SONIC FOUNDRY, INC. The financial and business analysis below provides information thatSonic 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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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.
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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 atSeptember 30, 2021 and$236 thousand atSeptember 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 forU.S. income taxes on the undistributed earnings of our foreign subsidiaries, which we consider to be permanently invested outside of theU.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 ofSeptember 30, 2021 and 2020, valuation allowances have been established for allU.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 theU.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.
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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
• Product and other revenue from the sale of Mediasite recorder units and server
software increased from
fiscal 2021. Mediasite recorder revenue increased
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
million in fiscal 2021. Hosting, events, and custom development revenue
increased by
million.
• At
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 indeferred 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 andUK data centers. 31
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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
• Salary, commissions and benefits decreased by
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
accounted for
aggregate increase of
additional headcount, a new bonus plan, office rent and maintenance expense,
professional services, partially offset by reduced travel and entertainment.
AtSeptember 30, 2021 , we had 99 employees in selling and marketing, a slight increase from 97 employees atSeptember 30, 2020 . Of the 99 employees in selling and marketing atSeptember 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
• Decrease in facilities and supplies of
corporate office COVID rent credit of
support cost of
of
• Increase in professional fees of
• Depreciation decreased
center reaching end of life.
• G&A expenses for
thousand and
of $267 thousand from the prior year.
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
• 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
year.
• Professional services increased by
research and T&E increased by about $16 thousands .
• Product development expenses for Sonic Foundry International and MSKK
accounted for
an aggregate increase of
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.
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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 inJapan andthe 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, 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
AtSeptember 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. AtSeptember 30, 2020 , the Company had$860 thousand outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V.
At
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, onJuly 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 inMarch 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 onJuly 28, 2021 , withUS 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
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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
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