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

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



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.

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.

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 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.