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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)
(
(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. ☐
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 April 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)
| March 31, | September 30, | |||||||
| 2023 | 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: | ||||||||
| Software development costs, net of amortization | ||||||||
| Investment in sales-type lease, long-term | ||||||||
| Capitalized commissions, long-term | ||||||||
| Right-of-use assets under operating leases | ||||||||
| Deferred tax asset | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity (deficit) | ||||||||
| 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 (deficit): | ||||||||
| 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 (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
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 March 31, |
Six Months Ended March 31, |
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| 2023 |
2022 |
2023 |
2022 |
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| Revenue: |
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| Product and other |
$ | $ | $ | $ | ||||||||||||
| Services |
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| 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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) | ( |
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| Non-operating income (expenses): |
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| Interest expense, net |
( |
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) | ( |
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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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) | ( |
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| Income tax benefit (expense) |
( |
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) | ( |
) | ( |
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| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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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 March 31, |
Six Months Ended March 31, |
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| 2023 |
2022 |
2023 |
2022 |
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| Net loss |
$ | ( |
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) | $ | ( |
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| Other comprehensive loss |
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| Foreign currency translation adjustment |
$ | ( |
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) | $ | ( |
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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 (Deficit)
(in thousands)
(Unaudited)
| Accumulated |
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| Additional |
other |
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| Preferred |
Common |
paid-in |
Accumulated |
comprehensive |
Treasury |
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| 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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| Issuance of common stock |
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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, March 31, 2022 |
$ | $ | $ | $ | ( |
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| Accumulated |
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| Additional |
other |
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| Preferred |
Common |
paid-in |
Accumulated |
comprehensive |
Treasury |
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| stock |
stock |
capital |
deficit |
loss |
stock |
Total |
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| Balance, December 31, 2021 |
$ | $ | $ | $ | ( |
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| Stock compensation |
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| Issuance of common stock |
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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, March 31, 2022 |
$ | $ | $ | $ | ( |
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| Accumulated |
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| Additional |
other |
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| Preferred |
Common |
paid-in |
Accumulated |
comprehensive |
Treasury |
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| stock |
stock |
capital |
deficit |
loss |
stock |
Total |
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| Balance, September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Stock compensation |
$ | |||||||||||||||||||||||||||
| Issuance of common stock and warrants |
$ | |||||||||||||||||||||||||||
| Stock option exercise |
$ | |||||||||||||||||||||||||||
| Foreign currency translation adjustment |
$ | |||||||||||||||||||||||||||
| Net loss |
( |
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| Balance, March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
| 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, December 31, 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, March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Six Months Ended |
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| March 31, |
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| 2023 |
2022 |
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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 |
( |
) | ||||||
| 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 |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
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| Changes in cash and cash equivalents due to changes in foreign currency |
( |
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| Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| 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
March 31, 2023
(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 accompanying financial statements have been prepared assuming the Company will continue as a going concern. In fiscal year 2023 to date, the Company incurred a net loss of $
However, management has considered its plans to continue the Company as a going concern and believes substantial doubt is alleviated. Management developed a plan to improve liquidity in its operations through reductions in expenses, incentives to accelerate cash collections and monetization of excess inventory. In addition, the Company is now executing on a plan to improve liquidity through 1) an agreement with its secured lenders to defer principal payments in the near term, for which it is in the process of documenting; 2) obtaining new debt financing from an existing lender to provide more capital; and 3) an evaluation of other strategic alternatives with multiple parties to provide liquidity. The Company believes it will be successful in such initiatives and together with growth in its various business lines that it will be able to continue as a going concern through at least the next twelve months.
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 six month period ended March 31, 2023 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.
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.
For the three and six months ended March 31, 2023, 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 March 31, 2023:
| Investment in sales-type lease, gross: | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 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):
| March 31, | September 30, | |||||||
| 2023 | 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 March 31, 2023 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 V 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):
| March 31, 2023 | 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 V 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.
No legal contingencies were recorded or were required to be disclosed for the six months ended March 31, 2023 or 2022.
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 and six months ended March 31, 2023, 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:
| Six Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Expected life (in years) | 5.7 | 5.3 | ||||||
| Risk-free interest rate | 4.03% - 4.20% | |||||||
| Expected volatility | 67.61% - 67.82% | |||||||
| Expected forfeiture rate | 9.70% - 9.80% | | ||||||
| Expected exercise factor | ||||||||
| Expected dividend yield | | | ||||||
A summary of option activity at March 31, 2023 and changes during the six 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 March 31, 2023 | $ | |||||||||||
| Exercisable at March 31, 2023 | $ | |||||||||||
A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 2023 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 March 31, 2023 | $ | | ||||||
The weighted average grant date fair value of options granted during the six months ended March 31, 2023 was $
Stock-based compensation expense for stock options recorded in the three and six months ended March 31, 2023 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 March 31, 2023 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 grant the underwriter the right to purchase an aggregate of 6% of the shares of common stock issued in the offering or a total 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 a Warrant whereby Burish purchased $
The total warrants outstanding as of March 31, 2023 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.
On February 14, 2023, the Company was notified by Nasdaq that it is not in compliance with the requirement to maintain a minimum of $
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). The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 and six months ended March 31, 2023, the Company incurred $
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”) 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 March 31, 2023, 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. As of March 31, 2023, three unexercised renewal options for operating leases have been recognized into the respective ROU asset and lease liability.
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 March 31, 2023, 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 | Six Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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):
| Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 | |||||||
| 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:
| March 31, 2023 | March 31, 2022 | |||||||
| 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 March 31, 2023, 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 had 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
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 March 24, 2023, Mediasite K.K.and the Japanese Finance 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, notes payable due to related parties, and warrant debt are as follows:
| Fiscal Year (in thousands) | ||||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Less: Discount on Notes Payable & Debt Issuance Costs & Loan Premium | ( | ) | ||
| 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 had
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 and six months ended March 31, 2023 and 2022 primarily consists of income tax expense/benefit at its foreign subsidiaries. The Company has net operating losses (NOL) carried over from previous years.
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 had 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 March 31, 2023 the Company has a full valuation allowance established as the Company
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 and six months ended March 31, 2023 and 2022, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK):
| Three months ended March 31, 2023 | ||||||||||||||||||||
| SOFO | SFI | MSKK | Eliminations | Total | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Hardware | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Software | ( | ) | ||||||||||||||||||
| Shipping | ||||||||||||||||||||
| Product and other total | ( | ) | ||||||||||||||||||
| Support | ( | ) | ||||||||||||||||||
| Hosting | ( | ) | ||||||||||||||||||
| Events | ||||||||||||||||||||
| Installs, training & other | ||||||||||||||||||||
| Services total | ( | ) | ||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Six Months Ended March 31, 2023 | ||||||||||||||||||||
| 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 March 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Six Months Ended March 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Transaction price allocated to future performance obligations
As of March 31, 2023, 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 and six months ended March 31, 2023, 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 and six months ended March 31, 2023, 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. |
|
| ● |
Uncertainty over our ability to successfully implement management's plan to improve liquidity, including the ability to implement and the effect on our business of cost containment measures and our ability to reach agreements to extend existing debt or secure new debt financing on terms acceptable to us. |
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.
Q2-2023 compared to Q2-2022
Q2-2023 revenue of $5.7 million decreased 21% compared to Q2-2022 revenue of $7.2 million. Revenue consisted of the following:
| • |
Product and other revenue from sale of Mediasite recorder units and server software Q2-2023 revenue of $1.6 million decreased $0.6 million or 26% compared to Q2-2022 revenue of $2.2 million due to a shift from our customer base from hardware devices to other means of video capture. |
|
| • | 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 $950 thousand or 19% from $5.1 million in Q2-2022 to $4.1 million in Q2-2023, related to foreign currency impact on our Japanese operations, a lower base of deferred revenue at the start of the quarter and timing of large integration projects recorded last year in Japan and Europe. | |
| • | At March 31, 2023, $10.1 million of revenue was deferred, of which we expect to recognize $8.6 million in the next twelve months, including approximately $3.5 million in the quarter ending June 30, 2023. At March 31, 2022, $8.6 million of revenue was deferred. | |
| • | Other revenue relates to freight charges and economic impact fees billed separately to our customers. |
YTD-2023 (six months) compared to YTD-2022 (six months)
YTD-2023 revenue of $10.8 million decreased 26% compared to YTD-2022 revenue of $14.5 million. Revenue consisted of the following:
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Product and other revenue from sale of Mediasite recorder units and server software YTD-2023 revenue of $2.5 million decreased $1.7 million or 40% compared to YTD-2022 revenue of $4.2 million due to a shift from our customer base from hardware devices to other means of video capture. |
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| • | 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 $2.1 million or 20% from $10.3 million YTD-2022 to $8.3 million YTD-2023, related to decreasing recorder purchases, foreign currency impact on our Japanese operations, a reduction in the number and size of events as customers go back to in person events, a lower base of deferred revenue at the start of the year and timing of large integration projects last year. | |
| • | Other revenue relates to freight charges and economic impact fees billed separately to our customers. |
Gross Margin
Q2-2023 compared to Q2-2022
Gross margin for Q2-2023 was $3.3 million or 57% of revenue compared to Q2-2022 gross margin of $5.2 million or 71% of revenue. The significant components of cost of revenue include:
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Product costs. Product costs consist of costs associated with our Mediasite recorder hardware, freight, labor and certain allocated costs. These costs were $772 thousand in Q2-2023 and $748 thousand in Q2-2022, resulting in gross margin on products of 52% and 65% respectively. |
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Services costs. Service costs consist of staff wages for tech support, hosting and events, operating costs for events and hosting, as well as accelerated depreciation expense for hosting infrastructure and other transition costs as we migrate to the public cloud. These costs were $1.7 million in Q2-2023 and $1.3 million in Q2-2022, resulting in gross margin on services of 59% and 74% respectively. |
YTD-2023 (six months) compared to YTD-2022 (six months)
Gross margin for YTD-2023 was $6.3 million or 59% of revenue compared to YTD-2022 gross margin of $10.3 million or 71%. The significant components of cost of revenue include:
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Product costs. Product costs consist of costs associated with our Mediasite recorder hardware, freight, labor and certain allocated costs. These costs were $1.1 million in 2023 and $1.6 million in 2022, resulting in gross margin on products of 55% and 61% respectively. |
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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 $3.3 million in 2023 and $2.6 million in 2022, resulting in gross margin on services of 60% and 75% respectively. The primary source of the change was $0.5 million for short-term transition costs related to our move to a public cloud environment with the remainder to support growth expectations from our events business. |
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.
Q2-2023 compared to Q2-2022
Selling and marketing expenses were $3.2 million in Q2-2022 and decreased $702 thousand to $2.5 million in Q2-2023. Expenses in the major categories include:
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Cost directly related to launching Global Learning Exchange increased $307 thousand. These costs include consulting cost, corporate salaries and wages, travel, and local partner operation fees. | |
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Mediasite people costs decreased $235 thousand. These costs include salary and benefits, outside consultants, and commissions. | |
| • | Mediasite advertising and tradeshows costs decreased $80 thousand related to attending a lower number of tradeshows and decreasing Mediasite internet advertising. | |
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There was a $355 thousand decrease in G&A allocation due to a lower base of G&A cost as well as a catch up allocation occurring in 2022 which was not necessary in 2023. |
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Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for a decrease of $41 thousand and $134 thousand, respectively, an aggregate decrease of $175 thousand from Q2-2022. |
YTD-2023 (six months) compared to YTD-2022 (six months)
Selling and marketing expenses were $6.3 million in YTD-2022 and decreased $739 thousand to $5.6 million in YTD-2023. Expenses in the major categories include:
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Cost directly related to launching Global Learning Exchange increased $746 thousand. These costs include consulting cost, corporate salaries and wages, travel, and local partner operation fees. | |
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Mediasite people costs decreased $470 thousand. These costs include salary and benefits, outside consultants, and commissions. | |
| • | Mediasite advertising and tradeshows costs decreased $70 thousand related to attending a lower number of tradeshows and decreasing Mediasite internet advertising. | |
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There was a $297 thousand decrease in G&A allocation related to a lower base of G&A cost in 2023. |
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Selling and marketing expenses for Sonic Foundry International and Mediasite KK accounted for a decrease of $58 thousand and $574 thousand, respectively, an aggregate decrease of $632 thousand from YTD-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.
Q2-2023 compared to Q2-2022
G&A expenses decreased $251 thousand or 20% from $1.3 million in Q2-2022 to $1.0 million in Q2-2023. Differences in the major categories include
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Decrease of $380 thousand related to salaries, bonus, benefits, and recruiting costs due to reduced headcount. |
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Decrease of $63 thousand in supplies. This is a decrease in software related costs. | |
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There was a $366 thousand increase in G&A allocation due to a catch up entry allocating additional cost out in Q2-2022. | |
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G&A expenses for Sonic Foundry International and Mediasite KK accounted for a decrease of $36 thousand and $122 thousand, respectively, an aggregate decrease of $158 thousand from Q2-2022. |
YTD-2023 (six months) compared to YTD-2022 (six months)
G&A expenses decreased $429 thousand or 14% from $3.1 million in YTD-2022 to $2.6 million in YTD-2023. Differences in the major categories include
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Decrease of $380 thousand related to salaries, bonus, benefits, and recruiting costs due to reduced headcount. |
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| • | Decrease of $168 thousand related to professional service and facilities costs. | |
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Increase of $172 thousand related to a swing in bad debt expense. | |
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There was a $122 thousand increase in G&A allocation due to lower G&A cost reducing the amount allocated out to other areas. | |
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G&A expenses for Sonic Foundry International and Mediasite KK accounted for a decrease of $48 thousand and $181 thousand, respectively, an aggregate decrease of $229 thousand from YTD-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.
Q2-2023 compared to Q2-2022
Product development expenses increased $459 thousand or 24% from $1.9 million in Q2-2022 to $2.4 million in Q2-2023. Differences in the major categories include:
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People costs increased $275 thousand primarily related to increased investment in Vidable. | |
| • | Supplies costs increased $123 thousand due to increased software costs. In addition, software maintenance costs increased $55 thousand vs prior year. | |
| • | Travel & related expenses increased $31 thousand due to increased headcount supporting Vidable compared to prior year. | |
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Product development expense for Sonic Foundry International and Mediasite KK accounted for a decrease of $1 thousand and $26 thousand, respectively, an aggregate decrease of $27 thousand compared to Q2-2022. |
YTD-2023 (six months) compared to YTD-2022 (six months)
Product development expenses increased $1.5 million or 40% from $3.7 million in YTD-2022 to $5.2 million in YTD-2023. Differences in the major categories include:
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People costs increased $922 thousand primarily related to increased investment in Vidable. | |
| • | Supplies costs increased $304 thousand due to increased software costs. | |
| • | Travel & related expenses increased $80 thousand due to increased headcount supporting Vidable compared to prior year. | |
| • | G&A allocation increased $202 thousand due to increased time spent supporting Vidable compared to prior year. | |
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Product development expense for Sonic Foundry International and Mediasite KK accounted for a decrease of $67 thousand and $49 thousand, respectively, an aggregate decrease of $116 thousand compared to YTD-2022. |
Other Income and Expense, Net
Interest expense for the three and six months ended March 31, 2023 was $492 thousand and $640 thousand compared to interest expense of $10 thousand and $5 thousand for the same periods last year.
During the three and six months ended March 31, 2023, 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 V compared to a gain in fair value of $2 thousand and $30 thousand during the three and six months ended March 31, 2022. 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 into 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 and six months ended March 31, 2023, the Company's foreign currency translation adjustment was a loss of $5 thousand and gain of $44 thousand, respectively, compared to losses $150 thousand and $177 thousand for the three and six months, respectively, ended March 31, 2022.
During the three and six months ended March 31, 2023 the Company recorded an aggregate transaction loss of $8 thousand and $11 thousand, respectively, compared to a loss of $19 thousand and $22 thousand for the three and six months ended March 31, 2022. 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 from debt and equity transactions discussed below.
At March 31, 2023, the Company's cash and cash equivalents amounted to $2.7M. Approximately $544 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 an attached warrant.
At March 31, 2023, the Company had $9.4 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 notes payable with Resona Bank and the Japanese Finance Corporation.
The Company was provided $9.5 million of cash from financing activities during the first six months of fiscal 2023. Payments on debt issuance costs of $193 thousand and payments on notes payable of $332 thousand were offset by proceeds from notes payable of $8.8 million and common stock issuance of $1.2 million. For the same period in fiscal 2022, the Company was provided $82 thousand for financing activities.
During the first six months of fiscal 2023, the Company used $8.4 million cash for operating activities, compared with $3.5 cash used by operating activities in the same period of fiscal 2022. The primary factors affecting the $8.4 million cash used by operating activities include the $7.8 million YTD net loss as a result of investments in the Company's new Vidable and Global Learning Exchange businesses, $1.3 million inventory increase associated with larger, long-range purchase commitments to account for global supply chain delays, $498 thousand change in operating lease obligations as a result of nearing the end of a large foreign lease where no lease will be signed beyond expiration. Operating cash use was partially offset by $1.0 million change in depreciation and amortization of property and equipment due to accelerated depreciation of our hosting assets during our move to a public cloud environment, $290 thousand change in deferred tax assets as a result of recognizing a full valuation allowance for our foreign operations, $430 thousand change in stock based compensation expense related to stock options, and $485 thousand change in right-of-use assets under operating leases due to the nearing expiration of the foreign lease noted above.
Capital expenditures were $245 thousand in the first six months of fiscal 2023 compared to $1.0 million in the same period in fiscal 2022 reflecting our reduction of hosted asset purchases as we move our datacenters to a public cloud. Capitalized software development costs were $1.5 million in the first six months of fiscal 2023 compared to $954 thousand in the same period in fiscal 2022 due to our continued growth in the investment into our Vidable business.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. In fiscal year 2023 to date, the Company incurred a net loss of $7.8 million compared to $2.9 million in fiscal year 2022 and has a deficit in stockholders’ equity at March 31, 2023 of $2.3 million. The Company currently does not have access to capital through a line of credit nor other readily available sources of capital. Together, these factors raise the need to consider the Company’s ability to continue as a going concern.
However, management has considered its plans to continue the Company as a going concern and believes substantial doubt is alleviated. Management developed a plan to improve liquidity in its operations through reductions in expenses, incentives to accelerate cash collections and monetization of excess inventory. In addition, the Company is now executing on a plan to improve liquidity through 1) an agreement with its secured lenders to defer principal payments in the near term, for which it is in the process of documenting; 2) obtaining new debt financing from an existing lender to provide more capital; and 3) an evaluation of other strategic alternatives with multiple parties to provide liquidity. The Company believes it will be successful in such initiatives and together with growth in its various business lines that it will be able to continue as a going concern through at least the next twelve 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 March 31, 2023, 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 March 31, 2023.
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.
| 10.1 | Sonic Foundry, Inc. 2020 Equity Incentive Plan (as amended effective March 10, 2023), filed herewith. | |
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Section 906 Certification of Chief Executive Officer and Chief Financial Officer |
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The following materials from the Sonic Foundry, Inc. Form 10-Q for the quarter ended March 31, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders' Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
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
| May 11, 2023 | By: |
/s/ Joe Mozden, Jr. |
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Joe Mozden, Jr. |
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Chief Executive Officer |
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| May 11, 2023 | By: |
/s/ Kenneth A. Minor |
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Kenneth A. Minor |
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Chief Financial Officer |
Exhibit 10.1
SONIC FOUNDRY, INC.
2020 EQUITY INCENTIVE PLAN, AS AMENDED
1.ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 Establishment. Sonic Foundry, Inc., a Maryland corporation, established the Sonic Foundry, Inc. 2020 Equity Incentive Plan (the “Plan”) effective as of January 28, 2021, the date of its approval by the stockholders of the Company (the “Effective Date”), as amended and restated March 10, 2022 and 2023.
Amendments of Plan. The 2020 Equity Incentive Plan was approved by the Company’s stockholders on January 28, 2021. The first amendment to the Plan was approved by the Company’s stockholders on March 10, 2022 to increase the number of shares subject to the plan from 1,000,000 to 2,000,000. The second amendment to the Plan was approved by the Company’s stockholders on March 10, 2023 to increase the number of shares subject to the Plan from 2,000,000 to 3,000,000. All references to the Plan set forth below shall be deemed references to the Plan as amended hereby.
1.2 Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Stock Appreciation Rights (“SARs”), Stock Purchase Rights, Stock Grants, Restricted Stock Units and Performance Shares, and Performance Share Units. [In addition, the Plan provides for certain cash-based amounts for service as Director.]
1.3 Term of Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Awards granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 Definitions. Whenever used herein, the terms set forth in Appendix I shall have their respective meanings set forth in Appendix I.
2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.
3. ADMINISTRATION.
3.1 Administration by the Committee. The Plan shall be administered by the Committee. All questions of interpretation of the Plan or of any Award shall be determined by the Committee, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Award.
3.2 Authority of Officers. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, determination or election. To the extent consistent with applicable law, the Board may, in its discretion, delegate to a committee comprised of one or more Officers (any such committee, an “Officer Committee”) the authority to designate Employees (other than themselves) to receive one or more Stock Awards, Options or rights to acquire shares of Stock and to determine the number of shares of Stock subject to such Stock Awards, Options and rights, without further approval of the Board or the Committee. Any such grants will be subject to the terms of the Board resolutions providing for such delegation of authority.
3.3 Powers of the Committee. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its discretion:
(a) to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock or units to be subject to each Award;
(b) to determine the type of Award granted and to designate Options as Incentive Stock Options or Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or other property;
(d) to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise or purchase price of shares purchased pursuant to any Award, (ii) the method of payment for shares purchased pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Award Formula and Performance Goals applicable to any Award and the extent to which such Performance Goals have been attained, (vi) the time of the expiration of any Award, (vii) the effect of the Participant’s termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;
(e) to determine whether an Award of SARs, Restricted Stock Units or Performance Shares or Performance Share Units will be settled in shares of Stock, cash, or in any combination thereof;
(f) to approve one or more forms of Award Agreement;
(g) subject to Section 3.4, to amend, modify, extend, cancel or renew any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto;
(h) to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto, including with respect to the period following a Participant’s termination of Service;
(i) to prescribe, amend or rescind rules, guidelines and policies relating to the plan, or to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the laws of or to accommodate the laws, regulations, tax or accounting effectiveness, accounting principles or custom of, non-United States jurisdictions whose citizens may be granted Awards; and
(j) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law.
3.4 Repricing. Without the affirmative vote of holders of a majority of the shares of Stock cast in person or by proxy at a meeting of the stockholders of the Company at which a quorum representing a majority of all outstanding shares of Stock is present or represented by proxy, neither the Board nor the Committee shall approve a program providing for (a) the cancellation of outstanding Options or SARs and the grant in substitution therefor of new Awards having a lower exercise or purchase price, (b) the amendment of outstanding Options or SARs to reduce the exercise price thereof or (c) except in connection with an adjustment pursuant to Section 4.2 or a transaction, the cashout of Options or SARs with an exercise price below Fair Market Value. This paragraph shall not be construed to apply to “issuing or assuming a stock option in a transaction to which section 424(a) applies,” within the meaning of Section 424 of the Code.
3.5 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee or as officers or employees of the Participating Company Group, members of the Board or the Committee and any officers or employees of the Participating Company Group to whom authority to act for the Board, the Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.
4.SHARES SUBJECT TO PLAN.
4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be 3,000,000. Such shares shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Award for any reason expires or is terminated or canceled without having been exercised or settled in full, or if shares of Stock acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by the Company at the Participant’s purchase price to effect a forfeiture of unvested shares upon termination of Service, the shares of Stock allocable to the terminated portion of such Award or such forfeited or repurchased shares of Stock shall be added back to the Plan share reserve in an amount corresponding to the reduction in such share reserve previously made in accordance with the rules described above in this Section 4.1 and again be available for issuance under the Plan. Shares of Stock shall not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award (other than a SAR that may be settled in shares of Stock and/or cash) that is settled in cash. Shares withheld in satisfaction of tax withholding obligations pursuant to Section 13.2 shall not again become available for issuance under the Plan. Upon exercise of a SAR, whether in cash or shares of Stock, the number of shares available for issuance under the Plan shall be reduced by the gross number of shares for which the SAR is exercised. If the exercise price of an Option is paid by “net exercise” (as described in Section 6.3(a)(iv)) or tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant, the number of shares available for issuance under the Plan shall be reduced by the gross number of shares for which the Option is exercised.
4.2 Adjustments for Changes in Capital Structure. In the event of any change in the Stock through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate adjustments shall be made in the number and class of shares subject to the Plan, in the ISO Share Limit (as defined in Section 5.3(b)),and to any outstanding Awards, and in the exercise or purchase price per share under any outstanding Award. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the exercise or purchase price under any Award be decreased to an amount less than the par value, if any, of the stock subject to such Award. The adjustments determined by the Committee pursuant to this Section 4.2 shall be final, binding and conclusive.
5.ELIGIBILITY AND AWARD LIMITATIONS.
5.1 Persons Eligible for Awards. Awards may be granted only to Employees, Directors and Consultants. No Award shall be granted prior to the date on which such person commences Service.
5.2 Participation. Except as otherwise provided in Section 3.2, Awards are granted solely at the discretion of the Committee. Eligible persons may be granted more than one (1) Award. However, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.
5.3 Incentive Stock Option Limitations.
(a) Persons Eligible. An Incentive Stock Option may be granted only to a person who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary Corporation (each being an “ISO-Qualifying Corporation”). Any person who is not an Employee of an ISO-Qualifying Corporation on the effective date of the grant of an Option to such person, but who is otherwise an Employee or a Director of, or Consultant to, the Company or any of its Affiliates, may be granted only a Nonstatutory Stock Option.
(b) ISO Share Limit. Subject to adjustment as provided in Section 4.2, the maximum number of shares of Stock that may be issued upon the exercise of Incentive Stock Options granted under the Plan will equal the aggregate Share number stated in the first sentence of Section 4.1, plus, to the extent allowable under Code Section 422 and the Treasury Regulations promulgated thereunder, any shares of Stock that become available for issuance under the Plan pursuant to Section 4.1 (the “ISO Share Limit”).
(c) Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Upon exercise, each portion shall be separately identified.
(d) Leaves of Absence. For purposes of Incentive Stock Options, no leave of absence may exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then six (6) months following the first (1st) day of such leave, any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.
6.TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby, in such form as the Committee shall from time to time establish. Award Agreements evidencing Options may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:
6.1 Exercise Price. The exercise price for each Option shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option and (b) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Sections 409A and 424(a) of the Code.
6.2 Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, and (b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option. Subject to the foregoing, unless otherwise specified by the Committee in the grant of an Option, any Option granted hereunder to an Employee, Consultant or Director shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions or the Plan.
6.3 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant having a Fair Market Value not less than the exercise price, (iii) by delivery of a properly executed notice of exercise together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a “Cashless Exercise”), (iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Stock issued upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued; provided further, however, that shares of Stock will no longer be outstanding under an Option and will not be exercisable thereafter to the extent that (A) shares are used to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations; or (v) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (v) by any combination thereof. The Committee may at any time or from time to time grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.
(b) Limitations on Forms of Consideration.
(i) Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. Unless otherwise provided by the Committee, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either (A) have been owned by the Participant for such period as necessary to avoid a charge to earnings for financial accounting purposes and not used for another Option exercise by attestation during any such period or (B) were not acquired, directly or indirectly, from the Company.
(ii) Cashless Exercise. The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise.
6.4 Effect of Termination of Service. An Option shall be exercisable after a Participant’s termination of Service to such extent and during such period as determined by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option or in another written (including electronic) agreement between the Company and the Participant.
6.5 Transferability of Options. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant’s guardian or legal representative. No Option shall be assignable or transferable by the Participant, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option, an Option shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 Registration Statement under the Securities Act or other applicable law.
7.TERMS AND CONDITIONS OF SARS.
SARs shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. Award Agreements evidencing SARs may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:
7.1 Types of SARs Authorized. SARs may be granted in tandem with all or any portion of a related Option (a “Tandem SAR”) or may be granted independently of any Option (a “Freestanding SAR”). A Tandem SAR may be granted either concurrently with the grant of the related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such related Option.
7.2 Exercise Price. The exercise price for each SAR shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share subject to a Tandem SAR shall be the exercise price per share under the related Option and (b) the exercise price per share subject to a Freestanding SAR shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the SAR.
7.3 Exercisability and Term of SARs.
(a)Tandem SARs. Tandem SARs shall be exercisable only at the time and to the extent, and only to the extent, that the related Option is exercisable, subject to such provisions as the Committee may specify where the Tandem SAR is granted with respect to less than the full number of shares of Stock subject to the related Option. The Committee may, in its discretion, provide in any Award Agreement evidencing a Tandem SAR that such SAR may not be exercised without the advance approval of the Company and, if such approval is not given, then the Option shall nevertheless remain exercisable in accordance with its terms. A Tandem SAR shall terminate and cease to be exercisable no later than the date on which the related Option expires or is terminated or canceled. Upon the exercise of a Tandem SAR with respect to some or all of the shares subject to such SAR, the related Option shall be canceled automatically as to the number of shares with respect to which the Tandem SAR was exercised. Upon the exercise of an Option related to a Tandem SAR as to some or all of the shares subject to such Option, the related Tandem SAR shall be canceled automatically as to the number of shares with respect to which the related Option was exercised.
(b)Freestanding SARs. Freestanding SARs shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such SAR; provided, however, that no Freestanding SAR shall be exercisable after the expiration of ten (10) years after the effective date of grant of such SAR.
7.4 Exercise of SARs. Upon the exercise of an SAR, the Participant (or the Participant’s legal representative or other person who acquired the right to exercise the SAR by reason of the Participant’s death) shall be entitled to receive payment of an amount for each share with respect to which the SAR is exercised equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price. Payment of such amount shall be made in cash, shares of Stock, or any combination thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing such SAR, payment shall be made in a lump sum as soon as practicable following the date of exercise of the SAR. The Award Agreement evidencing any SAR may provide for deferred payment in a lump sum or in installments. When payment is to be made in shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market Value of a share of Stock on the date of exercise of the SAR. For purposes of Section 7, an SAR shall be deemed exercised on the date on which the Company receives notice of exercise from the Participant.
7.5 Effect of Termination of Service. A SAR shall be exercisable after a Participant’s termination of Service to such extent and during such period as determined by the Committee, in its discretion, and set forth in the Award Agreement evidencing such SAR or in another written (including electronic) agreement between the Company and the Participant.
7.6 Nontransferability of SARs. SARs may not be assigned or transferred in any manner except by will or the laws of descent and distribution, and, during the lifetime of the Participant, shall be exercisable only by the Participant or the Participant’s guardian or legal representative.
8.TERMS AND CONDITIONS OF STOCK AWARDS.
Stock Awards shall be evidenced by Award Agreements specifying whether the Award is a Stock Grant, a Stock Purchase Right or a Restricted Stock Unit, and the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. Award Agreements evidencing Stock Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:
8.1 Types of Stock Awards Authorized. Stock Awards may be in the form of a Stock Grant, a Stock Purchase Right or a Restricted Stock Unit. Stock Awards may be granted or vest upon such conditions as the Committee shall determine, including, without limitation, service to a Participating Company or upon the attainment of one or more Performance Goals.
8.2 Purchase Price. The purchase price for shares of Stock issuable under each Stock Purchase Right shall be established by the Committee in its discretion. No monetary payment (other than applicable tax withholding) shall be required as a condition of receiving shares of Stock pursuant to a Stock Grant.
8.3 Purchase Period. A Stock Purchase Right shall be exercisable within a period established by the Committee, which shall in no event exceed thirty (30) days from the effective date of the grant of the Stock Purchase Right; provided, however, that no Stock Purchase Right granted to an Employee, a Consultant or a Director may become exercisable prior to the date on which such person commences Service.
8.4 Payment of Purchase Price. At the time of grant of Restricted Stock Units, the Committee will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Stock acquired pursuant to Restricted Stock Units. Except as otherwise provided below, payment of the purchase price for the number of shares of Stock being purchased pursuant to any Stock Purchase Right or delivered pursuant to a Restricted Stock Unit shall be made (i) in cash, by check, or cash equivalent, (ii) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (iii) by any combination thereof, in each case consistent with any requirements under applicable law regarding payment in respect of the “par value” of the Stock. The Committee may at any time or from time to time grant Stock Purchase Rights or Restricted Stock Units which do not permit all of the foregoing forms of consideration to be used in payment of the purchase price or which otherwise restrict one or more forms of consideration.
8.5 Vesting; Restrictions on Transfer; Deferral. Shares issued pursuant to any Stock Award (including, without limitation, the percentage of actual achievement relative to pre-established target Performance Goals) may or may not be made subject to vesting conditioned upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, a Performance Award Formula and/or Performance Goals (the “Vesting Conditions”), as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. During any period (the “Restriction Period”) in which shares acquired pursuant to a Stock Award remain subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than pursuant to a Change of Control as provided in Section 11, or as provided in Section 8.8. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. Restricted Stock Units may be subject to such conditions that may delay the delivery of the shares of Stock (or their cash equivalent) subject to Restricted Stock Units after the vesting of such Award.
8.6 Voting Rights; Dividends and Distributions. Except as provided in this Section, Section 8.5 and any Award Agreement, during the Restriction Period applicable to shares subject to a Stock Grant, the Participant shall have all of the rights of a stockholder of the Company holding shares of Stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares. With respect to Restricted Stock Units, the Committee may, in its sole discretion, provide that dividend equivalents shall not be paid, provide for the payment of dividend equivalents on Restricted Stock Units that have become nonforfeitable, provide for the accumulation until and payment of dividend equivalents to the extent that the Restricted Stock Units become nonforfeitable or any combination thereof. In the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, then any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant is entitled by reason of the Participant’s Stock Award shall be immediately subject to the same Vesting Conditions and, if applicable, deferral elections as the shares subject to the Stock Award with respect to which such dividends or distributions were paid or adjustments were made. Notwithstanding anything herein to the contrary, dividends or dividend equivalents may be accumulated but shall not be paid with respect to shares subject to a Stock Award unless and until the Vesting Conditions are satisfied.
8.7 Effect of Termination of Service. Unless otherwise provided by the Committee in the grant of a Stock Award and set forth in the Award Agreement or in another written (including electronic) agreement between the Company and the Participant, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then (i) the Company shall have the option to repurchase for the purchase price paid by the Participant any shares acquired by the Participant pursuant to a Stock Purchase Right which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service, (ii) the Participant shall forfeit to the Company any shares acquired by the Participant pursuant to a Stock Grant which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service and (iii) the Participant shall forfeit all rights in any portion of a Restricted Stock Unit award that has not vested as of the date of the Participant’s termination of Service. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company.
8.8 Nontransferability of Stock Award Rights. Rights to acquire shares of Stock pursuant to a Stock Award may not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the Participant’s beneficiary, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, shall be exercisable only by the Participant or the Participant’s guardian or legal representative.
9.TERMS AND CONDITIONS OF PERFORMANCE AWARDS. Performance Awards shall be evidenced by award agreements in such form as the committee shall from time to time establish. No performance award or purported performance award shall be a valid and binding obligation of the company unless evidenced by a fully executed award agreement. Award agreements evidencing performance awards may incorporate all or any of the terms of the plan by reference and shall comply with and be subject to the following terms and conditions:
9.1 Types of Performance Awards Authorized. Performance Awards may be in the form either of Performance Shares or Performance Share Units. Each Award Agreement evidencing a Performance Award shall specify the number of Performance Shares or Performance Share Units subject thereto, the Performance Award Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other terms, conditions and restrictions of the Award.
9.2 Initial Value of Performance Shares and Performance Units. Unless otherwise provided by the Committee in granting a Performance Award, each Performance Share shall have an initial value equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in Section 4.2, on the effective date of grant of the Performance Share and each Performance Unit shall have an initial value of one hundred dollars ($100). The final value payable to the Participant in settlement of a Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent to which Performance Goals established by the Committee are attained within the applicable Performance Period established by the Committee.
9.3 Establishment of Performance Period, Performance Goals and Performance Award Formula. In granting each Performance Award, the Committee shall establish in writing the applicable Performance Period, Performance Award Formula and one or more Performance Goals which, when measured at the end of the Performance Period, shall determine on the basis of the Performance Award Formula the final value of the Performance Award to be paid to the Participant. The Company shall notify each Participant granted a Performance Award of the terms of such Award, including the Performance Period, Performance Goal(s) and Performance Award Formula.
9.4 Measurement of Performance Goals. The Performance Goals shall be established by the Committee on the basis of achievement of Company-wide, divisional, or individual goals, applicable federal or state securities laws, or any other basis determined by the Committee in its discretion. Performance Goals may include a minimum, maximum, target level and intermediate or other levels of performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the level attained during the applicable Performance Period. A Performance Goal may be stated as an absolute value or as a value determined relative to a standard selected by the Committee. Performance Goals may differ from Participant to Participant and from Award to Award.
9.5 Settlement of Performance Awards.
(a) Determination of Final Value. As soon as practicable following the completion of the Performance Period applicable to a Performance Award, the Committee shall determine the extent to which the applicable Performance Goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award Formula.
(b) Discretionary Adjustment of Award Formula. In its discretion, the Committee may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or negative adjustment of the Performance Award Formula applicable to a Performance Award granted to any Participant to reflect such Participant’s individual performance in his or her position with the Company or such other factors as the Committee may determine. If permitted under a Participant’s Award Agreement, the Committee shall have the discretion, on the basis of such criteria as may be established by the Committee, to reduce some or all of the value of the Performance Award that would otherwise be paid to the Participant upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the Performance Award determined in accordance with the Performance Award Formula.
(c) Effect of Leaves of Absence. Unless otherwise required by law or determined by the Committee, payment of the final value, if any, of a Performance Award held by a Participant who has taken in excess of thirty (30) days of leaves of absence during a Performance Period shall be prorated on the basis of the number of days of the Participant’s Service during the Performance Period during which the Participant was not on a leave of absence.
(d) Notice to Participants. As soon as practicable following the Committee’s determination in accordance with Sections 9.5(a) and (b), the Company shall notify each Participant of the determination of the Committee.
(e) Payment in Settlement of Performance Awards. As soon as practicable following the Committee’s determination in accordance with Sections 9.5(a) and (b), payment shall be made to each eligible Participant (or such Participant’s legal representative or other person who acquired the right to receive such payment by reason of the Participant’s death) of the final value of the Participant’s Performance Award. Payment of such amount shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing a Performance Award, payment shall be made in a lump sum. An Award Agreement may provide for deferred payment in a lump sum or in installments at the election of the Participant or otherwise. If any payment is to be made on a deferred basis, the Committee may, but shall not be obligated to, provide for the payment during the deferral period of Dividend Equivalents or interest.
(f) Provisions Applicable to Payment in Shares. If payment is to be made in shares of Stock, the number of such shares shall be determined by dividing the final value of the Performance Award by the value of a share of Stock determined by the method specified in the Award Agreement. Such methods may include, without limitation, the closing market price on a specified date (such as the settlement date) or an average of market prices over a series of trading days. Shares of Stock issued in payment of any Performance Award may be fully vested and freely transferable shares or may be shares of Stock subject to Vesting Conditions as provided in Section 8.5. Any shares subject to Vesting Conditions shall be evidenced by an appropriate Award Agreement and shall be subject to the provisions of Sections 8.5 through 8.8 above.
9.6 Dividend Equivalents. In its discretion, the Committee may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to receive Dividend Equivalents with respect to the payment of cash dividends on Stock having a record date prior to the date on which the Performance Shares are settled or forfeited. Dividend Equivalents may be paid on Performance Shares that have become nonforfeitable or may be accumulated until and paid to the extent that Performance Shares become nonforfeitable or a combination thereof, as determined by the Committee. Settlement of Dividend Equivalents may be made in cash, shares of Stock, or a combination thereof as determined by the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 9.5. Dividend Equivalents shall not be paid with respect to Performance Units. Notwithstanding anything herein to the contrary, Dividend Equivalents may be accumulated but shall not be paid with respect to Performance Share Awards unless and until the Performance Share Awards are earned.
9.7 Effect of Termination of Service. The effect of a Participant’s termination of Service on the Participant’s Performance Award shall be as determined by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Performance Award or in another written (including electronic) agreement between the Company and the Participant.
9.8 Nontransferability of Performance Awards. Prior to settlement in accordance with the provisions of the Plan, no Performance Award may be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except by will or by the laws of descent and distribution. All rights with respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.
10.STANDARD FORMS OF AWARD AGREEMENT.
10.1 Award Agreements. Each Award shall comply with and be subject to the terms and conditions set forth in the appropriate form of Award Agreement approved by the Committee and as amended from time to time. Any Award Agreement may consist of an appropriate form of Notice of Grant and a form of Agreement incorporated therein by reference, or such other form or forms as the Committee may approve from time to time.
10.2 Authority to Vary Terms. The Committee shall have the authority from time to time to vary the terms of any standard form of Award Agreement either in connection with the grant or amendment of an individual Award or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Award Agreement are not inconsistent with the terms of the Plan.
10.3 Clawback/Recovery. All Awards granted under the Plan will be subject to recoupment in accordance with any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. In addition, the Committee may impose such other clawback, recovery or recoupment provisions in an Award Agreement as the Committee determines necessary or appropriate, including but not limited to a reacquisition right in respect of previously acquired shares of Common Stock or other cash or property upon the occurrence of cause as determined by the Committee.
11.CHANGE OF CONTROL.
11.1 Except as otherwise provided in a Participant’s Award Agreement, “Change of Control” shall mean a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement; provided, however, that anything in this Plan to the contrary notwithstanding, a Change of Control shall be deemed to have occurred if:
(a) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act, is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities entitled to vote in the election of directors of the Company, provided that such individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act, was not, prior to the Effective Date, the “beneficial owner” (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities entitled to vote in the election of directors of the Company;
(b) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board and any new directors, whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board) (the “Incumbent Directors”), cease for any reason to constitute a majority thereof;
(c) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a “Transaction”), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own securities representing more than 50% of the combined voting power of the Company, a parent of the Company or other corporation resulting from such Transaction (counting, for this purpose, only those securities held by the Company’s stockholders immediately after the Transaction that were received in exchange for, or represent their continuing ownership of, securities of the Company held by them immediately prior to the Transaction);
(d) all or substantially all of the assets of the Company are sold, liquidated or distributed; or
(e) there is a “Change of Control” or a “change in the effective control” of the Company within the meaning of Section 280G of the Code and the regulations promulgated thereunder.
11.2 The Committee or the Board may, in its discretion, provide in any Award Agreement, severance plan or other individual agreement, that, in the event of a Change of Control of the Company, the Award held by a Participant shall become vested, exercisable and/or payable to such extent as specified in such document.
11.3 In the event of a Change of Control, the surviving, continuing, successor, or purchasing entity or parent thereof, as the case may be (the “Acquiror”), may, without the consent of any Participant, either assume the Company’s rights and obligations under outstanding Awards or substitute for outstanding Awards substantially equivalent equity awards for the Acquiror’s stock. In the event the Acquiror elects not to assume or substitute for outstanding Awards in connection with a Change of Control, any unexercised and/or unvested portions of such outstanding Awards shall become immediately exercisable and vested in full as of immediately prior to the effective date of the Change of Control. The exercise and/or vesting of any Award that was permissible solely by reason of this paragraph 12 shall be conditioned upon the consummation of the Change in Control. Any Awards which are not assumed or replaced by the Acquiror in connection with the Change of Control nor exercised as of the time of consummation of the Change of Control shall terminate and cease to be outstanding effective as of the time of consummation of the Change of Control.
12. COMPLIANCE WITH SECURITIES LAW.
12.1 The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable requirements of United States federal and state and non-United States law with respect to such securities and the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (i) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award or (ii) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.
12.2 If the exercise of an Award, or the purchase or delivery of shares of Stock subject to an Award, following the termination of the Participant’s Service would be prohibited at any time during the applicable post-termination period solely because the issuance of shares of Stock would violate the registration requirements under the Securities Act, then the Award shall terminate on the earlier of (i) the expiration of a period of three (3) months after the termination of the Participant’s Service during which the exercise of the Award would not be in violation of such registration requirements, or (ii) the expiration of the term of the Award as set forth in the Award Agreement.
13.TAX WITHHOLDING.
13.1 Tax Withholding in General. Unless prohibited by applicable law, the Company shall have the right to deduct from any and all payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise of an Option, to make adequate provision for, the United States federal, state, local and non-United States taxes, if any, required by law to be withheld by the Participating Company Group with respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock, to release shares of Stock from an escrow established pursuant to an Award Agreement, or to make any payment in cash under the Plan until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.
13.2 Withholding in Shares. Unless prohibited by applicable law, the Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the tax withholding obligations of the Participating Company Group. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount permitted by the Committee or the amount of taxes owed by the Participant up to the maximum statutory tax rate in the Participant’s applicable jurisdiction.
14.TERMINATION OR AMENDMENT OF PLAN.
The Committee may terminate or amend the Plan at any time. However, without the approval of the Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company’s stockholders under any applicable law, regulation or rule. No termination or amendment of the Plan shall affect any then outstanding Award unless expressly provided by the Committee. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Award without the consent of the Participant, unless such termination or amendment is necessary to comply with any applicable law, regulation or rule.
15.MISCELLANEOUS PROVISIONS.
15.1 Repurchase Rights. Shares issued under the Plan may be subject to one or more repurchase options, or other conditions and restrictions as determined by the Committee in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.
15.2 Rights as Employee, Consultant or Director. No person, even though eligible pursuant to Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain an Employee, a Consultant or a Director, or interfere with or limit in any way any right of a Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a Participating Company other than the Company receives an Award under the Plan, that Award can in no event be understood or interpreted to mean that the Company is the Employee’s employer or that the Employee has an employment relationship with the Company.
15.3 Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 4.2 or another provision of the Plan.
15.4 Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise or settlement of any Award.
15.5 Beneficiary Benefits. Subject to local laws and procedures, the Company may request appropriate written documentation from a trustee or other legal representative, court, or similar legal body, regarding any benefit under the Plan to which the Participant is entitled in the event of such Participant’s death before such representative shall be entitled to act on behalf of the Participant and before a beneficiary receives any or all of such benefit.
15.6 Unfunded Obligation. Participants shall have the status of general unsecured creditors of the Company. Any amounts payable to Participants pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974, as amended. No Participating Company shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Committee, the Officer Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan.
15.7 Section 409A. It is intended that all of the benefits and payments provided under this Plan satisfy, to the greatest extent possible, the exemptions from the application of Code Section 409A (together, with any state law of similar effect, “Section 409A”) provided under Treasury Regulations Sections 1.409A-1(b)(4), 1.409A-1(b)(5), 1.409A-1(b)(6) and 1.409A-1(b)(9), and this Plan will be construed to the greatest extent possible as consistent with those provisions. To the extent not so exempt, this Plan and the payments and benefits to be provided hereunder are intended to, and will be construed and implemented so as to, comply in all respects with the applicable provisions of Section 409A. For purposes of Section 409A (including, without limitation, for purposes of Treasury Regulation Section 1.409A-2(b)(2)(iii)), any right to receive any installment payments under this Plan shall be treated as a right to receive a series of separate payments and, accordingly, each installment payment hereunder shall at all times be considered a separate and distinct payment.
To the extent that the Committee determines that any Award granted under the Plan is, or may reasonably be, subject to Section 409A, the Award Agreement evidencing such Award shall incorporate the terms and conditions necessary to avoid the consequences described in Section 409A(a)(1) of the Code (or any similar provision). Such terms and conditions shall include, without limitation, the following provision (or comparable provision of similar effect): “To the extent that (i) one or more of the payments or benefits received or to be received by a Participant upon “separation from service” (as defined under Treasury Regulation Section 1.409A-1(h) without regard to alternative definitions thereunder) pursuant to this Plan would constitute deferred compensation subject to the requirements of Section 409A, and (ii) the Participant is a “specified employee” within the meaning of Section 409A at the time of separation from service, then to the extent delayed commencement of any portion of such payments or benefits is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) and the related adverse taxation under Section 409A, such payments and benefits shall not be provided to the Participant prior to the earliest of (i) the expiration of the six-month period measured from the date of separation from service, (ii) the date of the Participant’s death or (iii) such earlier date as permitted under Section 409A without the imposition of adverse taxation on the Participant. Upon the first business day following the expiration of such applicable Section 409A(a)(2)(B)(i) period, all payments and benefits deferred pursuant to this paragraph shall be paid in a lump sum to the Participant, and any remaining payments and benefits due shall be paid as otherwise provided herein.” If an Award Agreement is silent as to such provision, the foregoing provision is hereby incorporated by reference directly into such Award Agreement.
In addition, and notwithstanding any provision of the Plan to the contrary, in the event that the Committee determines that any Award is, or may reasonably be, subject to Section 409A and related Department of Treasury guidance (including such Department of Treasury guidance issued from time to time) or contains any ambiguity as to the application of Section 409A, the Committee may, without the Participant’s consent, adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee determines are necessary or appropriate to (A) exempt (or clarify the exemption of) the Award from Section 409A, (B) preserve the intended tax treatment of the benefits provided with respect to the Award, and/or (C) comply with the requirements of Section 409A and related Department of Treasury guidance.
Notwithstanding anything to the contrary contained herein, neither the Company nor any of its Affiliates shall be responsible for, or required to reimburse or otherwise make any Participant whole for, any tax or penalty imposed on, or losses incurred by, any Participant that arises in connection with the potential or actual application of Section 409A to any Award granted hereunder.
APPENDIX I
(a) “Affiliate” means (i) an entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is controlled by the Company directly, or indirectly through one or more intermediary entities. For this purpose, the term “control” (including the term “controlled by”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the relevant entity, whether through the ownership of voting securities, by contract or otherwise; or shall have such other meaning assigned such term for the purposes of registration on Form S-8 under the Securities Act.
(b) “Award” means any Option, SAR, Stock Purchase Right, Stock Grant, Restricted Stock Unit, Performance Share, Performance Unit or for service as a Director, cash-based amounts (including, without limitation, retainers) granted under the Plan.
(c) “Award Agreement” means a written (including electronic) agreement between the Company and a Participant setting forth the terms, conditions and restrictions of the Award granted to the Participant. An Award Agreement may be an “Option Agreement, an “SAR Agreement,” a “Stock Purchase Agreement,” a “Stock Grant Agreement,” a “Restricted Stock Unit Agreement,” “a “Performance Share Agreement” or a “Performance Unit Agreement.”
(d) “Board” means the Board of Directors of the Company.
(e) “Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.
(f) “Committee” means the Executive Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. If no committee of the Board has been appointed to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.
(g) “Company” means Sonic Foundry, Inc., a Maryland corporation, or any successor corporation thereto.
(h) “Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a member of the Board) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on (i) registration on a Form S-8 Registration Statement under the Securities Act, or (ii) Rule 701 of the Securities Act, or (iii) other means of compliance with the securities laws of all relevant jurisdictions.
(i) “Director” means a member of the Board or the board of directors of any other Participating Company.
(j) “Disability” means the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) and 409A(a)(2)(C)(i) of the Code.
(k) “Dividend Equivalent” means a credit, made at the discretion of the Committee or as otherwise provided by the Plan, to the account of a Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award held by such Participant.
(l) “Employee” means any person treated as an employee (including an Officer or a member of the Board who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a member of the Board nor payment of a director’s fee shall be sufficient to constitute employment for purposes of the Plan.
(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(n) “Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on The Nasdaq Global Select Market, The Nasdaq Capital Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable or such other value determined by the Committee in good faith. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.
(ii) If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse.
(o) “Incentive Stock Option” means an Option intended to be (as set forth in the Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. If an Option is not specifically designated as an Incentive Stock Option, or if an Option is designated as an Incentive Stock Option but some portion or all of the Option fails to qualify as an Incentive Stock Option under the applicable rules, then the Option (or portion thereof) will be a Nonstatutory Stock Option.
(p) “Nonstatutory Stock Option” means an Option not intended to be (as set forth in the Award Agreement) or not qualifying as an incentive stock option within the meaning of Section 422(b) of the Code.
(q) “Officer” means any person designated by the Board as an officer of the Company.
(r) “Option” means the right to purchase Stock at a stated price for a specified period of time granted to a participant pursuant to Section 6 of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.
(s) “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.
(t) “Participant” means any eligible person who has been granted one or more Awards.
(u) “Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.
(v) “Participating Company Group” means, at any point in time, all entities collectively which are then Participating Companies.
(w) “Performance Award” means an Award of Performance Shares or Performance Units.
(x) “Performance Award Formula” means, for an Award, a formula or table established by the Committee, which provides the basis for computing the value of an Award at one or more threshold levels of attainment of the applicable Performance Goal(s) measured as of the end of the applicable Performance Period.
(y) “Performance Goal” means a performance goal established by the Committee.
(z) “Performance Period” means a period established by the Committee at the end of which one or more Performance Goals are to be measured.
(aa) “Performance Share” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 9 of the Plan to receive a payment equal to the value of a Performance Share based on performance.
(bb) “Performance Unit” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 9 of the Plan to receive a payment equal to the value of a Performance Unit based upon performance.
(cc) Restricted Stock Unit” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 8 of the Plan to receive one share of Stock, a cash payment equal to the value of one share of Stock, or a combination thereof, as determined in the sole discretion of the Committee.
(dd) “Restriction Period” means the period established in accordance with Section 8.5 of the Plan during which shares subject to a Stock Award are subject to Vesting Conditions.
(ee) “SAR” means a bookkeeping entry representing, for each share of Stock subject to such SAR, a right granted to a Participant pursuant to Section 7 of the Plan to receive payment of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price.
(ff) “Securities Act” means the Securities Act of 1933, as amended.
(gg) “Service” means a Participant’s employment or service with the Participating Company Group as an Employee, a Consultant or a Director, whichever such capacity the Participant held on the date of grant of an Award. Unless otherwise determined by the Committee, a Participant’s Service shall be deemed to have terminated if the Participant ceases to render service to the Participating Company Group in such initial capacity. However, a Participant’s Service shall not be deemed to have terminated merely because of a change in the Participating Company for which the Participant renders such Service in such initial capacity, provided that there is no interruption or termination of the Participant’s Service. A Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the entity for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing and to the extent applicable Section 409A, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.
(hh) “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2 of the Plan.
(ii) “Stock Award” means an Award of a Stock Grant, a Stock Purchase Right or a Restricted Stock Unit Award.
(jj) “Stock Grant” means Stock granted to a Participant pursuant to Section 8 of the Plan.
(kk) “Stock Purchase Right” means a right to purchase Stock granted to a Participant pursuant to Section 8 of the Plan.
(ll) “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.
(mm) “Ten Percent Owner” means a Participant who, at the time an Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.
(nn) “Vesting Conditions” mean those conditions established in accordance with Section 8.5 of the Plan prior to the satisfaction of which shares subject to a Stock Award remain subject to forfeiture or a repurchase option in favor of the Company.
Exhibit 31.1
CERTIFICATIONS
I, Joe Mozden, Jr., the CEO of Sonic Foundry, Inc., certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Sonic Foundry, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 11, 2023
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By: |
/s/ Joe Mozden, Jr. |
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By: |
Joe Mozden, Jr. | ||
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Title: |
CEO |
Exhibit 31.2
I, Ken Minor, the CFO of Sonic Foundry, Inc., certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Sonic Foundry, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 11, 2023
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By: |
/s/ Kenneth A. Minor |
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By: |
Kenneth A. Minor |
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Title: |
Chief Financial Officer |
SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Exhibit 32
Statement
Solely for the purposes of complying with 18 U.S.C.§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and the Chief Financial Officer of Sonic Foundry, Inc. (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 11, 2023
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By: |
/s/ Joe Mozden, Jr. |
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By: |
Joe Mozden, Jr. |
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Title: |
Chief Executive Officer |
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By: |
/s/ Kenneth A. Minor |
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By: |
Kenneth A. Minor |
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Title: |
Chief Financial Officer |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Revenue: | ||||
| Revenue | $ 5,738 | $ 7,243 | $ 10,752 | $ 14,496 |
| Cost of revenue: | ||||
| Cost of revenue | 2,462 | 2,079 | 4,432 | 4,184 |
| Gross margin | 3,276 | 5,164 | 6,320 | 10,312 |
| Operating expenses: | ||||
| Selling and marketing | 2,664 | 3,233 | 5,592 | 6,324 |
| General and administrative | 1,017 | 1,268 | 2,637 | 3,066 |
| Product development | 2,377 | 1,918 | 5,165 | 3,692 |
| Total operating expenses | 6,058 | 6,419 | 13,394 | 13,082 |
| Loss from operations | (2,782) | (1,255) | (7,074) | (2,770) |
| Non-operating income (expenses): | ||||
| Interest expense, net | (494) | (10) | (640) | (5) |
| Other expense, net | 9 | (17) | 196 | (36) |
| Total non-operating income (expense) | (485) | (27) | (444) | (41) |
| Loss before income taxes | (3,267) | (1,282) | (7,518) | (2,811) |
| Income tax benefit (expense) | (112) | (54) | (249) | (53) |
| Net loss | $ (3,379) | $ (1,336) | $ (7,767) | $ (2,864) |
| Loss per common share | ||||
| – basic (in dollars per share) | $ (0.28) | $ (0.15) | $ (0.66) | $ (0.35) |
| – diluted (in dollars per share) | $ (0.28) | $ (0.15) | $ (0.66) | $ (0.35) |
| Weighted average common shares | ||||
| – basic (in shares) | 12,075,832 | 9,114,451 | 11,775,782 | 9,095,810 |
| – diluted (in shares) | 12,075,832 | 9,114,451 | 11,775,782 | 9,095,810 |
| Product and Other [Member] | ||||
| Revenue: | ||||
| Revenue | $ 1,607 | $ 2,162 | $ 2,485 | $ 4,171 |
| Cost of revenue: | ||||
| Cost of revenue | 772 | 748 | 1,109 | 1,609 |
| Service [Member] | ||||
| Revenue: | ||||
| Revenue | 4,131 | 5,081 | 8,267 | 10,325 |
| Cost of revenue: | ||||
| Cost of revenue | $ 1,690 | $ 1,331 | $ 3,323 | $ 2,575 |
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Net loss | $ (3,379) | $ (1,336) | $ (7,767) | $ (2,864) |
| Other comprehensive loss | ||||
| Foreign currency translation adjustment | (5) | (150) | 44 | (177) |
| Comprehensive loss | $ (3,384) | $ (1,486) | $ (7,723) | $ (3,041) |
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) |
Preferred Stock [Member] |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Retained Earnings [Member] |
AOCI Attributable to Parent [Member] |
Treasury Stock, Common [Member] |
Total |
|---|---|---|---|---|---|---|---|
| Balance at Sep. 30, 2021 | $ 0 | $ 91,000 | $ 213,278,000 | $ (206,442,000) | $ (618,000) | $ (169,000) | $ 6,140,000 |
| Stock compensation | 0 | 0 | 409,000 | 0 | 0 | 0 | 409,000 |
| Issuance of common stock | 0 | 0 | 20,000 | 0 | 0 | 0 | 20,000 |
| Stock option exercise | 0 | 0 | 105,000 | 0 | 0 | 0 | 105,000 |
| Foreign currency translation adjustment | 0 | 0 | 0 | 0 | (177,000) | 0 | (177,000) |
| Net Income (loss) | 0 | 0 | 0 | (2,864,000) | 0 | 0 | (2,864,000) |
| Balance at Mar. 31, 2022 | 0 | 91,000 | 213,812,000 | (209,306,000) | (795,000) | (169,000) | 3,633,000 |
| Balance at Dec. 31, 2021 | 0 | 91,000 | 213,557,000 | (207,970,000) | (645,000) | (169,000) | 4,864,000 |
| Stock compensation | 0 | 0 | 188,000 | 0 | 0 | 0 | 188,000 |
| Issuance of common stock | 0 | 0 | 20,000 | 0 | 0 | 0 | 20,000 |
| Stock option exercise | 0 | 0 | 47,000 | 0 | 0 | 0 | 47,000 |
| Foreign currency translation adjustment | 0 | 0 | 0 | 0 | (150,000) | 0 | (150,000) |
| Net Income (loss) | 0 | 0 | 0 | (1,336,000) | 0 | 0 | (1,336,000) |
| Balance at Mar. 31, 2022 | 0 | 91,000 | 213,812,000 | (209,306,000) | (795,000) | (169,000) | 3,633,000 |
| Balance at Sep. 30, 2022 | 0 | 109,000 | 218,145,000 | (213,525,000) | (982,000) | (169,000) | 3,578,000 |
| Stock compensation | 0 | 0 | 430,000 | 0 | 0 | 0 | 430,000 |
| Issuance of common stock | 0 | 12,000 | 1,354,000 | 0 | 0 | 0 | 1,366,000 |
| Stock option exercise | 2,000 | 2,000 | |||||
| Foreign currency translation adjustment | 0 | 0 | 0 | 0 | 44,000 | 0 | 44,000 |
| Net Income (loss) | 0 | 0 | 0 | (7,767,000) | 0 | 0 | (7,767,000) |
| Balance at Mar. 31, 2023 | 0 | 121,000 | 219,931,000 | (221,292,000) | (938,000) | (169,000) | (2,347,000) |
| Balance at Dec. 31, 2022 | 0 | 121,000 | 219,816,000 | (217,913,000) | (933,000) | (169,000) | 922,000 |
| Stock compensation | 0 | 0 | 111,000 | 0 | 0 | 0 | 111,000 |
| Issuance of common stock | 0 | 0 | 3,000 | 0 | 0 | 0 | 3,000 |
| Stock option exercise | 0 | 0 | 1,000 | 0 | 0 | 0 | 1,000 |
| Foreign currency translation adjustment | 0 | 0 | 0 | 0 | (5,000) | 0 | (5,000) |
| Net Income (loss) | 0 | 0 | 0 | (3,379,000) | 0 | 0 | (3,379,000) |
| Balance at Mar. 31, 2023 | $ 0 | $ 121,000 | $ 219,931,000 | $ (221,292,000) | $ (938,000) | $ (169,000) | $ (2,347,000) |
Note 1 - Basis of Presentation and Significant Accounting Policies |
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| Basis of Presentation and Significant Accounting Policies [Text Block] |
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 $8.5 million debt at a rate of 12% interest per annum due in 30 equal installments beginning on June 1, 2023, including an agreement with Mark Burish, Chairman of the Company's Board of Directors for $3.0 million of such debt and agreement with an affiliate of a former director for the remaining $5.5 million of such debt. 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 an attached warrant.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. In fiscal year 2023 to date, the Company incurred a net loss of $7.8 million compared to $2.9 million in fiscal year 2022 and has a deficit in stockholders’ equity at March 31, 2023 of $2.3 million. The Company currently does not have access to capital through a line of credit nor other readily available sources of capital. Together, these factors raise the need to consider the Company’s ability to continue as a going concern.
However, management has considered its plans to continue the Company as a going concern and believes substantial doubt is alleviated. Management developed a plan to improve liquidity in its operations through reductions in expenses, incentives to accelerate cash collections and monetization of excess inventory. In addition, the Company is now executing on a plan to improve liquidity through 1) an agreement with its secured lenders to defer principal payments in the near term, for which it is in the process of documenting; 2) obtaining new debt financing from an existing lender to provide more capital; and 3) an evaluation of other strategic alternatives with multiple parties to provide liquidity. The Company believes it will be successful in such initiatives and together with growth in its various business lines that it will be able to continue as a going concern through at least the next twelve months.
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 six month period ended March 31, 2023 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.
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
For the three and six months ended March 31, 2023, the Company expensed involuntary termination benefits of $66 thousand and $473 thousand respectively, under ASC 420 compared to $16 thousand and $16 thousand expenses incurred during the same periods last year.
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, 2023:
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):
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, 2023 and September 30, 2022, the Company has recorded a liability of $84 thousand and $77 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement.
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 V 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):
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 V 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.
No legal contingencies were recorded or were required to be disclosed for the six months ended March 31, 2023 or 2022.
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 and six months ended March 31, 2023, the Company capitalized approximately $736 thousand and $1.5 million in software development costs related to new products, and this is included in software development, net of amortization on the balance sheet. During the three and six months ended March 31, 2022 the Company capitalized approximately $626 thousand and $954 thousand, respectively, in software development costs. During the three and six months ended March 31, 2023, the Company amortized approximately $11 thousand and $17 thousand respectively, in software development costs related to new products that became widely available to customers during the first quarter of 2023, compared to $0 during the three and six months ended March 31, 2022
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:
A summary of option activity at March 31, 2023 and changes during the six months then ended is presented below:
A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 2023 is presented below:
The weighted average grant date fair value of options granted during the six months ended March 31, 2023 was $0.41. As of March 31, 2023, there was $575 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $270 thousand. The cost is expected to be recognized over a weighted-average remaining life of 1.9 years.
Stock-based compensation expense for stock options recorded in the three and six months ended March 31, 2023 was $107 thousand and $426 thousand. Stock-based compensation expense recorded in the three and six months ended March 31, 2022 was $188 thousand and $409 thousand, respectively.There was $1 thousand and $2 thousand in cash received from transactions under all stock option plans during the three and six months, respectively, ended March 31, 2023, and $47 thousand and $105 thousand during three and six months, respectively, ended March 31, 2022. There were no tax benefits realized for tax deductions from option exercises in either of the three months ended March 31, 2023 or 2022. 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 300,000 common shares may be issued. A total of 75,458 shares are available to be issued under the plan at March 31, 2023. The Company recorded $3 and $3 thousand stock compensation expense under this plan for three and six months, respectively, ended March 31, 2023 compared to $3 and $6 thousand for three and six months, respectively, ended March 31, 2022. Cash received for the issuance of shares under the Purchase Plan, net of refund, in the three and six months ended March 31, 2023 was $3 thousand compared to $20 thousand for three and six months ended March 31, 2022.
Preferred Stock and Dividends
No shares of Preferred Stock, Series A or Series B were issued and outstanding as of March 31, 2023 or September 30, 2022.
Common Stock Transactions
On April 13, 2022, the Company announced an underwritten public offering of 1,700,000 shares of its common stock at a public offering price of $2.55 per share. The Company granted the underwriter a 45-day option to purchase up to an additional 255,000 shares of common stock at the public offering price, less underwriting discounts and commissions. None of the options were exercised and the 45-day option period has expired.
The Company also issued Underwriters' Warrants that grant the underwriter the right to purchase an aggregate of 6% of the shares of common stock issued in the offering or a total of 102,000 shares. 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 $3.06 per share.
On April 19, 2022, the public offering closed. Gross proceeds from the sale of 1,700,000 shares before deducting underwriting discounts and commissions and other offering expenses were approximately $4.3 million. Cost associated with the offering was $406 thousand consisting of finders fees, underwriting fees, legal fees, accounting service fees, and transfer agent closing fees.
On November 16, 2022, the Company entered into a Subscription Agreement with Mark Burish ("Burish"), Chairman of the Company's Board of Directors, and a Warrant whereby Burish purchased $1,200,000 of common stock at a price equal to the average closing bid price on the five days preceding the date of close (1,176,471 shares) and received a warrant to purchase 511,765 shares of common stock at a price of $1.02. The warrant matures on November 16, 2027.
The total warrants outstanding as of March 31, 2023 are as follows:
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.
On February 14, 2023, the Company was notified by Nasdaq that it is not in compliance with the requirement to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing. Since its Form 10-Q for the period ended December 31, 2022, reported stockholders’ equity of $922,000, and as of February 10, 2023, the Company does not meet the alternatives of market value of listed securities or net income, as set forth in Nasdaq Listing Rule 5550(b)(1), the Company no longer complies with the Rule. On April 28, 2023, Nasdaq granted the Company an extension until July 14, 2023, to comply with Nasdaq Listing Rule 5550(b)(1).
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 $.01 per share, from 15,000,000 to
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). The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:
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.
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Note 2 - Related-party Transactions |
6 Months Ended |
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| Notes to Financial Statements | |
| Related Party Transactions Disclosure [Text Block] |
2. Related Party Transactions
During the three and six months ended March 31, 2023, the Company incurred $10 thousand as legal expense to a law firm, a partner of which was a director of the Company until his resignation on November 15, 2022. The Company incurred similar fees of $30 thousand and $57 thousand during the three and six months, respectively, ended March 31, 2022. The Company had accrued liabilities for services to the same law firm of $25 thousand at September 30, 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 $5,500,000 at a rate of 12% interest per annum due in 30 equal installments beginning on June 1, 2023. The facility also includes a 2% facility fee and a loan premium due at maturity equal to 20% of the amount loaned which is earned monthly based on the number of months the loan remains outstanding. The loan is secured by all assets of the Company and carries certain restrictions and financial covenants including 1) a debt coverage ratio of cash and accounts receivable to the NBE loan of not less than 2) trailing six-month billings requirement of at least $12,000,000 for the September and December 2022 quarters, $11,000,000 for the March and June 2023 quarters and $12,000,000 for the September 2023 quarter and 3) a trailing six-month EBITDA burn requirement of less than $6,000,000 for the quarter ended September 2022, $6,500,000 for the quarter ending December 2022 and $7,000,000 for each of the quarters ending March, June and September 2023. The Managing Director of NBE is Frederick H. Kopko, Jr., a former member of the Company’s Board of Directors.
Simultaneously with the closing above, the Company closed a Security Agreement and Promissory Note with Mark Burish (“Burish”) for $3,000,000. The note carries the same interest rate and fees as the note with NBE and is subordinate to the NBE Loan and Security Agreement. On November 16, 2022, the Company entered into a Subscription Agreement with Burish whereby Burish purchased $1,200,000 of common stock at a price equal to the average closing bid price on the five days preceding the date of close (1,176,471 shares). In addition, on November 16, 2022, the Company entered into a Warrant whereby Burish received a warrant to purchase 511,765 shares of common stock at a price of $1.02. The warrant matures on November 16, 2027. On April 27, 2023, the Warrant was amended to require shareholder approval as a condition to exercising the warrant.
At March 31, 2023
, Mr. Burish had warrants to purchase a total of 562,441 shares of common stock.
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.
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| Commitments Disclosure [Text Block] |
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 March 31, 2023, the Company had an obligation to purchase $1.8 million of Mediasite product and $315 thousand of services during fiscal 2023, $500 thousand of services during fiscal 2024, and $417 thousand of services during fiscal 2025.
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. As of March 31, 2023, three unexercised renewal options for operating leases have been recognized into the respective ROU asset and lease liability.
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 $19 thousand at September 30, 2022, and$16 thousand at March 31, 2023.
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, 2023, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 are as follows (in thousands):
Supplemental information related to leases is as follows (in thousands, except lease term and discount rate):
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):
Other information related to leases was as follows:
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Note 4 - Credit Arrangements |
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| Debt Disclosure [Text Block] |
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 and Tranche 2 in the amount of $500,000, was disbursed on November 8, 2018. Each tranche of the Term Loan accrued interest at 10.75% per annum. Tranche 1 of the Term Loan was payable interest only until November 30, 2018. Thereafter, principal was due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018, and continuing until May 1, 2021, when the principal balance was due in full. Tranche 2 of the Term Loan was payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry was required to pay PFG V a cash fee of $150,000. The principal of the Term Loan may have been prepaid at any time without penalty as of May 14, 2019. The Term Loan was collateralized by substantially all the Company’s assets, including intellectual property. Both tranches and the $150,000 fee were paid off in May 2021.
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. The Warrant issued to PFG V expires on May 11, 2023.
At March 31, 2023, 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 $0 thousand. Included in other expense, the remeasurement gain on the derivative liability during the three and six months ended March 31, 2023 was $0 thousand for both periods compared to remeasurement gain of $2 thousand and $30 thousand during the three and six months, respectively, ended March 31, 2022, respectively.
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 is treated together as a debt discount on the PFG V debt and is being accreted to interest expense under the effective interest method over the -year term of the PFG V debt and the -year term of the warrant debt. During the three and six months ended March 31, 2023, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $9 thousand and $17 thousand, respectively, compared to $8 thousand and $15 thousand in the same periods last year. The carrying balance of the warrant debt at March 31, 2023, and September 30, 2022, was $246 thousand and $229 thousand, respectively.
Line of Credit dated July 28, 2021
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 1.35% per annum, paid monthly. The Credit Agreement required compliance with typical warranties and covenants including financial covenants of (1) Fixed Charge Coverage Ratio, as defined in the agreement, of at least at the end of each quarter and (2) Senior Cash Flow Coverage Ratio, as defined in the agreement, of no more than for each fiscal quarter, until these provisions were removed with the March 30, 2022, amendment. There was $0 outstanding on the line of credit at September 30, 2022.
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 had 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 $3,000,000 at an annual rate equal to 1.45% plus the greater of (i) zero percent (0.0%) and (ii) the one-month forward-looking term rate based on SOFR quoted by Bank from the Term SOFR Administrator’s Website. The Amendment also, among other things, extended the maturity date from July 28, 2022, to March 31, 2023.
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 $5,500,000 at a rate of 12% interest per annum due in 30 equal installments beginning on June 1, 2023. The facility also includes a 2% facility fee and a loan premium due at maturity equal to 20% of the amount loaned which is earned monthly based on the number of months the loan remains outstanding. The loan is secured by all assets of the Company and carries certain restrictions and financial covenants including 1) a debt coverage ratio of cash and accounts receivable to the NBE loan of not less than 2) trailing six-month billings requirement of at least $12,000,000 for the September and December 2022 quarters, $11,000,000 for the March and June 2023 quarters and $12,000,000 for the September 2023 quarter and 3) a trailing six-month EBITDA burn requirement of less than $6,000,000 for the quarter ended September 2022, $6,500,000 for the quarter ending December 2022 and $7,000,000 for each of the quarters ending March, June and September 2023. As of March 31, 2023, $1.8 million is included in the current portion of notes payable due to related parties.
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”), Chairman of the
Company's Board of Directors, for $3,000,000. The note carries the same interest rate and fees as the note with NBE and is subordinate to the NBE Loan and Security Agreement.
As of
March 31, 2023
, $1.0 million is included in the current portion of notes payable due to related parties.
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 $1,200,000 of common stock at a price equal to the average closing bid price on the five days preceding the date of close (1,176,471 shares) and received a Warrant to purchase 511,765 shares of common stock at a price of $1.02. The warrant matures on November 16, 2027.
Other Indebtedness
On August 20, 2020, Mediasite K.K. and Sumitomo Mitsui Banking Corporation entered into a $379 thousand Promissory Note under an initiative by the Japanese Finance Corporation government institution in response to the Cabinet Decision entitled "Emergency Economic Measures to Cope With COVID-19." Extending financial relief to organizations impacted by COVID-19, the loan had a term of years and carried a fixed interest rate of 0.46% per annum. Government subsidies provided through the Japanese Finance Corporations provide interest relief throughout the term of the loan. In addition, the loan agreement included a -year grace period with principal payments deferred through the end of the loan, which was September 30, 2023. On March 24, 2023, Mediasite K.K. repaid this loan in full.
On March 24, 2023, Mediasite K.K.and the Japanese Finance Corporation entered into a $336 thousand Promissory Note under an initiative by the Japanese Finance Corporation government institution. Extending financial relief to organizations that continue to be impacted by COVID-19, the loan has a term of years and carries a fixed interest rate of 0.5% per annum for the first three years and a fixed interest rate of 1.4% per annum for the remaining years. The loan agreement includes a one-year grace period with principal payments deferred through February 29, 2024. As of March 31, 2023, $5 thousand is included in the current portion notes payable.
On September 30, 2022, Mediasite K.K. and Resona Bank, Ltd. entered into a $415 thousand loan agreement. The loan has a term of 7 years and carries a fixed rate of 1.475% per annum. The loan will be repaid via monthly installments of $5 thousand from October 31, 2022, through September 28, 2029. As of March 31, 2023, $65 thousand is included in the current portion of notes payable.
The annual principal payments on the outstanding notes payable, notes payable due to related parties, and warrant debt are as follows:
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Note 5 - Income Taxes |
6 Months Ended |
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Mar. 31, 2023 | |
| Notes to Financial Statements | |
| Income Tax Disclosure [Text Block] |
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, 2023 or September 30, 2022, and has recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three or six months ended March 31, 2023 or 2022.
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 and six months ended March 31, 2023 and 2022 primarily consists of income tax expense/benefit at its foreign subsidiaries. The Company has net operating losses (NOL) carried over from previous years.
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 had 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 March 31, 2023 the Company has a full valuation allowance established as the Company no longer believes it is "more likely than not" that the prior deferred tax asset amount recorded can be realized. As of September 30, 2022, the Company recorded a deferred tax asset in the amount of $275 thousand, on the balance sheet relating to foreign net operating losses that the Company believed was "more likely than not" to be realized before expiration of the foreign net operating loss income tax benefit. In prior periods, the foreign deferred tax was immaterial and recorded within other long-term assets.
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.
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Note 6 - Revenue |
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| Revenue from Contract with Customer [Text Block] |
6. Revenue
Disaggregation of Revenues
The following tables summarize revenues from contracts with customers for the three and six months ended March 31, 2023 and 2022, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK):
Transaction price allocated to future performance obligations
As of March 31, 2023, the aggregate amount of the transaction price that is allocated to our future performance obligations was approximately $3.5 million in the next months, $8.5 million in the next months and $1.5 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, 2023, revenues recognized related to the amount included in the unearned revenues balance at the beginning of the period was $2.3 million and $5.5 million compared to $2.7 million and $6.3 million recognized during the three and six months ended March 31, 2022.
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 and six months ended March 31, 2023, amortization expense related to the amount included in the capitalized commissions at the beginning of the period was $56 thousand and $159 thousand compared to $84 thousand and $261 thousand recognized during the three and six months ended March 31, 2022.
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Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of Covid-19 Pandemic [Policy Text Block] |
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.
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. |
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| Costs Associated with Exit or Disposal Activity or Restructuring [Policy Text Block] |
Restructuring and exit activities
For the three and six months ended March 31, 2023, the Company expensed involuntary termination benefits of $66 thousand and $473 thousand respectively, under ASC 420 compared to $16 thousand and $16 thousand expenses incurred during the same periods last year. |
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| Lessor, Leases [Policy Text Block] | 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, 2023:
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| Inventory, Policy [Policy Text Block] | 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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| Asset Retirement Obligation [Policy Text Block] |
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, 2023 and September 30, 2022, the Company has recorded a liability of $84 thousand and $77 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. |
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| Fair Value of Financial Instruments, Policy [Policy Text Block] | 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 V 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):
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 V 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. |
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| Legal Costs, Policy [Policy Text Block] | 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 six months ended March 31, 2023 or 2022. |
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| Research, Development, and Computer Software, Policy [Policy Text Block] |
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 and six months ended March 31, 2023, the Company capitalized approximately $736 thousand and $1.5 million in software development costs related to new products, and this is included in software development, net of amortization on the balance sheet. During the three and six months ended March 31, 2022 the Company capitalized approximately $626 thousand and $954 thousand, respectively, in software development costs. During the three and six months ended March 31, 2023, the Company amortized approximately $11 thousand and $17 thousand respectively, in software development costs related to new products that became widely available to customers during the first quarter of 2023, compared to $0 during the three and six months ended March 31, 2022 |
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| Share-Based Payment Arrangement [Policy Text Block] | 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:
A summary of option activity at March 31, 2023 and changes during the six months then ended is presented below:
A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 2023 is presented below:
The weighted average grant date fair value of options granted during the six months ended March 31, 2023 was $0.41. As of March 31, 2023, there was $575 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $270 thousand. The cost is expected to be recognized over a weighted-average remaining life of 1.9 years.
Stock-based compensation expense for stock options recorded in the three and six months ended March 31, 2023 was $107 thousand and $426 thousand. Stock-based compensation expense recorded in the three and six months ended March 31, 2022 was $188 thousand and $409 thousand, respectively.There was $1 thousand and $2 thousand in cash received from transactions under all stock option plans during the three and six months, respectively, ended March 31, 2023, and $47 thousand and $105 thousand during three and six months, respectively, ended March 31, 2022. There were no tax benefits realized for tax deductions from option exercises in either of the three months ended March 31, 2023 or 2022. 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 300,000 common shares may be issued. A total of 75,458 shares are available to be issued under the plan at March 31, 2023. The Company recorded $3 and $3 thousand stock compensation expense under this plan for three and six months, respectively, ended March 31, 2023 compared to $3 and $6 thousand for three and six months, respectively, ended March 31, 2022. Cash received for the issuance of shares under the Purchase Plan, net of refund, in the three and six months ended March 31, 2023 was $3 thousand compared to $20 thousand for three and six months ended March 31, 2022. |
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| Preferred Stock and Dividends [Policy Text Block] |
Preferred Stock and Dividends
No shares of Preferred Stock, Series A or Series B were issued and outstanding as of March 31, 2023 or September 30, 2022. |
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| Stockholders' Equity, Policy [Policy Text Block] | Common Stock Transactions
On April 13, 2022, the Company announced an underwritten public offering of 1,700,000 shares of its common stock at a public offering price of $2.55 per share. The Company granted the underwriter a 45-day option to purchase up to an additional 255,000 shares of common stock at the public offering price, less underwriting discounts and commissions. None of the options were exercised and the 45-day option period has expired.
The Company also issued Underwriters' Warrants that grant the underwriter the right to purchase an aggregate of 6% of the shares of common stock issued in the offering or a total of 102,000 shares. 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 $3.06 per share.
On April 19, 2022, the public offering closed. Gross proceeds from the sale of 1,700,000 shares before deducting underwriting discounts and commissions and other offering expenses were approximately $4.3 million. Cost associated with the offering was $406 thousand consisting of finders fees, underwriting fees, legal fees, accounting service fees, and transfer agent closing fees.
On November 16, 2022, the Company entered into a Subscription Agreement with Mark Burish ("Burish"), Chairman of the Company's Board of Directors, and a Warrant whereby Burish purchased $1,200,000 of common stock at a price equal to the average closing bid price on the five days preceding the date of close (1,176,471 shares) and received a warrant to purchase 511,765 shares of common stock at a price of $1.02. The warrant matures on November 16, 2027.
The total warrants outstanding as of March 31, 2023 are as follows:
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.
On February 14, 2023, the Company was notified by Nasdaq that it is not in compliance with the requirement to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing. Since its Form 10-Q for the period ended December 31, 2022, reported stockholders’ equity of $922,000, and as of February 10, 2023, the Company does not meet the alternatives of market value of listed securities or net income, as set forth in Nasdaq Listing Rule 5550(b)(1), the Company no longer complies with the Rule. On April 28, 2023, Nasdaq granted the Company an extension until July 14, 2023, to comply with Nasdaq Listing Rule 5550(b)(1).
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 $.01 per share, from 15,000,000 to |
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| Earnings Per Share, Policy [Policy Text Block] | 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). 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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| New Accounting Pronouncements, Policy [Policy Text Block] | 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. |
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Note 1 - Basis of Presentation and Significant Accounting Policies (Tables) |
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| Investment in Sales-type Leases [Table Text Block] |
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| Schedule of Inventory, Current [Table Text Block] |
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| Fair Value, Liabilities Measured on Recurring Basis [Table Text Block] |
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| Schedule of Share-Based Payment Award, Employee Stock Purchase Plan, Valuation Assumptions [Table Text Block] |
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| Share-Based Payment Arrangement, Option, Activity [Table Text Block] |
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| Schedule of Nonvested Share Activity [Table Text Block] |
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| Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block] |
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| Schedule of Weighted Average Number of Shares [Table Text Block] |
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Note 3 - Commitments (Tables) |
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Note 4 - Credit Arrangements (Tables) |
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Note 6 - Revenue (Tables) |
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| Disaggregation of Revenue [Table Text Block] |
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Note 1 - Basis of Presentation and Significant Accounting Policies - Investment in Sales-type Leases (Details) - USD ($) $ in Thousands |
Mar. 31, 2023 |
Sep. 30, 2022 |
|---|---|---|
| 2023 | $ 205 | |
| 2024 | 171 | |
| 2025 | 69 | |
| Gross investment in sales-type lease | 445 | |
| Less: Unearned income | 0 | |
| Total investment in sales-type lease | 445 | |
| Current portion of total investment in sales-type lease | 272 | $ 281 |
| Long-term portion of total investment in sales-type lease | 173 | $ 221 |
| Net Investment in Lease, before Allowance for Credit Loss | $ 445 |
Note 1 - Basis of Presentation and Significant Accounting Policies - Inventory (Details) - USD ($) $ in Thousands |
Mar. 31, 2023 |
Sep. 30, 2022 |
|---|---|---|
| Raw materials and supplies | $ 493 | $ 507 |
| Finished goods | 2,423 | 1,062 |
| Less: Obsolescence reserve | (102) | (107) |
| Inventory, Net | $ 2,814 | $ 1,462 |
Note 1 - Basis of Presentation and Significant Accounting Policies - Financial Liabilities Measured at Fair Value on Recurring Basis (Details) - Fair Value, Recurring [Member] - USD ($) $ in Thousands |
Mar. 31, 2023 |
Sep. 30, 2022 |
|---|---|---|
| Derivative liability | $ 0 | $ 0 |
| Fair Value, Inputs, Level 1 [Member] | ||
| Derivative liability | 0 | 0 |
| Fair Value, Inputs, Level 2 [Member] | ||
| Derivative liability | 0 | 0 |
| Fair Value, Inputs, Level 3 [Member] | ||
| Derivative liability | $ 0 | $ 0 |
Note 1 - Basis of Presentation and Significant Accounting Policies - Fair Value Assumptions for Stock Options Granted (Details) |
6 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Expected exercise factor | 2.01% | 2.02% |
| Expected dividend yield | 0.00% | 0.00% |
| Maximum [Member] | ||
| Risk-free interest rate | 1.07% | |
| Expected volatility | 64.83% | |
| Expected forfeiture rate | 14.65% | |
| Minimum [Member] | ||
| Risk-free interest rate | 1.87% | |
| Expected volatility | 65.49% | |
| Expected forfeiture rate | 15.03% | |
Note 1 - Basis of Presentation and Significant Accounting Policies - Summary of Status of Company's Non-vested Shares (Details) |
6 Months Ended |
|---|---|
|
Mar. 31, 2023
$ / shares
shares
| |
| Non-vested options (in shares) | shares | 931,718 |
| Weighted-Average Grant Date Fair Value, Non-vested Balance (in dollars per share) | $ / shares | $ 1.57 |
| Options, Granted (in shares) | shares | 579,350 |
| Weighted-Average Grant Date Fair Value, Non-vested granted (in dollars per share) | $ / shares | $ 0.41 |
| Non-vested options, vested (in shares) | shares | (450,773) |
| Weighted-Average Grant Date Fair Value, vested (in dollars per share) | $ / shares | $ 1.28 |
| Non-vested options, forfeited (in shares) | shares | (47,954) |
| Weighted-Average Grant Date Fair Value, forfeited (in dollars per share) | $ / shares | $ 0.81 |
| Non-vested options (in shares) | shares | 1,012,341 |
| Weighted-Average Grant Date Fair Value, Non-vested Balance (in dollars per share) | $ / shares | $ 0.94 |
Note 1 - Basis of Presentation and Significant Accounting Policies - Schedule of Stockholders' Equity Note, Warrants or Rights (Details) |
Mar. 31, 2023
$ / shares
shares
|
|---|---|
| Warrants, outstanding (in shares) | shares | 1,054,215 |
| Warrants, exercise price (in dollars per share) | $ / shares | $ 2.24 |
| Warrants, term (Year) | 3 years 6 months |
| Warrants Issued in Connection With Capital Raise [Member] | |
| Warrants, outstanding (in shares) | shares | 952,215 |
| Warrants, exercise price (in dollars per share) | $ / shares | $ 2.16 |
| Warrants, term (Year) | 3 years 6 months |
| Warrants Issued in Connection with Vendor Agreements [Member] | |
| Warrants, outstanding (in shares) | shares | 102,000 |
| Warrants, exercise price (in dollars per share) | $ / shares | $ 3.06 |
| Warrants, term (Year) | 4 years 1 month 6 days |
Note 1 - Basis of Presentation and Significant Accounting Policies - Computation of Basic and Diluted Weighted Average Shares Used in Earnings Per Share Calculations (Details) - shares |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| – basic (in shares) | 12,075,832 | 9,114,451 | 11,775,782 | 9,095,810 |
| Effect of dilutive options and warrants (treasury method) (in shares) | 0 | 0 | 0 | 0 |
| – diluted (in shares) | 12,075,832 | 9,114,451 | 11,775,782 | 9,095,810 |
| 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 (in shares) | 3,567,342 | 2,919,809 | 3,567,342 | 2,919,809 |
Note 3 - Commitments (Details Textual) - USD ($) $ in Thousands |
6 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Sep. 30, 2022 |
|
| Recorded Unconditional Purchase Obligation | $ 1,800 | |
| Recorded Unconditional Purchase Obligation, to be Paid, Year One | 315 | |
| Recorded Unconditional Purchase Obligation, to be Paid, Year Two | 500 | |
| Recorded Unconditional Purchase Obligation, to be Paid, Year Three | 417 | |
| Property and Equipment [Member] | ||
| Finance Lease, Right-of-Use Asset, after Accumulated Amortization | $ 16 | $ 19 |
| Maximum [Member] | ||
| Lessee, Operating Lease, Remaining Lease Term (Year) | 10 years | |
| Lessee, Operating Lease, Renewal Term (Year) | 12 years | |
| Lessee, Operating Lease, Termination Term (Year) | 1 year |
Note 3 - Commitments - Maturities of Operating and Finance Lease (Details) $ in Thousands |
Mar. 31, 2023
USD ($)
|
|---|---|
| 2023 (remaining), operating lease | $ 619 |
| 2023 (remaining), finance lease | 5 |
| 2024, operating lease | 782 |
| 2024, finance lease | 8 |
| 2025, operating lease | 112 |
| 2025, finance lease | 4 |
| 2026, operating lease | 91 |
| 2026, finance lease | 3 |
| 2027, operating lease | 57 |
| 2027, finance lease | 0 |
| Thereafter, operating lease | 40 |
| Thereafter, finance lease | 0 |
| Total, operating lease | 1,701 |
| Total, finance lease | 20 |
| Less: imputed interest, operating lease | (38) |
| Less: imputed interest, finance lease | (1) |
| Total, operating lease | 1,663 |
| Total, finance lease | $ 19 |
Note 3 - Commitments - Supplement Information Related to Leases (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Operating lease costs | $ 311 | $ 297 | $ 620 | $ 764 |
| Variable operating lease costs | 0 | 4 | 0 | 21 |
| Total operating lease cost | 311 | 301 | 620 | 785 |
| Amortization of right-of-use assets | 2 | 19 | 3 | 40 |
| Interest on lease liabilities | 0 | 1 | 0 | 3 |
| Total finance lease cost | $ 2 | $ 20 | $ 3 | $ 43 |
Note 3 - Commitments - Supplement Cash Flow Information (Details) - USD ($) $ in Thousands |
6 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Operating cash outflows for operating leases | $ 605 | $ 696 |
| Operating cash outflows for finance leases | 0 | 3 |
| Financing cash outflows for finance leases | $ 7 | $ 43 |
| Operating leases (Year) | 2 years 2 months 12 days | 2 years 4 months 24 days |
| Finance leases (Year) | 2 years 7 months 6 days | 1 year 10 months 24 days |
| Operating leases | 2.41% | 2.10% |
| Finance leases | 2.33% | 5.59% |
Note 4 - Credit Arrangements - Annual Principal Payments (Details) $ in Thousands |
Mar. 31, 2023
USD ($)
|
|---|---|
| 2023 (remaining) | $ 1,412 |
| 2024 | 3,498 |
| 2025 | 3,523 |
| 2026 | 689 |
| 2027 | 123 |
| Thereafter | 258 |
| Less: Discount on Notes Payable & Debt Issuance Costs & Loan Premium | (96) |
| Total principal payments | $ 9,407 |
Note 5 - Income Taxes (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||
|---|---|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Mar. 31, 2023 |
Mar. 31, 2022 |
Sep. 30, 2022 |
|
| Income Tax Examination, Penalties and Interest Accrued | $ 0 | $ 0 | $ 0 | ||
| Income Tax Examination, Penalties and Interest Expense | 0 | $ 0 | 0 | $ 0 | |
| Deferred Income Tax Assets, Net | $ 0 | $ 0 | $ 275 | ||
Note 6 - Revenue 1 (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Contract with Customer, Liability, Revenue Recognized | $ 2,300 | $ 2,700 | $ 5,500 | $ 6,300 |
| Capitalized Contract Cost, Amortization | $ 56 | $ 84 | $ 159 | $ 261 |