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 December 31, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-14007
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, Suite 775, 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 is an accelerated filer (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 February 10, 2004 | |
| Common Stock, $0.01 par value |
29,348,025 |
| PAGE NO. | ||||
| PART I FINANCIAL INFORMATION |
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| Item 1. |
Consolidated Financial Statements |
|||
| Consolidated Balance Sheets – December 31, 2003 (Unaudited) and September 30, 2003 |
3 | |||
| Consolidated Statements of Operations (Unaudited) – three months ended December 31, 2003 and 2002 |
4 | |||
| Consolidated Statements of Cash Flows (Unaudited) – three months ended December 31, 2003 and 2002 |
5 | |||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||
| Item 3. |
15 | |||
| Item 4. |
15 | |||
| PART II OTHER INFORMATION |
||||
| Item 6. |
15 | |||
2
Sonic Foundry, Inc.
(in thousands except for share data)
| December 31, 2003 |
September 30, 2003 |
|||||||
| (unaudited) | ||||||||
| Assets |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 8,579 | $ | 12,623 | ||||
| Short-term investments |
3,552 | — | ||||||
| Accounts receivable, net of allowances of $33 and $40 |
438 | 508 | ||||||
| Accounts receivable, other |
249 | 139 | ||||||
| Inventories |
118 | 111 | ||||||
| Prepaid expenses and other current assets |
310 | 214 | ||||||
| Total current assets |
13,246 | 13,595 | ||||||
| Property and equipment: |
||||||||
| Leasehold improvements |
129 | 132 | ||||||
| Computer equipment |
805 | 741 | ||||||
| Furniture and fixtures |
96 | 96 | ||||||
| Total property and equipment |
1,030 | 969 | ||||||
| Less accumulated depreciation |
433 | 381 | ||||||
| Net property and equipment |
597 | 588 | ||||||
| Other assets: |
||||||||
| Goodwill and other intangibles, net |
7,713 | 7,726 | ||||||
| Capitalized software development costs, net of amortization of $577 and $508 |
823 | 892 | ||||||
| Total other assets |
8,536 | 8,618 | ||||||
| Total assets |
$ | 22,379 | $ | 22,801 | ||||
| Liabilities and stockholders’ equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 699 | $ | 1,065 | ||||
| Accrued liabilities |
851 | 1,263 | ||||||
| Unearned revenue |
308 | 194 | ||||||
| Current portion of capital lease obligations |
28 | 48 | ||||||
| Total current liabilities |
1,886 | 2,570 | ||||||
| Deferred rent |
32 | — | ||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $.01 par value, authorized 5,000,000 shares; none issued and outstanding |
— | — | ||||||
| 5% preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 10,000,000 shares, none issued and outstanding |
— | — | ||||||
| Common stock, $.01 par value, authorized 100,000,000 shares; 29,393,275 and 28,684,449 issued and 29,333,025 and 28,614,199 outstanding at December 31, 2003 and September 30, 2003, respectively |
294 | 287 | ||||||
| Additional paid-in capital |
168,961 | 168,106 | ||||||
| Accumulated deficit |
(148,600 | ) | (147,532 | ) | ||||
| Receivable for common stock issued |
(26 | ) | (462 | ) | ||||
| Treasury stock, at cost, 70,250 shares |
(168 | ) | (168 | ) | ||||
| Total stockholders’ equity |
20,461 | 20,231 | ||||||
| Total liabilities and stockholders’ equity |
$ | 22,379 | $ | 22,801 | ||||
See accompanying notes
3
Sonic Foundry, Inc.
(in thousands except for per share data)
(Unaudited)
| Three Months Ended December 31, |
||||||||
| 2003 |
2002 |
|||||||
| Continuing Operations |
||||||||
| Revenue: |
||||||||
| Product sales |
$ | 603 | $ | 173 | ||||
| Customer support fees |
67 | — | ||||||
| Other |
229 | — | ||||||
| Total revenue |
899 | 173 | ||||||
| Cost of revenue |
324 | 157 | ||||||
| Gross margin |
575 | 16 | ||||||
| Operating expenses: |
||||||||
| Selling and marketing expenses |
748 | 927 | ||||||
| General and administrative expenses |
681 | 711 | ||||||
| Product development expenses |
368 | 470 | ||||||
| Total operating expense |
1,797 | 2,108 | ||||||
| Loss from operations |
(1,222 | ) | (2,092 | ) | ||||
| Other income, net |
34 | 5 | ||||||
| Loss from continuing operations |
(1,188 | ) | (2,087 | ) | ||||
| Loss from operations of discontinued operations including $89 of income tax benefit in 2003 |
— | (1,260 | ) | |||||
| Gain on disposal of discontinued operations |
120 | — | ||||||
| Net loss |
$ | (1,068 | ) | $ | (3,347 | ) | ||
| Loss per common share: |
||||||||
| Continuing operations |
$ | (0.04 | ) | $ | (0.08 | ) | ||
| Discontinued operations |
(0.00 | ) | (0.04 | ) | ||||
| Net loss per common share – basic and diluted |
$ | (0.04 | ) | $ | (0.12 | ) | ||
See accompanying notes
4
Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Three months ended December 31, |
||||||||
| 2003 |
2002 |
|||||||
| Operating activities |
||||||||
| Net loss |
$ | (1,068 | ) | $ | (3,347 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Gain on sale of discontinued operations |
(120 | ) | — | |||||
| Amortization of intangible assets and capitalized software development costs |
82 | 113 | ||||||
| Depreciation and amortization of property and equipment |
52 | 857 | ||||||
| Amortization of debt discount and debt issue costs |
— | 1,085 | ||||||
| Noncash compensation charges and charges for stock warrants and options |
59 | 14 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
70 | (64 | ) | |||||
| Accounts receivable, other |
(110 | ) | 8 | |||||
| Inventories |
(7 | ) | (62 | ) | ||||
| Prepaid expenses and other assets |
(130 | ) | 128 | |||||
| Accounts payable, accrued liabilities and deferred rent |
(746 | ) | (305 | ) | ||||
| Unearned revenue |
114 | — | ||||||
| Total adjustments |
(736 | ) | 1,774 | |||||
| Net cash used in operating activities |
(1,804 | ) | (1,573 | ) | ||||
| Investing activities |
||||||||
| Purchase of short-term investments |
(3,552 | ) | — | |||||
| Proceeds from sale of discontinued operations, net |
120 | — | ||||||
| Purchases of property and equipment |
(61 | ) | (18 | ) | ||||
| Net cash used in investing activities |
(3,493 | ) | (18 | ) | ||||
| Financing activities |
||||||||
| Proceeds from issuance of common stock, net of issuance costs |
1,273 | 38 | ||||||
| Proceeds from debt issuances |
— | 1,069 | ||||||
| Payments on long-term debt and capital leases |
(20 | ) | (838 | ) | ||||
| Payments on line of credit, net |
— | (87 | ) | |||||
| Net cash provided by financing activities |
1,253 | 182 | ||||||
| Effect of exchange rate changes on cash |
— | 10 | ||||||
| Net decrease in cash |
(4,044 | ) | (1,399 | ) | ||||
| Cash and cash equivalents at beginning of period |
12,623 | 3,704 | ||||||
| Cash and cash equivalents at end of period |
$ | 8,579 | $ | 2,305 | ||||
| Supplemental cash flow information: |
||||||||
| Interest paid |
— | (191 | ) | |||||
| Income taxes refunded (paid) |
(100 | ) | 180 | |||||
| Non-cash transactions - |
||||||||
| Capital lease acquisitions |
— | 30 | ||||||
See accompanying notes
5
| 1. | Basis of Presentation and Significant Accounting Policies |
Sonic Foundry, Inc. (the Company) is in the business of developing automated rich-media application software and systems, (our “Media Systems” business). Our current operations were formed in October 2001 when we acquired the assets and assumed certain liabilities of MediaSite, Inc. (“MediaSite”).
Until recently, we were engaged in three businesses – Media Services, Desktop Software and Media Systems. Our media services operation (“Media Services”) provided format conversion, tape duplication, film restoration and other services to the media, broadcast and entertainment industries. On May 16, 2003, the Company completed the sale of the Media Services business.
The desktop software business (“Desktop Software”) designed, developed, marketed and supported software products for digitizing, converting, editing and publishing audio, video, and/or multimedia content. On July 30, 2003, the Company completed the sale of the Desktop Software business to a subsidiary of Sony Pictures Digital.
All revenue and expenses included in the results of operations of both the Media Services business and the Desktop Software business have been presented as discontinued operations (the “Discontinued Operations”) and previously reported consolidated financial statements have been restated to reflect the discontinued operations presentation. See Note 2 – Management’s Plan and Discontinued Operations.
Interim Financial Data
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s annual report filed on Form 10-K for the fiscal year ended September 30, 2003. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. Operating results for the three-month period ended December 31, 2003 are not necessarily indicative of the results that might be expected for the year ended September 30, 2004.
Revenue Recognition
General
Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Revenue is deferred when undelivered products or services are essential to the functionality of delivered products, customer acceptance is uncertain, significant obligations remain, or the fair value of undelivered elements is unknown. The Company has not accepted product returns, other than for limited warranty repairs, and does not offer price protection, rebates or other offerings that occur under sales programs and accordingly, does not reduce revenue for such programs. The following policies apply to the Company’s major categories of revenue transactions.
Products
Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the customer. Under the terms and conditions of the sale, this occurs at the time of shipment to the customer. Product revenue currently represents sales of our MediaSite Live (“MSL”) product, excluding the revenue generated from service-related solutions, which is included in services revenue discussed below.
Services
We sell support contracts to customers of our MSL hardware, typically one year in length, and record the related revenue ratably over the contractual period. Our support contracts cover phone and electronic technical
6
support availability over and above the level provided by our distributors as well as an extension of the standard hardware warranty from 90 days to one year. Hardware warranty service is performed by the manufacturer we contract with to build the units. Revenue for time and material contracts such as training fees are recognized as services are rendered. Service amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue until the revenue recognition criteria are met.
Other
Other revenue consists of software licensing of MediaSite Publisher and custom software development performed under time and materials or fixed fee arrangements. Software licensing is recorded when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectibility is reasonably assured. Custom software development includes fees recorded pursuant to long-term contracts (including research grants), using the percentage of completion method of accounting, when significant customization or modification of a product is required.
Revenue Arrangements that Include Multiple Elements
Revenue for transactions that include multiple elements such as hardware, software, training, and support agreements is allocated to each element based on its relative fair value and recognized for each element when the revenue recognition criteria have been met for such element. Fair value is generally determined based on the price charged when the element is sold separately. In the absence of fair value of a delivered element, revenue is allocated first to the fair value of the undelivered elements and the residual revenue to the delivered elements. The Company recognizes revenue for delivered elements only when all of the following criteria are satisfied: undelivered elements are not essential to the functionality of delivered elements, uncertainties regarding customer acceptance are resolved, and the fair value for all undelivered elements is known.
Shipping and Handling
Costs related to shipping and handling are included in cost of sales for all periods presented.
We perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral. We maintain allowances for potential credit losses and such losses have been within our expectations.
Cash, Cash Equivalents and Short-term investments
The company considers all highly liquid investments, generally with a maturity of three months or less, to be cash equivalents.
Inventories
Inventory consists of raw materials and supplies used in the assembly of MediaSite Live units.
Stock Based Compensation
As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,”