Risks and Uncertainties
This report includes estimates, projections, statements relating to our business
plans, objectives, and expected operating results that are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements may appear
throughout this report, including the following sections: "Management's
Discussion and Analysis," and "Risk Factors." These forward-looking statements
generally are identified by the words "believe," "project," "expect,"
"anticipate," "estimate," "intend," "strategy," "future," "opportunity," "plan,"
"may," "should," "will," "would," "will be," "will continue," "will likely
result," and similar expressions. Forward-looking statements are based on
current expectations and assumptions that are subject to risks and uncertainties
that may cause actual results to differ materially. We describe risks and
uncertainties that could cause actual results and events to differ materially in
"Risk Factors" (Part I, Item 1A of the Company's Annual Report on Form 10-K for
the Fiscal Year ended
Overview
Impacts of COVID-19
On
While COVID-19 has had negative impacts on our operations and the future impacts of the pandemic and any corresponding economic results are largely unknown and rapidly evolving. The Company has implemented new products and new approaches to deliver existing products to grow revenue. In response to the cancellations of in-person events, the Company introduced a new virtual events platform as an alternate solution for our customers. The Company is confident the pandemic will accelerate the Company's new product strategy.
Restructuring and exit activities
The determination of when the Company accrues for involuntary termination benefits under restructuring plans depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. The Company accounts for on-going benefit arrangements, such as those documented by employment agreements, in accordance with Accounting Standards Codification 712 ("ASC 712") Nonretirement Postemployment Benefits. Under ASC 712, liabilities for postemployment benefits are recorded at the time the obligations are probable of being incurred and can be reasonably estimated. The Company accounts for one-time employment benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations. When applicable, the Company records such costs into operating expense.
During the three and six months ended
Evolving Strategy on Growth Initiatives
While the Company continues to work at steadily improving results of its Mediasite business, we recognized growth constraints in our existing business, and, therefore, we are shifting our focus toward building our runway in adjacent markets for future growth strategies as follows:
First, we are expanding our cloud capabilities to better support our • customers' video needs. This is an important step in movingSonic Foundry from primarily a hardware provider to a SaaS service provider with recurring revenue streams. Second, we are building a library of AI -enabled video solutions that can • deliver instant, comprehensive, and automated video enhancement at scale. We believe the market for this technology is compelling. • The third key component of our growth strategy is aimed at democratizing global higher education.U.S. andU.K. universities are being increasingly challenged with lower enrollment and are looking for ways to expand into new growth markets. In close collaboration with several university clients, we have identified a global supply-demand imbalance. There are many students worldwide that can afford a higher education yet do not have access to it for a variety of reasons-geo/political instability; international travel restrictions; and inadequate infrastructure. Our innovative solution will allow students to have an in-person experience in locally supported, affordable, community-centric environments that offer aggregated educational content through our Mediasite platform. This is essentially master classes taught by top professors that encourage students to engage with one another in a collaborative and supported setting that bridges the educational gap and offers education opportunities in economically disadvantaged regions.
This year is the beginning of our transformation from focusing solely on our
existing business to investing substantially, not only in our current space, but
in these adjacent markets where we believe we can realize greater growth
opportunities. While this strategy will take some time to fully realize, we have
deals signed by key enterprise clients
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Table of Contents RESULTS OF OPERATIONS Revenue
Revenue from our business includes the sale of Mediasite recorders and server software products and related services contracts, such as customer support, installation, customization services, training, content hosting and event services. We market our products to educational institutions, corporations and government agencies that need to deploy, manage, index and distribute video content on Internet-based networks. We reach both our domestic and international markets through reseller networks, a direct sales effort and partnerships with system integrators.
Q2-2022 compared to Q2-2021
Q2-2022 revenue of
• Product and other revenue from sale of Mediasite recorder units and server software Q2-2022 revenue of$2.1 million decreased$442 thousand or 17% compared to Q2-2021 revenue of$2.6 million and consistent with the decline in demand for hardware devices experienced over the last several years. • Service revenue represents the portion of fees charged for Mediasite customer support contracts amortized over the length of the contract, typically 12 months, as well as training, installation, events and content hosting services. Service revenue decreased$1.1 million or 18% from$6.1 million in Q2-2021 to$5.0 million in Q2-2022, primarily associated with a loss of recurring customers and from a lower base of deferred revenue at the start of fiscal year 2022. AtMarch 31, 2022 ,$8.6 million of revenue was deferred, of which we expect to • recognize$7.0 million in the next twelve months, including approximately$3.2 million in the quarter endingJune 30, 2022 . AtMarch 31, 2021 ,$9.6 million of revenue was deferred. • Other revenue relates to freight charges billed separately to our customers. YTD-2022 (six months) compared to YTD-2021 (six months)
Revenue for YTD-2022 totaled
•$4.2 million product and other revenue from the sale of recorders and software during YTD-2022 versus$4.7 million YTD-2021. The decrease reflects continued shift in demand from on-premise to cloud deployments causing a consistent decline in hardware devices. •$10.3 million revenue from services during YTD-2022 versus$13.1 million in YTD-2021. The$2.8 million or 22% decrease is primarily associated with a loss of recurring customers and from a lower base of deferred revenue at the start of fiscal year 2022. Gross Margin Q2-2022 compared to Q2-2021
Gross margin for Q2-2022 was
• Product costs. Product costs consist of costs associated with our Mediasite recorder hardware, freight, labor and certain allocated costs. These costs were$747 thousand in Q2-2022 and$951 thousand in Q2-2021, resulting in gross margin on products of 65% and 63%, respectively. This increase is due to a higher component of product sales being related to multi year deals. • Services costs. Service costs consist of staff wages for tech support, hosting and events, operating costs for events and hosting, as well as depreciation expense for hosting infrastructure. These costs were$1.3 million in Q2-2022 and$1.6 million in Q2-2021, resulting in gross margin on services of 73% and 74% respectively. YTD-2022 (six months) compared to YTD-2021 (six months)
Gross margin for YTD-2022 was
• Product costs. YTD-2022 product costs were$1.6 million compared to$1.8 million in YTD-2021, resulting in gross margin on products of 61% in YTD-2022 and 63% in YTD-2021. This increase is due to a decrease in COGS which is in line with the Company's effort to reduce spending. • Service costs. YTD-2022 service costs were$2.6 million compared to$3.2 million in YTD-2021, resulting in gross margin on services of 75% for both periods. 26
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Table of Contents Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses include wages and commissions for sales, marketing and business development personnel, print advertising and various promotional expenses for our products. Timing of these costs may vary greatly depending on introduction of new products and services or entrance into new markets, or participation in major tradeshows.
Q2-2022 compared to Q2-2021
Selling and marketing expenses increased
• The Company allocation increased selling and marketing expenses by$342 thousand with an offset in general and administrative expenses. • Professional Services expense increased by$248 thousand as a result of larger marketing needs for new company initiatives. • Selling and marketing expenses forSonic Foundry International and Mediasite KK accounted for$170 thousand and$753 thousand , respectively, an aggregate decrease of$56 thousand from Q2-2021. YTD-2022 (six months) compared to YTD-2021 (six months)
Selling and marketing expenses increased
Differences in the major categories include:
• The Company allocation increased selling and marketing expenses by$310 thousand with an offset in general and administrative expenses. • Professional Services expense increased by$328 thousand as a result of larger marketing needs for new company initiatives. • Salary, commissions, and benefits decreased by$493 thousand as a result of staff turnover which offset other increases in selling and marketing. • Selling and marketing expenses forSonic Foundry International and Mediasite KK accounted for$326 thousand and$1.8 million , respectively, an aggregate increase of$270 thousand from YTD-2021. The increase in expenses are due to an increase in people costs. 27
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General and Administrative Expenses
General and administrative ("G&A") expenses consist of personnel and related costs associated with the facilities, finance, legal, human resource and information technology departments, as well as other expenses not fully allocated to functional areas.
Q2-2022 compared to Q2-2021
G&A expenses increased
• Increase of$382 thousand due to increased salaries, commissions, and benefits as a result of additional headcount. • During three months endedMarch 31, 2022 , the Company booked an allocation true up shifting$287 thousand cost out of G&A expenses into S&M and R&D, in relation to Q1 2022 expenses. This allocation was done to maintain consistency year over year in how leadership team costs are accounted for. • G&A expenses forSonic Foundry International and Mediasite KK accounted for$56 thousand and$229 thousand , respectively, an aggregate increase of$46 thousand from Q2-2021. YTD-2022 (six months) compared to YTD-2021 (six months)
G&A expenses increased
• Salary, commissions, benefits, and recruiting expense increased by$621 thousand as a result of hiring additional employees. • G&A expenses forSonic Foundry International and Mediasite KK accounted for$123 thousand and$478 thousand , respectively, an aggregate increase of$179 thousand from YTD-2021. Product Development Expenses
Product development expenses include salaries and wages of the software research and development staff and an allocation of benefits, facility and administrative expenses.
Q2-2022 compared to Q2-2021
Product development expenses increased
• Increase of$238 thousand related to a change in allocation methodology. Of which$87 thousand was related to a true up of Q1 expenses to maintain year over year consistency in leadership team costs, and the remainder is in relation to increased headcount year over year. • For the three months endedMarch 31, 2022 , the Company capitalized approximately$626 thousand in software development costs related to new products as technological feasibility was established during the period, and this is included in other long term assets on the balance sheet. • Product development expense forSonic Foundry International and Mediasite KK accounted for$79 thousand and$74 thousand , respectively, an aggregate decrease of$54 thousand compared to Q2-2021. YTD-2022 (six months) compared to YTD-2021 (six months)
Product development expenses increased by
• Increase of$166 thousand in supplies cost (primarily software) and increase of$87 thousand in people cost due to increased headcount. • For the six months endedMarch 31, 2022 , the Company capitalized approximately$954 thousand in software development costs related to new products as technological feasibility was established during the period, and this is included in other long term assets on the balance sheet. • Product development expense forSonic Foundry International and Mediasite KK accounted for$160 thousand and$187 thousand , respectively, an aggregate decrease of$43 thousand compared to YTD-2021.
Other Income and Expense, Net
Interest expense for the three and six months ended
During the three and six months ended
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Table of Contents Foreign Currency
The Company's wholly-owned subsidiaries operate in
For the three and six months ended
During the three and six months ended
Liquidity and Capital Resources
The Company's primary sources of liquidity are its cash from operations and debt
and equity financing. During the first six months of fiscal 2022, the Company
had used
Capital expenditures were
The Company was provided
At
At
The Company believes its cash position plus available resources is adequate to accomplish its business plan through at least the next 12 months.
The Company completed a common stock issuance to certain investors totaling
The Company will likely evaluate lease opportunities to finance equipment purchases in the future and support working capital needs. We likely will seek additional equity financing but there are no assurances that these will be on terms acceptable to the Company.
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