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, 2021 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, 2021), 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 the global leader for video capture, management, and streaming solutions as well as virtual and hybrid events. Trusted by thousands of educational institutions, corporations, health organizations and government entities in over 65 countries with solutions that transform communication, training, and learning. Sonic Foundry's brands include Mediasite®, Mediasite Connect, Vidable™ and Global Learning Exchange™.







Impacts of COVID-19

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. The Company continues to follow guidelines outlined by the CDC and local county protocol. On August 2, 2021, the Company returned to in-person working. The Company implemented a newly developed hybrid module to allow employees to work 60% in office and 40% from home. Full return to in-person events is not anticipated until summer 2022.

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 March 31, 2022 the Company expensed involuntary termination benefits of $16 thousand and $16 thousand under ASC 420 compared to $0 and $101 thousand during the same periods last year.

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 moving Sonic 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. and U.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 who are excited to bring these new ventures to market with us, and we intend to aggressively invest in this strategy.





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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 $7.2 million decreased 17% compared to Q2-2021 revenue of $8.7 million. Revenue consisted of the following:





  • 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.

    At March 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 ending June 30, 2022. At March 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 $14.5 million compared to YTD-2021 revenue of $17.9 million, a $3.4 million or 19% decrease. Revenue consisted of the following:





  • $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 $5.2 million or 71% of revenue compared to Q2-2021 gross margin of $6.1 million or 70%. The significant components of cost of revenue include:





  • 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 $10.3 million or 71% of revenue compared to YTD-2021 gross margin of $12.9 million or 72%. The significant components of cost of revenue include:





  • 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.






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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 $338 thousand or 12% from $2.9 million in Q2-2021 to $3.2 million in Q2-2022. Differences in the major categories include:





  • 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 for Sonic 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 $419 thousand or 7% from $5.9 million in YTD-2021 to $6.3 million in YTD-2022.

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 for Sonic 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.






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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 $213 thousand or 20% from $1.1 million in Q2-2021 to $1.3 million in Q2-2022. Differences in the major categories include:





  • Increase of $382 thousand due to increased salaries, commissions, and benefits
    as a result of additional headcount.




  • During three months ended March 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 for Sonic 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 $813 thousand or 36% from $2.3 million in YTD-2021 to $3.1 million in YTD-2022. Differences in the major categories include:





  • Salary, commissions, benefits, and recruiting expense increased by
    $621 thousand as a result of hiring additional employees.




  • G&A expenses for Sonic 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 $187 thousand, or 11% from $1.7 million in Q2-2021 to $1.9 million in Q2-2022. Differences in the major categories include:





  • 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 ended March 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 for Sonic 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 $221 thousand, or 6% from $3.5 million in YTD -2021 to $3.7 million in YTD -2022. Differences in the major categories include:





  • 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 ended March 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 for Sonic 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 March 31, 2022 was $10 thousand and $4 thousand, compared to $23 thousand and $52 thousand for the same periods last year. The quarterly decrease over the prior year is a net effect of the PFG debt payoff and PPP Loan forgiveness. The Company recorded no amortization expense related to the back-end fee on the PFG loan for the three and six months ended March 31, 2022 due to the debt being paid out in May 2021, compared to $13 thousand and $25 thousand for the same periods last year.

During the three and six months ended March 31, 2022, a gain in fair value of $2 thousand and $30 thousand, 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 $14 thousand and $19 thousand during the three and six months ended March 31, 2021. The fair value of the derivative liability is measured at fair value based on a Black Scholes option pricing model with assumptions for stock price, exercise price, volatility, expected term, risk free interest rate and dividend yield.





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Foreign Currency

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 in the consolidated statements of operations.

For the three and six months ended March 31, 2022, the Company's foreign currency translation adjustment was a loss of $150 thousand and $177 thousand, respectively, compared to a loss of $215 thousand and $127 thousand, respectively, for the three and six months ended March 31, 2021.

During the three and six months ended March 31, 2022, the Company recorded an aggregate transaction loss of $19 thousand and $22 thousand, respectively, compared to an aggregate transaction gain of $29 thousand and $24 thousand for the three and six months ended March 31, 2021. The aggregate transaction gain or loss is included in the other expense line of the condensed consolidated statements of operations.

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 $3.5 million cash for operating activities, compared with $1.3 million cash used by operating activities in the same period of fiscal 2021. The primary factors effecting the $3.5 million cash used by operating activities are the $2.9 million net loss YTD, $2.3 million change in unearned revenue, and $689 thousand inventory purchase, partially offset by $2.6 million other operating activities including primarily $409 thousand stock-based compensation expenses, $534 thousand depreciation expenses, $654 thousand change in accounts receivable, and $628 thousand change in accounts payable, other long term asset, and long term liability.

Capital expenditures were $1.0 million in the first six months of fiscal 2022 compared to $448 thousand in the same period in fiscal 2021.

The Company was provided $62 thousand of cash from financing activities during the first sixmonths of fiscal 2022. Payments on capital lease and financing arrangements of $43 thousand were offset by proceeds from stock option exercises of $105 thousand. For the same period in fiscal 2021, the Company used $475 thousand for financing activities.

At March 31, 2022, the Company had $541 thousand outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V and the Mediasite KK term debt.

At March 31, 2022, approximately $2.2 million of cash and cash equivalents was held by the Company's foreign subsidiaries.

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 $3.5 million, net of $88 thousand expenses, on July 27, 2021. The proceeds of the stock issuance were intended to satisfy the initial listing requirements of the Nasdaq Capital Market. On April 19, 2022, the Company closed a public offering of common stock issurance of totaling $4.3 million, net of $300 thousand expenses. The proceeds of the stock issuance will be invested in the Company's new products, GLX and Vidable.

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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