Acquisition

6 Months Ended

Mar. 31, 2015

MediaMission Holding B.V. [Member]

Acquisition

7. Acquisition of MediaMission Holding B.V.

On December 16, 2013, Sonic Foundry completed its acquisition of all of the outstanding stock of MediaMission Holding B.V., the owner of 100% of the outstanding stock in MediaMission B.V., (“MediaMission”) and MediaMission Hosting B.V. Sonic Foundry paid $1.493 million for all the outstanding stock in MediaMission Holding B.V., comprised of $458,000 cash, $687,000 subordinated note payable over three years (interest rate of 6.5%) and $348,000 in shares of Sonic Foundry stock. The stock portion of the purchase price consisted of 37,608 shares of Sonic Foundry common stock. In connection with the acquisition of MediaMission Holding B.V., the Company entered into employment agreements with the two managing principals of MediaMission. As a result of the acquisition, the Company is expected to further increase its presence in the European market. The goodwill of $932 thousand arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and MediaMission. None of the goodwill recognized is deductible for income tax purposes.

The Company recorded the acquired tangible and intangible assets and liabilities assumed based on their estimated fair values. The fair value of the customer relationships was estimated by applying the income approach. That measure is based on significant inputs that are not observable in the market, and therefore represents Level 3 inputs. Key assumptions include a discount rate of 28 percent, estimated effective tax rate of 20 percent, and estimated customer attrition rate of 15 percent. The Company believes that the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The customer relationship intangible is amortized on a straight line basis over ten year years and amortization is categorized as a selling and marketing expense.

The following table summarizes the fair values of the assets acquired and liabilities assumed on the date of the acquisition (in thousands):

	Fair Value
Assets acquired:
Cash	$	339
Other current assets		923
Property and equipment		49
Customer relationships		591
Goodwill		932
Total assets acquired		2,834
Liabilities assumed:
Current liabilities		(1,111	)
Deferred tax liability		(230	)
Total liabilities assumed		(1,341	)
Total purchase price	$	1,493

MediaMission contributed revenue of $155 thousand and net loss of $75 thousand for the three months ended March 31, 2015. MediaMission contributed revenue of $392 thousand and net loss of $198 thousand for the six months ended March 31, 2015. MediaMission revenue contributions and net loss for the three months ended March 31, 2014 were $136 thousand and $240 thousand, respectively. MediaMission contributed revenue of $227 thousand and a net loss of $197 thousand for the period from the date of acquisition to March 31, 2014.

Mediasite KK [Member]

Acquisition

8. Acquisition of MSKK

On January 14, 2014, Sonic Foundry paid approximately $5.7 million for the remaining stock in Mediasite KK, comprised of equal components of approximately $1.9 million cash, subordinated note payable in one year (interest rate of 5%) and value in shares of Sonic Foundry. The stock portion of the purchase price consisted of 189,222 shares of Sonic Foundry common stock. Assets acquired include cash, accounts receivable, inventory, fixed assets and customer relationship and other intangibles and liabilities assumed include accounts payable, debt, taxes payable and unearned revenues. Prior to completion of this acquisition, the Company owned a minority interest of approximately 26% of Mediasite KK. In connection with the acquisition, the one quarter lag in reporting their results was eliminated. The Company determined that the acquisition was deemed to be a material business combination. During the second fiscal quarter of 2014, this initial investment was valued at the same amount as the value when control was achieved which resulted in a non-cash gain of approximately $1.4 million. This amount was partially offset by a $901 thousand tax expense associated with the gain. As a result of the acquisition, the Company is expected to further increase its presence in the Japanese and Asian market. The goodwill of $2.9 million arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and Mediasite KK. None of the goodwill recognized is deductible for income tax purposes.

The Company recorded the acquired tangible and intangible assets and liabilities assumed based on their estimated fair values. The fair value of the customer relationships was estimated by applying the income approach. That measure is based on significant inputs that are not observable in the market, and therefore represents Level 3 inputs. Key assumptions include a discount rate of 30 percent, estimated effective tax rate of 35.5 percent, and estimated customer attrition rate of 15 percent. The Company believes that the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The customer relationship intangible is amortized on a straight line basis over ten year years and amortization is categorized as a selling and marketing expense.

The following table summarizes the fair values of the assets acquired and liabilities assumed on the date of the acquisition (in thousands):

	Fair Value
Assets acquired:
Cash	$	3,163
Other current assets		1,792
Property and equipment		240
Customer relationships		2,071
Goodwill		2,906
Total assets acquired		10,172
Liabilities assumed:
Current liabilities		(1,590	)
Deferred tax liability		(808	)
Total liabilities assumed		(2,398	)
Less ownership basis of original 26% investment		(2,053	)
Total purchase price for 74% remaining stock	$	5,721

Mediasite KK contributed revenue of $1.7 million and net income of $313 thousand for the three months ended March 31, 2015. Mediasite KK contributed revenue of $2.7 million and net income of $100 thousand for the six months ended March 31, 2015. Mediasite KK contributed revenue of approximately $2.2 million and net income of approximately $300 thousand for the period from the date of acquisition to March 31, 2014.