1.	Basis of Presentation and Significant Accounting Policies

Financial Statements

In the opinion of management, the accompanying unaudited consolidated condensed 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 nine month period ended June 30, 2015 are not necessarily indicative of the results that might be expected for the year ending September 30, 2015.

Inventory Valuation

Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of completed units and spare parts are carried at the lower of cost or market, with cost determined on a first-in, first-out basis.

Inventory consists of the following (in thousands):


	June 30, 2015		September 30, 2014
Raw materials and supplies	$	484	$	549
Finished goods		1,234		1,172

	$	1,718	$	1,721

Capitalized Software Development Costs

Software development costs incurred in conjunction with product development are charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the net realizable value of the related product. Typically the period between achieving technological feasibility of the Company’s products and the general availability of the products has been short. Consequently, software development costs qualifying for capitalization are typically immaterial and are generally expensed to research and development costs, as incurred. Upon product release, the amortization of software development costs is determined annually as the greater of the amount computed using the ratio of current gross revenues for the products to their total of current and anticipated future gross revenues, or the straight-line method over the estimated economic life of the products, expected to be three years. Amortization expense of software development costs of $133 thousand is included in Cost of Revenue – Product for the nine months ending June 30, 2015 and 2014, respectively. The gross amount of capitalized external and internal development costs is $533 thousand at June 30, 2015 and September 30, 2014. There were no software development efforts that qualified for capitalization for the nine months ended June 30, 2015.

Legal Contingencies

In June 2014, the Company entered into a settlement agreement with Astute Technology, LLC (“Astute”). The key terms of the agreement were: 1) a grant of a non-revocable license of Astute patents to the Company; 2) a grant of a fully paid, non-refundable license of certain Sonic Foundry patents to Astute; 3) both Astute and our customer agreed to identify three meetings they currently capture that the other party will not seek or respond to any request for proposal; and 4) a payment of $1.35 million to Astute. Pursuant to the settlement agreement, the payments were made in three equal amounts with the first paid in June 2014, the second paid in October 2014 and the final installment paid in March 2015. The Company contributed $1.1 million of the $1.35 million payable to Astute. Of the $1.1 million, $428 thousand related to prior use and was recorded as a charge to income during fiscal 2014. The remaining $672 thousand was recorded as a product right asset, which is being amortized, on a straight-line basis, over the remaining life of the patents, through 2020. Future amounts due to Astute were accrued for as of the time of settlement.

Except as reported above, no legal contingencies were recorded for the nine months ended June 30, 2015 and 2014, 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 homogenous 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 fair value of each option grant is estimated using the assumptions in the following table:


	Nine months ended June 30,
	2015	2014
Expected life	4.8-5.0 years	4.8-4.9 years
Risk-free interest rate	0.96%-1.04%	0.60%-0.82%
Expected volatility	45.46%-49.47%	47.11%-47.18%
Expected forfeiture rate	10.72%-11.99%	11.6%-12.2%
Expected exercise factor	1.40-1.43	1.39-1.41
Expected dividend yield	0%	0%

A summary of option activity as of June 30, 2015 and changes during the nine months then ended is presented below:


	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Period in Years
Outstanding at October 1, 2014		1,240,941		$	10.31		6.9
Granted		313,954			9.26		9.8
Exercised		(11,117	)		7.28		6.9
Forfeited		(74,051	)		11.90		4.2

Outstanding at June 30, 2015		1,469,727			10.03		6.8
Exercisable at June 30, 2015		865,629			10.52		5.6

A summary of the status of the Company’s non-vested shares and changes during the nine month period ended June 30, 2015 is presented below:


	2015
Non-vested Shares	Shares			Weighted-Average Grant Date Fair Value
Non-vested at October 1, 2014		539,519		$	3.29
Granted		313,954			3.19
Vested		(227,629	)		2.98
Forfeited		(21,746	)		1.95

Non-vested at June 30, 2015		604,098		$	3.35

The weighted average grant date fair value of options granted during the nine months ended June 30, 2015 was $3.19. As of June 30, 2015, there was $880 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, including $144 thousand of estimated forfeitures. The cost is expected to be recognized over a weighted-average remaining life of 2.0 years.

Stock-based compensation recorded in the three month period ended June 30, 2015 of $207 thousand was allocated $129 thousand to selling and marketing expenses, $22 thousand to general and administrative expenses, and $56 thousand to product development expenses. Stock-based compensation recorded in the nine month period ended June 30, 2015 of $745 thousand was allocated $467 thousand to selling and marketing expenses, $198 thousand to general and administrative expenses, and $80 thousand to product development expenses. Stock-based compensation recorded in the three month period ended June 30, 2014 of $204 thousand was allocated $135 thousand to selling and marketing expenses, $12 thousand to general and administrative expenses, and $57 thousand to product development expenses. Stock-based compensation recorded in the nine month period ended June 30, 2014 of $679 thousand was allocated $449 thousand to selling and marketing expenses, $40 thousand to general and administrative expenses, and $190 thousand to product development expenses. Cash received from exercises under all stock option plans and warrants for the three and nine month periods ended June 30, 2015 was $33 thousand and $41 thousand, respectively. Cash received from exercises under all stock option plans and warrants for the three and nine month periods ended June 30, 2014 was $61 thousand and $243 thousand, respectively. There were no tax benefits realized for tax deductions from option exercises in either of the nine month periods ended June 30, 2015 or 2014. 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 150,000 common shares may be issued. A total of 46,703 shares are available to be issued under the plan. The Company recorded stock compensation expense under this plan for the three month and nine month periods ended June 30, 2015 of $5 thousand and $18 thousand, respectively. The Company recorded stock compensation expense under this plan for the three and nine month periods ended June 30, 2014 of $8 thousand and $19 thousand, respectively.

Common Stock Warrants

On December 22, 2014, the company issued 74,802 warrants to two individuals in combination with the sale of a like number of shares of common stock, one of which is the Chairman of the Company’s Board of Directors. These warrants were immediately exercisable, expire five years after the date of issuance and have an exercise and weighted average price of $14.00. The remaining contractual life of these outstanding warrants as of June 30, 2015 was 4.48 years. The fair value of the warrants was determined using the lattice model and the same inputs as those used for valuing the Company’s stock option fair value. The fair value of the warrants was $133 thousand at the date of issuance. The Company determined that the warrants are freestanding and do not fall within the scope of ASC 480 or ASC 815. The warrants were recorded in conjunction with the stock issued.

Per share computation

Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income (loss). The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2015		2014		2015		2014
Denominator for basic earnings per share - weighted average common shares		4,355,049		4,246,265		4,324,868		4,147,938
Effect of dilutive options (treasury method)		—		146,757		—		—

Denominator for diluted earnings per share - adjusted weighted average common shares		4,355,049		4,393,022		4,324,868		4,147,938

Options and warrants outstanding during each period, but not included in the computation of diluted earnings per share because they are antidilutive		1,581,529		1,197,980		1,581,529		1,197,980

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all exiting revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The FASB subsequently issued a one-year deferral of the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, the guidance is effective for annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of adopting ASU 2014-09 to determine the impact, if any, it may have on our financial statements.

In November 2014, the FASB issued Accounting Standards Update No. 2014-17, “Business Combinations (Topic 805) – Pushdown Accounting” (“ASU 2014-17”). ASU 2014-17 is intended to provide guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statement. The amendments should reduce diversity in the timing and content of footnote disclosure. ASU 2014-17 is effective after November 18, 2014. The Company has adopted this guidance, but it does not have an impact on previous acquisitions.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which amends the current presentation of debt issuance costs in the financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of as an asset. The amendments are to be applied retrospectively and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, but early adoption is permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”). The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license. The amendments in ASU 2015-05 are effective for fiscal years beginning after December 15, 2015, and interim periods within those years. Early adoption is permitted. The guidance may be applied either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company does not believe the implementation of this standard will result in a material impact to its financial statements.

In May 2015, the FASB issued ASU 2015-08, “Business Combinations (Topic 805) – Pushdown Accounting” (“ASU 2015-08”). ASU 215-08 amends various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 115. The Company does not believe the implementation of this standard will result in a material impact to its 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.