SONIC FOUNDRY INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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

——————————————————————————–

  Table of Contents



                              Sonic Foundry, Inc.

                           Annual Report on Form 10-K

                     For the Year Ended September 30, 2021





Overview



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

——————————————————————————–

  Table of Contents



                              Sonic Foundry, Inc.

                           Annual Report on Form 10-K

                     For the Year Ended September 30, 2021





Due 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 thousand at
September 30, 2021 and $236 thousand at 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

——————————————————————————–

  Table of Contents



                              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, 2021 and 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. Treasury yields
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.



                                       30

——————————————————————————–

  Table of Contents



                              Sonic Foundry, Inc.

                           Annual Report on Form 10-K

                     For the Year Ended September 30, 2021



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.


Revenue increased by approximately $400 thousand from fiscal 2021 to fiscal 2020
consisting of the following:

• Product and other revenue from the sale of Mediasite recorder units and server

software increased from $10.3 million in fiscal 2020 to $10.5 million in

fiscal 2021. Mediasite recorder revenue increased $489 thousand offset by a

decrease of $207 thousand related to server software revenue and a decrease of

        $148 thousand related 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 $24.4 million in fiscal 2020 to $24.7

million in fiscal 2021. Hosting, events, and custom development revenue

increased by $2.5 million, offset by support revenue, which decreased by $2.2

    million.


• At September 30, 2021, $11.0 million of revenue was deferred, of which we

    expect to recognize $9.4 million in the next twelve months, including
    approximately $3.5 million in the quarter ending December 31, 2021. At
    September 30, 2020, $12.1 million of 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 million or 71% compared to
$25.1 million or 72% in fiscal 2020.  The slight decline year over year is
primarily attributed to the increase in hosting expenses, primarily due to $380
thousand increase in depreciation expense associated with the new US and UK data
centers.



                                       31

——————————————————————————–

  Table of Contents



                              Sonic Foundry, Inc.

                           Annual Report on Form 10-K

                     For the Year Ended September 30, 2021





Operating 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 $1.0 million, or 8%, from
$13.0 million in fiscal 2020 to $12.0 million in fiscal 2021. Fluctuations in
the major categories include:

• Salary, commissions and benefits decreased by $1.3 million due to department

    restructuring strategy that is largely complete.


  • Advertising and professional services decreased by $166 thousand.


  • T&E decreased $161 thousand due to the impact of COVID on travel.

• Selling and marketing expenses for Sonic Foundry International and MSKK

accounted for $806 thousand and $3.2 million, respectively in fiscal 2021, an

aggregate increase of $742 thousand from the prior year associated with

additional headcount, a new bonus plan, office rent and maintenance expense,

professional services, partially offset by reduced travel and entertainment.




At 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 million in
fiscal 2021 from $5.1 million in fiscal 2020. Fluctuations in major categories
include:


• Increase in compensation and benefits of $98 thousand in fiscal 2021.

• Decrease in facilities and supplies of $378 thousand associated with a

corporate office COVID rent credit of $320 thousand and a reduction in IT

support cost of $86 thousand offset by an increase in operating expense fees

of $26 thousand in fiscal 2021.

• Increase in professional fees of $130 thousand due to increased legal costs.

• Depreciation decreased $292 thousand associated with the original US data

center reaching end of life.

• G&A expenses for Sonic Foundry International and MSKK accounted for $314

thousand and $1.1 million, respectively, in fiscal 2021, an aggregate increase

    of $267 thousand from the prior year.



At September 30, 2021, we had 20 full-time employees in G&A, an increase from
16 full-time employees at September 30, 2020. Of the 20 employees in G&A at
September 30, 2021, 6 are employed by our foreign subsidiaries.


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 $900 thousand, or 15%, from
$6.3 million in fiscal 2020 to $7.2 million in fiscal 2021. The increase is
primarily due to the following:

• Increase in compensation, benefits, and commissions of $523 thousand due to

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

year.

• Professional services increased by $128 thousand due to product development

    research and T&E increased by about $16 thousands.


  • Product development expenses for Sonic Foundry International and MSKK

accounted for $450 thousand and $377 thousand, respectively, for fiscal 2021,

an aggregate increase of $53 thousand from the prior year related to the

    subsidiaries.




At 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

——————————————————————————–

  Table of Contents



                              Sonic Foundry, Inc.

                           Annual Report on Form 10-K

                     For the Year Ended September 30, 2021





Other Income and Expense, Net



Interest expense for fiscal 2021 decreased $614 thousand compared to fiscal
2020, mainly as a result of the Burish debt to equity conversion in May 2020.
The Company also recorded $61 thousand of interest expense during fiscal 2021
related to the accretion of discounts on the PFG Loan and Warrant Debt compared
to $74 thousand in the same period last year. In addition, the Company recorded
amortization expense related to the back-end fee on the PFG loan of $31 thousand
and $50 thousand fiscal 2021 and fiscal 2020 respectively. The Company also
recorded $84 thousand of interest expense through May 14, 2020 related 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
Transactions.



During fiscal 2021, a gain in fair value of $12 thousand was 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 thousand
during 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 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 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

——————————————————————————–

  Table of Contents



                              Sonic Foundry, Inc.

                           Annual Report on Form 10-K

                     For the Year Ended September 30, 2021





For the year ended September 30, 2021, the Company's foreign currency
translation adjustment was a loss of $156 thousand compared to a gain of
$84 thousand in 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 thousand compared to an aggregate loss of $36 thousand during 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 million of cash in
operating activities compared with $3.3 million of 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 million in fiscal 2021
compared to $1.7 million in fiscal 2020.  The investment is primarily related to
completing the new US Data center and computer equipment purchase.

The Company was provided $2.7 million of cash flows for financing activities
during 2021, primarily due to $3.7 million proceeds from issuance of common
stock partially offset by $935 thousand due to payments on notes payable. For
the same period in fiscal 2020, the Company generated $1.7 million of 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.

At September 30, 2021, there was no balance outstanding on the line of credit
with US Bank and Mitsui Sumitomo Bank.



At September 30, 2021, the Company had $556 thousand outstanding, 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 thousand outstanding,
net of warrant debt and debt discounts, related to notes payable with PFG V.



At September 30, 2021 approximately $3.8 million of cash and cash equivalents
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 thousand expenses, 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 Bank for $3 million at 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, 2021 and
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

© Edgar Online, source Glimpses

https://www.marketscreener.com/quote/stock/SONIC-FOUNDRY-INC-120787544/news/SONIC-FOUNDRY-INC-MANAGEMENT-S-DISCUSSION-AND-ANALYSIS-OF-FINANCIAL-CONDITION-AND-RESULTS-OF-OPERAT-37275634/

Next Post

Leading Digital Marketing Agency, Pure SEO, Announces Acquisition of This Side Up

Fri Dec 10 , 2021
Auckland, New Zealand, December 09, 2021 –(PR.com)– New Zealand’s most prominent SEO and digital marketing agency is excited to announce the acquisition of data-led, specialist ecommerce and programmatic digital advertising agency, This Side Up. This Side Up complements Pure SEO’s stable of brands, consisting of Pure SEO, Digital Popcorn, and Conversion […]