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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1998
------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-14007
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SONIC FOUNDRY, INC.
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(Exact name of small business issuer as specified in its charter)
MARYLAND 39-1783372
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
754 Williamson Street, Madison, WI 53703
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(Address of principal executive offices)
(608)256-3133
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(Issuers' telephone number)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 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 .
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State the number of shares outstanding of each of the issuer's common equity as
of the last practicable date:
Outstanding
Class May 15, 1998
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Common Stock, $0.01 par value 2,617,835
Transitional Small Business Disclosure Format (check one)
Yes No X .
----- -----
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SONIC FOUNDRY, INC.
QUARTERLY REPORT ON FORM 10-QSB
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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PART I-- FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets--March 31, 1998 (Unaudited) and 3
September 30, 1997
Statements of Operations (Unaudited)--three-months ended 5
March 31, 1998 and 1997, six-months ended
March 31, 1998 and 1997.
Statements of Cash Flows (Unaudited)--Six-months 6
ended March 31, 1998 and 1997.
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II OTHER INFORMATION 18
EXHIBITS 20
SIGNATURES 22
</TABLE>
2
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Sonic Foundry, Inc.
Balance Sheets
<TABLE>
<CAPTION>
September 30 March 31
1997 1998
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Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 114,737 $ 195,169
Accounts receivable, net of allowances of
$20,090 and $74,570 at September 30, 1997 and 428,484 870,420
March 31, 1998, respectively
Inventories 56,662 138,869
Prepaid expenses and other current assets 81,370 137,283
------------------------------
Total current assets 681,253 1,341,741
Property and equipment:
Land 95,000 95,000
Buildings and improvements 734,575 788,905
Equipment 674,695 772,066
Furniture and fixtures 36,877 75,484
------------------------------
1,541,147 1,731,455
Less accumulated depreciation 190,193 275,560
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Net property and equipment 1,350,954 1,455,895
Capitalized software development costs, net 300,078 481,032
Initial public offering issuance costs -- 153,342
Other assets 678 435
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Total assets $2,332,963 $3,432,445
=============================
</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
September 30 March 31
1997 1998
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Liabilities and stockholders' equity (Unaudited)
<S> <C> <C>
Current liabilities:
Line of credit $ 220,000 $ --
Note payable to related party 40,000 --
Notes payable -- 940,417
Accounts payable 570,650 915,848
Accrued liabilities 84,282 102,781
Current portion of long-term obligations 31,174 39,199
------------------------------
Total current liabilities 946,106 1,998,245
Long-term obligations 702,443 695,395
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, issued and outstanding
6,879,732 shares at September 30, 1997 and
March 31, 1998, respectively 68,797 68,797
Common stock, $.01 par value, authorized
20,000,000 shares; issued and outstanding
229,760 and 468,160 shares at September 30,
1997 and March 31, 1998, respectively 2,298 4,682
Common stock warrant 78,000 143,000
Additional paid-in capital 1,363,900 2,057,116
Accumulated deficit (828,581) (1,534,790)
------------------------------
Total Stockholders' equity 684,414 738,805
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Total liabilities and stockholders' equity $ 2,332,963 $ 3,432,445
==============================
</TABLE>
See accompanying notes.
4
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Sonic Foundry, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1998 1997 1998
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<S> <C> <C> <C> <C>
Software license fees $ 586,129 $1,342,291 $1,405,110 $2,273,768
Cost of software license
fees 109,428 524,781 282,351 684,196
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476,701 817,510 1,122,759 1,589,572
Selling and marketing
expenses 374,018 670,158 700,912 1,319,478
General and administrative
expenses 243,249 364,395 492,973 681,670
Product development
expenses 100,685 130,147 187,354 237,031
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717,952 1,164,700 1,381,239 2,238,179
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Loss from operations (241,251) (347,190) (258,480) (648,607)
Other income (expense):
Interest expense (10,761) (35,646) (19,244) (57,736)
Other income 3,065 134 6,806 134
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(7,696) (35,512) (12,438) (57,602)
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Loss before income taxes (248,947) (382,702) (270,918) (706,209)
Income tax benefit (20,000)
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Net loss (228,947) $ (382,702) (270,918) $ (706,209)
======================== =========================
Net loss per common share --
Basic and diluted $ (1.79) $ (0.99) $ (2.54) $ (2.27)
======================== =========================
</TABLE>
See accompanying notes. 5
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Sonic Foundry, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended March 31,
1997 1998
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<S> <C> <C>
Operating activities
Net loss $ (270,918) $ (706,209)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 44,065 85,610
Amortization of debt discount -- 5,417
Amortization of capitalized software development costs 50,018 67,345
Changes in operating assets and liabilities:
Accounts receivable 16,414 (441,936)
Inventories 26,519 (82,207)
Prepaid expenses and other assets (121,401) (55,913)
Accounts payable and accrued liabilities (13,299) 363,697
--------------------------
Total adjustments 2,316 (57,987)
--------------------------
Net cash used in operating activities (268,602) (764,196)
Investing activities
Purchases of property and equipment (572,331) (190,308)
Capitalized software development costs -- (248,299)
--------------------------
Net cash used in investing activities (572,331) (438,607)
Financing activities
Initial public offering issuance costs (153,342)
Proceeds from sale of common stock, net of issuance costs 681,494 655,600
Proceeds from debt 266,920 1,022,200
Borrowings (Payments) on line of credit, net 100,000 (220,000)
Payments on note payable to related party (100,000) --
Payments on long-term debt -- (21,223)
--------------------------
Net cash provided by financing activities 948,414 1,283,235
--------------------------
Net increase in cash 107,481 80,432
Cash and cash equivalents at beginning of period 135,260 114,737
--------------------------
Cash and cash equivalents at end of period $ 242,741 $ 195,169
==========================
Supplemental cash flow information:
Interest paid $ 19,244 $ 59,056
Noncash transactions --
Exchange of common stock for preferred stock 183,023 --
Conversion of notes payable into common stock -- 40,000
</TABLE>
See accompanying notes. 6
<PAGE>
Sonic Foundry, Inc.
Notes to Financial Statements
March 31, 1998
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Interim Financial Data
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the Company's registration statement filed on
Form SB-2, as amended for the fiscal year ended September 30, 1997. 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 six-month
period ended March 31, 1998 are not necessarily indicative of the results that
might be expected for the year ended September 30, 1998.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to SFAS No. 128
requirements.
7
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Sonic Foundry, Inc.
Notes to Financial Statements
March 31, 1998
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1998 1997 1998
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<S> <C> <C> <C> <C>
Denominator
Denominator for basic and diluted
earnings per share - adjusted
weighted average common shares 127,800 385,827 106,676 311,627
===================== =======================
Securities that could potentially
dilute basic earnings per share in
the future that are not included in
the computation of diluted earnings
per share as their impact is
antidilutive (treasury stock method)
Options and warrants 348,206 380,817 343,284 373,428
Convertible Series B Preferred Stock 3,340,000 3,439,866 3,340,000 3,439,866
</TABLE>
Initial Public Offering
In April 1998, the Company completed an initial public offering of 2,000,000
shares of common stock at a price of $7.50 per share and 1,000,000 common stock
purchase warrants at a price of $0.10 each. The Company has granted the
underwriters an option to purchase up to an additional 300,000 shares of common
stock and/or 150,000 common stock purchase warrants to cover over-allotments. On
May 5, 1998 the underwriters acquired an additional 49,675 shares of common
stock and 99,837 common stock purchase warrants pursuant to the terms of the
option. The net proceeds to the Company from the offering, after deduction of
underwriting discounts and other estimated expenses relating to the offering,
are estimated to be approximately $12,833,000 (or $14,833,000 if the over-
allotment option is exercised in full). The Company intends to use the net
proceeds for development of new products, capital expenditures, sales and
marketing, expansion of internal operations and working capital and general
corporate purposes.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements which involve risks and
uncertainties. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of certain factors.
Overview
The Company is a leading provider of PC-based software products designed to run
under the Windows and Windows NT operating systems. The Company's current
products allow musicians, audio engineers and home users the ability to create,
record, edit and design digital audio files and record or master their own audio
CD's.
The Company was incorporated in 1994 and immediately began shipment of Sound
Forge, an entry-level digital-based audio editor developed by one of the
Company's founders. Initially, the Company's efforts were focused on research
activities aimed at developing an improved version of Sound Forge that would
meet the needs of musicians and audio engineers. In December 1994 the Company
released Sound Forge 3.0 and shifted its efforts to developing complementary
add-on products, marketing Sound Forge and recruiting support and development
personnel. The Company's product line expanded in 1995 with the introduction of
Sound Forge XP, a scaled down version of Sound Forge, and again in August 1996
with the introduction of Sound Forge 4.0 and plug-in products whose functions
include noise reduction, spectrum analysis and batch conversion. In late 1996
the Company raised capital from the sale of additional equity to fund continued
investments in research, development and recruitment activities, to purchase
operating assets and to significantly expand marketing and brand recognition
efforts. The Company released CD Architect, an audio mastering software product,
in June 1997 and an acoustics modeler, a plug-in software product that allows
users to overlay the acoustics of any environment upon an audio file, in August
1997. In January 1998 the Company began shipping Soft Encode, a software product
which provides an economical method of authoring Dolby certified AC-3 files.
The Company invested significant resources in sales, marketing, research and
other operating activities during the nine-month period ended September 30, 1997
and the six-month period ended March 31, 1998. The Company believes that its
success depends largely on building superior technology and quality into its
products, extending its technological lead on the competition and developing
brand recognition early in a product's life cycle. Accordingly, the Company
expects to continue spending heavily on these activities in the near future.
Despite these heavy investments in marketing and product development, the
historical growth in software license fees may not be sustainable in the future.
In light of the Company's limited operating history and rapid improvements in
technology and marketing of its products, the Company believes that period-to-
period comparisons of its revenues and operating results, including its gross
9
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profit and operating expenses as a percentage of total net revenues, are not
necessarily meaningful and should not be relied upon as indications of future
performance.
The Company uses and expects to continue to use sales promotions to encourage
the purchase and use of its products. Additionally, the Company plans to build
its brand awareness by expanding its efforts in developing OEM bundling
arrangements with hardware and software developers which tend to have lower
costs and much higher volumes than traditional distribution arrangements. The
effect of such sales promotions and OEM transactions may be material in certain
periods and are difficult to predict. No assurances can be given that discount
pricing and high volume OEM transactions will not have a permanent negative
effect on the pricing of the Company's products.
On September 30, 1997, the Company changed its fiscal year end to September 30
of each year. As a result the Company's most recent fiscal year ended on
September 30, 1997 and previous fiscal years ended on December 31, 1995 and
1996.
Results of Operations
Three Months Ended March 31, 1997 and 1998
Software License Fees
Revenues consist of fees charged for the licensing of windows based software
products including Sound Forge, Sound Forge XP, CD Architect, acoustics modeler,
Soft Encode and various plug-in products.
Software license fees increased by $756,000 to $1,342,000 for the three-month
period ended March 31, 1998 from $586,000 during the three-month period ended
March 31, 1997. During the quarter ended March 31, 1998, the Company began
selling the Professional CD Architect bundle consisting of the Company's CD
Architect software and third party recordable compact disc drives. Total
revenues of $436,000 were recorded during the quarter ended March 31, 1998 from
sales of such bundled products. The remainder of the increase was attributable
to new windows based software products introduced in late 1997 and early 1998
including acoustics modeler, CD Architect and Soft Encode as well as the
increased emphasis in late 1997 on advertising and other product marketing
activities.
Software license fees to international customers accounted for 24% and 17% of
software license fees for the three-month periods ended March 31, 1997 and 1998,
respectively. The percentage decrease was attributable to the growth in domestic
sales associated with the expanded U.S. Music dealer network.
Cost of Software License Fees
Cost of software license fees increased by $416,000 to $525,000 for the three-
month period ended March 31, 1998 from $109,000 during the three month period
ended March 31, 1997 and were 18.7% and 39.1% of software license fees during
the 1997 and 1998 periods, respectively. The increase in both absolute dollars
and as a percentage of net software license fees resulted primarily from the
sales of lower margin Professional CD Factory bundles consisting of the
Company's CD Architect software and third party
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recordable compact disc drives. The remainder of the increase in total costs of
software license fees were associated with the increase in software license
revenues.
Selling and Marketing Expenses
Selling and marketing expenses increased by $296,000 to $670,000 during the
three-month period ended March 31, 1998 from $374,000 during the three-month
period ended March 31, 1997. Selling and marketing expenses as a percentage of
software license fees were 63.8% and 49.9% for the 1997 and 1998 periods,
respectively. The increase in absolute dollars was primarily related to
increased personnel related costs incurred to support the increase in historical
revenues as well as products expected to be released in the near future. The
lower level of selling and marketing expenses as a percentage of software
license fees was due to the company's efforts to reduce the level of
advertising, trade show and certain other marketing costs in order to provide
sufficient cash flow to fund certain costs of the company's registration of
securities with the Securities Exchange Commission in an initial public
offering.
General and Administrative Expenses
General and administrative expenses increased by $121,000 to $364,000 during the
three-month period ended March 31, 1998 from $243,000 during the three-month
period ended March 31, 1997. General and administrative expenses as a
percentage of software license fees were 41.5% and 27.1% during the 1997 and
1998 periods, respectively. The increase in absolute dollars was primarily
attributable to increases in salaries, benefits, rent, utilities, depreciation
and other expenses required to build an infrastructure to support recently
released products as well as products currently under development. The decrease
in general and administrative expenses as a percentage of software license fees
was primarily due to achieving greater personnel efficiencies as the volume of
software license fees increased.
Product Development Expenses
Product development expenses increased by $29,000 to $130,000 during the three-
month period ended March 31, 1998 from $101,000 during the three-month period
ended March 31, 1997. Product development expenses as a percentage of software
license fees were 17.2% and 9.7% for the 1997 and 1998 periods, respectively.
The level of development effort expended on software products that had reached
the level of technological feasibility but were not ready for general release
had increased significantly during the three-month period ended March 31, 1998
over the comparable period in 1997. The Company's ACID product fell into this
category during the entire three-month period ended March 31, 1998 while no
products met this definition during the 1997 period. The Company capitalized
$123,000 of software development costs pursuant to SFAS Number 86 relating
primarily to the ACID product during the three-month period ended March 31,
1998. The combined increase in product development costs incurred during the
1998 period over the comparable 1997 period was due to an increase in the number
of software engineers needed to accelerate development of the Company's
expanding line of software products.
11
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Income Tax Expense (Benefit)
No Federal or State tax expense was recorded for the quarter ended March 31,
1998 due to the Company's Federal and State net operating loss position. No
deferred tax expense has been recorded in the quarter ended March 31, 1998 as
the Company continues to record a valuation allowance to reserve for the net
deferred tax assets.
Six Months Ended March 31, 1997 and 1998
Software License Fees
Software license fees increased by $869,000 to $2,274,000 for the six-month
period ended March 31, 1998 from $1,405,000 during the six-month period ended
March 31, 1997. During the six-month period ended March 31, 1998, the Company
began selling the Professional CD Architect bundle consisting of the Company's
CD Architect software and third party recordable compact disc drives. Total
revenues of $436,000 were recorded during the period from sales of such bundled
products. The remainder of the increase was attributable to new windows based
software products introduced in late 1997 and early 1998 including acoustics
modeler, CD Architect and Soft Encode as well as the increased emphasis in late
1997 on advertising and other product marketing activities.
Software license fees to international customers accounted for 21% and 17% of
software license fees for the six-month periods ended March 31, 1997 and 1998,
respectively. The percentage decrease was attributable to the growth in domestic
sales associated with the expanded U.S. Music dealer network.
Cost of Software License Fees
Cost of software license fees increased by $402,000 to $684,000 for the six-
month period ended March 31, 1998 from $282,000 during the six-month period
ended March 31, 1997 and were 20.1% and 30.1% of software license fees during
the 1997 and 1998 periods, respectively. The increase in both absolute dollars
and as a percentage of net software license fees resulted primarily from the
sales of lower margin Professional CD Factory bundles consisting of the
Company's CD Architect software and third party recordable compact disc drives.
The remainder of the increase in total costs of software license fees were
associated with the increase in software license revenues.
Selling and Marketing Expenses
Selling and marketing expenses increased by $618,000 to $1,319,000 during the
six-month period ended March 31, 1998 from $701,000 during the six-month period
ended March 31, 1997. Selling and marketing expenses as a percentage of
software license fees were 49.9% and 58.0% for the 1997 and 1998 periods,
respectively. The increase in absolute dollars and as a percentage of software
license fees were primarily related to
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increased personnel, advertising and trade show costs incurred to support the
increase in historical revenues as well as products expected to be released in
the near future. These increases were partially offset by a reduction of such
costs during the quarter ended March 31, 1998 in order to provide sufficient
cash flow to fund certain IPO related costs.
General and Administrative Expenses
General and administrative expenses increased by $189,000 to $682,000 during the
six-month period ended March 31, 1998 from $493,000 during the six-month period
ended March 31, 1997. General and administrative expenses as a percentage of
software license fees were 35.1% and 30.0% during the 1997 and 1998 periods,
respectively. The increase in absolute dollars was primarily attributable to
increases in salaries, benefits, rent, utilities, depreciation and other
expenses required to build an infrastructure to support recently released
products as well as products currently under development. The decrease in
general and administrative expenses as a percentage of software license fees was
primarily due to achieving greater personnel efficiencies as the volume of
software license fees increased.
Product Development Expenses
Product development expenses increased by $50,000 to $237,000 during the six-
month period ended March 31, 1998 from $187,000 during the six-month period
ended March 31, 1997. Product development expenses as a percentage of software
license fees were 13.3% and 10.4% for the 1997 and 1998 periods, respectively.
The level of development effort expended on software products that had reached
the level of technological feasibility but were not ready for general release
had increased significantly during the six-month period ended March 31, 1998
over the comparable period in 1997. The Company's ACID product fell into this
category during the entire six-month period ended March 31, 1998 while no
products met this definition during the 1997 period. The Company capitalized
$248,000 of software development costs pursuant to SFAS Number 86 relating
primarily to the ACID product during the six-month period ended March 31, 1998.
The combined increase in product development costs incurred during the 1998
period over the comparable 1997 period was due to an increase in the number of
software engineers needed to accelerate development of the Company's expanding
line of software products.
Income Tax Expense (Benefit)
No Federal or State tax expense was recorded for the six-month period ended
March 31, 1998 due to the Company's Federal and State net operating loss
position. No deferred tax expense has been recorded in the six-month period
ended March 31, 1998 as the Company continues to record a valuation allowance to
reserve for the net deferred tax assets.
13
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Liquidity and Capital Resources
Since inception, the Company has funded its operations largely through private
sales of common stock and proceeds from issuances of notes payable. In April
1998 the Company completed an initial public offering of common stock and common
stock purchase warrants.
Cash used in operating activities of $269,000 and $765,000 for the six-month
periods ended March 31, 1997 and 1998, respectively, was largely affected by net
losses of $271,000 and $706,000, respectively. Also affecting cash used in
operating activities
14
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were additional investments in accounts receivable, inventory and other assets
of $78,000 and $580,000 for the six-month periods ended March 31, 1997 and 1998,
respectively. Cash invested in such assets for the six-month period ended March
31, 1998 was partially offset by additional credit obtained from trade creditors
of $364,000. Depreciation, amortization and deferred tax charges for the six-
month periods ended March 31, 1997 and 1998 totaled $94,000 and $158,000,
respectively.
Cash used in investing activities of $572,000 and $439,000 for the six-month
periods ended March 31, 1997 and 1998, respectively, related primarily to
purchases of fixed assets of $572,000 and $190,000, respectively, representing
expenditures for the company's principal facility in 1997 and purchases of
computers, furniture and other assets. Cash used in investing activities was
also affected in the 1998 period by $248,000 incurred for software development
activities capitalized pursuant to SFAS 86.
Cash provided by financing activities of $948,000 and $1,284,000 for the six-
month periods ended March 31, 1997 and 1998 related primarily to issuances of
shares of common stock of $681,000 and $656,000, respectively and from $267,000
and $781,000 from net issuances of long term debt. The six-month period ended
March 31, 1998 were also impacted by $153,000 in costs associated with the
Company's initial public offering of common stock and common stock purchase
warrants completed in April 1998.
In July 1996 the Company offered shares of Common Stock for sale in a private
placement at a price of $5.00 per share. A total of 360,160 shares were sold as
of January 1998 with net proceeds to the Company of $1,782,000. Of the total
sold, 127,800 shares ($620,000), was sold in the year ended December 31, 1996,
101,960 shares ($510,000), was sold during the nine-month period ended September
30, 1997 and 130,400 shares ($652,000), was sold during the six-month period
ended March 31, 1998.
In February 1997 the Company entered into a $620,000 construction loan with a
bank to fund the purchase and renovation of a 10,000 square foot facility to
house the Company's expanded operations. On January 8, 1998, the Company
converted the construction loan into a term loan due January 3, 2003. The loan
requires monthly payments of principal and interest assuming a twenty year
amortization and interest of 7.71% per annum.
In February 1997 the Company repaid two $100,000 notes, one to a bank and the
other to a group of private investors with the proceeds from a $250,000
revolving line of credit issued by a bank and bearing interest at prime plus 1%
per annum (9.5% at March 31, 1998). As of March 31, 1998 there was no
outstanding balance under the line of credit.
The Company received the proceeds of a $40,000 unsecured note in August 1997
from certain relatives of a Company officer. The note paid interest monthly at
15% per annum and was convertible into Common Stock at $5.00 per share at the
election of the Company. The Company exercised its right and converted the note
into 8,000 shares of Common Stock in October 1997.
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In February 1998, the Company issued unsecured notes payable in the aggregate
amount of $1,000,000. The notes mature February 1999 and bear interest at a
rate of 12% per annum. In connection with the issuance of the notes, the
Company issued a total of 50,000 common stock purchase warrants, each
exercisable for one share of Common Stock at an exercise price of $5.00 per
share. Such warrants are exercisable for a period of four years beginning
February 1999. The carrying amount of the debt was recorded net of a debt
discount equal to the value of the Common Stock Purchase Warrants or $65,000.
As of March 31, 1998, the unamortized balance of the discount was $59,583.
In March 1998 employees excercised their option to purchase 100,000 shares of
common stock at an aggregate purchase price of $3,600 pursuant to the Company's
employee stock option plan.
In April 1998, the Company completed an initial public offering of 2,000,000
shares of common stock at a price of $7.50 per share and 1,000,000 common stock
purchase warrants at a price of $0.10 each. The Company has granted the
underwriters an option to purchase up to an additional 300,000 shares of common
stock and/or 150,000 common stock purchase warrants to cover over-allotments.
On May 5, 1998 the underwriters acquired an additional 49,675 shares of common
stock and 99,837 common stock purchase warrants pursuant to the terms of the
option. The net proceeds to the Company from the offering, after deduction of
underwriting discounts and other estimated expenses relating to the offering,
are estimated to be approximately $12,833,000 (or $14,833,000 if the over-
allotment option is exercised in full). The Company intends to use the net
proceeds for development of new products, capital expenditures, sales and
marketing, expansion of internal operations and working capital and general
corporate purposes.
Although the Company has no substantial commitments for capital expenditures,
management anticipates there will be a need for increased capital expenditures
and lease commitments in the next 12 months consistent with the anticipated
growth in operations and infrastructure. The Company has exercised a purchase
option on approximately 8,000 square feet of partially heated storage space in a
building adjacent to its principal facility, which it currently leases. The
Company expects to expend approximately $1,000,000 to close on the purchase
option and renovate the space for office use in late 1998.
The Company has significantly increased its operating expenses since its
inception and expects the need for significant investment in marketing and other
support staff and associated costs to continue. Management believes that the
net proceeds of the initial public offering completed in April 1998 and cash
provided by operations will enable it to meet its operational and capital
requirements for at least the next 12 months.
Net Operating Loss Carryforwards
At March 31, 1998, the Company had Federal and state net operating loss
carryforwards of approximately $1,739,000 and $1,746,000, respectively,
available to offset future
16
<PAGE>
Federal taxable income, expiring in 2012. In addition, the Company has research
and development credits totaling approximately $50,000 which can be used to
reduce Federal and state taxable income through 2012. Federal and State tax laws
limit the use of such carryforward benefits in certain circumstances. Although
no event has taken place that would limit the Company's use of its net operating
loss benefits, no assurances can be made that the Company will ultimately
utilize them.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. Since this standard applies only to the presentation
of comprehensive income, it will not have any impact on the Company's results of
operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997, and therefore the Company will adopt the new requirements retroactively in
1999. Management has not completed its review of SFAS No. 131, but does not
anticipated that the adoption of this statement will have a significant effect
on the Company's reported segments.
Year 2000 Impact
The Company has inventoried and evaluated the software applications it uses in
its operations. In its evaluation, the Company assessed the age of the
software, its sophistication with which it stores and uses dates and its
relative importance to the Company's operations. Bases on its evaluation, the
Company believes the cost of any testing or remediation will not have a material
adverse effect on the Company's financial condition or results of operations.
17
<PAGE>
PART II--OTHER INFORMATION
ITEM
1. Legal Proceedings--None
2. Changes in Securities--None
(a) None
(b) None
(c) During the quarterly period ended March 31, 1998, the Registrant has
issued and sold unregistered securities as follows:
(1) 5,000 shares of Common Stock were sold for $25,000 in
January 1998 to a private party.
(2) Warrants were issued to three individuals in February 1998 to
purchase a total of 50,000 shares of Common Stock. These warrants
were issued in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act, relating to sales by
an issuer not involving a public offering. Consideration received
by the registrant consisted of a loan in the amount of $1,000,000.
(3) Two options were exercised to purchase an aggregate of 100,000
shares of Common Stock by two employees in March 1998. One
employee exercised options to purchase 80,000 shares and the other
exercised options to purchase 20,000 shares. These sales were made
in reliance upon the exemption from registration set forth in Rule
701. Consideration received by the Registrant consisted of the
option exercise price of $3,600.
No underwriters were engaged in connection with these issuances
and sales.
(d) The information in this paragraph 2(d) relates to the registrant's
Registration Statement on Form SB-2, Registration No. 333-46005 (the
"Registration Statement"). The managing underwriters (the
"Underwriters") for the offering of the securities sold pursuant to the
Registration Statement (the "Offering") were Dirks & Company, Inc. and
Security Capital Trading Inc. The Offering commenced on April 22, 1998.
The following chart sets forth, with respect to each class of
securities registered pursuant to the Offering, for both the account of
the registrant and the account of certain selling stockholders, the
amount sold to date and the aggregate offering price of the amount sold
to date:
18
<PAGE>
<TABLE>
<CAPTION>
Aggregate Offering Price
Amount Aggregate Offering Amount Sold to of Amount Sold to Date
Security Registered Price Date
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par value 2,300,000/1/ $17,250,000 2,049,675/2/ $15,372,562.50
$.01 per share ("Common
Stock"), for sale by the
Company.
- --------------------------------------------------------------------------------------------------------------
Common Stock for sale by 368,160 $ 2,761,200 368,160 $ 2,761,200
the selling stockholders.
- --------------------------------------------------------------------------------------------------------------
Redeemable Common Stock 1,150,000/3/ $ 115,000 1,099,837/4/ $ 109,983.70
Purchase Warrants
("Warrants").
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The offering has terminated, except that the Underwriters may exercise the Over-
allotment Option, until June 6, 1998, to purchase an additional 250,325 shares
of Common Stock and/or 50,163 Warrants. Because the Offering commenced after
the ending date of the reporting period of this report, information with respect
to subparagraphs (v), (vi) and (vii) of paragraph (f) (4) of Item 701 will be
disclosed in registrant's next quarterly report.
3. Defaults upon Senior Securities None
4. Submission of Matters to a vote of Security Holders None
5. Other Information None
6. Exhibits and Reports on Form 8-k
(a) Exhibit (see exhibit list)
(b) Reports on Form 8-k - None
- ----------------------
1 Includes 300,000 shares of Common Stock registered pursuant to an over-
allotment option (the "Over-Allotment Option") granted to the Underwriters.
Excludes (i) additional shares of Common Stock issuable upon exercise of the
Warrants, (ii) additional shares of Common Stock issuable upon exercise of
certain Representatives' Warrants, as defined in the Registration Statement, and
(iii) additional shares of Common Stock issuable upon exercise of Warrants
issuable upon exercise of the Representatives' Warrants.
2 Includes 49,675 shares of Common Stock sold to date pursuant to the Over-
Allotment Option.
3 Includes 150,000 Warrants registered pursuant to the Over-Allotment Option.
Excludes (i) the Representatives' Warrants, and (ii) Warrants issuable upon
exercise of the Representatives' Warrants.
4 Includes 99,837 Warrants sold to date pursuant to the Over-Allotment Option.
19
<PAGE>
<TABLE>
<CAPTION>
ITEM 6(a) EXHIBIT LIST
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Registrant, filed as Exhibit No. 3.1
to the Registration Statement, and hereby incorporated by reference.
3.2 Amended and Restated By-Laws of the Registrant, filed as Exhibit No. 3.2 to the
Registration Statement, and hereby incorporated by reference.
4.1 Specimen Common Stock Certificate, filed as Exhibit No. 4.1 to the Registration Statement,
and hereby incorporated by reference.
4.2 Form of Warrant Agreement, including Warrant Certificate, filed as Exhibit No. 4.2 to the
Registration Statement, and hereby incorporated by reference.
4.3 Form of Representatives' Warrant Agreement, including Specimen Representatives' Warrant
Certificate, filed as Exhibit No. 4.3 to the Registration Statement, and hereby
incorporated by reference.
10.1 Registrant's 1995 Stock Option Plan, filed as Exhibit No. 10.1 to the Registration
Statement, and hereby incorporated by reference.
10.2 Registrant's Non-Employee Directors' Stock Option Plan, filed as Exhibit No. 10.2 to the
Registration Statement, and hereby incorporated by reference.
10.3 Commercial Lease between Registrant and The Williamson Center, LLC regarding 740 and 744
Williamson Street, Madison, Wisconsin dated January 20, 1998, filed as Exhibit No. 10.3 to
the Registration Statement, and hereby incorporated by reference.
10.4 Employment Agreement between Registrant and Rimas Buinevicius dated as of November 30,
1997 and effective as of January 1, 1997, filed as Exhibit No. 10.4 to the Registration
Statement, and hereby incorporated by reference.
10.5 Employment Agreement between Registrant and Monty R. Schmidt dated as of November 30, 1997
and effective as of January 1, 1997, filed as Exhibit No. 10.5 to the Registration
Statement, and hereby incorporated by reference.
10.6 Employment Agreement between Registrant and Curtis J. Palmer dated as of November 30, 1997
and effective as of January 1, 1997, filed as Exhibit No. 10.6 to the Registration
Statement, and hereby incorporated by reference.
10.7 Digital Audio System License Agreement between Registrant and Dolby Laboratories Licensing
Corporation dated July 28, 1997, filed as Exhibit No.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
10.7 to the Registration Statement, and hereby incorporated by reference.
10.8 Digital Audio System License Agreement between Registrant and Dolby Laboratories Licensing
Corporation dated July 28, 1997, filed as Exhibit No. 10.8 to the Registration Statement,
and hereby incorporated by reference.
10.9 Start-up Agreement between Registrant and Ingram Micro Inc. dated October 16, 1997, filed
as Exhibit No. 10.9 to the Registration Statement, and hereby incorporated by reference.
10.10 Form of Lock-up Agreement between Registrant and all directors, officers, and non-selling
stockholders, filed as Exhibit No. 10.10 to the Registration Statement, and hereby
incorporated by reference.
10.11 Form of Lock-up Agreement between Registrant and all selling stockholders, filed as
Exhibit No. 10.11 to the Registration Statement, and hereby incorporated by reference.
27.1 Financial Data Schedule
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sonic Foundry, Inc.
-------------------
(Registrant)
May 21, 1998 By: /s/ Rimas P. Buinevicius
------------------------
Rimas P. Buinevicius
Chairman and Chief
Executive Officer
May 21, 1998 By: /s/ Kenneth A. Minor
------------------------
Kenneth A. Minor
Chief Financial Officer
May 21, 1998 By: /s/ Frederick Kopko
------------------------
Frederick Kopko
Secretary
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
March 31, 1998 10-QSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 195,169
<SECURITIES> 0
<RECEIVABLES> 870,420
<ALLOWANCES> 0
<INVENTORY> 138,869
<CURRENT-ASSETS> 1,341,741
<PP&E> 1,731,455
<DEPRECIATION> 275,560
<TOTAL-ASSETS> 3,432,445
<CURRENT-LIABILITIES> 1,998,245
<BONDS> 695,395
0
68,797
<COMMON> 4,682
<OTHER-SE> 665,326
<TOTAL-LIABILITY-AND-EQUITY> 3,432,445
<SALES> 2,273,768
<TOTAL-REVENUES> 2,273,768
<CGS> 684,196
<TOTAL-COSTS> 684,196
<OTHER-EXPENSES> 2,238,179
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,736
<INCOME-PRETAX> (706,209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (706,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (706,209)
<EPS-PRIMARY> (2.27)
<EPS-DILUTED> (2.27)
</TABLE>
