. The Note Modification Agreement modifies the terms of the Subordinated Promissory Notes by deferring all interest payments due at the end of each calendar month beginning April 30, 2019 and continuing through and including July 31, 2020, in an amount which will be determined based on the variable interest rate on the Subordinated Promissory Notes. The deferred interest amount shall be added to the principal amount due on the Subordinated Notes and shall be paid on the maturity date. As a result of the Note Modification Agreement, $502 thousand and $259 thousand of accrued interest related to the Subordinated Notes Payable was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020 and September 30, 2019, respectively.
The anniversary fee on the Subordinated Promissory Notes was due on February 28, 2020 ("first year anniversary fee") and has been deferred. On March 24, 2020, the Company entered into a First Amendment to Note Modification Agreement ("First Amendment") to formalize the deferment of the first year anniversary fee. The First Amendment modified the terms of the Subordinated Promissory Notes by deferring the first year anniversary fee due on February 28, 2020. The deferred first year anniversary fee was added to the principal amount due on the Subordinated Notes and is required to be paid on the maturity date. As a result of the First Amendment, $25 thousand was re-classed from current to long-term on the Company's condensed consolidated balance sheets as of March 31, 2020.
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. A special committee of disinterested and independent directors approved the issuance of the Subordinated Promissory Notes and the Warrant.
Other Indebtedness
On January 30, 2020, Mediasite K.K. entered into a Term Loan ("Term Loan") with Sumitomo Mitsui Banking Corporation for $460 thousand in cash. The Term loan accrues interest at an annual rate of 1.475%. Beginning in January 2020, principal is due in 12 equal monthly installments, plus accrued interest, continuing through December 30, 2020, when the principal balance will be paid in full.
At March 31, 2020, $347 thousand was outstanding on the term loan with Mitsui Sumitomo Bank. The term loan accrues interest at an annual rate of approximately one-and-one-half percent (1.475%).
At March 31, 2020 and September 30, 2019, no balance was outstanding on the line of credit with Mitsui Sumitomo Bank. The credit facility is related to Mediasite K.K., and accrues interest at an annual rate of approximately one-and-one half percent (1.575%).
5. Income Taxes
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at March 31, 2020 or September 30, 2019, and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three or six months ended March 31, 2020 or 2019.
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.
6. Revenue
Disaggregation of Revenues
The following tables summarize revenues from contracts with customers for the three and six months ended March 31, 2020 and 2019, respectively, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
SOFO
|
SFI
|
MSKK
|
Eliminations
|
Total
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
$
|
1,563
|
|
$
|
153
|
|
$
|
181
|
|
$
|
(124
|
)
|
$
|
1,773
|
|
Software
|
883
|
|
64
|
|
194
|
|
(178
|
)
|
963
|
|
Shipping
|
74
|
|
2
|
|
—
|
|
—
|
|
76
|
|
|
|
|
|
|
|
Product and other total
|
2,520
|
|
219
|
|
375
|
|
(302
|
)
|
2,812
|
|
|
|
|
|
|
|
Support
|
1,887
|
|
136
|
|
919
|
|
(168
|
)
|
2,774
|
|
Hosting
|
1,132
|
|
160
|
|
321
|
|
—
|
|
1,613
|
|
Events
|
705
|
|
12
|
|
655
|
|
—
|
|
1,372
|
|
Installs & training
|
94
|
|
1
|
|
—
|
|
—
|
|
95
|
|
|
|
|
|
|
|
Services total
|
3,818
|
|
309
|
|
1,895
|
|
(168
|
)
|
5,854
|
|
|
|
|
|
|
|
Total revenue
|
$
|
6,338
|
|
$
|
528
|
|
$
|
2,270
|
|
$
|
(470
|
)
|
$
|
8,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2020
|
|
SOFO
|
SFI
|
MSKK
|
Eliminations
|
Total
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
$
|
2,609
|
|
$
|
219
|
|
$
|
196
|
|
$
|
(197
|
)
|
$
|
2,827
|
|
Software
|
1,597
|
|
253
|
|
231
|
|
(234
|
)
|
1,847
|
|
Shipping
|
190
|
|
3
|
|
—
|
|
—
|
|
193
|
|
|
|
|
|
|
|
Product and other total
|
4,396
|
|
475
|
|
427
|
|
(431
|
)
|
4,867
|
|
|
|
|
|
|
|
Support
|
3,897
|
|
291
|
|
1,237
|
|
(360
|
)
|
5,065
|
|
Hosting
|
2,138
|
|
280
|
|
697
|
|
—
|
|
3,115
|
|
Events
|
2,023
|
|
74
|
|
1,327
|
|
—
|
|
3,424
|
|
Installs & training
|
208
|
|
2
|
|
—
|
|
—
|
|
210
|
|
|
|
|
|
|
|
Services total
|
8,266
|
|
647
|
|
3,261
|
|
(360
|
)
|
11,814
|
|
|
|
|
|
|
|
Total revenue
|
$
|
12,662
|
|
$
|
1,122
|
|
$
|
3,688
|
|
$
|
(791
|
)
|
$
|
16,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
SOFO
|
SFI
|
MSKK
|
Eliminations
|
Total
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
$
|
784
|
|
$
|
35
|
|
$
|
376
|
|
$
|
(189
|
)
|
$
|
1,006
|
|
Software
|
618
|
|
124
|
|
120
|
|
(159
|
)
|
703
|
|
Shipping
|
87
|
|
—
|
|
—
|
|
—
|
|
87
|
|
|
|
|
|
|
|
Product and other total
|
1,489
|
|
159
|
|
496
|
|
(348
|
)
|
1,796
|
|
|
|
|
|
|
|
Support
|
1,961
|
|
145
|
|
976
|
|
(241
|
)
|
2,841
|
|
Hosting
|
1,062
|
|
115
|
|
513
|
|
—
|
|
1,690
|
|
Events
|
850
|
|
38
|
|
742
|
|
—
|
|
1,630
|
|
Installs & training
|
29
|
|
11
|
|
—
|
|
—
|
|
40
|
|
|
|
|
|
|
|
Services total
|
3,902
|
|
309
|
|
2,231
|
|
(241
|
)
|
6,201
|
|
|
|
|
|
|
|
Total revenue
|
$
|
5,391
|
|
$
|
468
|
|
$
|
2,727
|
|
$
|
(589
|
)
|
$
|
7,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2019
|
|
SOFO
|
SFI
|
MSKK
|
Eliminations
|
Total
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
$
|
1,598
|
|
$
|
174
|
|
$
|
385
|
|
$
|
(300
|
)
|
$
|
1,857
|
|
Software
|
1,260
|
|
239
|
|
318
|
|
(276
|
)
|
1,541
|
|
Shipping
|
148
|
|
1
|
|
—
|
|
—
|
|
149
|
|
|
|
|
|
|
|
Product and other total
|
3,006
|
|
414
|
|
703
|
|
(576
|
)
|
3,547
|
|
|
|
|
|
|
|
Support
|
3,948
|
|
334
|
|
1,222
|
|
(472
|
)
|
5,032
|
|
Hosting
|
2,116
|
|
264
|
|
866
|
|
—
|
|
3,246
|
|
Events
|
2,081
|
|
76
|
|
1,394
|
|
—
|
|
3,551
|
|
Installs & training
|
108
|
|
15
|
|
—
|
|
—
|
|
123
|
|
|
|
|
|
|
|
Services total
|
8,253
|
|
689
|
|
3,482
|
|
(472
|
)
|
11,952
|
|
|
|
|
|
|
|
Total revenue
|
$
|
11,259
|
|
$
|
1,103
|
|
$
|
4,185
|
|
$
|
(1,048
|
)
|
$
|
15,499
|
|
Transaction price allocated to future performance obligations
ASC 606 allows for the use of certain practical expedients, which we have elected and applied to measure our future performance obligations as of March 31, 2020.
As of March 31, 2020, 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, $9.5 million in the next twelve months, and the remaining $2.1 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 and six months ended March 31, 2020, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $2.4 million and $6.7 million compared to $2.6 million and $6.9 million recognized during the three and six months ended March 31, 2019.
Assets recognized from the costs to obtain our contracts with customers
We recognize an asset for the incremental costs of obtaining a contract with a customer. We amortize these deferred costs proportionate with related revenues over the period of the contract. During the three and six months ended March 31, 2020, amortization expense recognized related to the amount included in the capitalized commissions at the beginning of the period was $127 thousand and $330 thousand compared to $147 thousand and $396 thousand recognized during the three and six months ended March 31, 2019.
7. Subsequent Events
On March 11, 2020, COVID-19 was declared a pandemic by the World Health Organization. The disruption caused by the outbreak is uncertain and continues to evolve rapidly, however, it may result in material adverse impact on the Company's financial position, operations and cash flows. While we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies and their employees affected by the COVID-19 pandemic. Following the approval of the Board of Directors, the Company and First Business Bank entered into a $2,314,815 Promissory Note (the "Promissory Note") under the Paycheck Protection Program (PPP) contained within the (CARES) Act. The PPP loan has a term of two years, is unsecured, and is guaranteed by the U.S. Small Business Administration. The loan carries a fixed interest rate of 1% per annum, with the first six months of interest deferred. Under the terms of the CARES Act, the Company will be eligible to apply for forgiveness of all loan proceeds used for payroll costs, rent, utilities, and other qualifying expenses during the eight-week period following receipt of the loan, provided the Company maintains its employment and compensation within certain parameters during such period, and provided further that not more than 25% of the amount forgiven can be attributable to non-payroll costs. Any amount not forgiven is due in equal installments of principal and interest beginning seven months from the date of the Promissory Note through the maturity date of two years from the date of first disbursement. The note was effective upon receipt of funds on April 21, 2020.
On April 27, 2020, the Company announced that its Special Committee of Independent and Disinterested Directors had accepted an offer from Mr. Mark Burish to purchase all outstanding shares of the Company’s common stock not presently held by Mr. Burish at $5.00 per share. The transaction was expected to close in the third calendar quarter of 2020. As previously announced, the Company formed the Special Committee to consider strategic alternatives.
In May 2020, the Special Committee and the Disinterested Directors and Mr. Burish agreed to not pursue the transaction at this time. Both Mr. Burish and the Special Committee were concerned that the proposal would not obtain the required shareholder approval, and therefore concluded that converting the debt to equity at the same value proposed by Mr. Burish for the acquisition was the most appropriate way to maximize both Company and Shareholder value, improve the Company's financial position, and provide the Company with resources to further its growth opportunities. In accordance therewith, on May 13, 2020, the Company entered into a Debt Conversion Agreement with Mr. Burish to convert Mr. Burish's existing secured debt of approximately $5.6 million into common stock at $5.00 per share.