The financial and business analysis below provides information that
Sonic Foundry, Inc.(the "Company") believes is relevant to an assessment and understanding of the Company's consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes. This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results 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: "Management's Discussion and Analysis," and "Risk Factors." 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. We describe risks and uncertainties that could cause actual results and events to differ materially in "Risk Factors" (Part 1, Item 1A of this Form 10-K), "Quantitative and Qualitative Disclosures about Market Risk" (Part II, Item 7A of this Form 10-K), and in this Item 7. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise. 27
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Sonic Foundry, Inc.Annual Report on Form 10-K For the Year Ended September 30, 2021Overview Sonic Foundry, Inc.is a trusted global leader for video capture, management and streaming solutions. Trusted by educational institutions, corporations and government entities, Mediasite Video Platform quickly and cost-effectively automates the capture, management, delivery and search of live and on-demand streaming video. Mediasite transforms communications, training, education and events for our customers worldwide. Critical Accounting Policies We have identified the following as critical accounting policies to our Company and have discussed the development, selection of estimates and the disclosure regarding them with the audit committee of the board of directors: • Revenue recognition; • Inventory reserves; • Allowance for doubtful accounts; • Asset retirement obligations; • Valuation allowance for net deferred tax assets; and • Accounting for stock-based compensation. Revenue recognition We recognize revenues in accordance with Financial Accounting Standards Board("FASB"), Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). Recording revenues requires judgment, including determining whether an arrangement includes multiple performance obligations, whether any of those obligations are distinct and cannot be combined and allocation of the transaction price to each performance obligation based on the relative standalone selling prices ("SSP"). Customers receive certain contract elements over time. Changes to the elements in an arrangement or, in our determination, to the relative SSP for these elements, could materially affect the amount of earned and unearned revenues reflected in our consolidated financial statements. The primary judgments relating to our revenue recognition include determining whether (i) the contract with a customer exists; (ii) performance obligations are identified; (iii) the transaction price is determined; (iv) the transaction price is allocated to performance obligations; and (v) the distinct performance obligations are satisfied by transferring control of the product or service to the client. Transfer of control is typically evaluated from the customer's perspective. At contract inception, we determine whether we satisfy the performance obligation over time or at a point in time. Revenues from hosted software and hosting solutions are primarily recognized ratably over time or as fee-bearing usages occur. Certain software licenses are sold either on-premises or through term-based hosting agreements. These hosting arrangements provide customers with the same product functionality and differ mainly in the duration over which the customer benefits from the software. We deliver our software licenses electronically. Electronic delivery occurs when we provide the customer with access to the software and license key via a secure portal. Revenue from on-premises software licenses is generally recognized upfront at the point in time when the software is made available to the customer. Our contracts with customers for on-premises software licenses include maintenance services and may also include training and/or professional services. Maintenance services agreements consist of fees for providing software updates on an if and when available basis and for providing technical support for software products for a specified term. We believe that our software updates and technical support each have the same pattern of transfer to the customer and are substantially the same. Therefore, we consider these updates and technical support to be a single distinct performance obligation. Revenues allocated to maintenance services are recognized ratably as the maintenance services are provided. Revenues related to training services are billed on a fixed fee basis and are recognized as the services are delivered. Payments received in advance of services performed are deferred and recognized when the related services are performed. Revenues related to professional services are billed on a time and materials basis and are recognized as the services are performed. We also provide cloud-based subscriptions, which allow customers to access our software during a contractual period without taking possession of the software. We recognize revenue related to these cloud-based subscriptions ratably over the life of the subscription agreement beginning when the customer first has access to the software. We are often party to multiple concurrent contracts or contracts pursuant to which a client may purchase a combination of goods and services. These situations require judgment to determine whether multiple contracts should be combined and accounted for as a single arrangement. In making this determination, we consider whether the economics of the individual contracts cannot be understood without reference to the whole and multiple promises represent one single performance obligation. 28
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Sonic Foundry, Inc.Annual Report on Form 10-K For the Year Ended September 30, 2021Due to the large number, broad nature and average size of individual contracts we are a party to, the effect of judgments and assumptions we apply in recognizing revenues for any single contract is not likely to have a material effect on our consolidated operations. However, the broader accounting policy assumptions that we apply across similar arrangements or classes of clients could significantly influence the timing and amount of revenues recognized in our results of operations. Reserves Beginning in fiscal year 2020, the Company established a hardware inventory reserve. In conjunction with a new hardware release due in the fourth quarter FY 2020, certain older models are no longer being actively sold and those units, along with their corresponding raw materials, have been 100% reserved. The inventory reserve methodology stayed unchanged in fiscal year 2021. The Company fully reserved all inactive hardware due to release of Media Site 8.0.
Credit Evaluation and Allowance for Doubtful Accounts
We assess the realization of our receivables by performing ongoing credit evaluations of our customers' financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. Our reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. Allowance for doubtful accounts for accounts receivable and financing receivables was
$261 thousandat September 30, 2021and $236 thousandat September 30, 2020. Asset retirement obligation An asset retirement obligation ("ARO") represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company's ARO is associated with MSKK leasehold improvements that we are contractually obligated to remove at the end of a lease to comply with the lease agreement. We recognize asset retirement obligations upon construction of leasehold improvements with such conditions if a reasonable estimate of fair value can be made. The ARO is recorded in other noncurrent liabilities in the Consolidated Balance Sheets. The associated estimated ARO is capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life. 29
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Sonic Foundry, Inc.Annual Report on Form 10-K For the Year Ended September 30, 2021
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, 2021and 2020, valuation allowances have been established for all U.S.and for certain foreign deferred tax assets which we believe do not meet the "more likely than not" criteria for recognition. 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.
Accounting for stock-based compensation
The Company uses a lattice valuation model to account for all employee stock options granted. The lattice valuation model is a more flexible analysis to value options because of its ability to incorporate inputs that change over time, such as actual exercise behavior of option holders. The Company uses historical data to estimate the option exercise and employee departure behavior in the lattice valuation model. Expected volatility is based on historical volatility of the Company's stock. The Company considers all employees to have similar exercise behavior and therefore has not identified separate homogenous groups for valuation. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is based on the
U.S. Treasuryyields in effect at the time of grant. Forfeitures are based on actual behavior patterns. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measured.
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 one-time benefit arrangement. The Company accounts for on-going benefit arrangements in accordance with Accounting Standards Codification 712 ("ASC 712") Nonretirement Postemployment Benefits. According to ASC 712, involuntary termination benefits would be measured and recognized when the expense is both probable and estimatable. For those employees who have a severance arrangement outlined under an existing employment agreement, the communication date would be the date of hire since at that point in time, the Company and the employee had a mutual understanding of the agreement. The measurement and recognition date of the expense would occur when the Company is committed to the plan and it is probable the impacted employee is entitled to the termination benefit. The Company accounts for one-time benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. According to ASC 420, an arrangement for one-time employee termination benefits exists at the date the plan of termination meets certain criteria and has been communicated to employees. RESULTS OF OPERATIONS
You should read the following discussion of our results of operations and
financial condition in conjunction with our consolidated financial statements
and related notes thereto included in Item 8 of this Annual Report on Form 10-K.
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Sonic Foundry, Inc.Annual Report on Form 10-K For the Year Ended September 30, 2021Revenue 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.
Revenue increased by approximately
consisting of the following:
• Product and other revenue from the sale of Mediasite recorder units and server
software increased from
fiscal 2021. Mediasite recorder revenue increased
$148 thousandrelated to freight from fiscal 2020 to fiscal 2021.
• Services revenue represents the portion of fees charged for Mediasite customer
support, hosting, and captioning contracts amortized over the length of the
contract, typically 12 months. It also includes point in time service revenue
such as installations and training, custom development, and event services.
Total services revenue increased from
million in fiscal 2021. Hosting, events, and custom development revenue
expect to recognize
$9.4 millionin the next twelve months, including approximately $3.5 millionin the quarter ending December 31, 2021. At September 30, 2020, $12.1 millionof revenue was deferred. The decrease in
deferred revenue is due to lesser amount of billings in fiscal 2021 compared
to revenue earned.
• Other revenue relates to freight charges billed separately to our customers.
Gross Margin Total gross margin in fiscal 2021 was
$24.9 millionor 71% compared to $25.1 millionor 72% in fiscal 2020. The slight decline year over year is primarily attributed to the increase in hosting expenses, primarily due to $380 thousandincrease in depreciation expense associated with the new US and UKdata centers. 31
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Sonic Foundry, Inc.Annual Report on Form 10-K For the Year Ended September 30, 2021Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses include wages and commissions for sales, marketing and business development personnel, print and digital advertising, tradeshows 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.
Selling and marketing expense decreased over
the major categories include:
• Salary, commissions and benefits decreased by
restructuring strategy that is largely complete. • Advertising and professional services decreased by
$166 thousand. • T&E decreased $161 thousanddue to the impact of COVID on travel.
• Selling and marketing expenses for
aggregate increase of
additional headcount, a new bonus plan, office rent and maintenance expense,
professional services, partially offset by reduced travel and entertainment.
September 30, 2021, we had 99 employees in selling and marketing, a slight increase from 97 employees at September 30, 2020. Of the 99 employees in selling and marketing at September 30, 2021, 59 are employed by our foreign subsidiaries.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of personnel and related
costs associated with the facilities, finance, legal, human resources and
information technology departments, as well as other expenses not fully
allocated to functional areas.
G&A expenses decreased by approximately
$185 thousand, or 4%, to $4.9 millionin fiscal 2021 from $5.1 millionin fiscal 2020. Fluctuations in major categories include:
• Increase in compensation and benefits of
• Decrease in facilities and supplies of
corporate office COVID rent credit of
support cost of
• Increase in professional fees of
• Depreciation decreased
center reaching end of life.
• G&A expenses for
$267 thousandfrom the prior year.
16 full-time employees at
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.
Product development expenses increased approximately
primarily due to the following:
• Increase in compensation, benefits, and commissions of
the addition of a senior level management position in fiscal 2021 as well as
the replacement of certain staff level roles at the end of the prior fiscal
• Professional services increased by
research and T&E increased by about
$16 thousands. • Product development expenses for Sonic Foundry Internationaland MSKK
an aggregate increase of
September 30, 2021, and 2020, we had 48 full-time employees in product development. Of the 48 employees in product development at September 30, 2021, 9 are employed by our foreign subsidiaries. There were no software development costs in fiscal 2021 or 2020 that qualified for capitalization. 32
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Sonic Foundry, Inc.Annual Report on Form 10-K For the Year Ended September 30, 2021Other Income and Expense, Net Interest expense for fiscal 2021 decreased $614 thousandcompared to fiscal 2020, mainly as a result of the Burish debt to equity conversion in May 2020. The Company also recorded $61 thousandof interest expense during fiscal 2021 related to the accretion of discounts on the PFG Loan and Warrant Debt compared to $74 thousandin the same period last year. In addition, the Company recorded amortization expense related to the back-end fee on the PFG loan of $31 thousandand $50 thousandfiscal 2021 and fiscal 2020 respectively. The Company also recorded $84 thousandof interest expense through May 14, 2020related to the accretion of discounts on the Burish notes payable.
Warrants were also issued in connection with the Burish note. For further
details, see Note 3 – Credit Arrangements and Note 9 – Related Party
During fiscal 2021, a gain in fair value of
$12 thousandwas recorded related to the fair value re-measurement on the derivative liability associated with the PFG V Loan and Warrant Debt compared to a loss in fair value of $57 thousandduring fiscal 2020. No foreign currency exchange gain or loss was recorded related to re-measurement of the subordinated notes payable related to the Company's foreign subsidiaries in either fiscal 2021 or 2020.
Provisions Related to Income Taxes
The Company believes the valuation allowance for its deferred tax assets is appropriate. See Note 6 - Income Taxes for further details. The repatriation of undistributed foreign earnings is not expected to result in a material change to our financial results.
Foreign Currency Translation Adjustment
The Company's wholly-owned subsidiaries operate in
Japanand 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 whiles 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 on the consolidated statements of operations. 33
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Sonic Foundry, Inc.Annual Report on Form 10-K For the Year Ended September 30, 2021For the year ended September 30, 2021, the Company's foreign currency translation adjustment was a loss of $156 thousandcompared to a gain of $84 thousandin the year ended September 30, 2020. The loss in fiscal 2021 is attributable to the weakening of the Japanese Yen and the Euro compared to the U.S.dollar. During fiscal 2021, the Company recorded an aggregate transaction gain of $16 thousandcompared to an aggregate loss of $36 thousandduring fiscal 2020. The aggregate transaction gain or loss is included in the other expense line of the consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and debt and equity financing. During fiscal 2021, the Company generated
$1.2 millionof cash in operating activities compared with $3.3 millionof cash provided in operating activities in fiscal 2020. The Company had a net income in fiscal 2021 as compared to net loss in fiscal 2020. Capital expenditures for property and equipment were $1.5 millionin fiscal 2021 compared to $1.7 millionin fiscal 2020. The investment is primarily related to completing the new US Data center and computer equipment purchase. The Company was provided $2.7 millionof cash flows for financing activities during 2021, primarily due to $3.7 millionproceeds from issuance of common stock partially offset by $935 thousanddue to payments on notes payable. For the same period in fiscal 2020, the Company generated $1.7 millionof cash from financing activities, primarily due to proceeds from the PPP Loan of $2.3 million, the Mediasite K.K. term debt of $463 thousand, and the Mediasite K.K.government assistance loan of $378 thousand.
September 30, 2021, the Company had $556 thousandoutstanding, net of warrant debt and debt discounts, related to notes payable with PFG V and Mediatesite K.K term debt. At September 30, 2020, the Company had $860 thousandoutstanding, net of warrant debt and debt discounts, related to notes payable with PFG V.
was held by the Company’s foreign subsidiaries.
The Company believes its cash position plus available line of credit is adequate
to accomplish its business plan through at least the next twelve months.
The Company completed a common stock issuance to certain investors totaling
$3.5 million, net of $88 thousandexpenses, on July 27, 2021. The proceeds of the stock issuance are intended to satisfy the initial listing requirements of the Nasdaq Capital Market for which the Company applied in March 2021. While the Company believes it satisfies all the requirements to be listed on Nasdaq, there can be no assurances that Nasdaq will approve our listing application. Additionally, the Company signed a line of credit agreement on July 28, 2021, with US Bankfor $3 millionat an annual rate equal to 1.35% plus the greater of zero percent and the one month LIBOR rate. The Company will likely evaluate lease opportunities to finance equipment purchases in the future and support working capital needs. We may also seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company. 34
Table of Contents Sonic Foundry, Inc. Annual Report on Form 10-K For the Year Ended September 30, 2021 Contractual Obligations The following summarizes our contractual obligations at
September 30, 2021and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands): Less than Years Years Over Contractual Obligations: Total 1 Year 2-3 4-5 5 years Product and service purchase $ 3,568 $ 3,400 $ 168$ - $ - commitments Operating lease obligations 2,666 1,008 1,559 42 57 Capital lease obligations (a) 111 83 21 7 - Notes payable (a) 556 - 556 - -
(a) Includes fixed and determinable interest payments
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