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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
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SONIC FOUNDRY, INC.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
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(Registrant’s telephone number including area code)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer |
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| Accelerated filer |
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| Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
State the number of shares outstanding of each of the issuer’s common equity as of the last practicable date:
| Class |
| Outstanding January 24, 2023 |
| Common Stock, $0.01 par value |
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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. For a more complete discussion of accounting policies and certain other information, refer to the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2022.
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
(Unaudited)
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowances of $ & $ | ||||||||
| Inventories | ||||||||
| Investment in sales-type lease, current | ||||||||
| Capitalized commissions, current | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment: | ||||||||
| Leasehold improvements | ||||||||
| Computer equipment | ||||||||
| Furniture and fixtures | ||||||||
| Total property and equipment | ||||||||
| Less accumulated depreciation and amortization | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Investment in sales-type lease, long-term | ||||||||
| Capitalized commissions, long-term | ||||||||
| Right-of-use assets under operating leases | ||||||||
| Deferred tax asset | ||||||||
| Software development, net of amortization | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Current portion of unearned revenue | ||||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease obligations | ||||||||
| Current portion of notes payable and warrant debt, net of discounts | ||||||||
| Current portion of notes payable due to related parties | ||||||||
| Total current liabilities | ||||||||
| Long-term portion of unearned revenue | ||||||||
| Long-term portion of finance lease obligations | ||||||||
| Long-term portion of operating lease obligations | ||||||||
| Long-term portion of notes payable and warrant debt, net of discounts | ||||||||
| Long-term portion of notes payable due to related parties | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value, authorized shares; issued | ||||||||
| Preferred stock, Series A, voting, cumulative, convertible, $ par value (liquidation preference of $ per share), authorized shares; shares issued and outstanding | ||||||||
| Preferred stock, Series B, voting, cumulative, convertible, $ par value (liquidation preference at par), authorized shares, issued | ||||||||
| Common stock, $ par value, authorized shares; and shares issued, respectively and and shares outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost, shares | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(in thousands, except for share and per share data)
(Unaudited)
| Three Months Ended December 31, |
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| 2022 |
2021 |
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| Revenue: |
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| Product and other |
$ | $ | ||||||
| Services |
$ | |||||||
| Total revenue |
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| Cost of revenue: |
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| Product and other |
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| Services |
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| Total cost of revenue |
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| Gross margin |
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| Operating expenses: |
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| Selling and marketing |
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| General and administrative |
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| Product development |
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| Total operating expenses |
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| Loss from operations |
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| Non-operating income (expenses): |
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| Interest expense, net |
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| Other expense, net |
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| Total non-operating income (expense) |
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| Loss before income taxes |
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| Income tax benefit (expense) |
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| Net loss |
$ | ( |
) | $ | ( |
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| Dividends on preferred stock |
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| Net loss attributable to common stockholders |
$ | ( |
) | $ | ( |
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| Loss per common share |
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| – basic |
$ | ( |
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| – diluted |
$ | ( |
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| Weighted average common shares |
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| – basic |
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| – diluted |
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See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
| Three Months Ended December 31, |
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| 2022 |
2021 |
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| Net loss |
$ | ( |
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| Other comprehensive loss |
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| Foreign currency translation adjustment |
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| Comprehensive loss |
$ | ( |
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See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
| Accumulated |
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| Additional |
other |
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| Preferred | Common | paid-in | Accumulated | comprehensive | Treasury | |||||||||||||||||||||||
| stock |
stock |
capital |
deficit |
loss |
stock |
Total |
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| Balance, September 30, 2021 |
$ | $ | $ | $ | ( |
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| Stock compensation |
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| Stock option exercise |
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| Foreign currency translation adjustment |
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| Net loss |
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| Balance, December 31, 2021 |
$ | $ | $ | $ | ( |
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| Accumulated |
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| Additional |
other |
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| Preferred | Common | paid-in | Accumulated | comprehensive | Treasury | |||||||||||||||||||||||
| stock |
stock |
capital |
deficit |
loss |
stock |
Total |
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| Balance, September 30, 2022 |
$ | $ | $ | $ | ( |
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| Stock compensation |
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| Issuance of common stock and warrants |
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| Stock option exercise |
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| Foreign currency translation adjustment |
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| Net loss |
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| Balance, December 31, 2022 |
$ | $ | $ | $ | ( |
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See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Three Months Ended |
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| December 31, |
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| 2022 |
2021 |
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| Operating activities |
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| Net (loss) |
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| Adjustments to reconcile net (loss) to net cash used in operating activities: |
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| Amortization of software development costs |
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| Amortization of warrant debt, debt discount and debt issuance costs |
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| Depreciation and amortization of property and equipment |
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| Deferred income taxes |
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| Loss on sale of fixed assets |
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| Provision for doubtful accounts |
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| Stock-based compensation expense related to stock options |
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| Remeasurement (gain) on derivative liability |
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| Changes in operating assets and liabilities: |
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| Accounts receivable |
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| Inventories |
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| Investment in sales-type lease |
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| Capitalized commissions |
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| Prepaid expenses and other current assets |
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| Right-of-use assets under operating leases |
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| Operating lease obligations |
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| Other long-term assets |
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| Accounts payable and accrued liabilities |
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| Other long-term liabilities |
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| Unearned revenue |
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| Net cash used in operating activities |
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| Investing activities |
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| Purchases of property and equipment |
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| Capitalization of software development costs |
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| Net cash used in investing activities |
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| Financing activities |
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| Proceeds from notes payable |
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| Payments on notes payable |
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| Payment on debt issuance costs |
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| Proceeds from issuance of common stock and warrants |
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| Proceeds from exercise of common stock options |
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| Payments on finance lease obligations |
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| Net cash provided by (used in) financing activities |
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| Changes in cash and cash equivalents due to changes in foreign currency |
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| Net increase (decrease) in cash and cash equivalents |
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| Cash and cash equivalents at beginning of year |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental cash flow information: |
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| Interest paid |
$ | $ | ||||||
| Income taxes paid, foreign |
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| Non-cash financing and investing activities: |
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| Equity warrant issued in conjunction with notes payable due to related parties |
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| Property and equipment financed by finance lease or accounts payable |
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See accompanying notes to the condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
December 31, 2022
(Unaudited)
| 1. | Basis of Presentation and Significant Accounting Policies |
Business
Sonic Foundry, Inc. (the "Company") is the global leader for video capture, management, and streaming solutions as well as virtual and hybrid events. Trusted by thousands of educational institutions, corporations, health organizations and government entities in over 65 countries with solutions that transform communication, training, and learning. Sonic Foundry’s brands include Mediasite®, Mediasite Connect, Vidable™ and Global Learning Exchange™.
On November 16, 2022 the Company entered into two agreements for a total of $
The proceeds from these financing transactions are intended for general corporate purposes and will assist the Company in maintaining the investment it’s making in its new lines of business – Vidable and Global Learning Exchange. In addition, the Company has been proactive in developing plans to improve its liquidity, including expense and headcount reductions initiated in December 2022 and prioritization of contracts and promotions that will increase or accelerate cash collections.
The Company had a balance of cash of $
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, 2022 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 three month period ended December 31, 2022 are not necessarily indicative of the results that might be expected for the year ending September 30, 2023. The September 30, 2022 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.
Impacts of COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows 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. The Company continues to follow guidelines outlined by the CDC and local county protocol. On August 2, 2021, the Company returned to in-person working. The Company implemented a hybrid module to allow employees to work 60% in office and 40% from home.
COVID-19 has had negative impacts on our operations and the future impacts of the pandemic and any corresponding economic results are largely unknown and rapidly evolving. The Company has implemented new products and new approaches to deliver existing products to grow revenue. In response to the cancellations of in-person events, the Company introduced a new virtual events platform as an alternate solution for our customers. In addition, the Company is confident the pandemic will accelerate the Company's new product strategy.
Restructuring and exit activities
The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a -time benefit arrangement. The Company accounts for on-going benefit arrangements, such as those documented by employment agreements, in accordance with Accounting Standards Codification 712 ("ASC 712") Nonretirement Postemployment Benefits. Under ASC 712, liabilities for postemployment benefits are recorded at the time the obligations are probable of being incurred and can be reasonably estimated. The Company accounts for -time employment benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. When applicable, the Company records such costs into operating expense.
During the three months ended December 31, 2022, the Company expensed involuntary termination benefits of $
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 December 31, 2022:
| Investment in sales-type lease, gross: | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Gross investment in sales-type lease | ||||
| Less: Unearned income | ||||
| Total investment in sales-type lease | $ | |||
| Current portion of total investment in sales-type lease | $ | |||
| Long-term portion of total investment in sales-type lease | ||||
| $ |
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):
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| Raw materials and supplies | $ | $ | ||||||
| Finished goods | ||||||||
| Less: Obsolescence reserve | ( | ) | ( | ) | ||||
| $ | $ | |||||||
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 December 31, 2022 and September 30, 2022, the Company has recorded a liability of $
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 (See Note 4) 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):
| December 31, 2022 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
| Derivative liability | $ | $ | $ | $ | ||||||||||||
| September 30, 2022 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
| Derivative liability | $ | $ | $ | $ | ||||||||||||
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 Non-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).
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, accounts payable, debt instruments and 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 to 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.
Software Development Cost
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 cost, subject to impairment. Until the first fiscal quarter of 2022, the period between achieving technological feasibility of the Company’s products and the general availability of the products has been short. During the three months ended December 31, 2022, the Company capitalized approximately $
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:
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Expected life (in years) | ||||||||
| Risk-free interest rate | | |||||||
| Expected volatility | ||||||||
| Expected forfeiture rate | | |||||||
| Expected exercise factor | ||||||||
| Expected dividend yield | | | ||||||
A summary of option activity at December 31, 2022 and changes during the three months then ended is presented below:
| Weighted- | Weighted-Average | |||||||||||
| Average | Remaining Contractual | |||||||||||
| Options | Exercise Price | Period in Years | ||||||||||
| Outstanding at October 1, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited and cancelled | ( | ) | — | |||||||||
| Outstanding at December 31, 2022 | $ | |||||||||||
| Exercisable at December 31, 2022 | $ | |||||||||||
A summary of the status of the Company’s non-vested options and changes during the three month period ended December 31, 2022 is presented below:
| Weighted-Average | ||||||||
| Grant Date Fair | ||||||||
| Non-vested Options | Options | Value | ||||||
| Non-vested at October 1, 2022 | $ | |||||||
| Granted | | |||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Non-vested at December 31, 2022 | $ | | ||||||
The weighted average grant date fair value of options granted during the three months ended December 31, 2022 was $
Stock-based compensation expense for stock options recorded in the three months ended December 31, 2022 was $
The Company also has an Employee Stock Purchase Plan ("Purchase Plan") under which an aggregate of
Preferred Stock and Dividends
No shares of Preferred Stock, Series A or Series B were issued and outstanding as of December 31, 2022 or September 30, 2022.
Common Stock Transactions
On April 13, 2022, the Company announced an underwritten public offering of
The Company also issued Underwriters' Warrants that grants the underwriter the right to purchase an aggregate of 6% of the shares of common stock issued in the offering or a total of
The Underwriters’ Warrants are exercisable, in whole or in part, commencing October 10, 2022, and expiring on October 10, 2027, at an initial exercise price of $
On April 19, 2022, the public offering closed. Gross proceeds from the sale of
On November 16, 2022, the Company entered into a Subscription Agreement with Mark Burish ("Burish"), Chairman of the Company's Board of Directors, and Warrant whereby Burish purchased $
The total warrants outstanding as of December 31, 2022 are as follows:
| Warrants Outstanding | Wtd Ave. | |||||||||||
| Issued in Connection | Amount | Exercise Price | Life in Yrs. | |||||||||
| Capital Raise | $ | |||||||||||
| Vender Agreement | $ | |||||||||||
| $ | ||||||||||||
Uplisting to Nasdaq Capital Market
On January 24, 2022, the Company announced that the Nasdaq Stock Market LLC (“Nasdaq”) had approved its application for uplisting the Company’s common stock to the Nasdaq Capital Market. Sonic Foundry’s common stock commenced trading on the Nasdaq Capital Market at the opening of the market on Tuesday, January 25, 2022, under the Company’s former ticker symbol “SOFO.” On August 10, 2022, the Company received notice that as a result of the resignation of a board member, that we no longer meet the requirement that there be a minimum of three independent directors on the audit committee, nor that we had a majority of independent directors on the board. We believe we are now in compliance with these requirements. On January 6, 2023, we received notice from Nasdaq that the closing bid price of our common stock was below the $1 minimum requirement for 30 straight business days. The rules provide a period of 180 calendar days to regain compliance if the common stock trades above the minimum $1 bid price for at least ten days. We may also be eligible for an additional 180-day period in which to regain compliance. To qualify for the additional 180-day period, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
Increase in Authorized Shares of Common Stock
On February 2, 2022, the Company's Board of Directors approved a resolution to increase the authorized number of shares of common stock of the Company, par value $.
Per Share Computation
Basic earnings (loss) per share have been computed using the weighted-average number of shares of common stock outstanding during the period 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:
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Denominator for basic net income (loss) per share - weighted average common shares | ||||||||
| Effect of dilutive options and warrants (treasury method) | ||||||||
| Denominator for diluted net income (loss) per share - adjusted weighted average common shares | ||||||||
| 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 | ||||||||
Recent Accounting Pronouncements
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"). The amendments in this ASU affect 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 are effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendment is permitted, including adoption in any interim periods for which financial statement have not yet issued. 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.
2. Related Party Transactions
During the three months ended December 31, 2022, the Company incurred fees of $
On November 16, 2022, the Company entered into a Loan and Security Agreement with Neltjeberg Bay Enterprises, LLC (“NBE”) whereby NBE loaned the Company $
Simultaneously with the closing above, the Company closed a Security Agreement and Promissory Note with Mark Burish (“Burish”), the Company’s chairman of the Board of Directors, for $
Mr. Burish beneficially owns 40% of the Company’s common stock. Mr. Burish also serves as the Chairman of the Board of Directors.
All transactions with Mr. Burish and NBE were approved by a Special Committee of Disinterested and Independent Directors.
3. Commitments
Purchase Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product for hardware inventory, as well as services to support our hosting environment, which are not recorded on the Company's condensed consolidated balance sheet. At December 31, 2022, the Company had an obligation to purchase $
Leases
The Company has operating leases for corporate office space with various expiration dates. Our leases have remaining lease terms of up to years, some of which include escalation clauses, renewal options for up to years or termination options within 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 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 includes any initial direct costs incurred. We use the implicit interest 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 and have a net carrying value of $
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 December 31, 2022, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 are as follows (in thousands):
| Operating Leases | Finance Leases | |||||||
| 2023 (remaining) | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Supplemental information related to leases is as follows (in thousands, except lease term and discount rate):
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating lease costs | $ | $ | ||||||
| Variable operating lease costs | ( | ) | ||||||
| Total operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | $ | $ | ||||||
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, and COVID-19 rent credit.
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
| Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash outflows for operating leases | $ | $ | ||||||
| Operating cash outflows for finance leases | ||||||||
| Financing cash outflows for finance leases | ||||||||
Other information related to leases was as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Weighted average remaining lease term (in years) | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
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 $
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
At December 31, 2022, and September 30, 2022, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $
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 $
Line of Credit dated July 28, 2021
The Company entered into a Revolving Credit Agreement (the “Credit Agreement”) with U.S. Bank National Association (the “Bank”) on July 28, 2021. Under the Credit Agreement the Company could borrow the lesser of $
The Credit Agreement had a maturity date of March 31, 2023, and was secured by all assets of the Company and accrued interest equal to the one-month LIBOR rate plus
In connection with the Credit Agreement, the Company entered into the Stock Pledge Agreement with the Bank, as a condition of the Credit Loan. Upon default, the Bank shall have the right to transfer and claim the securities of the subsidiaries, Sonic Foundry International B.V. in Netherland and Mediasite K.K. in Japan.
Amendment to Line of Credit dated March 30, 2022
The Company entered into an amendment to the Credit Agreement with U.S. Bank National Association on March 30, 2022. Under the Credit Agreement, the Company could borrow from the Bank, for general and working capital purposes, an aggregate amount outstanding at any one time of $
In connection with the Credit Agreement, the Company was also required to maintain a collateral account with the Bank in the name of the Company but under the sole control of the Bank. As a condition to drawing on the Revolving Credit Loan, the Company had to deposit into the Collateral Account funds in an amount equal to the amount of principal the Company wishes to draw on the Revolving Credit Loan. Previous covenants and borrowing base requirements were removed as part of this amendment.
Termination of Line of Credit dated November 14, 2022
On November 14, 2022, Sonic Foundry, Inc. (the “Company”) terminated its Revolving Credit Agreement with U.S. Bank National Association.
Loan and Security Agreement with Neltjeberg Bay Enterprises, LLC dated November 16, 2022
On November 16, 2022, the Company entered into a Loan and Security Agreement with Neltjeberg Bay Enterprises, LLC (“NBE”) whereby NBE loaned the Company $
Security Agreement and Promissory Note with Mark Burish dated November 16, 2022
Simultaneously with the closing above, the Company closed a Security Agreement and Promissory Note with Mark Burish (“Burish”), the Company’s chairman of the Board of Directors, for $
Subscription Agreement and Warrant with Mark Burish dated November 16, 2022
The Company entered into a Subscription Agreement with Burish and Warrant whereby Burish purchased $
Other Indebtedness
On August 20, 2020, Mediasite K.K. and Sumitomo Mitsui Banking Corporation entered into a $
On September 30, 2022, Mediasite K.K. and Resona Bank, Ltd. entered into a $
The annual principal payments on the outstanding notes payable and warrant debt are as follows:
| Fiscal Year (in thousands) | ||||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total principal payments | $ |
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 has net operating losses (NOL) carried over from previous years. Therefore, the Company had no accruals for interest and penalties on the Company’s Condensed Consolidated Balance Sheets at December 31, 2022 or September 30, 2022, and has recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three or three months ended December 31, 2022 or 2021.
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 Company's income tax expense for the three months ended December 31, 2022 and 2021 primarily consists of income tax expense/benefit at its foreign subsidiaries.
Valuation allowance for net deferred tax assets
Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. We do not provide for U.S. income taxes on the undistributed earnings of our foreign subsidiaries, which we consider to be permanently invested outside of the U.S.
We make judgments regarding the realizability of our deferred tax assets. The balance sheet carrying value of our net deferred tax assets is based on whether we believe that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets after consideration of all available evidence. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Generally, cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.
As of September 30, 2022, valuation allowances have been established for all U.S. and for certain foreign deferred tax assets which we believe do not meet the “more likely than not” criteria for recognition. As of December 31, 2022, and September 30, 2022, the Company recorded a deferred tax asset in the amount of $
If we are subsequently able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, then we will be required to recognize these deferred tax assets through the reduction of the valuation allowance, which could result in a material benefit to our results of operations in the period in which the benefit is determined.
6. Revenue
Disaggregation of Revenues
The following tables summarize revenues from contracts with customers for the three months ended December 31, 2022 and 2021, respectively, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK):
| Three months ended December 31, 2022 | ||||||||||||||||||||
| SOFO | SFI | MSKK | Eliminations | Total | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Hardware | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Software | ( | ) | ||||||||||||||||||
| Shipping | ||||||||||||||||||||
| Product and other total | ( | ) | ||||||||||||||||||
| Support | ( | ) | ||||||||||||||||||
| Hosting | ( | ) | ||||||||||||||||||
| Events | ||||||||||||||||||||
| Installs, training & other | ||||||||||||||||||||
| Services total | ( | ) | ||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Three months ended December 31, 2021 | ||||||||||||||||||||
| SOFO | SFI | MSKK | Eliminations | Total | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Hardware | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Software | ( | ) | ||||||||||||||||||
| Shipping | ||||||||||||||||||||
| Product and other total | ( | ) | ||||||||||||||||||
| Support | ( | ) | ||||||||||||||||||
| Hosting | ( | ) | ||||||||||||||||||
| Events | ||||||||||||||||||||
| Installs, training & other | ||||||||||||||||||||
| Services total | ( | ) | ||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Transaction price allocated to future performance obligations
As of December 31, 2022, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately $
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, 2022, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $
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, primarily capitalized commissions, proportionate with related revenues over the period of the contract. During the three months ended December 31, 2022, amortization expense related to the amount included in the capitalized commissions at the beginning of the period was $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, expected operating results and other statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: the notes to the condensed consolidated financial statements and "Management’s Discussion and Analysis." These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. These statements are based upon our current plans and strategies and reflect our current assessment of the risks and uncertainties related to our business and are made as of the date of this report. These statements are inherently subject to known and unknown risks and uncertainties. There may be events in the future that we are not able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results to differ materially from those currently anticipated include the following:
| ● |
Uncertainties relating to our ability to successfully implement our evolving business strategy in new lines of business; |
| ● |
The impact of competition, customer adoption of our products and services, and the importance of video; |
| ● |
Our capital needs, ability to raise capital in the future and ability to meet debt covenants; |
| ● |
The ongoing effect and impact of public health crises, such as the coronavirus ("COVID-19") pandemic in particular as it impacts our events business; |
| ● |
The impact of global economic conditions, currency exchange rates, supply chain and other geopolitical developments on our business; |
| ● |
The effect of competition in the markets for our products; |
| ● |
Our financial condition and liquidity; |
| ● |
The occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems and the efforts to transition our leased data centers to the public cloud; and |
| ● |
Potential long-lived asset impairments. |
All forward statements should be considered in the context of the risks and other factors described above and in "Risk Factors" (Part I, Item 1A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2022), "Quantitative and Qualitative Disclosures about Market Risk" (Part II, Item 7A of the Company’s Annual Report on Form 10-K for the Fiscal Year ended September 30, 2022), and "Management’s Discussion and Analysis" (Part I, Item 2 of this Form 10-Q). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
Overview
Sonic Foundry, Inc. is the global leader for video capture, management, and streaming solutions as well as virtual and hybrid events. Trusted by thousands of educational institutions, corporations, health organizations and government entities in over 65 countries with solutions that transform communication, training, and learning. Sonic Foundry’s brands include Mediasite®, Mediasite Connect, Vidable™ and Global Learning Exchange™.
Impacts of COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows 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. The Company continues to follow guidelines outlined by the CDC and local county protocol. On August 2, 2021, the Company returned to in-person working. The Company implemented a hybrid module to allow employees to work 60% in office and 40% from home.
While COVID-19 has had negative impacts on our operations and the future impacts of the pandemic and any corresponding economic results are largely unknown and rapidly evolving. The Company has implemented new products and new approaches to deliver existing products to grow revenue. In response to the cancellations of in-person events, the Company introduced a new virtual events platform as an alternate solution for our customers. The Company is confident the pandemic will accelerate the Company's new product strategy.
Restructuring and exit activities
Evolving Strategy on Growth Initiatives
While the Company continues to work at steadily improving results of its Mediasite business, we recognized growth constraints in our existing business, and, therefore, we are shifting our focus toward building our runway in adjacent markets for future growth strategies as follows:
| • | First, we are expanding our cloud capabilities to better support our customers’ video needs. This is an important step in moving Sonic Foundry from primarily a hardware provider to a SaaS service provider with recurring revenue streams. | |
| • | Second, we are building a library of AI -enabled video solutions that can deliver instant, comprehensive, and automated video enhancement at scale. We believe the market for this technology is compelling. | |
|
•
|
The third key component of our growth strategy is aimed at democratizing global higher education. U.S. and U.K. universities are being increasingly challenged with lower enrollment and are looking for ways to expand into new growth markets. In close collaboration with several university clients, we have identified a global supply-demand imbalance. There are many students worldwide that can afford a higher education yet do not have access to it for a variety of reasons—geo/political instability; international travel restrictions; and inadequate infrastructure. Our innovative solution will allow students to have an in-person experience in locally supported, affordable, community-centric environments that offer aggregated educational content through our Mediasite platform. This is essentially master classes taught by top professors that encourage students to engage with one another in a collaborative and supported setting that bridges the educational gap and offers education opportunities in economically disadvantaged regions. |
This transformation from focusing solely on our Mediasite business to investing substantially, not only in our current space, but in these adjacent markets began in fiscal 2022. While we expect modest revenue in fiscal 2023 from these growth initiatives, we intend to continue to aggressively invest in them with the expectation that they will ultimately result in greater revenue than our Mediasite business. Managing a business with a combination of mature and start-up brands is challenging and will likely require constant adjustment in the allocation of resources within the brands, particularly in the current weak economic environment. Such adjustments may delay expected growth in one or more brands or make retention of customers or employees more challenging. Any such changes will negatively impact our business.
RESULTS OF OPERATIONS
Revenue
Revenue from our business includes the sale of Mediasite recorders and server software products and related services contracts, such as customer support, installation, customization services, training, content hosting and event services. We market our products to educational institutions, corporations and government agencies that need to deploy, manage, index and distribute video content on Internet-based networks. We reach both our domestic and international markets through reseller networks, a direct sales effort and partnerships with system integrators.
Q1-2023 compared to Q1-2022
Q1-2023 revenue of $5.0 million decreased 31% compared to Q1-2022 revenue of $7.3 million. Revenue consisted of the following:
| • |
Product and other revenue from sale of Mediasite recorder units and server software Q1-2023 revenue of $878 thousand decreased $1.1 million or 56% compared to Q1-2022 revenue of $2.0 million as a result of client delays due to supply chain disruptions. |
|
| • | Service revenue represents the portion of fees charged for Mediasite customer support contracts amortized over the length of the contract, typically 12 months, as well as training, installation, events and content hosting services. Service revenue decreased $1.1 million or 21% from $5.2 million in Q1-2022 to $4.1 million in Q1-2023, primarily from a reduction in the number and size of events as customers begin to go back to in person events, delays in renewals of support contracts, foreign currency impact on our Japanese and European operations, and a lower base of deferred revenue at the start of the quarter. | |
| • | At December 31, 2022, $9.0 million of revenue was deferred, of which we expect to recognize $7.6 million in the next twelve months, including approximately $3.1 million in the quarter ending March 31, 2023. At December 31, 2021, $9.8 million of revenue was deferred. | |
| • | Other revenue relates to freight charges and economic impact fees billed separately to our customers. |
Gross Margin
Q1-2023 compared to Q1-2022
Gross margin for Q1-2023 was $3.0 million or 61% of revenue compared to Q1-2022 gross margin of $5.1 million or 71%. The significant components of cost of revenue include:
| • |
Product costs. Product costs consist of costs associated with our Mediasite recorder hardware, freight, labor and certain allocated costs. These costs were $337 thousand in Q1-2023 and $861 thousand in Q1-2022, resulting in gross margin on products of 62% and 57% respectively. |
| • |
Services costs. Service costs consist of staff wages for tech support, hosting and events, operating costs for events and hosting, as well as depreciation expense for hosting infrastructure. These costs were $1.6 million in Q1-2023 and $1.3 million in Q1-2022, resulting in gross margin on services of 61% and 75% respectively. The decrease in margin is due to accelerated depreciation on hosting infrastructure related to AWS transition on a lower revenue base. |
Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses include wages and commissions for sales, marketing and business development personnel, print advertising and various promotional expenses for our products. Timing of these costs may vary greatly depending on introduction of new products and services or entrance into new markets, or participation in major tradeshows.
Q1-2023 compared to Q1-2022
Selling and marketing expenses were $3.1 million in Q1-2022 and decreased $163 thousand to $2.9 million in Q1-2023. Expenses in the major categories include:
| • |
Cost directly related to launching Global Learning Exchange increased $438 thousand. These costs include consulting cost, corporate salaries and wages, travel, and local partner operation fees. |
| • |
Mediasite people costs decreased $235 thousand. These costs include salary and benefits, outside consultants, and commissions. |
| • |
There was a $58 thousand increase in G&A allocation related to additional GLX support and Mediasite T & E and Meals increased $34 thousand. |
| • |
Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for a decrease of $17 thousand and $439 thousand, respectively, an aggregate decrease of $456 thousand from Q1-2022. |
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities, finance, legal, human resource and information technology departments, as well as other expenses not fully allocated to functional areas.
Q1-2023 compared to Q1-2022
G&A expenses decreased $178 thousand or 10% from $1.8 million in Q1-2022 to $1.6 million in Q1-2023. Differences in the major categories include
| • |
Increase of $153 thousand due to an increase in bad debt expense. |
| • |
Professional services decreased $63 thousand related to decreased accounting and legal costs and facilites costs decreased $63 thousand due to lower rent and software maintenance plans expenses. |
| • |
There was a $244 thousand decrease in G&A allocation related to additional support for Vidable and GLX. |
| • |
G&A expenses for Sonic Foundry International and Mediasite KK accounted for a decrease of $59 thousand and $12 thousand, respectively, an aggregate decrease of $71 thousand from Q1-2022. |
Product Development Expenses
Product development expenses include salaries and wages of the software research and development staff and an allocation of benefits, facility and administrative expenses.
Q1-2023 compared to Q1-2022
Product development expenses increased $1.0 million or 57% from $1.8 million in Q1-2022 to $2.8 million in Q1-2023. Differences in the major categories include:
| • |
People costs increased $567 thousand related to increased investment in Vidable. Supplies costs increased $181 thousand due to increased software costs. G&A allocation increased $213 thousand due to increased time spent supporting Vidable. Professional services costs increased $80 thousand due to increased consulting costs. |
| • |
Product development expense for Sonic Foundry International and Mediasite KK accounted for a decrease of $42 thousand and $47 thousand, respectively, an aggregate decrease of $89 thousand compared to Q1-2022. |
Other Income and Expense, Net
Interest income for the three months ended December 31, 2022 was $0. Interest income for the three months ended December 31, 2021 was $10 thousand. The Company recorded no amortization expense related to the back-end fee on the PFG loan for the three months ended December 31, 2022 and 2021 due to the debt being paid off in May 2021.
During the three months ended December 31, 2022, no gain in fair value was recorded related to the fair value remeasurement on the derivative liability associated with the Loan and Security Agreement and Warrant Debt with PFG compared to a gain in fair value of $27 thousand during the three months ended December 31, 2021. The fair value of the derivative liability is measured at fair value 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.
Foreign Currency
The Company's wholly-owned subsidiaries operate in Japan and the Netherlands, and utilize the Japanese Yen and Euro, respectively, as their functional currency. Assets and liabilities of the Company's foreign operations are translated in US dollars at period end exchange rates while revenues and expenses are translated using average rates for the period. Gains and losses from the translation are deferred and included in accumulated other comprehensive loss in the consolidated statements of operations.
For the three months ended December 31, 2022, the Company's foreign currency translation adjustment was a gain of $49 thousand, compared to a loss $27 thousand for the three months ended December 31, 2021.
During the three months ended December 31, 2022 and 2021 the Company recorded an aggregate transaction loss of $3 thousand. The aggregate transaction gain or loss is included in the other expense line of the condensed consolidated statements of operations.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are its cash from operations and debt and equity financing. During the first three months of fiscal 2023, the Company used $3.9 million cash for operating activities, compared with $2.6 cash used by operating activities in the same period of fiscal 2022. The primary factors affecting the $3.9 million cash used by operating activities include the $4.4 million net loss for the quarter, $732 thousand change in unearned revenue, $1.1 million inventory increase, $282 thousand change in operating lease obligations, $255 thousand change in prepaid expenses and other current assets, and $113 thousand change in accounts payable and accrued liabilities partially offset by $1.7 million change in accounts receivable, 480 thousand change in depreciation and amortization of property and equipment, $126 thousand change in deferred tax assets, $319 thousand change in stock based compensation expense related to stock options and $278 thousand change in right-of-use assets under operating leases.
Capital expenditures were $204 thousand in the first three months of fiscal 2023 compared to $616 thousand in the same period in fiscal 2022. Capitalized software development costs were $755 thousand in the first three months of fiscal 2023 compared to $328 thousand in the same period in fiscal 2022.
The Company was provided $9.5 million of cash from financing activities during the first threemonths of fiscal 2023. Payments on debt issuance costs of $193 thousand were offset by proceeds from notes payable of $8.5 million and common stock issuance of $1.2 million. For the same period in fiscal 2022, the Company was provided $35 thousand for financing activities.
At December 31, 2022, the Company had $9.3 million outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V, NBE, and Mark Burish as well as the Mediasite KK term debt and note payable with Resona Bank.
At December 31, 2022, approximately $923 thousand of cash and cash equivalents was held by the Company’s foreign subsidiaries.
On November 16, 2022 the Company entered into two agreements for a total of $8.5 million debt at a rate of 12% interest per annum due in 30 equal installments beginning on June 1, 2023. On November 16, 2022 the Company also entered into a subscription agreement with Mr. Mark Burish for a total of $1.2 million of common stock along with attached warrant.
The proceeds from these financing transactions are intended for general corporate purposes and will assist the Company in maintaining the investment it’s making in its new lines of business – Vidable and Global Learning Exchange. In addition, the Company has been proactive in developing plans to improve its liquidity, including expense and headcount reductions initiated in December 2022 and prioritization of contracts and promotions that will increase or accelerate cash collections.
The Company had a balance of cash of $8.0 million at December 31, 2022 and believes its cash position, along with the other resources and plans described above, will be sufficient to accomplish its business plan through at least the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on evaluations at December 31, 2022, our principal executive officer and principal financial officer, with the participation of our management team, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act). Disclosure controls and procedures ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2022.
Changes in Internal Controls
During the period covered by the quarterly report on Form 10-Q, the Company has not made any changes to its internal control over financial reporting (as referred to in Paragraph 4(b) of the Certifications of the Company's principal executive officer and principal financial officer included as exhibits to the report) that have materially affected or are reasonably likely to affect the Company's internal control over financial reporting.
OTHER INFORMATION
None.
There have been no material changes in our risk factors from those disclosed in our Form 10-K for the fiscal year ended September 30, 2022 filed with the SEC.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Registrant will furnish upon request to the Securities and Exchange Commission a copy of all exhibits, annexes and schedules attached to each contract referenced in item 10.
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Compensatory Plan or Arrangement |
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Sonic Foundry, Inc.
(Registrant
| February 9, 2023 | By: |
/s/ Joe Mozden, Jr. |
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Joe Mozden, Jr. |
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Chief Executive Officer |
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| February 9, 2023 | By: |
/s/ Kenneth A. Minor |
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Kenneth A. Minor |
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Chief Financial Officer |