Company Quick10K Filing
Sonic Foundry
Price1.09 EPS-1
Shares7 P/E-2
MCap7 P/FCF-10
Net Debt2 EBIT-3
TEV9 TEV/EBIT-3
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-13
10-Q 2020-03-31 Filed 2020-05-14
10-Q 2019-12-31 Filed 2020-02-13
10-K 2019-09-30 Filed 2019-12-19
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-20
10-Q 2018-12-31 Filed 2019-05-20
10-K 2018-09-30 Filed 2019-03-15
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-15
10-Q 2017-12-31 Filed 2018-02-13
10-K 2017-09-30 Filed 2018-01-12
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-11
10-Q 2016-12-31 Filed 2017-02-09
10-K 2016-09-30 Filed 2016-12-22
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-12
10-Q 2015-12-31 Filed 2016-02-11
10-K 2015-09-30 Filed 2015-12-10
10-Q 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-14
10-Q 2014-12-31 Filed 2015-02-06
10-K 2014-09-30 Filed 2014-12-17
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-21
10-Q 2013-12-31 Filed 2014-02-13
10-K 2013-09-30 Filed 2013-12-26
10-Q 2013-06-30 Filed 2013-07-31
10-Q 2013-03-31 Filed 2013-05-02
10-Q 2012-12-31 Filed 2013-02-06
10-K 2012-09-30 Filed 2012-12-12
10-Q 2012-06-30 Filed 2012-08-01
10-Q 2012-03-31 Filed 2012-05-01
10-Q 2011-12-31 Filed 2012-01-31
10-K 2011-09-30 Filed 2011-11-22
10-Q 2011-06-30 Filed 2011-08-02
10-Q 2011-03-31 Filed 2011-05-02
10-Q 2010-12-31 Filed 2011-01-31
10-K 2010-09-30 Filed 2010-11-22
10-Q 2010-06-30 Filed 2010-08-05
10-Q 2010-03-31 Filed 2010-05-03
10-Q 2009-12-31 Filed 2010-01-29
8-K 2020-08-13 Earnings, Exhibits
8-K 2020-08-05 Officers, Other Events, Exhibits
8-K 2020-06-03
8-K 2020-05-14
8-K 2020-04-27
8-K 2020-04-22
8-K 2020-04-09
8-K 2020-03-03
8-K 2019-12-31
8-K 2019-09-30
8-K 2019-09-12
8-K 2019-08-23
8-K 2019-08-05
8-K 2019-06-30
8-K 2019-04-22
8-K 2019-04-02
8-K 2019-03-31
8-K 2019-03-11
8-K 2019-03-04
8-K 2019-02-28
8-K 2019-02-14
8-K 2019-02-05
8-K 2019-01-04
8-K 2018-12-31
8-K 2018-12-18
8-K 2018-09-30
8-K 2018-06-30
8-K 2018-05-17
8-K 2018-04-16
8-K 2018-04-12
8-K 2018-03-31
8-K 2018-01-19
8-K 2018-01-12
8-K 2017-12-31

SOFO 10Q Quarterly Report

Part I. Financial Information
Item 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 sofo33120exhibit3111.htm
EX-31.2 sofo33120exhibit3121.htm
EX-32 sofo33120exhibit321.htm

Sonic Foundry Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
403020100-102012201420172020
Assets, Equity
1593-3-9-152012201420172020
Rev, G Profit, Net Income
2.91.60.3-0.9-2.2-3.52012201420172020
Ops, Inv, Fin

10-Q 1 sofo-63020x10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2020
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-30407
 
SONIC FOUNDRY, INC.
(Exact name of registrant as specified in its charter)
 
MARYLAND
 
39-1783372
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
222 West Washington Ave, Madison, WI 53703
(Address of principal executive offices)
(608) 443-1600
(Registrant’s telephone number including area code)
 
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
Yes  x           No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes  x            No   ¨
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
 
¨
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes  ¨     No   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨            No  x
State the number of shares outstanding of each of the issuer’s common equity as of the last practicable date:
Class
 
Outstanding
July 31, 2020
Common Stock, $0.01 par value
 
7,922,044
 



PART I. FINANCIAL INFORMATION
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 10 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, 2019.


2


TABLE OF CONTENTS
 
 
 
PAGE NO.
PART I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 


3


Item 1
Sonic Foundry, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
(Unaudited)

June 30,
2020
 
September 30,
2019
Assets

 

Current assets:

 

Cash and cash equivalents
$
6,442

 
$
4,295

Accounts receivable, net of allowances of $159 & $135
5,438

 
6,532

Inventories
544

 
558

Investment in sales-type lease, current
147

 
163

Capitalized commissions, current
354

 
464

Prepaid expenses and other current assets
1,111

 
972

Total current assets
14,036

 
12,984

Property and equipment:

 

Leasehold improvements
1,122

 
1,121

Computer equipment
6,644

 
5,610

Furniture and fixtures
1,326

 
1,233

Total property and equipment
9,092

 
7,964

Less accumulated depreciation and amortization
7,056

 
6,396

Property and equipment, net
2,036

 
1,568

Other assets:

 

Investment in sales-type lease, long-term
13

 
134

Capitalized commissions, long-term
89

 
106

Right-of-use assets under operating leases
2,335

 

Other long-term assets
413

 
388

Total assets
$
18,922

 
$
15,180

Liabilities and stockholders’ deficit

 

Current liabilities:

 

Accounts payable
$
1,544

 
$
843

Accrued liabilities
1,122

 
2,216

Unearned revenue
9,558

 
9,610

Current portion of finance lease obligations
137

 
194

Current portion of operating lease obligations
1,364

 

Current portion of notes payable and warrant debt, net of discounts
1,255

 
968

Total current liabilities
14,980

 
13,831

Long-term portion of unearned revenue
1,760

 
1,842

Long-term portion of finance lease obligations
110

 
179

Long-term portion of operating lease obligations
989

 

Long-term portion of notes payable and warrant debt, net of discounts
2,485

 
5,429

Derivative liability, at fair value
125

 
9

Other liabilities
141

 
143

Total liabilities
20,590

 
21,433

Commitments and contingencies

 

Stockholders’ deficit:
 
 
 
Preferred stock, $.01 par value, authorized 500,000 shares; none issued

 

9% Preferred stock, Series A, voting, cumulative, convertible, $.01 par value (liquidation preference of $1,000 per share), authorized 4,500 shares; zero shares issued and outstanding, at amounts paid in

 

5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 1,000,000 shares, none issued

 

Common stock, $.01 par value, authorized 10,000,000 shares; 7,934,760 and 6,749,359 shares issued, respectively and 7,922,044 and 6,736,643 shares outstanding, respectively
79

 
67

Additional paid-in capital
208,914

 
203,735

Accumulated deficit
(209,958
)
 
(209,340
)
Accumulated other comprehensive loss
(534
)
 
(546
)
Treasury stock, at cost, 12,716 shares
(169
)
 
(169
)
Total stockholders’ deficit
(1,668
)
 
(6,253
)
Total liabilities and stockholders’ deficit
$
18,922

 
$
15,180

See accompanying notes to the condensed consolidated financial statements.



4


Sonic Foundry, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except for share and per share data)
(Unaudited)

Three Months Ended June 30,
 
Nine Months Ended June 30,

2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Product and other
$
2,744

 
$
4,221

 
$
7,612

 
$
7,768

Services
5,173

 
5,847

 
16,987

 
17,799

Total revenue
7,917

 
10,068

 
24,599

 
25,567

Cost of revenue:

 
 
 
 
 
 
Product and other
1,199

 
1,558

 
3,188

 
2,854

Services
971

 
1,123

 
3,566

 
3,673

Total cost of revenue
2,170

 
2,681

 
6,754

 
6,527

Gross margin
5,747

 
7,387

 
17,845

 
19,040

Operating expenses:

 
 
 
 
 
 
Selling and marketing
2,980

 
3,785

 
9,433

 
11,564

General and administrative
1,030

 
1,609

 
3,647

 
4,492

Product development
1,511

 
1,849

 
4,600

 
5,617

Total operating expenses
5,521

 
7,243

 
17,680

 
21,673

Income (loss) from operations
226

 
144

 
165

 
(2,633
)
Non-operating expenses:
 
 
 
 
 
 
 
Interest expense, net
(140
)
 
(276
)
 
(621
)
 
(657
)
Other expense, net
(106
)
 
(63
)
 
(150
)
 
(66
)
Total non-operating expenses
(246
)
 
(339
)
 
(771
)
 
(723
)
Income (loss) before income taxes
(20
)
 
(195
)
 
(606
)
 
(3,356
)
Income tax benefit (expense)
127

 
36

 
(12
)
 
(77
)
Net income (loss)
$
107

 
$
(159
)
 
$
(618
)
 
$
(3,433
)
Dividends on preferred stock

 
(24
)
 

 
(122
)
Net income (loss) attributable to common stockholders
$
107

 
$
(183
)
 
$
(618
)
 
$
(3,555
)
Income (loss) per common share

 
 
 
 
 
 
– basic
$
0.01

 
$
(0.03
)
 
$
(0.09
)
 
$
(0.64
)
– diluted
$
0.01

 
$
(0.03
)
 
$
(0.09
)
 
$
(0.64
)
Weighted average common shares
 
 
 
 
 
 
 
– basic
7,399,545

 
6,122,098

 
6,972,924

 
5,528,999

– diluted
7,830,293

 
6,122,098

 
6,972,924

 
5,528,999

See accompanying notes to the condensed consolidated financial statements


5


Sonic Foundry, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$
107

 
$
(159
)
 
$
(618
)
 
$
(3,433
)
Foreign currency translation adjustment
15

 
89

 
12

 
134

Comprehensive income (loss)
$
122

 
$
(70
)
 
$
(606
)
 
$
(3,299
)
See accompanying notes to the condensed consolidated financial statements.


6


Sonic Foundry, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
(in thousands)
(Unaudited)

 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, September 30, 2018
$
1,651

 
$
51

 
$
200,130

 
$
(207,419
)
 
$
(676
)
 
$
(26
)
 
$
(169
)
 
$
(6,458
)
Cumulative effect of ASC 606 adoption Note 6

 

 

 
1,691

 

 

 

 
1,691

Adjusted balance, October 1, 2018
1,651

 
51

 
200,130

 
(205,728
)
 
(676
)
 
(26
)
 
(169
)
 
(4,767
)
Stock compensation

 

 
203

 

 

 

 

 
203

Issuance of common stock and warrants

 
10

 
1,100

 

 

 

 

 
1,110

Warrants issued in connection with subordinated notes payable

 

 
674

 

 

 

 

 
674

Conversion of preferred stock
(1,773
)
 
6

 
1,767

 

 

 

 

 

Preferred stock dividends
122

 

 
(122
)
 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 
134

 

 

 
134

Net loss

 

 

 
(3,433
)
 

 

 

 
(3,433
)
Balance, June 30, 2019
$

 
$
67

 
$
203,752

 
$
(209,161
)
 
$
(542
)
 
$
(26
)
 
$
(169
)
 
$
(6,079
)



 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, March 31, 2019
$
1,187

 
$
53

 
$
201,490

 
$
(209,002
)
 
$
(631
)
 
$
(26
)
 
$
(169
)
 
$
(7,098
)
Stock compensation

 

 
(17
)
 

 

 

 

 
(17
)
Issuance of common stock and warrants

 
10

 
1,096

 

 

 

 

 
1,106

Conversion of preferred stock
(1,210
)
 
4

 
1,206

 

 
 
 

 

 

Preferred stock dividends
23

 

 
(23
)
 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 
89

 

 

 
89

Net loss

 

 

 
(159
)
 

 

 

 
(159
)
Balance, June 30, 2019
$

 
$
67

 
$
203,752

 
$
(209,161
)
 
$
(542
)
 
$
(26
)
 
$
(169
)
 
$
(6,079
)






7


Sonic Foundry, Inc.
Condensed Consolidated Statements of Stockholders' Deficit
(in thousands)
(Unaudited)

 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, September 30, 2019
$

 
$
67

 
$
203,735

 
$
(209,340
)
 
$
(546
)
 
$

 
$
(169
)
 
$
(6,253
)
Stock compensation

 

 
104

 

 

 

 

 
104

Issuance of common stock

 
1

 
81

 

 

 

 

 
82

Conversion of related-party debt to common stock

 
11

 
4,994

 

 

 

 

 
5,005

Foreign currency translation adjustment

 

 

 

 
12

 

 

 
12

Net loss

 

 

 
(618
)
 

 

 

 
(618
)
Balance, June 30, 2020
$

 
$
79

 
$
208,914

 
$
(209,958
)
 
$
(534
)
 
$

 
$
(169
)
 
$
(6,673
)



 
Preferred stock
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Receivable
for
common
stock issued
 
Treasury
stock
 
Total
Balance, March 31, 2020
$

 
$
68

 
$
203,884

 
$
(210,065
)
 
$
(549
)
 
$

 
$
(169
)
 
$
(6,831
)
Stock compensation

 

 
18

 

 

 

 

 
18

Issuance of common stock

 

 
18

 

 

 

 

 
18

Conversion of related-party debt to common stock

 
11

 
4,994

 

 

 

 

 
5,005

Foreign currency translation adjustment

 

 

 

 
15

 

 

 
15

Net income

 

 

 
107

 

 

 

 
107

Balance, June 30, 2020
$

 
$
79

 
$
208,914

 
$
(209,958
)
 
$
(534
)
 
$

 
$
(169
)
 
$
(6,673
)







8


Sonic Foundry, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

Nine Months Ended
June 30,

2020
 
2019
Operating activities

 

Net loss
$
(618
)
 
$
(3,433
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

Amortization of other intangibles
204

 
170

Depreciation and amortization of property and equipment
644

 
748

Loss on sale of fixed assets

 
8

Provision for doubtful accounts - including financing receivables
31

 
31

Provision for inventory reserve
90

 

Loss on conversion of related party debt to equity
26

 

Stock-based compensation expense related to stock options and warrants
104

 
203

Stock issued for board of director fees
61

 
246

Deferred loan interest to related party
322

 

Remeasurement loss (gain) on derivative liability
116

 
(12
)
Changes in operating assets and liabilities:

 

Accounts receivable
1,077

 
660

Financing receivables

 
87

Inventories
(76
)
 
75

Investment in sales-type lease
136

 

Capitalized commissions
127

 
138

Prepaid expenses and other current assets
(128
)
 
280

Right-of-use assets under operating leases
208

 

Operating lease obligations
(234
)
 

Other long-term assets
(24
)
 

Accounts payable and accrued liabilities
(749
)
 
(294
)
Other long-term liabilities
(2
)
 
(46
)
Unearned revenue
(153
)
 
(1,339
)
Net cash provided by (used in) operating activities
1,162

 
(2,478
)
Investing activities

 

Purchases of property and equipment
(683
)
 
(373
)
Net cash used in investing activities
(683
)
 
(373
)
Financing activities

 

Proceeds from notes payable
2,778

 
5,500

Proceeds from lines of credit

 
9,199

Payments on notes payable
(984
)
 
(583
)
Payments on lines of credit

 
(9,636
)
Payment of debt issuance costs

 
(110
)
Proceeds from issuance of preferred stock and common stock
2

 
864

Proceeds from exercise of common stock options
18

 

Payments on finance lease obligations
(162
)
 
(193
)
Net cash provided by (used in) financing activities
1,652

 
5,041

Changes in cash and cash equivalents due to changes in foreign currency
16

 
8

Net increase (decrease) in cash and cash equivalents
2,147

 
2,198

Cash and cash equivalents at beginning of year
4,295

 
1,189

Cash and cash equivalents at end of period
$
6,442

 
$
3,387

Supplemental cash flow information:
 
 
 
Interest paid
$
114

 
$
425

Income taxes paid, foreign
141

 
237

Non-cash financing and investing activities:
 
 
 
Property and equipment financed by finance lease or accounts payable
478

 
45

Debt discount and warrant

 
679

Preferred stock dividends paid in additional shares

 
122

Conversion of preferred shares to common shares

 
1,772

Conversion of related party debt to common shares
5,005

 

See accompanying notes to the condensed consolidated financial statements.

9


Sonic Foundry, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2020
(Unaudited)

1.
Basis of Presentation and Significant Accounting Policies
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, 2019 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 nine month period ended June 30, 2020 are not necessarily indicative of the results that might be expected for the year ending September 30, 2020.
Financing Receivables
Financing receivables consist of customer receivables resulting from the sale of the Company's products and services, primarily software and long-term customer support contracts, and are presented net of allowance for losses. The Company has a single portfolio consisting of fixed-term receivables, which is further segregated into two classes based on type of product and lease.

Amounts receivable of $526 thousand at September 30, 2019 primarily represents sales of perpetual software licenses to a single international distributor on invoices outstanding for product delivered from March 2016 through June 2017.

The Company generally determines its allowance for losses on financing receivables at the customer class level by considering a number of factors, including the length of time financing receivables are past due, historical and anticipated experience, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company writes off financing receivables when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for financing receivable losses. Interest is not accrued on past due receivables. There was an allowance of $526 thousand at September 30, 2019.

During the period ended March 31, 2020 it was determined that the financing receivable would not be collected. Therefore, both the financing receivable of $526 thousand and the corresponding reserve of $526 thousand were written off.
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 June 30, 2020:
 
 
Investment in sales-type lease, gross:
 
   2021
$
148

   2022
13

Gross investment in sales-type lease
161

Less: Unearned income
(1
)
Total investment in sales-type lease
$
160

 
 
Current portion of total investment in sales-type lease
$
147

Long-term portion of total investment in sales-type lease
13

 
$
160



10


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):
 
June 30,
2020
 
September 30, 2019
Raw materials and supplies
$
235

 
$
163

Finished goods
399

 
395

Less: Obsolescence reserve
(90
)
 

 
$
544

 
$
558

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 June 30, 2020 and September 30, 2019, the Company has recorded a liability of $131 thousand and $129 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. Asset retirement obligations are included in other-long term liabilities on the condensed consolidated balance sheets.
Fair Value of Financial Instruments

In determining the fair value of financial assets and liabilities, the Company currently utilizes market data or other assumptions that it believes market participants would use in pricing the asset or liability in the principal or most advantageous market, and adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to the Company at the measurement date.
    
Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.

Financial Liabilities Measured at Fair Value on Recurring Basis

The fair value of the bifurcated conversion feature represented by the warrant derivative liability associated with the PFG debt 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):
June 30, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Derivative liability
 
$

 
$
125

 
$

 
$
125


11


September 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Derivative liability
 
$

 
$
9

 
$

 
$
9


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 Nonrecurring Basis

The initial fair values of PFG debt and warrant debt (see Note 4) were based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3). 

The Mr. Mark Burish ("Mr. Burish") warrant was measured at fair value using a Black Scholes model and the remaining fair value was allocated to the related Mr. Burish note purchase agreement (see Note 4) which management believes materially approximates the fair value based on calculating the present value of expected future cash flows (Level 3). The non-recurring fair value measurements were performed as of the date of issuance of the note purchase agreement and warrant. The discount is being amortized over the life of the related debt.

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, financing receivables, accounts payable and debt instruments and capital 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 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 three or nine months ended June 30, 2020 or 2019.
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.







12


The fair value of each option grant is estimated using the assumptions in the following table:
 
Nine Months Ended
June 30,
 
2020
 
2019
Expected life
4.5 - 4.7 years
 
4.3 - 4.4 years
Risk-free interest rate
0.25% - 1.63%
 
2.14% - 2.93%
Expected volatility
72.40% - 82.10%
 
60.19% - 67.69%
Expected forfeiture rate
14.33% - 15.38%
 
13.51% - 14.76%
Expected exercise factor
1.2
 
1.2
Expected dividend yield
0%
 
0%
A summary of option activity at June 30, 2020 and changes during the nine months then ended is presented below:
 
Options
 
Weighted-
Average
Exercise Price
 
Weighted-Average
Remaining Contractual
Period in Years
Outstanding at October 1, 2019
1,654,429

 
$
5.62

 
4.9
Granted
190,750

 
1.29

 
9.4
Exercised
(21,000
)
 
0.88

 
8.4
Forfeited
(61,283
)
 
3.98

 
4.5
Outstanding at June 30, 2020
1,762,896

 
5.26

 
4.6
Exercisable at June 30, 2020
1,400,497

 
6.27

 
3.7
A summary of the status of the Company’s non-vested options and changes during the nine month period ended June 30, 2020 is presented below:
Non-vested Options
Options
 
Weighted-Average
Grant Date Fair
Value
Non-vested at October 1, 2019
357,114

 
$
0.77

Granted
190,750

 
0.56

Vested
(159,464
)
 
0.95

Forfeited
(26,001
)
 
0.54

Non-vested at June 30, 2020
362,399

 
$
0.60


The weighted average grant date fair value of options granted during the nine months ended June 30, 2020 was $0.56. As of June 30, 2020, there was $124 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $92 thousand. The cost is expected to be recognized over a weighted-average remaining life of 1.9 years.
Stock-based compensation recorded in the three and nine months ended June 30, 2020 was $18 thousand and $104 thousand. Stock-based compensation recorded in the three and nine months ended June 30, 2019 was $(17) thousand and $203 thousand. There was $18 thousand and $19 thousand in cash received from exercises under all stock option plans and warrants during the three and nine months ended June 30, 2020 and zero during the same periods in 2019. There were no tax benefits realized for tax deductions from option exercises in either of the three and nine month periods ended June 30, 2020 or 2019. 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 200,000 common shares may be issued. A total of 9,440 shares are available to be issued under the plan, which is net of 13,567 shares issued on July 13, 2020. The Company recorded stock compensation expense under this plan of less than $1 thousand and $2 thousand for each of the three and nine month periods ended June 30, 2020 and 2019.


13



Preferred Stock and Dividends
The Company considered relevant guidance when accounting for the issuance of preferred stock, and determined that the preferred shares meet the criteria for equity classification. Dividends accrued on preferred shares will be shown as a reduction to net income (or an increase in net loss) for purposes of calculating earnings per common share.
Per Share Computation
Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income (loss) attributable to common stockholders. The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:
 
Three Months Ended
June 30,
 
Nine Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Denominator for basic net income (loss) per share - weighted average common shares
7,399,545

 
6,122,098

 
6,972,924

 
5,528,999

Effect of dilutive options (treasury method)
430,748

 
 
 
Denominator for diluted net income (loss) per share - adjusted weighted average common shares
7,830,293

 
6,122,098

 
6,972,924

 
5,528,999

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
1,630,706

 
2,055,415

 
2,061,454

 
2,428,675

Liquidity
At June 30, 2020, approximately $2.4 million of cash and cash equivalents was held by the Company's foreign subsidiaries.
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next twelve months. We 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.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", ("ASU 2019-12"). The amendments in this ASU affect entities within the scope of Topic 740. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for public entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. An entity that elects early adoption much adopt all the amendments in the same period. 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.
Recently Adopted Accounting Pronouncements

Leases (ASC Topic 842, Leases ("ASC 842"))
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", ("ASU 2016-02") as well as several other related updates which were codified as ASC 842. On October 1, 2019, we adopted this update using the modified retrospective method through a cumulative-effect adjustment. The reported results for the three and nine months ended June 30, 2020 reflect the application of Topic 842, while the comparative information has not been restated and continues to be reported under the related lease accounting

14


standards in effect for those periods. The adoption of this update represents a change in accounting principle and resulted in the recognition of right-of-use assets and lease liabilities of $2.5 million on October 1, 2019. We elected the package of practical expedients, which permits us to leverage our prior conclusions about lease identification, lease classification and initial direct costs incurred. We also elected the practical expedient to combine lease and non-lease components when determining the value of right-of-use assets and lease liabilities. The primary effect of adopting this update relates to the recognition of our operating leases on our condensed consolidated balance sheets and providing additional disclosures about our leasing activities. Leases previously designated as capital leases are now identified as finance leases and continue to be reported on the condensed consolidated balance sheets. Leases previously identified as sales-type leases, where the Company is a lessor, continue to be reported on the condensed consolidated balance sheets. Refer to Note 3 - Commitments for additional disclosures related to our leasing activities.



15


2. Related Party Transactions

During the three and nine months ended June 30, 2020, the Company incurred fees of $112 thousand and $372 thousand to a law firm, a partner of which is a director and stockholder of the Company. The Company incurred similar fees of $105 thousand and $236 thousand during the three and nine months ended June 30, 2019. The Company had accrued liabilities for unbilled services of $0 thousand and $30 thousand at June 30, 2020 and September 30, 2019, respectively, to the same law firm.

On May 13, 2020, the Company entered into a debt conversion agreement with Mr. Burish to convert all outstanding debt owed to Mr. Burish into common stock at a conversion price of $5.00 per share. The total debt amount, including accrued interest and fees, of $5.6 million was converted into 1,114,723 shares of common stock. The transaction was recommended by the Company's Special Committee of Independent and Disinterested Directors and unanimously approved by all disinterested directors of the Company. Silverwood Partners, the Special Committee's financial advisor, issued a fairness opinion in connection with the transaction.

Mr. Burish beneficially owns more than 5% of the Company’s common stock. Mr. Burish also serves as the Chairman of the Board of Directors. An affiliated party beneficially owns more than 5% of the Company's common stock. All transactions with Mr. Burish and with the affiliated party were approved by a Special Committee of Disinterested and Independent Directors.


16


3. Commitments
Inventory Purchase Commitments
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At June 30, 2020, the Company has an obligation to purchase $1.1 million of Mediasite product, which is not recorded on the Company’s condensed consolidated balance sheet.
Leases
The Company has operating leases for corporate office space with various expiration dates. Our leases have remaining lease terms of up to three years, some of which include escalation clauses, renewal options for up to twelve years or termination options within one 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 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 rate when it is readily determinable. Otherwise, the present value of future minimum lease payments is determined using the Company's incremental borrowing rate. The incremental borrowing rate is based on the interest rate of the Company's most recent borrowing.
The lease term we use for the valuation of our right-of-use assets and lease liabilities may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense is recognized on a straight-line basis over the expected lease term for operating leases. Amortization expense of the right-of-use asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental interest rate.
Right-of-use assets and lease liabilities are recognized for our leases. Right-of-use assets under finance leases are included in property and equipment on the condensed consolidated balance sheets.
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 June 30, 2020, future maturities of operating and finance lease liabilities for the fiscal years ended September 30 are as follows (in thousands):
 
Operating Leases
 
Finance Leases
2020 (remaining)
$
345

 
$
44

2021
1,515

 
128

2022
456

 
79

2023
96

 
8

2024
102

 
5

Thereafter
101

 

Total
2,615

 
264

Less: imputed interest
(262
)
 
(18
)
Total
$
2,353

 
$
246

Effect of Adopting ASC 842
Opening Balance Sheet Adjustment on October 1, 2019

17


As a result of applying the modified retrospective method to adopt ASC 842, the following amounts on our condensed consolidated balance sheet were adjusted as of October 1, 2019 to reflect the cumulative effect adjustment to the opening balance sheet (in thousands):
 
As reported
 
ASC 842 adoption
 
Adjusted
 
September 30, 2019
 
adjustments
 
October 1, 2019
Right-of-use assets under operating leases

 
2,533

 
2,533

Total assets
$
15,180

 
$
2,533

 
$
17,713

 
 
 
 
 
 
Current portion of operating lease obligations
$

 
$
1,314

 
$
1,314

Accrued liabilities
2,216

 
(44
)
 
2,172

Total current liabilities
13,831

 
1,270

 
15,101

 
 
 
 
 
 
Long-term portion of operating lease obligations

 
1,263

 
1,263

Total liabilities
$
21,433

 
$
2,533

 
$
23,966

Supplemental information related to leases is as follows (in thousands, except lease term and discount rate):
 
 
Nine Months Ended June 30, 2020
Operating lease costs
 
$
990

Variable operating lease costs
 
22

Total operating lease cost
 
$
1,012

 
 
 
Finance lease cost:
 
 
   Amortization of right-of-use assets
 
$
147

   Interest on lease liabilities
 
17

Total finance lease cost
 
$
164

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.
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
 
 
Nine Months Ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
 
 
   Operating cash outflows for operating leases
 
$
1,016

   Operating cash outflows for finance leases
 
17

   Financing cash outflows for finance leases
 
161

Other information related to leases was as follows:
 
 
June 30, 2020
Weighted average remaining lease term (in years)
 


   Operating leases
 
2.4

   Finance leases
 
2.2

Weighted average discount rate
 


   Operating leases
 
9.54
%
   Finance leases
 
7.22
%


18


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 $2,000,000; and Tranche 2 in the amount of $500,000, was disbursed on November 8, 2018. Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan is payable interest only until November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee of $150,000. The principal of the Term Loan may be prepaid at any time without penalty as of May 14, 2019. The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property.
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. All warrants issued in connection with PFG V expire on May 11, 2023.

At June 30, 2020, and September 30, 2019, the estimated fair value of the derivative liability associated with the warrants issued in connection with the 2018 Loan and Security Agreement, was $125 thousand and $9 thousand, respectively. Included in other expense, the remeasurement loss on the derivative liability during the three and nine months ended June 30, 2020 was $52 thousand and $116 thousand, respectively, compared to remeasurement gains of $5 thousand and $12 thousand during the three and nine months ended June 30, 2019.
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 of $156 thousand is treated together as a debt discount on the PFG V Debt and will be accreted to interest expense under the effective interest method over the three-year term of the PFG V Debt and the five-year term of the Warrant Debt. During the three and nine months ended June 30, 2020, the Company recorded accretion of discount expense associated with the warrants issued with the PFG V loan of $6 thousand and $17 thousand compared to $5 thousand and $14 thousand in the same periods last year. In addition, $14 thousand and $42 thousand amortization of the debt discount was recorded in the current three month and six month period compared to $14 thousand and $40 thousand in the prior year. At June 30, 2020, the carrying value of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $917 thousand and $166 thousand, respectively. In addition, the Company agreed to pay PFG V a cash fee of up to $150,000 payable upon maturity (the “back-end fee”), which will be earned ratably over the three year term of the PFG V loan. During the three and nine months ended June 30, 2020, the Company recorded interest expense of $13 thousand and $38 thousand, associated with recognition of the back-end fee compared to $13 thousand and $38 thousand during the three and nine months ended June 30, 2019.
The non-cash effective interest expense is calculated on the net balance of the PFG V Debt, debt discount, back-end fee and related loan origination fees, on a monthly basis. During the three and nine months ended June 30, 2020, non-cash interest expense of $7 thousand related to the effective interest rate on the PFG V loan was recorded in both periods.
On March 11, 2019, Sonic Foundry, Inc. entered into a Consent, Waiver & Modification to the 2018 Loan and Security Agreement dated May 11, 2018 (the "Modification") with Partners for Growth V, L.P. ("PFG"). Under the Modification: PFG waived the Company's default on the Minimum EBITDA financial covenant for the quarterly reporting period ending December 31, 2018; modified the existing financial covenants to be as follows: (i) Minimum Coverage Ratio (as defined), which requires, as of the last day of each month on or after the closing date, to be equal to or greater than (x) 0.7: 1.00 for the December through May calendar months, and (y) 0.9:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined), which requires, as of the last day of each calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be no less than $13,000,000; and modified the negative covenants to be as follows: the Company (x) shall not cause or permit (a) Japanese subsidiary indebtedness under its revolving line of credit facility to exceed at any time $1,000,000 outstanding, or (b) aggregate subsidiary indebtedness to exceed $1,200,000 at any time. At June 30, 2020, the Company was in compliance with all covenants per the 2018 Loan and Security Agreement, as modified.

19


Under the Modification, the Company was required to draw the next tranche of $1,000,000 in proceeds on the Note Purchase Agreement (detailed below) on or before March 31, 2019 as well as the final tranche of $1,000,000 in proceeds on or before April 30, 2019. The Company met this requirement as all tranches were fully drawn prior to April 30, 2019.
The existing terms of the PFG loan in terms of amortization, interest rate, payment schedule and maturity date are unchanged.
At June 30, 2020, a gross balance of $917 thousand was outstanding on the term debt with PFG V with an effective interest rate of sixteen-and-six-tenths percent (16.60%). At September 30, 2019, a gross balance of $1.7 million was outstanding with PFG V.
Initial Notes of the February 28, 2019 Note Purchase Agreement
On January 4, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the Promissory Note was due and payable on January 4, 2020. The Promissory Note may be prepaid at any time without penalty. The Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
On January 31, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "January 31, 2019 Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the January 31, 2019 Promissory Note was due and payable on January 31, 2020. The January 31, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to Mr. Burish, with each share valued at $1.30 per share. The January 31, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
On February 14, 2019, Sonic Foundry, Inc. and Mr. Burish entered into a Promissory Note (the "February 14, 2019 Promissory Note") pursuant to which Mr. Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. Interest accrued and outstanding principal on the February 14, 2019 Promissory Note was due and payable on February 14, 2020. The February 14, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by issuing common stock to Mr. Burish with each share valued at $1.30 per share. The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.
February 28, 2019 Note Purchase Agreement
On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Mr. Burish.
The Note Purchase Agreement provided for subordinated secured promissory notes (the "Subordinated Promissory Notes") in an aggregate original principal amount of up to $5,000,000. Mr. Burish acquired from the Company (a) on the initial closing date, the notes in an aggregate principal amount of $3,000,000 (the "Initial Notes") and (b) two additional tranches, each in the amount of $1,000,000 and payable at any time prior to the first anniversary of the Agreement (the "Additional Notes" and together with the Initial Notes, collectively, the "Purchase Price"). The Initial Notes were previously disbursed in January and February of 2019, as detailed above (the Promissory Note, the January 31st, 2019 Promissory Note, and the February 14, 2019 Promissory Note, collectively referred to as the "Initial Notes"). The fourth tranche was disbursed on March 13, 2019 and the fifth and final tranche was disbursed on April 4, 2019.
The Subordinated Promissory Notes accrued interest at the variable per annum rate equal to the Prime Rate (as defined) plus four percent (4.00%). The outstanding principal balance of the Subordinated Promissory Notes, plus all unpaid accrued interest, plus all outstanding and unpaid obligations, was set to mature on February 28, 2024 (the "Maturity Date"). Principal installments of $100,000 were to begin monthly on August 31, 2020, and continue through the Maturity Date. The Note Purchase Agreement dated February 28, 2019 was subordinated to the existing PFG loan.
At each anniversary of the Closing, an administration fee ("anniversary fee") equal to 0.5% of the purchase price less principal payments made was due and payable to Mr. Burish. During the three and nine months ended June 30, 2020, the Company recorded an accrued anniversary fee associated with the Subordinated Promissory Notes of $3 thousand and $16 thousand. There was no accrued anniversary fee for the prior periods. The anniversary fee on the Subordinated Promissory Notes was due on February 28, 2020 ("first year anniversary fee") and was deferred. On March 24, 2020, the Company entered into a First Amendment to Note Modification Agreement ("First Amendment") to formalize the deferment of the first year anniversary fee. The deferred first year anniversary fee was added to the principal amount due on the Subordinated Notes.

20


The proceeds from the Note Purchase Agreement were allocated between the Subordinated Promissory Notes and the Warrant debt based on their relative fair value on the date of issuance. The warrant debt of $674 thousand was treated together as a debt discount on the Subordinated Notes Payable and has been accreted to interest expense under the effective interest rate method over the five-year term of the Subordinated Notes Payable. During the three and nine months ended June 30, 2020, the Company recorded accretion of discount expense associated with the Subordinated Promissory Notes of $33 thousand and $67 thousand compared to the three and six months ended June 30, 2019 of $13 thousand and $13 thousand.
The non-cash effective interest expense was calculated on the net balance of the Subordinated Promissory Notes, Warrant, and related loan origination fees, on a monthly basis. During the three and nine months ended June 30, 2020, $13 thousand and $2 thousand of non-cash interest benefit related to the effective interest rate on the Subordinated Promissory Notes was recorded.
May 13, 2020 Debt Conversion Agreement
On May 13, 2020, the Company entered into a debt conversion agreement with Mr. Burish to convert all outstanding debt owed to Mr. Burish into common stock at a conversion price of $5.00 per share. The net carrying value of $5.0 million, including principal and accrued interest of $5.6 million less debt discount and loan origination fees of $596 thousand, was converted into 1,114,723 shares of common stock. This resulted in a net loss of $26 thousand.
February 28, 2019 Warrant
Coincident with execution of the Note Purchase Agreement, the Company entered into a Warrant Agreement ("Warrant") with Mr. Burish. Pursuant to the terms of the Warrant, the Company issued to Mr. Burish a warrant to purchase up to 728,155 shares of common stock of the Company at an exercise price of $1.18 per share, subject to certain adjustments.
On April 25, 2019, Mr. Burish exercised his warrant to purchase 728,155 shares of common stock of the Company at an exercise price of $1.18 per share. A special committee of disinterested and independent directors approved the issuance of the Subordinated Promissory Notes and the Warrant.
Paycheck Protection Program (PPP) Loan Dated April 20, 2020

Following the approval of the Board of Directors, the Company and First Business Bank entered into a $2.3 million Promissory Note (the "Promissory Note") under the Paycheck Protection Program (PPP) contained within the new Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP loan has a term of two years for those companies receiving loan proceeds prior to June 5, 2020, is unsecured, and is guaranteed by the U.S. Small Business Administration ("SBA"). The loan carries a fixed interest rate of 1% per annum. Under the terms of the CARES Act, the Company will be eligible for and intends to apply for forgiveness of all loan proceeds used for payroll costs, rent, utilities, and other qualifying expenses during the eight-week or twenty-four week period ("covered period") following receipt of the loan, provided the Company maintains its employment and compensation within certain parameters during such period, and provided further that not more than 40% of the amount forgiven can be attributable to non-payroll costs. The Company must apply for forgiveness within 10 months from the end of the covered period.. First Business Bank will then have 60 days to review the application and submit it to the SBA and the SBA will have 90 days from receipt of the application to review and render a decision back to the lender. If the borrower does not apply for loan forgiveness within the 10 month time frame, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the amount and the date the first payment is due. The SBA is scheduled to begin accepting applications for forgiveness from lenders on August 10, 2020 when the development of its new software-as-a-service platform goes live, however, the Company's lender is currently waiting for completion of their own platform before accepting any applications. As of June 30, 2020 the full amount of the loan has been included in long-term notes payable and interest of $5 thousand has been accrued on the full amount of the loan.
Other Indebtedness
On January 30, 2020, Mediasite K.K. entered into a Term Loan ("Term Loan") with Sumitomo Mitsui Banking Corporation for $460 thousand in cash. The Term loan accrues interest at an annual rate of 1.475%. Beginning in January 2020, principal is due in 12 equal monthly installments, plus accrued interest, continuing through December 30, 2020, when the principal balance will be paid in full.

21


At June 30, 2020, $232 thousand was outstanding on the term loan with Mitsui Sumitomo Bank. The term loan accrues interest at an annual rate of approximately one-and-one-half percent (1.475%).
At June 30, 2020 and September 30, 2019, no balance was outstanding on the line of credit with Mitsui Sumitomo Bank. The credit facility is related to Mediasite K.K., and accrues interest at an annual rate of approximately one-and-one half percent (1.575%).



22


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 June 30, 2020 or September 30, 2019, and has not recognized any interest or penalties in the Condensed Consolidated Statements of Operations for either of the three or nine months ended June 30, 2020 or 2019.
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.


23


6. Revenue
Disaggregation of Revenues
The following tables summarize revenues from contracts with customers for the three and nine months ended June 30, 2020 and 2019, respectively, (in thousands) by subsidiary, which includes the parent (SOFO), our Netherlands location (SFI) and our Japanese location (MSKK) :
Three months ended June 30, 2020
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
1,635

$
272

$
111

$
(310
)
$
1,708

Software
707

105

330

(122
)
1,020

Shipping
13

3



16

 
 
 
 
 
 
Product and other total
2,355

380

441

(432
)
2,744

 
 
 
 
 
 
Support
1,865

146

458

(128
)
2,341

Hosting
1,358

145

202


1,705

Events
702

23

168


893

Installs & training
217

17



234

 
 
 
 
 
 
Services total
4,142

331

828

(128
)
5,173

 
 
 
 
 
 
Total revenue
$
6,497

$
711

$
1,269

$
(560
)
$
7,917

Nine months ended June 30, 2020
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
4,244

$
491

$
308

$
(507
)
$
4,536

Software
2,304

358

561

(356
)
2,867

Shipping
203

6



209

 
 
 
 
 
 
Product and other total
6,751

855

869

(863
)
7,612

 
 
 
 
 
 
Support
5,762

437

1,695

(488
)
7,406

Hosting
3,496

425

899


4,820

Events
2,725

97

1,495


4,317

Installs & training
425

19



444

 
 
 
 
 
 
Services total
12,408

978

4,089

(488
)
16,987

 
 
 
 
 
 
Total revenue
$
19,159

$
1,833

$
4,958

$
(1,351
)
$
24,599



24


Three months ended June 30, 2019
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
2,761

$
388

$
76

$
(268
)
$
2,957

Software
1,027

128

79

(78
)
1,156

Shipping
105

3



108

 
 
 
 
 
 
Product and other total
3,893

519

155

(346
)
4,221

 
 
 
 
 
 
Support
1,965

176

451

(245
)
2,347

Hosting
1,066

123

388


1,577

Events
1,079

64

648


1,791

Installs & training
132




132

 
 
 
 
 
 
Services total
4,242

363

1,487

(245
)
5,847

 
 
 
 
 
 
Total revenue
$
8,135

$
882

$
1,642

$
(591
)
$
10,068



Nine Months Ended June 30, 2019
 
SOFO
SFI
MSKK
Eliminations
Total
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Hardware
$
4,359

$
562

$
461

$
(568
)
$
4,814

Software
2,287

367

397

(354
)
2,697

Shipping
253

4



257

 
 
 
 
 
 
Product and other total
6,899

933

858

(922
)
7,768

 
 
 
 
 
 
Support
5,913

510

1,673

(717
)
7,379

Hosting
3,182

387

1,254


4,823

Events
3,160

140

2,042


5,342

Installs & training
240

15