SONIC FOUNDRY INC - 10-Q Quarterly Report

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, 2004

¨	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 August 6, 2004
Common Stock, $0.01 par value		29,680,187

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		PAGE NO.
*PART I*	*FINANCIAL INFORMATION*

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets – June 30, 2004 (Unaudited) and September 30, 2003	3

	Consolidated Statements of Operations (Unaudited) – Three months and Nine months ended June 30, 2004 and 2003	4

	Consolidated Statements of Cash Flows (Unaudited) – Nine months ended June 30, 2004 and 2003	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15

*PART II*	*OTHER INFORMATION*

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 6.	Exhibits and Reports on Form 8-K	16

Sonic Foundry, Inc.

Consolidated Balance Sheets

(in thousands except for share data)


	June 30, 2004			September 30, 2003
	(unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	4,545		$	12,623
Short-term investments		4,550			—
Accounts receivable, net of allowances of $49 and $40		1,062			508
Accounts receivable, other		26			139
Inventories		240			111
Prepaid expenses and other current assets		443			214

Total current assets		10,866			13,595
Property and equipment:
Leasehold improvements		180			132
Computer equipment		981			741
Furniture and fixtures		177			96

Total property and equipment		1,338			969
Less accumulated depreciation		555			381

Net property and equipment		783			588
Other assets:
Goodwill and other intangibles, net		7,688			7,726
Capitalized software development costs, net of amortization of $717and $508		683			892

Total other assets		8,371			8,618

Total assets	$	20,020		$	22,801

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	885		$	1,065
Accrued liabilities		763			1,263
Unearned revenue		415			194
Current portion of capital lease obligations		—			48

Total current liabilities		2,063			2,570

Deferred rent		29			—

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; 29,661,565 and 28,684,449 issued and 29,591,315 and 28,614,199 outstanding at June 30, 2004 and September 30, 2003, respectively		297			287
Additional paid-in capital		169,315			168,106
Accumulated deficit		(151,489	)		(147,532	)
Receivable for common stock issued		(27	)		(462	)
Treasury stock, at cost, 70,250 shares		(168	)		(168	)

Total stockholders’ equity		17,928			20,231

Total liabilities and stockholders’ equity	$	20,020		$	22,801

See accompanying notes

Sonic Foundry, Inc

Statements of Operations

(in thousands except for share data)

(Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2004			2003			2004			2003
Continuing Operations
Revenue:
Product sales	$	959		$	343		$	2,253		$	705
Customer support fees		110			—			266			25
Other		85			—			475			4

Total revenue		1,154			343			2,994			734
Cost of revenue		443			195			1,198			538

Gross margin		711			148			1,796			196

Operating expenses:
Selling and marketing expenses		1,176			641			2,722			2,128
General and administrative expenses		738			980			2,063			2,343
Product development expenses		420			330			1,181			1,136

Total operating expense		2,334			1,951			5,966			5,607

Loss from operations		(1,623	)		(1,803	)		(4,170	)		(5,411	)
Other income (expense), net		25			(3	)		81			(2	)

Loss from continuing operations		(1,598	)		(1,806	)		(4,089	)		(5,413	)

Discontinued operations:
Loss from operations of discontinued operations including $0 and $89 of income tax benefit in the three and nine months ended June 30, 2003		—			(923	)		—			(2,768	)
Gain (loss) on disposal of discontinued operations		—			(1,788	)		132			(1,788	)

Income (loss) from discontinued operations		—			(2,711	)		132			(4,556	)


Net loss	$	(1,598	)	$	(4,517	)	$	(3,957	)	$	(9,969	)

Loss per common share:
Continuing operations	$	(0.05	)	$	(0.06	)	$	(0.14	)	$	(0.20	)
Discontinued operations		—			(0.10	)		—			(0.16	)

Net loss per common share – basic and diluted	$	(0.05	)	$	(0.16	)	$	(0.14	)	$	(0.36	)

See accompanying notes

Sonic Foundry, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Nine months ended June 30,
	2004			2003
Operating activities
Net loss	$	(3,957	)	$	(9,969	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Gain) loss on sale of discontinued operations		(132	)		1,788
Amortization of intangible assets and capitalized software development costs		247			323
Depreciation and amortization of property and equipment		174			2,132
Amortization of debt discount and debt issue costs		—			2,762
Noncash compensation charges and charges for stock warrants and options		193			257
Loss on sale of property and equipment		—			15
Changes in operating assets and liabilities:
Accounts receivable		(554	)		747
Accounts receivable, other		113			(47	)
Inventories		(129	)		(43	)
Prepaid expenses and other assets		(213	)		6
Accounts payable, accrued liabilities and deferred rent		(651	)		(653	)
Unearned revenue		221			90

Total adjustments		(731	)		7,377

Net cash used in operating activities		(4,688	)		(2,592	)

Investing activities
Net purchase of short-term investments		(4,550	)		—
Proceeds from sale of discontinued operations, net		132			4,876
Proceeds from sale of property and equipment		—			15
Purchases of property and equipment		(369	)		(51	)

Net cash provided by (used in) investing activities		(4,787	)		4,840

Financing activities

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