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 September 30, 2019 and Part II, Item 1A of this Form
10-Q), "Quantitative and Qualitative Disclosures about Market Risk" (Part I,
Item 3 of this Form 10-Q and Part II, Item 7A of the Company's Annual Report on
Form 10-K for the Fiscal Year ended September 30, 2019), and "Management's
Discussion and Analysis" (Part I, Item 2 of this Form 10-Q). We undertake no
obligation to update or revise publicly any forward-looking statements, whether
because of new information, future events, or otherwise.
Overview
Sonic Foundry, Inc. is a trusted global leader for video capture, management and
streaming solutions. Trusted by educational institutions, corporations and
government entities, Mediasite Video Platform quickly and cost-effectively
automates the capture, management, delivery and search of live and on-demand
streaming video and rich media. Mediasite transforms communications, training,
education and events for our customers.

Recent Developments

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and impact of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as those of our key business partners, vendors and other counterparties for an indefinite period of time. To support the health and well-being of our employees, business partners and communities, a vast majority of our employees have been working remotely since mid-March 2020 and continue to do so. We are currently researching and preparing for a limited return to the office at the end of May 2020.

COVID-19 has had negative near-term impacts on our operations and the future impacts of the pandemic and any corresponding economic results are largely unknown and rapidly evolving. Beginning in March, the events portion of our business was and continues to be significantly impacted by cancellations and/or postponements due to social distancing protocols enacted to stem the spread of the virus. In addition, the closure of educational institutions globally and the negative financial impact on their funding, could impact our sales in the upcoming quarters. While the virus has increased awareness of the need for distance learning tools and the adoption of video as a necessary communication medium, it is impossible for us to predict with confidence the long-term financial impact on our business including results of operations and liquidity. RESULTS OF OPERATIONS ASC 842



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On October 1, 2019, we adopted ASC Topic 842, Leases ("ASC 842"), using the modified retrospective method. Under this method, we recognized the cumulative effect of applying the new standard to existing leases that were active as of the adoption date as an adjustment to the opening balance sheet. The reported results for the three and six months ended March 31, 2020 reflect the adoption of ASC 842, while the comparative information has not been restated and continues to be reported under the related accounting standards in effect for those periods. Refer to Note 3 - Commitments to the notes to the condensed consolidated financial statements (unaudited) for additional information related to the effect of the adoption of ASC 842 as of and for the three and six months ended March 31, 2020. 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.


                          Q2-2020 compared to Q2-2019

Revenue in Q2-2020 increased $669 thousand, or 8% to $8.7 million, from Q2-2019 revenue of $8.0 million. Revenue consisted of the following:



•     Product and other revenue from sale of Mediasite recorder units and server
      software was $2.8 million in Q2-2020 and $1.8 million in Q2-2019. Average
      selling price was lower in Q2-2020 as compared to Q2-2019 primarily as a
      result of a higher sales volume of low-cost recorders. Production and other
      revenue in Q2-2020 included a large refresh recorder transaction while
      Q2-2019 was negatively impacted by our planned reduced reliance on
      distribution.


                                                 Q2-2020      Q2-2019
Recorders sold                                        369          131
Rack units to mobile units ratio                25.4 to 1     3.4 to 1

Average sales price, excluding service (000's) $ 4.7 $ 7.5 Refresh Units

                                          58           70



•     Services 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. Services revenue decreased $347 thousand or 6% from $6.2
      million in Q2-2019 to $5.9 million in Q2-2020 primarily due to
      cancellations in event services due to COVID-19.



•     At March 31, 2020, $11.5 million of revenue was deferred, of which we
      expect to recognize $9.5 million in the next twelve months, including
      approximately $3.6 million in the quarter ending June 30, 2020. At
      September 30, 2019, $11.5 million of revenue was deferred.

• Other revenue relates to freight charges billed separately to our customers.




            YTD-2020 (six months) compared to YTD-2019 (six months)

Revenues for YTD-2020 totaled $16.7 million compared to YTD-2019 revenues of $15.5 million. Revenues included the following:



•      $4.9 million product and other revenue from the sale of 572 Mediasite
       recorders and software during YTD-2020 versus $3.5 million from the
       delivery of 235 Mediasite recorders and software in YTD-2019. Recorders
       sold were substantially more than YTD-2019, partially due to a large
       refresh order in Q2-2020 and our planned reduced reliance on distribution.



•      $11.8 million from Mediasite customer support contracts, installation,
       training, events and hosting services versus $12.0 million in 2019.



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Gross Margin
                          Q2-2020 compared to Q2-2019

Gross margin for Q2-2020 was $6.3 million or 72% of revenue compared to Q2-2019 gross margin of $6.0 million or 75%. The significant components of cost of revenue include:



•     Material and freight costs for the Mediasite recorders. Costs for Q2-2020
      Mediasite recorder hardware and other costs totaled $453 thousand, along
      with $37 thousand of freight costs, and $645 thousand of labor and
      allocated costs, compared to Q2-2019 Mediasite recorder costs of $233
      thousand for hardware and other costs, $50 thousand for freight and $383
      thousand of labor and allocated costs. This resulted in gross margin on
      products of 59% in Q2-2020 and 64% in Q2-2019.



•     Services costs. Staff wages and other costs allocated to cost of service
      revenue were $1.2 million in Q2-2020 and $1.4 million in Q2-2019, resulting
      in gross margin on services of 79% in Q2-2020 and 78% in Q2-2019.


            YTD-2020 (six months) compared to YTD-2019 (six months)

Gross margin for YTD-2020 was $12.1 million or 73% of revenue compared to YTD-2019 gross margin of $11.7 million or 75% . The significant components of cost of revenue include:



•      Material and freight costs for the Mediasite recorders. Costs for
       YTD-2020 Mediasite recorder hardware and other costs totaled $600
       thousand, along with $58 thousand of freight costs, and $1,289 thousand of
       labor and allocated costs, compared to YTD-2019 Mediasite recorder costs
       of $491 thousand for hardware and other costs, $103 thousand for freight
       and $775 thousand of labor and allocated costs. This resulted in gross
       margin on products of 59% in YTD-2020 and 63% in YTD-2019.



•      Service costs. Staff wages and other costs allocated to cost of service
       revenue were $2.6 million in YTD-2020 and $2.6 million in YTD-2019,
       resulting in gross margin on services of 78% in YTD-2020 and 79% in
       YTD-2019.



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.
                          Q2-2020 compared to Q2-2019

Selling and marketing expenses decreased $779 thousand or 20% from $3.8 million in Q2-2019 to $3.1 million in Q2-2020. Differences in the major categories include:



•     Salary, commissions, and benefits expense decreased by $392 thousand as a
      result of reduced headcount.



•     Travel expenses, including entertainment and meals, decreased by $153
      thousand.



•     Selling and marketing expenses for Sonic Foundry International and
      Mediasite KK accounted for $143 thousand and $615 thousand respectively, an
      aggregate decrease of $51 thousand from Q2-2019.


            YTD-2020 (six months) compared to YTD-2019 (six months)

Selling and marketing expenses decreased $1,326 thousand or 17% from $7.8 million in YTD-2019 to $6.5 million in YTD-2020. Differences in the major categories include:



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•     Salary, commissions, and benefits expense decreased by $736 thousand as a
      result of reduced headcount.



•     Travel expenses, including entertainment and meals, decreased by $308
      thousand.



•     Selling and marketing expenses for Sonic Foundry International and
      Mediasite KK accounted for $281 thousand and $1,337 thousand, respectively,
      an aggregate decrease of $43 thousand from YTD-2019.



We anticipate selling and marketing headcount to remain consistent throughout
the remainder of the fiscal year.
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.

                          Q2-2020 compared to Q2-2019

G&A expenses decreased $169 thousand or 13% from $1.4 million in Q2-2019 to $1.2 million in Q2-2020. Differences in the major categories include:



•     Decrease in compensation and benefits of $81 thousand as a result of
      reduced headcount.



•     Professional services increased by $72 thousand primarily due to increase
      in legal and advisory fees.



•     G&A expenses for Sonic Foundry International and Mediasite KK accounted for
      $13 thousand and $185 thousand respectively, an aggregate decrease of $78
      thousand from Q2-2019.



            YTD-2020 (six months) compared to YTD-2019 (six months)

G&A expenses decreased $266 thousand or 9% from $2.9 million in YTD-2019 to $2.6 million in YTD-2020. Differences in the major categories include:



•      Decrease in compensation and benefits of $356 thousand as a result of
       reduced headcount.



•      Professional services increased by $172 thousand primarily due to an
       increase in legal and advisory fees.



•      G&A expenses for Sonic Foundry International and Mediasite KK accounted
       for $30 thousand and $425 thousand respectively, an aggregate decrease of
       $71 thousand from YTD-2019.



We anticipate general and administrative headcount to remain consistent
throughout the remainder of the fiscal year.
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.

                          Q2-2020 compared to Q2-2019

Product development expenses decreased by $436 thousand, or 23% from $1.9 million in Q2-2019 to $1.5 million in Q2-2020. Differences in the major categories include:



•     Decrease in compensation and benefits of $341 thousand as a result of
      reduced headcount.

• Decrease in professional services of $41 thousand.





•     Product development expense for Sonic Foundry International and Mediasite
      KK accounted for $108 thousand and $76 thousand respectively, an aggregate
      decrease of $24 thousand compared to Q2-2019.




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            YTD-2020 (six months) compared to YTD-2019 (six months)

Product development expenses decreased by $679 thousand, or 18% from $3.8 million in YTD-2019 to $3.1 million in YTD-2020. Differences in the major categories include:



•      Decrease in compensation and benefits of $463 thousand related primarily
       to an increase in compensation rates and the cost of benefits.



•      Decrease in professional services of $50 thousand, due to decreased use of
       outsourced development.



•      Product development expense for Sonic Foundry International and Mediasite
       KK accounted for $226 thousand and $146 thousand respectively, an
       aggregate decrease of $31 thousand compared to YTD-2019.

We anticipate product development headcount to remain consistent throughout the remainder of the fiscal year. We do not anticipate that any fiscal 2020 software development efforts will qualify for capitalization.

Other Income and Expense, Net Interest expense for the three and six months ended March 31, 2020 decreased $9 thousand and increased $100 thousand, respectively, compared to the same periods last year mainly as a result of interest on the Subordinated Promissory Notes with Mr. Burish, the first tranche of which was disbursed on January 4, 2019. Interest payments and the first anniversary fee on the Burish notes are currently being deferred. See Note 4 - Credit Arrangements for further details on the deferred interest and fees. The Company also recorded $14 thousand and $28 thousand of interest expense for the three and six months ended March 31, 2020 related to the accretion of discounts on the PFG Loan and Warrant Debt compared to $14 thousand and $27 thousand for the three and six months ended March 31, 2019. The Company also recorded amortization expense related to the back-end fee on the PFG loan of $13 thousand and $25 thousand in both the three and six month ended March 31, 2020 compared to $13 thousand and $25 thousand for the same periods last year. The Company also recorded $34 thousand and $67 thousand of interest expense during the three and six months ended March 31, 2020 related to the accretion of discounts on the Burish notes payable compared to $13 thousand for the three and six months ended March 31, 2019. During the three and six months ended March 31, 2020, a loss in fair value of $61 thousand and $63 thousand, respectively, was recorded related to the fair value remeasurement on the derivative liability associated with the Loan and Security Agreement and Warrant Debt with PFG compared to a loss in fair value of $8 thousand and a gain of $15 thousand, respectively, during the three and six months ended March 31, 2019.

Foreign Currency Translation Adjustment

The Company's wholly-owned subsidiaries operate in Japan and the Netherlands, and utilize the Japanese Yen and Euro, respectively, as their functional currency. Assets and liabilities of the Company's foreign operations are translated in US dollars at period end exchange rates while revenues and expenses are translated using average rates for the period. Gains and losses from the translation are deferred and included in accumulated other comprehensive loss the consolidated statements of operations.

For the three and six months ended March 31, 2020, the Company's foreign currency translation adjustment was a gain of $5 thousand and a loss of $3 thousand compared to to a loss of $17 thousand and a gain of $45 thousand for the three and six months ended March 31, 2019. The gain is attributable to the strengthening in the Japanese Yen compared to the US dollar compared to the prior period.

During the three and six months ended March 31, 2020, the Company recorded an aggregate transaction of $0 and a gain of $15 thousand compared to an aggregate loss of $3 thousand and $40 thousand for the three and six months ended March 31, 2019. The aggregate transaction gain or loss is included in the other expense line of the condensed consolidated statements of operations.








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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 2020, the Company
generated $680 thousand of cash from operating activities compared with $3.3
million used in the same period of fiscal 2019.
Capital expenditures were $118 thousand in the first six months of fiscal 2020
compared to $222 thousand in the same period in fiscal 2019.

The Company used $278 thousand of cash from financing activities during the first six months of fiscal 2020, primarily due to net proceeds from the disbursement of the Mediasite term note of $463 thousand offset by payments of $618 thousand on existing debt. For the same period in fiscal 2019, the Company generated $3.5 million of cash from financing activities, mainly due to notes payable proceeds, primarily due to net proceeds from the disbursement of Tranches 1-4 of the Burish Note Purchase Agreement.



At March 31, 2020, the Company had $6.7 million outstanding, net of warrant debt
and debt discounts, related to notes payable with PFG V, the subordinated notes
issued under the Burish Note Purchase Agreement and the Mediasite KK term debt.
The Company made principal payments of $250 thousand and $500 thousand for the
three and six months ended March 31, 2020 on the PFG V debt, and $113 thousand
on the Mediasite KK term debt in the current quarter.
At March 31, 2020, approximately $1.5 million of cash and cash equivalents was
held by the Company's foreign subsidiaries.
On May 13, 2020, the Company and Mr. Burish entered into a Debt Conversion
Agreement to convert Mr. Burish's existing secured debt of approximately $5.6
million into common stock at $5.00 per share. Both the Special Committee and Mr.
Burish concluded that converting the debt to equity was the most appropriate way
to maximize both Company and Shareholder value, improve the Company's financial
position, and provide the Company with resources to further its growth
opportunities.
The Company believes its cash position plus available resources is adequate to
accomplish its business plan through at least the next twelve months. We will
likely evaluate lease opportunities to finance equipment purchases in the future
and anticipate continuing to utilize proceeds from the notes and term debt to
support working capital needs. We may also seek additional equity financing but
there are no assurances that these will be on terms acceptable to the Company.


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