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, 2020 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, 2020), 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. 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 will implement a newly developed hybrid module to allow 60% in office and 40% work from home.

COVID-19 has had both positive and 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 2020 and continuing through this quarter and beyond, the in-person events portion of our business continues to be impacted by cancellations and/or postponements due to social distancing protocols enacted to stop the spread of the virus. While there was a return in the current quarter to the type of smaller, in-person web events that are common for our Japan subsidiary, the events business in the US remains primarily a virtual events initiative, which has been a growing portion of our events business. 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.







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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 fourth quarter of fiscal 2020, the Company expensed involuntary termination benefits of $705 thousand under ASC 712. During the three and nine months ended June 30, 2021, the Company expensed involuntary termination benefits of $56 and $157 thousand under ASC 420 compared to zero during the same periods last year. No further expenses relating to this restructuring are anticipated in future quarters. The expense is recorded in the general and administrative expense line in the condensed consolidated statement of operation.





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.





                          Q3-2021 compared to Q3-2020

Q3-2021 revenue of $8.7 million increased 9% compared to Q3-2020 revenue of $7.9 million. Revenue consisted of the following:





  • Product and other revenue from sale of Mediasite recorder units and server
    software Q3-2021 revenue of $2.7 million remained consistent with  Q3-2020.




  • 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 increased $829 thousand or 16% from $5.2 million in
    Q3-2020 to $6.0 million in Q3-2021, primarily due to the Company's COVID-19
    recovery in events and growth in hosting.




  • At June 30, 2021, $9.8 million of revenue was deferred, of which we expect to
    recognize $7.9 million in the next twelve months, including approximately
    $3.2 million in the quarter ending September 30, 2021. At June 30, 2020,
    $11.3 million of revenue was deferred.




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




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            YTD-2021 (nine months) compared to YTD-2020 (nine months)

Revenue for YTD-2021 totaled $26.5 million compared to YTD-2020 revenue of $24.6 million, a $1.9 million or 8% increase. Revenue consisted of the following:

$7.4 million product and other revenue from the sale of recorders and software
  • during YTD-2021 versus $7.6 million YTD-2020. The decrease reflects continued
    shift in demand from on-premise to cloud deployments as well as continued
    impact of COVID-19 on recorder and software capture installations.




  • $19.1 million revenue from services compared to $17.0 million in 2020. The
    $2.1 million or 12.6% increase is due to the Company's growth in hosting and
    events.




Gross Margin

                           Q3-2021 compared to Q3-2020

Gross margin for Q3-2021 was $6.0 million or 70% of revenue compared to Q3-2020 gross margin of $5.7 million or 73%. 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 $1.1 million in Q3-2021 and $1.2 million in Q3-2020, resulting in gross
    margin on products of 60% and 56%, respectively.




  • 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 $1.5 million in Q3-2021
    and $971 thousand in Q3-2020, resulting in gross margin on services of 74% and
    81%, respectively. The increase in service cost was a result of $115 thousand
    in depreciation expense associated with the new data centers to support
    hosting business in the United States, United Kingdom, and Japan. The
    remaining difference is primarily associated with the increase in hosting
    expenses required to support ongoing hosting operations.




            YTD-2021 (nine months) compared to YTD-2020 (nine months)

Gross margin for YTD-2021 was $18.9 million or 71% of revenue compared to YTD-2020 gross margin of $17.8 million or 73%. The significant components of cost of revenue include:





  • Product costs. YTD-2021 product costs were $2.8 million compared to $3.2
    million in YTD-2020, resulting in gross margin on products of 62% in YTD-2021
    and 58% in YTD-2020.




  • Service costs. YTD-2021 service costs were $4.8 million compared to $3.6 in
    YTD-2020, resulting in gross margin on services of 75% in YTD-2021 and 79% in
    YTD-2020.






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.





                          Q3-2021 compared to Q3-2020

Selling and marketing expenses decreased $120 thousand or 4% from $3 million in Q3-2020 to $2.9 million in Q3-2021. Differences in the major categories include:



  • Salary, commissions, and benefits expense decreased by $202thousand as a
    result of reduced headcount.




  • Advertising expense decreased by $70 thousand as a result of virtually hosted
    tradeshows.




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  • Selling and marketing expenses for Sonic Foundry International and Mediasite
    KK accounted for $190 thousand and $825 thousand respectively, an aggregate
    increase of $186 thousand from Q3-2020




            YTD-2021 (nine months) compared to YTD-2020 (nine months)

Selling and marketing expenses decreased $668 thousand or 7% from $9.4 million in YTD-2020 to $8.8 million in YTD-2021.

Differences in the major categories include:





  • Salary, commissions, and benefits expense decreased by $556 thousand as a
    result of reduced headcount.




  • Travel expenses decreased $195 thousand primarily due to restrictions related
    to the pandemic.




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  • Selling and marketing expenses for Sonic Foundry International and Mediasite
    KK accounted for $605 thousand and $2.3 million, respectively, an aggregate
    increase of $478 thousand from YTD-2020.

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.





                          Q3-2021 compared to Q3-2020

G&A expenses increased $73 thousand or 7% from $1,030 thousand in Q3-2020 to $1,103 thousand in Q3-2021. Differences in the major categories include:





  • Increase in compensation, benefits, and professional services of $298 thousand
    offset by $160 thousand rent credit and $97 thousand depreciation reclassed
    from G&A to COGS.




  • G&A expenses for Sonic Foundry International and Mediasite KK accounted for
    $24 thousand and $196 thousand respectively, an aggregate increase of
    $23 thousand from Q3-2020.




            YTD-2021 (nine months) compared to YTD-2020 (nine months)

G&A expenses decreased $291 thousand or 7.9% from $3.6 million in YTD-2020 to $3.3 million in YTD-2021. Differences in the major categories include:





  • Decrease in professional fees and facilities $297 thousand offset by
    $596 thousand increase in compensation and benefits.




  • G&A expenses for Sonic Foundry International and Mediasite KK accounted for
    $76 thousand and $566 thousand respectively, an aggregate decrease of
    $10 thousand from YTD-2020.

We anticipate G&A headcount to remain consistent throughout the remainder of the fiscal year.





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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.





                          Q3-2021 compared to Q3-2020

Product development expenses increased $372 thousand, or 25% from $1.5 million in Q3-2020 to $1.9 million in Q3-2021. Differences in the major categories include:





  • Increase in compensation and benefits of $186 thousand as a result of
    additional headcount and outside product development resources and $142
    thousand as a result of additional investment in product development research.




  • Product development expense for Sonic Foundry International and Mediasite KK
    accounted for $118 thousand and $98 thousand respectively, an aggregate
    increase of $13 thousand compared to Q3-2020.




           YTD-2021 (nine months) compared to YTD-2020 (nine months)

Product development expenses increased by $755 thousand, or 16% from $4.6 million in YTD -2020 to $5.4 million in YTD -2021. Differences in the major categories include:



  • Increase in compensation and benefits of $410 thousand as a result of
    additional headcount and $181 thousand as a result of additional investment in
    product development research.




  • Product development expense for Sonic Foundry International and Mediasite KK
    accounted for $326 thousand and $280 thousand respectively, an aggregate
    increase of $31 thousand compared to YTD-2020.

We anticipate product development headcount to remain consistent throughout the remainder of the fiscal year. We do not anticipate that any fiscal 2021 software development efforts will qualify for capitalization.

Other Income and Expense, Net

Interest income for the three months ended June 30, 2021 was $10 thousand. Interest expense for the nine months ended June 30, 2021 was $42 thousand. Interest expense was $140 thousand and $621 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 also recorded $13 thousand and $54 thousand of interest expense, respectively, for the three and nine months ended June 30, 2021 related to the accretion of discounts on the PFG Loan and Warrant Debt compared to $14 thousand and $42 thousand for the three and nine months ended June 30, 2020. The Company also recorded amortization expense related to the back-end fee on the PFG loan of $6 thousand and $31, respectively, for the three and nine months ended June 30, 2021 compared to $13 thousand and $38 thousand for the same period last year. The Company also recorded zero interest expense during the three and nine months ended June 30, 2021 related to the accretion of discounts on the Burish notes payable compared to $16 thousand and $84 thousand, respectively, for the three and nine months ended June 30, 2020.

During the three and nine months ended June 30, 2021, a gain in fair value of $22 thousand and $3 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 $52 thousand and $116 thousand during the three and nine months ended June 30, 2020. 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. The Company also recorded a gain from debt forgiveness of $2.3 million from PPP Loan forgiveness in the three months ended June 30, 2021.





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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 in the consolidated statements of operations.

For the three and nine months ended June 30, 2021, the Company's foreign currency translation adjustment was a gain of $7 thousand and a loss of $120 thousand, respectively, compared to a gain of $15 thousand and gain of $12 thousand, respectively, for the three and nine months ended June 30, 2020.

During the three and nine months ended June 30, 2021, the Company recorded an aggregate transaction gain of $2 thousand and $26 thousand compared to an aggregate transaction loss of $56 and $34 thousand for the three and nine months ended June 30, 2020. 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 nine months of fiscal 2021, the Company had used $797 thousand cash for operating activities, compared with $1.2 million cash provided by operating activities in the same period of fiscal 2020. The primary factors effecting the $797 thousand cash used by operating activities are the $3.5 million net income, $375 thousand stock-based compensation, $712 thousand change in inventory, and $592 thousand change in accounts receivable partially offset by $2.0 million change in accounts payable, $2.3 million changes in unearned revenue, and $2.3 million PPP loan forgiveness.

Capital expenditures were $619 thousand in the first nine months of fiscal 2021 compared to $683 thousand in the same period in fiscal 2020.

The Company used $776 thousand of cash for financing activities during the first nine months of fiscal 2021. Payments on notes payable of $935 thousand were partially offset by proceeds from stock option exercises of $247 thousand. For the same period in fiscal 2020, the Company generated $1.7 million of cash from financing activities, primarily due to net proceeds from the disbursement of the Mediasite term note of $463 thousand and the PPP loan of $2.3 million. Proceeds were offset by payments of $984 thousand on existing debt.

At June 30, 2021, the Company had $552 thousand outstanding, net of warrant debt and debt discounts, related to notes payable with PFG V and the Mediasite KK term debt. During the current quarter, the Company paid off the PFG V debt.

At June 30, 2021, approximately $3.4 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 $75 thousand expenses, on July 27, 2021. The proceeds of the stock issuance are intended to be satisfy the initial listing requirements of the Nasdaq Capital Market. Additionally, the Company signed a line of credit agreement on July 28, 2021, with US Bank for $3 million at an annual rate equal to 1.35% plus the greater of zero percent and the one month LIBOR rate. The Company will likely evaluate lease opportunities to finance equipment purchases in the future and 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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