Note 1 - Basis of Presentation and Significant Accounting Policies

6 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

1. Basis of Presentation and Significant Accounting Policies

Business

Sonic Foundry, Inc. (the "Company") is the global leader for video capture, management, and streaming solutions as well as virtual and hybrid events. Trusted by thousands of educational institutions, corporations, health organizations and government entities in over 65 countries with solutions that transform communication, training, and learning.  Sonic Foundry’s brands include Mediasite®, Mediasite Connect, Vidable™ and Global Learning Exchange™.

On November 16, 2022, the Company entered into two agreements for a total of $8.5 million debt at a rate of 12% interest per annum due in 30 equal installments beginning on June 1, 2023, including an agreement with Mark Burish, Chairman of the Company's Board of Directors for $3.0 million of such debt and agreement with an affiliate of a former director for the remaining $5.5 million of such debt. On November 16, 2022 the Company also entered into a subscription agreement with Mr. Mark Burish for a total of $1.2 million of common stock along with an attached warrant.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. In fiscal year 2023 to date, the Company incurred a net loss of $7.8 million compared to $2.9 million in fiscal year 2022 and has a deficit in stockholders’ equity at March 31, 2023 of $2.3 million. The Company currently does not have access to capital through a line of credit nor other readily available sources of capital. Together, these factors raise the need to consider the Company’s ability to continue as a going concern.

However, management has considered its plans to continue the Company as a going concern and believes substantial doubt is alleviated. Management developed a plan to improve liquidity in its operations through reductions in expenses, incentives to accelerate cash collections and monetization of excess inventory. In addition, the Company is now executing on a plan to improve liquidity through 1) an agreement with its secured lenders to defer principal payments in the near term, for which it is in the process of documenting; 2) obtaining new debt financing from an existing lender to provide more capital; and 3) an evaluation of other strategic alternatives with multiple parties to provide liquidity. The Company believes it will be successful in such initiatives and together with growth in its various business lines that it will be able to continue as a going concern through at least the next twelve months.

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, 2022 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 six month period ended March 31, 2023 are not necessarily indicative of the results that might be expected for the year ending September 30, 2023. The September 30, 2022 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.

Impacts of COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns.  While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time. The Company continues to follow guidelines outlined by the CDC and local county protocol. 

COVID-19 has had negative impacts on our operations and the future impacts of the pandemic and any corresponding economic results are largely unknown and rapidly evolving. The Company has implemented new products and new approaches to deliver existing products to grow revenue.  In response to the cancellations of in-person events, the Company introduced a new virtual events platform as an alternate solution for our customers. In addition, the Company is confident the pandemic will accelerate the Company's new product strategy.

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, such as those documented by employment agreements, in accordance with Accounting Standards Codification 712 ("ASC 712") Nonretirement Postemployment Benefits. Under ASC 712, liabilities for postemployment benefits are recorded at the time the obligations are probable of being incurred and can be reasonably estimated. The Company accounts for one-time employment benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. When applicable, the Company records such costs into operating expense.

For the three and six months ended March 31, 2023, the Company expensed involuntary termination benefits of $66 thousand and $473 thousand respectively, under ASC 420 compared to $16 thousand and $16 thousand expenses incurred during the same periods last year.

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 March 31, 2023:

Investment in sales-type lease, gross:
2023	$	205
2024		171
2025		69
Gross investment in sales-type lease		445
Less: Unearned income		—
Total investment in sales-type lease	$	445
Current portion of total investment in sales-type lease	$	272
Long-term portion of total investment in sales-type lease		173
	$	445

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):

	March 31,			September 30,
	2023			2022
Raw materials and supplies	$	493		$	507
Finished goods		2,423			1,062
Less: Obsolescence reserve		(102	)		(107	)
	$	2,814		$	1,462

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  March 31, 2023 and September 30, 2022, the Company has recorded a liability of $84 thousand and $77 thousand, respectively, for retirement obligations associated with returning the MSKK leased property to the respective lessors upon the termination of the lease arrangement. 

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 V debt (See Note 4) 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):

March 31, 2023	Level 1		Level 2		Level 3		Total Fair Value
Derivative liability	$	—	$	—	$	—	$	—

September 30, 2022	Level 1		Level 2		Level 3		Total Fair Value
Derivative liability	$	—	$	—	$	—	$	—

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 Non-Recurring Basis

The initial fair values of PFG V 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). 

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, accounts payable, debt instruments and 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 to 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 six months ended March 31, 2023 or 2022.

Software Development Cost

Software development costs incurred in conjunction with product development are charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at cost, subject to impairment. Until the first fiscal quarter of 2022, the period between achieving technological feasibility of the Company’s products and the general availability of the products has been short. During the three and six months ended March 31, 2023, the Company capitalized approximately $736 thousand and $1.5 million in software development costs related to new products, and this is included in software development, net of amortization on the balance sheet. During the three and six months ended March 31, 2022 the Company capitalized approximately $626 thousand and $954 thousand, respectively, in software development costs. During the three and six months ended March 31, 2023, the Company amortized approximately $11 thousand and $17 thousand respectively, in software development costs related to new products that became widely available to customers during the first quarter of 2023, compared to $0 during the three and six months ended March 31, 2022

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:

	Six Months Ended
	March 31,
	2023		2022
Expected life (in years)		5.7		5.3
Risk-free interest rate		4.03% - 4.20%		1.07% - 1.87%
Expected volatility		67.61% - 67.82%		64.83% - 65.49%
Expected forfeiture rate		9.70% - 9.80%		14.65% - 15.03%
Expected exercise factor		2.01		2.02
Expected dividend yield		0.00%		0.00%

A summary of option activity at March 31, 2023 and changes during the six months then ended is presented below:

				Weighted-		Weighted-Average
				Average		Remaining Contractual
	Options			Exercise Price		Period in Years
Outstanding at October 1, 2022		2,095,538		$	3.74		7.29
Granted		579,350			0.84		9.80
Exercised		(2,550	)		0.66		6.00
Forfeited and cancelled		(159,211	)		5.16		—
Outstanding at March 31, 2023		2,513,127		$	2.98		7.66
Exercisable at March 31, 2023		1,500,786		$	3.55		6.72

A summary of the status of the Company’s non-vested options and changes during the six month period ended March 31, 2023 is presented below:

				Weighted-Average
				Grant Date Fair
Non-vested Options	Options			Value
Non-vested at October 1, 2022		931,718		$	1.57
Granted		579,350			0.41
Vested		(450,773	)		1.28
Forfeited		(47,954	)		0.81
Non-vested at March 31, 2023		1,012,341		$	0.94

The weighted average grant date fair value of options granted during the six months ended March 31, 2023 was $0.41. As of March 31, 2023, there was $575 thousand of total unrecognized compensation cost related to non-vested stock-based compensation, with total forfeiture adjusted unrecognized compensation cost of $270 thousand. The cost is expected to be recognized over a weighted-average remaining life of 1.9 years.

Stock-based compensation expense for stock options recorded in the three and six months ended March 31, 2023 was $107 thousand and $426 thousand. Stock-based compensation expense recorded in the three and six months ended March 31, 2022 was $188 thousand and $409 thousand, respectively.There was $1 thousand and $2 thousand in cash received from transactions under all stock option plans during the three and six months, respectively, ended March 31, 2023, and $47 thousand and $105 thousand during three and six months, respectively, ended March 31, 2022. There were no tax benefits realized for tax deductions from option exercises in either of the three months ended  March 31, 2023 or 2022. 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 300,000 common shares may be issued. A total of 75,458 shares are available to be issued under the plan at March 31, 2023. The Company recorded $3 and $3 thousand stock compensation expense under this plan for three and six months, respectively, ended March 31, 2023 compared to $3 and $6 thousand for three and six months, respectively, ended March 31, 2022. Cash received for the issuance of shares under the Purchase Plan, net of refund, in the three and six months ended March 31, 2023 was $3 thousand compared to $20 thousand for three and six months ended March 31, 2022.

Preferred Stock and Dividends

No shares of Preferred Stock, Series A or Series B were issued and outstanding as of  March 31, 2023 or September 30, 2022.

Common Stock Transactions

On April 13, 2022, the Company announced an underwritten public offering of 1,700,000 shares of its common stock at a public offering price of $2.55 per share. The Company granted the underwriter a 45-day option to purchase up to an additional 255,000 shares of common stock at the public offering price, less underwriting discounts and commissions. None of the options were exercised and the 45-day option period has expired.

The Company also issued Underwriters' Warrants that grant the underwriter the right to purchase an aggregate of 6% of the shares of common stock issued in the offering or a total of 102,000 shares. The Underwriters’ Warrants are exercisable, in whole or in part, commencing October 10, 2022, and expiring on October 10, 2027, at an initial exercise price of $3.06 per share. 

On April 19, 2022, the public offering closed. Gross proceeds from the sale of 1,700,000 shares before deducting underwriting discounts and commissions and other offering expenses were approximately $4.3 million. Cost associated with the offering was $406 thousand consisting of finders fees, underwriting fees, legal fees, accounting service fees, and transfer agent closing fees.

On November 16, 2022, the Company entered into a Subscription Agreement with Mark Burish ("Burish"), Chairman of the Company's Board of Directors, and a Warrant whereby Burish purchased $1,200,000 of common stock at a price equal to the average closing bid price on the five days preceding the date of close (1,176,471 shares) and received a warrant to purchase 511,765 shares of common stock at a price of $1.02. The warrant matures on November 16, 2027.

The total warrants outstanding as of March 31, 2023 are as follows:

Warrants Outstanding			Wtd Ave.
Issued in Connection	Amount		Exercise Price		Life in Yrs.
Capital Raise		952,215	$	2.16		3.5
Vender Agreement		102,000	$	3.06		4.1
		1,054,215	$	2.24		3.5

Uplisting to Nasdaq Capital Market

On  January 24, 2022, the Company announced that the Nasdaq Stock Market LLC (“Nasdaq”) had approved its application for uplisting the Company’s common stock to the Nasdaq Capital Market. Sonic Foundry’s common stock commenced trading on the Nasdaq Capital Market at the opening of the market on Tuesday,  January 25, 2022, under the Company’s former ticker symbol “SOFO.” On August 10, 2022, the Company received notice that as a result of the resignation of a board member, that we no longer meet the requirement that there be a minimum of three independent directors on the audit committee, nor that we had a majority of independent directors on the board. We believe we are now in compliance with these requirements. On January 6, 2023, we received notice from Nasdaq that the closing bid price of our common stock was below the $1 minimum requirement for 30 straight business days. The rules provide a period of 180 calendar days to regain compliance if the common stock trades above the minimum $1 bid price for at least ten days. We may also be eligible for an additional 180-day period in which to regain compliance. To qualify for the additional 180-day period, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.

On February 14, 2023, the Company was notified by Nasdaq that it is not in compliance with the requirement to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing. Since its Form 10-Q for the period ended December 31, 2022, reported stockholders’ equity of $922,000, and as of February 10, 2023, the Company does not meet the alternatives of market value of listed securities or net income, as set forth in Nasdaq Listing Rule 5550(b)(1), the Company no longer complies with the Rule. On April 28, 2023, Nasdaq granted the Company an extension until July 14, 2023, to comply with Nasdaq Listing Rule 5550(b)(1).

Increase in Authorized Shares of Common Stock

On  February 2, 2022, the Company's Board of Directors approved a resolution to increase the authorized number of shares of common stock of the Company, par value $.01 per share, from 15,000,000 to 25,000,000.

Per Share Computation

Basic earnings (loss) per share have been computed using the weighted-average number of shares of common stock outstanding during the period 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). The following table sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2023		2022		2023		2022
Denominator for basic net income (loss) per share - weighted average common shares		12,075,832		9,114,451		11,775,782		9,095,810
Effect of dilutive options and warrants (treasury method)		—		—		—		—
Denominator for diluted net income (loss) per share - adjusted weighted average common shares		12,075,832		9,114,451		11,775,782		9,095,810
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		3,567,342		2,919,809		3,567,342		2,919,809

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", ("ASU 2016-13"). The amendments in this ASU affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments are effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendment is permitted, including adoption in any interim periods for which financial statement have not yet issued. 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.