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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 June 30, 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
------------------------------- ---------------------
(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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(Issuer's 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 .
----- -----
State the number of shares outstanding of each of the issuer's common equity as
of the last practicable date:
Outstanding
Class August 10, 1998
----- ---------------
Common Stock, $0.01 par value 2,665,935
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 JUNE 30, 1998
TABLE OF CONTENTS
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1998 (Unaudited) and 3
September 30, 1997
Statements of Operations (Unaudited) - three-months ended 5
June 30, 1998 and 1997, nine-months ended
June 30, 1998 and 1997.
Statements of Cash Flows (Unaudited) - nine-months 6
ended June 30, 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
2
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Sonic Foundry, Inc.
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1997 1998
-----------------------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 114,737 $10,933,597
Accounts receivable, net of allowances of
$20,090 and $89,638 at September 30, 1997 and
June 30, 1998, respectively 428,484 1,551,254
Inventories 56,662 189,637
Prepaid expenses and other current assets 81,370 242,682
-----------------------------
Total current assets 681,253 12,917,170
Property and equipment:
Land 95,000 190,000
Buildings and improvements 734,575 1,089,034
Equipment 674,695 85,841
Furniture and fixtures 36,877 965,490
-----------------------------
1,541,147 2,330,365
Less accumulated depreciation 190,193 326,065
-----------------------------
Net property and equipment 1,350,954 2,004,300
Capitalized software development costs, net 300,078 490,880
Other assets 678 348
-----------------------------
Total assets $2,332,963 $15,412,698
=============================
</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1997 1998
-----------------------------
Liabilities and stockholders' equity (Unaudited)
<S> <C> <C>
Current liabilities:
Line of credit $ 220,000 $ --
Note payable to related party 40,000 --
Accounts payable 570,650 514,518
Accrued liabilities 84,282 113,156
Current portion of long-term obligations 31,174 44,993
-----------------------------
Total current liabilities 946,106 672,667
Long-term obligations 702,443 679,223
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 and 7,223,719 shares at September
30, 1997 and June 30, 1998, respectively 68,797 72,237
Common stock, $.01 par value, authorized
20,000,000 shares; issued and outstanding
229,760 and 2,665,935 shares at September 30,
1997 and June 30, 1998, respectively 2,298 26,660
Common stock warrant 78,000 143,000
Additional paid-in capital 1,363,900 15,297,096
Accumulated deficit (828,581) (1,478,185)
-----------------------------
Total stockholders' equity 684,414 14,060,808
-----------------------------
Total liabilities and stockholders' equity $2,332,963 $15,412,698
=============================
</TABLE>
See accompanying notes.
4
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Sonic Foundry, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Software license fees $ 721,064 $2,114,474 $2,126,174 $4,388,242
Cost of software license
fees 134,819 570,096 417,170 1,254,292
------------------------------- -------------------------------
586,245 1,544,378 1,709,004 3,133,950
Selling and marketing
expenses 438,666 743,364 1,139,578 2,062,842
General and administrative
expenses 237,084 487,112 730,057 1,168,782
Product development
expenses 110,643 269,060 297,997 506,091
------------------------------- -------------------------------
786,393 1,499,536 2,167,632 3,737,715
------------------------------- -------------------------------
Income (loss) from
operations (200,148) 44,842 (458,628) (603,765)
Other income (expense):
Interest expense (12,428) (44,192) (31,672) (101,928)
Other income 254 108,144 7,060 108,278
------------------------------- -------------------------------
(12,174) 63,952 (24,612) 6,350
------------------------------- -------------------------------
Income (loss) before
income taxes and
extraordinary item (212,322) 108,794 (483,240) (597,415)
Income tax benefit -- -- -- --
------------------------------- -------------------------------
Income (loss) before
extraordinary item (212,322) 108,794 (483,240) (597,415)
Extraordinary loss on
early extinguishment
of debt -- (48,750) -- (48,750)
------------------------------- -------------------------------
Net Income (loss) $(212,322) $ 60,044 $ (483,240) $ (646,165)
=============================== ===============================
Net Income (loss) per
common share -
Income (loss) before
extraordinary item $(1.37) $0.05 $(4.18) $(0.66)
Extraordinary loss on
early extinguishment
of debt -- (0.02) -- (0.05)
------------------------------- -------------------------------
Basic $(1.37) $0.03 $(4.18) $(0.71)
=============================== ===============================
Diluted $(1.37) $0.01 $(4.18) $(0.71)
=============================== ===============================
</TABLE>
See accompanying notes.
5
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Sonic Foundry, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
1997 1998
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (483,240) $ (646,165)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 78,104 136,202
Amortization of debt discount -- 16,250
Extraordinary loss on early extinguishment of debt -- 48,750
Amortization of capitalized software development
costs 81,242 123,594
Changes in operating assets and liabilities:
Accounts receivable 24,245 (1,122,770)
Inventories (5,411) (132,975)
Prepaid expenses and other assets (74,108) (161,312)
Accounts payable and accrued liabilities 49,597 (27,258)
---------------------------------
Total adjustments 153,669 (1,119,519)
---------------------------------
Net cash used in operating activities (329,571) (1,765,684)
INVESTING ACTIVITIES
Purchases of property and equipment (819,530) (789,218)
Capitalized software development costs (140,742) (314,396)
---------------------------------
Net cash used in investing activities (960,272) (1,103,614)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of
issuance costs 975,294 13,917,558
Proceeds from debt 395,522 1,022,200
Borrowings (Payments) on line of credit, net 100,000 (220,000)
Payments on note payable to related party (100,000) --
Subchapter S distributions (63,000) --
Payments on long-term debt (9,157) (1,031,600)
---------------------------------
Net cash provided by financing activities 1,298,659 13,688,158
---------------------------------
Net increase in cash 8,816 10,818,860
Cash and cash equivalents at beginning of period 135,260 114,737
---------------------------------
Cash and cash equivalents at end of period $144,076 $10,933,597
=================================
Supplemental cash flow information:
Interest paid $ 31,672 $ 84,409
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
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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 nine-month
period ended June 30, 1998 are not necessarily indicative of the results that
might be expected for the year ended September 30, 1998.
NET INCOME (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.
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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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Denominator
Denominator for basic earnings per share--
weighted average common shares 154,467 2,112,980 115,564 905,872
Effect of dilutive securities:
Options and warrants -- 357,235 -- --
Convertible Series B Preferred Stock -- 3,611,859 -- --
---------------------------- ------------------------------
Denominator for diluted earnings per share--
adjusted weighted average common shares 154,467 6,082,074 115,564 905,872
============================ ==============================
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 348,606 -- 345,049 368,906
Convertible Series B Preferred Stock 3,340,000 -- 3,340,000 3,439,866
</TABLE>
INITIAL PUBLIC OFFERING
On April 27, 1998, the Company commenced 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 granted the
underwriters a 45 day 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. During the option period, the underwriters acquired an additional
97,775 shares of common stock and 145,387 common stock purchase warrants
pursuant to the terms of the option. The net proceeds to the Company from the
offering, including the over-allotment option, were $13,258,359. 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, a Windows based audio editing software program developed by one of the
Company's founders. By 1996 the Company had released Sound Forge versions 3.0
and 4.0 which significantly expanded the effects and processes available in its
editor, thereby meeting the needs of professional musicians and audio engineers.
Additionally, the product line was expanded to include Sound Forge XP, a scaled
down version of Sound Forge, as well as various 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 expanded
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 in August 1997 an acoustics modeler called Acoustic
Mirror, which allows users to overlay the acoustics of any environment upon an
audio file. In January 1998 the Company began shipping Soft Encode, a software
product which provides an economical method of authoring Dolby certified AC-3
files, and in May 1998, began shipping a software product called ACID. ACID
allows musicians, media professionals, Internet developers and others to compose
royalty free, loop based music. The Company expects the product, included with
hundreds of pre-recorded loops, to have broad based use among customers who
create and enhance dance music, add background music to videos and develop web
pages. Additionally, the Company expects to introduce a consumer version of
ACID for home entertainment use in the near future. To support both products,
the Company has begun shipping libraries of audio loops on CD in order to
provide musicians and non-musicians alike a variety of music genres with which
to choose from in composing music.
The Company invested significant resources in sales, marketing, research and
other operating activities during the nine-month period ended September 30, 1997
and the nine-month period ended June 30, 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
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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
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 June 30, 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, Acoustic Mirror,
Soft Encode, ACID and various plug-in products and music libraries. Software
license fees increased by $1,393,000 to $2,114,000 for the three-month period
ended June 30, 1998 from $721,000 during the three-month period ended June 30,
1997. Approximately 80% of the increased revenues resulted from the release of
new software products in late 1997 or early 1998. ACID, CD Architect and a
product bundle consisting of the Company's CD Architect software and purchased
third party recordable compact disc drives were the primary contributors. The
remainder of the increase was attributable to growth from existing products
driven by increased expenditures on sales and marketing personnel, advertising
and other product marketing activities.
Software license fees to international customers accounted for 31.8% and 22.5%
of software license fees for the three-month periods ended June 30, 1997 and
1998, respectively. The percentage decrease was attributable to the growth in
domestic sales associated with the expanded U.S. music dealer network.
10
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COST OF SOFTWARE LICENSE FEES
Cost of software license fees increased by $435,000 to $570,000 for the three-
month period ended June 30, 1998 from $135,000 during the three month period
ended June 30, 1997 and were 18.7% and 27.0% 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 $304,000 to $743,000 during the
three-month period ended June 30, 1998 from $439,000 during the three-month
period ended June 30, 1997. Selling and marketing expenses as a percentage of
software license fees were 60.8% and 35.2% 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 for 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 operating efficiencies obtained as the level of software
license fees increased.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $250,000 to $487,000 during the
three-month period ended June 30, 1998 from $237,000 during the three-month
period ended June 30, 1997. General and administrative expenses as a percentage
of software license fees were 32.9% and 23.0% during the 1997 and 1998 periods,
respectively. The increase in absolute dollars was primarily attributable to
increases in wages and related recruitment and benefit costs, professional fees,
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 and related
efficiencies as the volume of software license fees increased.
Product Development Expenses
Product development expenses increased by $158,000 to $269,000 during the three-
month period ended June 30, 1998 from $111,000 during the three-month period
ended June 30, 1997. Product development expenses as a percentage of software
license fees were 15.3% and 12.7% for the 1997 and 1998 periods, respectively.
In accordance with SFAS Number 86, the Company capitalizes the cost of
development of software products that have reached the level of technological
feasibility. The Company's ACID product fell into this category during a
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portion of the three-month period ended June 30, 1998 while CD Architect and
Acoustic Mirror met this definition during the 1997 period. The Company
capitalized $81,000 and $66,000 relating to these products during the three-
month periods ended June 30, 1997 and 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 quarter ended June 30, 1998
due to the Company's Federal and State net operating loss position. No deferred
tax benefit was recorded in the quarter ended June 30, 1998 as the Company
continues to record a valuation allowance equal to the balance of net deferred
tax assets.
Nine Months Ended June 30, 1997 and 1998
SOFTWARE LICENSE FEES
Software license fees increased by $2,262,000 to $4,388,000 for the nine-month
period ended June 30, 1998 from $2,126,000 during the nine-month period ended
June 30, 1997. The increased revenues resulted primarily from the release of new
software products in late 1997 and early 1998. ACID, CD Architect and a product
bundle consisting of the Company's CD Architect software and purchased third
party recordable compact disc drives were the primary contributors.
Software license fees to international customers accounted for 24.6% and 19.7%
of software license fees for the nine-month periods ended June 30, 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 $837,000 to $1,254,000 for the nine-
month period ended June 30, 1998 from $417,000 during the nine-month period
ended June 30, 1997 and were 19.7% and 28.6% 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.
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SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased by $923,000 to $2,063,000 during the
nine-month period ended June 30, 1998 from $1,140,000 during the nine-month
period ended June 30, 1997. Selling and marketing expenses as a percentage of
software license fees were 53.6% and 47.0% for the 1997 and 1998 periods,
respectively. The increase in absolute dollars were primarily related to
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. The lower level of selling and marketing expenses as a
percentage of software license fees was due to operating efficiencies obtained
as the level of software license fees increased.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $439,000 to $1,169,000 during
the nine-month period ended June 30, 1998 from $730,000 during the nine-month
period ended June 30, 1997. General and administrative expenses as a percentage
of software license fees were 34.3% and 26.6% 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 $208,000 to $506,000 during the nine-
month period ended June 30, 1998 from $298,000 during the nine-month period
ended June 30, 1997. Product development expenses as a percentage of software
license fees were 14.0% and 11.5% for the 1997 and 1998 periods, respectively.
In accordance with SFAS Number 86, the Company capitalizes the cost of
development of software products that have reached the level of technological
feasibility. The Company's ACID product fell into this category during the
nine-month period ended June 30, 1998 while CD Architect and Acoustic Mirror met
this definition during the 1997 period. The Company capitalized $141,000 and
$314,000 relating to these products during the nine-month periods ended June 30,
1997 and 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 nine-month period ended
June 30, 1998 due to the Company's Federal and State net operating loss
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position. No deferred tax benefit was recorded in the nine-month period ended
June 30, 1998 as the Company continues to record a valuation allowance equal to
the balance of the net deferred tax assets.
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 $330,000 and $1,766,000 for the nine-month
periods ended June 30, 1997 and 1998, respectively, was largely affected by net
losses of $483,000 and $646,000, respectively. Also affecting cash used in
operating activities were additional investments in accounts receivable,
inventory and other assets of $55,000 and $1,417,000 for the nine-month periods
ended June 30, 1997 and 1998, respectively. Cash invested in such assets for
the nine-month period ended June 30, 1997 was partially offset by additional
credit obtained from trade creditors of $50,000 while cash was used to reduce
accounts payable by $27,000 during the nine-month period ended June 30, 1998.
Depreciation, amortization and deferred tax charges for the nine-month periods
ended June 30, 1997 and 1998 totaled $159,000 and $276,000, respectively.
Cash used in investing activities of $960,000 and $1,104,000 for the nine-month
periods ended June 30, 1997 and 1998, respectively, related primarily to
purchases of fixed assets of $820,000 and $789,000, 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 by $141,000 and $314,000 for the nine-month periods ended June 30,
1997 and 1998 incurred for software development activities.
Cash provided by financing activities of $1,299,000 and $13,688,000 for the
nine-month periods ended June 30, 1997 and 1998 related primarily to issuances
of shares of common stock of $975,000 and $13,918,000, respectively and from net
issuances of long term debt in the amount of $386,000 and $(229,000),
respectively.
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
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
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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. The line of credit terminated by its terms in May, 1998.
The Company received the proceeds of a $40,000 unsecured note in August 1997
from 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.
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.
In May 1998, the Company repaid the balance of the notes in full and wrote off
the remaining unamortized balance of the debt discount of $49,000.
Employees exercised 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 each of the months March and April 1998.
In June 1998, the Company completed an initial public offering of 2,097,775
shares of common stock at a price of $7.50 per share and 1,145,387 common stock
purchase warrants at a price of $0.10 each. The net proceeds to the Company
from the offering, after deduction of underwriting discounts and other expenses
relating to the offering, were approximately $13,261,958. 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. In May 1998 the Company acquired a
building adjacent to its principal facility consisting of approximately 8,000
square feet of partially heated storage space. The Company expects to expend
approximately $700,000 to renovate the space for office use in late 1998 and
early 1999.
15
<PAGE>
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 June 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 June 30, 1998, the Company had Federal and state net operating loss
carryforwards of approximately $1,550,000 and $1,555,000, respectively,
available to offset future 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.
16
<PAGE>
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. Based 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) None
(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 27 1998,
and terminated on June 10, 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 and the aggregate offering price
of the amount sold:
<TABLE>
<CAPTION>
Aggregate Offering
Amount Aggregate Amount Price of Amount
Security Registered Offering Price Sold Sold to Date
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par value
$.01 per share ("Common
Stock"), for sale by the
Company. 2,300,000/1/ $17,250,000 2,097,775/2/ $15,733,312.50
- ----------------------------------------------------------------------------------------------------
Common Stock for sale by
the selling stockholders. 368,160 $ 2,761,200 368,160 $ 2,761,200
- ----------------------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants
("Warrants"). 1,150,000/3/ $ 115,000 1,145,387/4/ $ 114,538.70
- ----------------------------------------------------------------------------------------------------
</TABLE>
/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 97,775 shares of Common Stock sold 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 145,387 Warrants sold pursuant to the Over-Allotment Option.
18
<PAGE>
<TABLE>
<S> <C>
Aggregate Offering Price of Common Stock Sold $15,733,312.50
Aggregate Offering Price of Warrants Sold 114,538.70
---------------------------
Total Gross Proceeds to Company $15,847,851.20
Expenses of Offering:
Underwriting Discount $ 1,378,763.05
Underwriting Non-Accountable Expense Allowance 475,435.54
Other Expenses 735,294.00
---------------------------
Net Proceeds $13,258,358.61
---------------------------
Uses of Proceeds:
Repayment of Indebtedness 1,000,000.00
Working Capital and General Corporate Purposes 1,441,104.81
Temporary Investments:
Certificate of Deposit 8,069,334.86
Eurodollar account 2,747,918.94
---------------------------
Total Uses of Proceeds $13,258,358.61
---------------------------
</TABLE>
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
19
<PAGE>
ITEM 6(a) EXHIBIT LIST
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------------
<C> <S>
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. 10.7 to the Registration Statement,
and hereby incorporated by reference.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------------
<C> <S>
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)
August 13, 1998 By: /s/ Rimas P. Buinevicius
------------------------
Rimas P. Buinevicius
Chairman and Chief
Executive Officer
August 13, 1998 By: /s/ Kenneth A. Minor
------------------------
Kenneth A. Minor
Chief Financial Officer
August 13, 1998 By: /s/ Frederick Kopko
------------------------
Frederick Kopko
Secretary
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 10,933,597
<SECURITIES> 0
<RECEIVABLES> 1,640,892
<ALLOWANCES> 89,638
<INVENTORY> 189,637
<CURRENT-ASSETS> 12,917,170
<PP&E> 2,330,365
<DEPRECIATION> 326,065
<TOTAL-ASSETS> 15,412,698
<CURRENT-LIABILITIES> 672,667
<BONDS> 679,223
0
72,237
<COMMON> 26,660
<OTHER-SE> 13,961,911
<TOTAL-LIABILITY-AND-EQUITY> 15,412,698
<SALES> 4,388,242
<TOTAL-REVENUES> 4,388,242
<CGS> 1,254,292
<TOTAL-COSTS> 1,254,292
<OTHER-EXPENSES> 3,737,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,928
<INCOME-PRETAX> (597,415)
<INCOME-TAX> 0
<INCOME-CONTINUING> (597,415)
<DISCONTINUED> 0
<EXTRAORDINARY> (48,750)
<CHANGES> 0
<NET-INCOME> (646,165)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
