Sonic Foundry Inc. Annual Report 2016

FY2016 Annual Report · Sonic Foundry Inc.

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ANNUAL REPORT 2016

Dear Fellow Shareholders,

Since I joined Sonic Foundry six years ago, I’ve worked with
the management team to identify key areas of growth. We’ve
been able to expand to new geographies and have grown
from a U.S.-based company to a truly global enterprise, with
functioning sales representation in Japan, Europe, the Middle
East, India and China.

We’ve evolved the product mix far beyond the room-based
video capture solutions for which we are most widely known
and respected. Our offerings now include an array of video
content capture solutions to serve content creators in every
environment, from the most technically advanced meeting
and learning spaces, to technology-light spaces, to a simple
laptop on a dining room table.

This new product mix means that recurring services revenue,
which includes Mediasite Video Cloud subscriptions, support
renewals, annual software licenses and events services, is
growing at a faster rate than that of our total revenue.

These actions have been intended to provide new sources of long term revenue growth. However, the rate of
growth has been slower than what all of us would like to see.

We also continue to pursue large transactions for our traditional products to provide an additional source of
revenue growth. The timing of these transactions has always been difficult to predict and gives rise to “lumpy”
growth. The most obvious illustration of this is that we enjoyed approximately $4 million of billings from these
large transactions in 2015 but realized $0 in billings for 2016.

However, in 2016 we saw improved business fundamentals. Billings in our core business—excluding large
transactions—grew by 12%, we realized measurable improvement in gross margins and a swing from an
adjusted EBITDA loss the prior year to profit.

We are also proud of the significant progress we made on several of our core business objectives, including:

STEADY GAINS IN INTERNATIONAL EXECUTION

Sonic Foundry International (formerly MediaMission)

We developed significant partnerships with key players in the healthcare industry, such as Noordhoff
Health in the Netherlands, a business unit of Noordhoff Publishers, to co-create innovative learning
solutions with more than 4,000 hospitals. This initiative will be used as a model to develop further
partnership initiatives in Europe and the United States.

Mediasite K.K. in Japan

Strong performance in Japan was driven in part by corporate training initiatives in highly-regulated
industries such as pharmaceuticals and health. We’ve also established strategic reseller partnerships
with companies such as Sony, IMS Health, Toshiba, Hitachi Cable Network and NTT which are producing
strong results.

China

Overall billings to China grew nearly threefold, and we have collected $1.3 million to date from our
partnership with PushiTech, a spin-off of Neusoft. We are seeing increased distribution activity and
growth in licensing of software products as they leverage their established relationships with customers,
and the state and federal government to sell the value of scalable video applications.

EXTENDING THE VALUE OF VIDEO IN THE ENTERPRISE

Key Technology Partnerships

We enhanced our corporate delivery capabilities with technology integration partnerships with Ramp
Holdings and Riverbed. The partnerships help to scale delivery of behind-the-firewall enterprise streaming
video applications such as corporate communications, training and live webcasts to Sonic Foundry’s
2300+ corporate and government customers.

Mediasite Events

Mediasite Events turnkey service engagements benefited from the expansion of new and repeat global
conferences, such as VMWare, Ellucian, Citrix, Gartner and Autodesk.

Mediasite Video Cloud Growth

Improved operational efficiencies coupled with increased customer demand has led to significant
growth in our cloud service, which we expect to continue in 2017 and beyond. The viewership growth by
our customers using Mediasite Video Cloud is validation that we have the right services offering.

LOOKING AHEAD

The rapidly changing video landscape creates a new opportunity for Sonic Foundry in 2017.

For more than a decade we’ve been first to plant the video flag in emerging market segments, in particular
higher education. We have done this by selling our video capture and creation tools directly to customers who
use those tools to create content in their organizations.

Now, as demand for the benefits of video extends beyond our traditional end-user markets, we have the
opportunity to partner with businesses seeking to help their customers adopt video strategies. We enable
these video strategies by embedding our technology within our partner’s value proposition. The management
team, our board of directors and I are committed to expanding our business in this area. This year we will create
and prioritize new strategic partnership opportunities, and deploy our best team resources to pursue them.

We plan to replicate the early success we’ve seen in the publishing space with our Noordhoff Health partnership.
We are confident that similar requirements for video will enable us to extend the traditional benefits of
Mediasite to net-new growth partners.

We’ve identified global partners with established footprints that require scalable video solutions with
management and security, and with flexibility in creation, workflow and consumption of video. We have had
productive meetings with multinational networking and telecommunications companies, manufacturers of
adjacent technologies and global information services companies. In all of these opportunities, our partners
will sell their solution to their customers and license our technology to enable video in their solution.

In addition to this new initiative we will focus on continued growth in our core business. We will assist the
PushiTech sales and marketing team in China as it continues gaining inroads into the broad Chinese market.
We will continue our work to deepen existing channel partnerships which will help us to maintain our competitive
advantage in winning the largest deals in academic video. Finally, I am confident that we can continue to grow
our core business in North America, Europe, and Japan at 5-7%.

We will help transform the vast libraries of video into interactive, indexed rich video though automated
metadata creation and advanced search capabilities, and positively impact the individuals who are learning
from it. Maximizing shareholder value is the core of every decision we make and every action we take. Our
mission to drive shareholder value will be realized by enabling more effective communications by leveraging
the power of video to bridge both time and distance.

Sincerely,

Gary Weis, CEO of Sonic Foundry

SONIC FOUNDRY, INC.
222 West Washington Avenue
Madison, Wisconsin 53703

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held March 7, 2017

The Annual Meeting of Stockholders of SONIC FOUNDRY, INC., a Maryland corporation (“Sonic”) will be held at
the Monona Terrace Community and Convention Center, One John Nolen Drive, Madison, Wisconsin 53703 on March
7, 2017 at 9:00 a.m. local time, for the following purposes:

To elect one director to hold office for a term of five years, and until his successor is duly elected and qualified.

To approve, by a non-binding advisory vote, of the compensation paid by the Company to its Named Executive
Officers;

To select, by a non-binding advisory vote, the frequency at which the stockholders of the Company will be
asked to approve, by a non-binding advisory vote, the compensation paid by the Company to its Named
Executive Officers;

To vote on a Proposal to amend the 2008 Sonic Foundry Employee Stock Purchase Plan to increase the number
of shares of common stock subject to the plan from 150,000 to 200,000.

To vote on a Proposal to amend the 2009 Stock Incentive Plan to increase the number of shares of common stock
subject to the plan from 1,800,000 to 2,700,000.

To vote on a Proposal to amend the 2008 Sonic Foundry Non-Employee Directors Stock Option Plan to increase
the number of shares of common stock subject to the plan from 100,000 to 150,000.

To ratify the appointment of Baker Tilly Virchow Krause LLP as our independent auditors for the fiscal year
ending September 30, 2017.

To transact such other business as may properly come before the meeting or any adjournments thereof.

All the above matters are more fully described in the accompanying Proxy Statement.

Only holders of record of Common Stock at the close of business on January 10, 2017 are entitled to notice of, and to
vote at, this meeting or any adjournment or adjournments thereof.

Please complete and return the enclosed proxy in the envelope provided or follow the instructions on the proxy card to
authorize a proxy by telephone or over the Internet, whether or not you intend to be present at the meeting in person.

By Order of the Board of Directors,

Madison, Wisconsin
January 26, 2017

Kenneth A. Minor
Secretary

─────────────────────────────────────

If you cannot personally attend the meeting, it is earnestly requested that you promptly indicate your vote on the
issues included on the enclosed proxy and date, sign and mail it in the enclosed self-addressed envelope, which
requires no postage if mailed in the United States or, follow the instructions on the proxy card to authorize a proxy
by telephone or over the Internet. Doing so will save us the expense of further mailings. If you sign and return
your proxy card without marking choices, your shares will be voted in accordance with the recommendations of
the Board of Directors.

─────────────────────────────────────

SONIC FOUNDRY, INC.
222 W. Washington Avenue
Madison, Wisconsin 53703

PROXY STATEMENT

January 26, 2017

The Board of Directors of Sonic Foundry, Inc., a Maryland corporation (“Sonic”), hereby solicits the enclosed proxy.
Unless instructed to the contrary on the proxy, it is the intention of the persons named in the proxy to vote the proxies:

FOR the election of Brian T. Wiegand for a term expiring in 2022;

FOR approval, by a non-binding advisory vote, of the compensation paid by the Company to its Named Executive
Officers;

FOR the selection, by a non-binding advisory vote, of the frequency at which the stockholders of the Company
will be asked to approve, by a non-binding advisory vote, the compensation paid by the Company to its Named
Executive Officers;

FOR approval of a proposal to amend the 2008 Sonic Foundry Employee Stock Purchase Plan to increase the
number of shares of common stock subject to the plan from 150,000 to 200,000.

FOR approval of a proposal to amend the 2009 Stock Incentive Plan to increase the number of shares of common
stock subject to the plan from 1,800,000 to 2,700,000.

FOR a Proposal to amend the 2008 Sonic Foundry Non-Employee Directors Stock Option Plan to increase the
number of common shares subject to the plan from 100,000 to 150,000; and

FOR the ratification of the appointment of Baker Tilly Virchow Krause LLP as independent auditors of Sonic for
the fiscal year ending September 30, 2017.

In the event that the nominee for director becomes unavailable to serve, which management does not expect, the
persons named in the proxy reserve full discretion to vote for any other persons who may be nominated. Proxies may
also be authorized by telephone or over the Internet by following the instructions on the proxy card. Any stockholder
giving a proxy may revoke it at any time prior to the voting of such proxy. This Proxy Statement and the
accompanying proxy are being mailed on or about February 1, 2017.

Each stockholder will be entitled to one vote for each share of Common Stock standing in his or her name on our
books at the close of business on January 10, 2017 (the “Record Date”). Only holders of issued and outstanding shares
of Sonic's common stock as of the close of business on the Record Date are entitled to notice of and to vote at the
Annual Meeting, including any adjournment or postponement thereof. On that date, we had outstanding and entitled
to vote 4,416,423 shares of Common Stock, held by approximately 4,000 stockholders, of which approximately 200
were held in street name.

QUORUM; VOTES REQUIRED

Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspector of elections appointed for
the Annual Meeting and will determine whether or not a quorum is present. Where, as to any matter submitted to the
stockholders for a vote, proxies are marked as abstentions (or stockholders appear in person but abstain from voting),
such abstentions will be treated as shares that are present and entitled to vote for purposes of determining the presence
of a quorum, but will not be treated as present and entitled to vote for any other purpose. If a broker indicates on the
proxy that it does not have discretionary authority as to certain shares to vote on a particular matter and has not
received instructions from the beneficial owner, which is known as a broker non-vote, such shares will also be
considered present for purposes of a quorum, provided that the broker exercises discretionary authority on any other
matter in the Proxy. A majority of the shares of Common Stock issued, outstanding and entitled to vote at the Annual
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Meeting, present in person or represented by proxy, shall constitute a quorum at the Annual Meeting. The election of
the Director requires a plurality of the votes present and entitled to vote. Therefore, the director who receives the
highest vote total will be elected. Neither an abstention nor a withheld vote will affect the outcome of the election.
The vote to amend the 2008 Employee Stock Purchase Plan, the amendment of the 2009 Stock Incentive Plan and, the
amendment of the Sonic Foundry Non-Employee Directors Stock Option Plan require the affirmative vote of the
holders of a majority of shares entitled to vote at the Annual Meeting. A plurality of the votes cast at the Annual
Meeting is required to select, by a non-binding advisory vote, the frequency at which the stockholders of the Company
will be asked to approve, by a non-binding advisory vote, the compensation paid by the Company to its Named
Executive Officers. If you abstain from voting on either of these proposals, it will have the same effect as a vote
against the proposal. The non-binding advisory vote of the compensation paid by the Company to its Named Executive
Officers and ratification of the appointment of Baker Tilly Virchow Krause LLP requires the affirmative vote of the
holders of a majority of the votes cast at the Annual Meeting. If you abstain or withhold your vote on this proposal,
it will have no effect on the outcome of the proposal.

The New York Stock Exchange ("NYSE") has rules that govern brokers who have record ownership of listed company
stock held in brokerage accounts for their clients who beneficially own the shares. Under these rules, brokers who do
not receive voting instructions from their clients have the discretion to vote uninstructed shares on certain discretionary
matters but do not have discretion to vote uninstructed shares as to certain other non-discretionary matters. A broker
may return a proxy card on behalf of a beneficial owner from whom the broker has not received instructions that casts
a vote with regard to discretionary matters but expressly states that the broker is not voting as to non-discretionary
matters. The broker's inability to vote with respect to the non-discretionary matters with respect to which the broker
has not received instructions from the beneficial owner is referred to as a "broker non-vote". Under current NYSE
interpretations, the proposal to ratify the appointment of Baker Tilly Virchow Krause, LLP as our independent auditor
is considered a discretionary matter, while the non-binding advisory vote of the compensation paid by the Company
to its named executive officers, the proposal to amend the 2008 Stock Purchase Plan, the proposal to amend the 2009
Stock Incentive Plan and the proposal to amend the 2008 non-employee directors stock option plan are considered
non-discretionary matters.

DATE, TIME AND PLACE OF ANNUAL MEETING

The Annual Meeting will be held on March 7, 2017 at 9:00 a.m. (Central time) at the Monona Terrace Community
and Convention Center, One John Nolen Drive, Madison, Wisconsin 53703.

PROPOSAL ONE: ELECTION OF DIRECTOR

Our Amended and Restated Articles of Incorporation and Bylaws provide that the Board of Directors shall be divided
into five classes, with each class having a five-year term. Directors are assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. Vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes may be filled by either the affirmative vote of the holders of a
majority of the then-outstanding shares or by the affirmative vote of a majority of the remaining directors then in office,
even if less than a quorum of the Board of the Directors. Newly created directorships resulting from any increase in the
number of directors may, unless the Board of Directors determines otherwise, be filled only by a majority vote of the
entire Board of Directors. A director elected by the Board of Directors to fill a vacancy (including a vacancy created by
an increase in the number of directors) shall serve until the next annual meeting of stockholders or until such director’s
successor is elected and qualified.

Our Amended and Restated Articles of Incorporation provide that the number of directors, which shall constitute the
whole Board of Directors, shall be not be less than three or more than twelve. The currently authorized number of
directors is five. The seat on the Board of Directors currently held by Brian T. Wiegand, is designated as a Class IV
Board seat, with term expiring at the Annual Meeting. The Board of Directors has nominated Brian T. Wiegand as Class
IV Director for election at the Annual Meeting.

If elected at the Annual Meeting, Mr. Wiegand would serve until the 2022 Annual Meeting and until his successor is
elected and qualified or until his earlier death, resignation or removal.

The election of Mr. Wiegand requires a plurality of the votes present and entitled to vote.

Nominee for Director for a Five-Year term expiring on the 2022 Annual Meeting

Brian T. Wiegand

Mr. Wiegand, age, 48, has been a director of the Company since July 2012, and is a serial entrepreneur who
successfully founded and sold several internet-based companies. He is currently the founder and CEO of Gavy, Inc.,
a live video shopping platform that is expected to launch in 2017. Mr. Wiegand founded and served as CEO of
Hopster, a company that links digital marketing efforts with real-world shopping behavior by rewarding consumer
purchase loyalty, engagement and advocacy. Hopster announced in October 2014 that it was acquired by Inmar,
Incorporated, where Mr. Wiegand served as SVP of Growth and Strategy from the date of purchase to August 2016.
Mr. Wiegand co-founded and served as executive chair of the board of Alice.com, an online retail platform that
connects manufacturers and consumers in the consumer packaged goods market. Alice.com filed for receivership in
August 2013. Mr. Wiegand also co-founded Jellyfish.com, a shopping search engine, in June of 2006. He served as
CEO until October 2007 when the company was sold to Microsoft. Mr. Wiegand continued with Microsoft as the
General Manager of Social Commerce until May 2008. He also co-founded NameProtect, a trademark research and
digital brand protection services company in August 1997 which was sold to Corporation Services Company in March
2007. In addition, Mr. Wiegand founded BizFilings in 1996, the Internet’s leading incorporation Services Company.
He served as the president and CEO until 2002 when the company was acquired by Wolters Kluwer. Mr. Wiegand
attended the University of Wisconsin – Madison.

The members of the Board of Directors unanimously recommend a vote FOR the election of Mr. Wiegand as
Class IV Director.

DIRECTORS CONTINUING IN OFFICE

Gary R. Weis

Term Expires in 2018
(Class V Director)

Mr. Weis, age 69, has been Chief Executive Officer since March 2011, Chief Technology Officer since September
2011 and a Director of Sonic since February 2004. Prior to joining Sonic, he served as President, Chief Executive
Officer and a Director of Cometa Networks, a wireless broadband Internet access company from March 2003 to April
2004. From May 1999 to February 2003 he was Senior Vice President of Global Services at AT&T where he was
responsible for one of the world's largest data and IP networks, serving more than 30,000 businesses and providing
Internet access to more than one million individuals worldwide. While at AT&T, Mr. Weis also was CEO of Concert,
a joint venture between AT&T and British Telecom. Previously, from January 1995 to May 1999 he was General
Manager of IBM Global Services, Network Services. Mr. Weis served as a Director from March 2001 to February
2003 of AT&T Latin America, a facilities-based provider of telecom services in Brazil, Argentina, Chile, Peru and
Columbia. Mr. Weis earned BS and MS degrees in Applied Mathematics and Computer Science at the University of
Illinois, Chicago.

David C. Kleinman

Term Expires in 2019
(Class I Director)

Mr. Kleinman, age 81, has been a Director of Sonic since December 1997 and has taught at the Chicago Booth School
of Business at the University of Chicago from 1971 to 2014, where he was Adjunct Professor of Strategic Management.
Mr. Kleinman was a Director (trustee) of the Columbia Acorn Trust, and its predecessors from 1972 to December 2010
(where he was a member of the Committee on Investment Performance and past chair, a member and past chair of the
Audit Committee and a member of the Compliance Committee); a Director (trustee) of the Wanger Advisors Trust from
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2005 to December 2010; a Director and non-executive chair of the Board from 1984 to 2014 and Chair Emeritus since
2014 of North Lime Holdings and its wholly owned subsidiary, Irex Corporation, a contractor and distributor of insulation
materials; and a Director from 1993 to 2015 of Plymouth Tube Company, a manufacturer of metal tubing and metal
extrusions (where he served on the Audit Committee). From 1999 to 2006, he was a member of the Advisory Board of
DSC Logistics, a logistics management and warehousing firm. From May 1997 to February 2004, Mr. Kleinman served
as a Director of AT&T Latin America and predecessor companies, a facilities-based provider of telecom services in
Brazil, Argentina, Chile, Peru and Columbia (where he was chair of the Audit Committee and a member of the
Compensation Committee). From 1994 to 2005, he was a director of Wisconsin Paper and Products Company, a jobber
of paper and paper products. From 1964 to 1971, Mr. Kleinman was a member of the finance staff of the Ford Motor
Company. Mr. Kleinman received a BS degree in Mathematical Statistics and a PHD in Business from the University
of Chicago.

Mark D. Burish

Term Expires in 2020
(Class II Director)

Mr. Burish, age 63, has been a director since March 2010 and has served as Non-Executive Chair since April 2011.
Mr. Burish is a shareholder of the law firm of Hurley, Burish & Stanton, Madison, WI, which he helped start in 1983.
He is the founder and CEO of Our House Senior Living, LLC, Milestone Senior Living, LLC and Milestone
Management Services, LLC which he started in 1997. Mr. Burish received his BA degree in communications from
Marquette University in 1975 and his JD degree from the University of Wisconsin in 1978.

Frederick H. Kopko, Jr.

Term Expires in 2021
(Class III Director)

Frederick H. Kopko, age 61, served as Sonic Foundry’s Secretary from April 1997 to February 2001 and has been a
Director since December 1995. Mr. Kopko is a partner of the law firm of McBreen & Kopko, Chicago, Illinois, and
has been a partner of that firm since January 1990. Mr. Kopko practices in the area of corporate law. He is the
Managing Director, Neltjeberg Bay Enterprises LLC, a merchant banking and business consulting firm and has been
a Director of Mercury Air Group, Inc. since 1992. Mr. Kopko received a B.A. degree in Economics from the University
of Connecticut, a J.D. degree from the University of Notre Dame Law School and an M.B.A. degree from the
University of Chicago.

When considering whether the Board of Directors and nominees thereto have the experience, qualifications, attributes
and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light
of our business and structure, the Board of Directors focused primarily on the information discussed in each of the
Board members' biographical information set forth above. Each of the Company's directors possess high ethical
standards, act with integrity and exercise careful, mature judgment. Each is committed to employing his skills and
abilities to aid the long-term interests of the stakeholders of the Company. In addition, each of our directors has
exhibited judgment and skill, and has either been actively involved with the Company for a considerable period of
time or has experience with other organizations of comparable or greater size. In particular, Mr. Kopko has had
extensive experience with companies comparable in size to Sonic Foundry, including serving as a director of Mercury
Air Group, Inc. and fills a valuable need with experience in securities and other business law. Mr. Weis has had
experience in both developing and established companies, having served as a CEO and Director of Cometa Networks
and in several positions at AT&T and IBM, including Senior Vice President of Global Services. While at AT&T, Mr.
Weis also was CEO of Concert, a joint venture between AT&T and British Telecom. Mr. Weis has served as CEO of
the Company since March 2011. Mr. Kleinman has significant experience serving on boards of directors of various
companies and has significant experience in finance and strategic management through his employment with the
Chicago Booth School of Business at the University of Chicago where he also obtained valuable market insight to the
Company’s largest customer base. Mr. Burish brings additional valuable legal experience to the Board as well as
experience obtained through founding multiple companies. Mr. Wiegand has significant experience in founding and
operating technology companies and building brand awareness with both businesses and consumers.

Director Independence

CORPORATE GOVERNANCE

Through its listing requirements for companies with securities listed on the NASDAQ Capital Market, the NASDAQ
Stock Market (“NASDAQ”) requires that a majority of the members of our Board be independent, as defined under
NASDAQ’s rules. The NASDAQ rules have both objective tests and a subjective test for determining who is an
“independent director.” The objective tests state, for example, that a director is not considered independent if he or
she is an employee of the Company or has engaged in various types of business dealings with the Company. The
subjective test states that an independent director must be a person who lacks a relationship that in the opinion of the
Board would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The
Board has made a subjective determination as to each independent director that no relationship exists that, in the
opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities
of a director. In making these determinations, the Board reviews information provided by the directors in an annual
questionnaire with regard to each director’s business and personal activities as they relate to the Company. Based on
this review and consistent with NASDAQ’s independence criteria, the Board has affirmatively determined that Mark
D. Burish, David C. Kleinman and Brian T. Wiegand are independent.

Related Person Transaction

The Board has adopted a Related Person Transaction Policy (the “Policy”), which is a written policy governing the
review and approval or ratification of Related Person Transactions, as defined in SEC rules.

Under the Policy, each of our directors and executive officers must notify the Chairman of the Audit Committee in
writing of any new potential Related Person Transaction involving such person or an immediate family member. The
Audit Committee will review the relevant facts and circumstances and will approve or ratify the transaction only if it
determines that the transaction is not inconsistent with, the best interests of the Company. The Related Party
Transaction must then be approved by the independent directors. In determining whether to approve or ratify a Related
Person Transaction, the Audit Committee and the independent directors may consider, among other things, the benefits
to the Company; the impact on the director’s independence (if the Related Person is a director or an immediate family
member); the availability of other sources for comparable products or services; the terms of the transaction; and the
terms available to unrelated third parties or to employees generally. There were no new Related Person Transactions
in the fiscal year ended September 30, 2016 (“Fiscal 2016”).

Board Leadership Structure and Role in Risk Oversight

Mark D. Burish serves as Non-Executive Chairman of the Board and Gary R. Weis serves as our Chief Executive
Officer and Chief Technical Officer. The Company believes that having separate positions provides an appropriate
leadership structure.

Our business and affairs are managed under the direction of our board, which is the Company’s ultimate decision-
making body, except with respect to those matters reserved to our stockholders. Our Board’s key mission is to
maximize long-term stockholder value. Our Board establishes our overall corporate policies, selects and evaluates
our executive management team (which is charged with the conduct of our business), and acts as an advisor and
counselor to executive management. Our board also oversees our business strategy and planning, as well as the
performance of management in executing its business strategy and assessing and managing risks.

What is the Board’s role in risk oversight?

The board takes an active role in monitoring and assessing the Company’s risks, which include risks associated with
operations, credit, financing and capital investments. Management is responsible for the Company’s day-to-day risk
management activities and our board’s role is to engage in informed risk oversight. Management, through its

disclosure committee, compiles an annual ranking of risks to which the Company could be subjected and reviews the
results of this risk assessment with the audit committee. Any significant risks are then reviewed by the board and
assigned for oversight. In fulfilling this oversight role, our board focuses on understanding the nature of our enterprise
risks, including our operations and strategic direction, as well as the adequacy of our risk management process and
overall risk management system. There are a number of ways our board performs this function, including the
following:

• at its regularly scheduled meetings, the board receives management updates on our business operations,

financial results and strategy and discusses risks related to the business;

•

the audit committee assists the board in its oversight of risk management by discussing with management,
particularly, the Chief Financial Officer, our guidelines and policies regarding financial and enterprise risk
management and risk appetite, including major risk exposures, and the steps management has taken to monitor
and control such exposures; and

through management updates and committee reports, the board monitors our risk management activities,
including the annual risk assessment process, risks relating to our compensation programs, and financial and
operational risks being managed by the Company.

The board of directors also has oversight responsibility for risks and exposures related to employee compensation
programs and management succession planning, and assesses whether the organization’s compensation practices
encourage risk taking that would have a material adverse effect on the Company. The compensation committee
periodically reviews the structure and elements of our compensation programs and its policies and practices that
manage or mitigate such risk, including the balance of short-term and long-term incentives, use of multiple
performance measures, and a multi-year vesting schedule for long-term incentives. Based on these reviews, the
committee believes our compensation programs do not encourage excessive risk taking.

Board Structure and Meetings

The Board met five times during Fiscal 2016. The Board also acted by written consent from time to time. All directors
attended at least 75% of the total number of Board meetings and committee meetings on which they serve (during the
period in which each director served). In addition, NASDAQ marketplace rules contemplate that the independent
members of our Board will meet during the year in separate closed meetings referred to as “executive sessions” without
any employee director or executive officer present. Executive sessions were usually held after regularly scheduled
Board meetings during Fiscal 2016.

The Board of Directors has four standing committees, the Audit Committee, the Executive Compensation Committee,
the Governance Committee and the Nominations Committee.

Sonic has a standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Members of the Audit Committee are Messrs. Kleinman (chair),
Burish and Wiegand. Sonic’s Board of Directors has determined that all members of Sonic’s Audit Committee are
“independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and as defined under
Nasdaq listing standards. The Audit Committee provides assistance to the Board in fulfilling its oversight responsibility
including: (i) internal and external financial reporting, (ii) risks and controls related to financial reporting, and (iii) the
internal and external audit process. The Audit Committee is also responsible for recommending to the Board the selection
of our independent public accountants and for reviewing all related party transactions. The Audit Committee met five
times in Fiscal 2016. A copy of the charter of the Audit Committee is available on Sonic’s website.

Sonic's Board of Directors has determined that, due to his affiliation with the Chicago Booth School of Business at the
University of Chicago, and due to his current and past service as a director on numerous company boards, and
membership on numerous audit committees, including chair, along with his other academic and business credentials, Mr.
Kleinman has the requisite experience and applicable background to meet Nasdaq standards requiring financial

sophistication of at least one member of the audit committee. Sonic's Board of Directors has also determined that neither
Mr. Kleinman nor any other member of the Audit Committee is an audit committee financial expert as defined by
applicable SEC regulations

The Compensation Committee consists of Messrs. Kleinman (chair) and Burish. The Board of Directors has determined
that all of the members of the Compensation Committee are “independent” as defined under Nasdaq listing standards.
The Compensation Committee makes recommendations to the Board with respect to salaries of employees, the amount
and allocation of any incentive bonuses among the employees, and the amount and terms of stock options to be granted
to executive officers. The Compensation Committee met once in Fiscal 2016. A copy of the charter of the Compensation
Committee is available on Sonic’s website.

The Governance Committee consists of Messrs. Burish (chair) and Kopko. The Governance Committee was established
on January 24, 2013 to consider board terms and other governance issues related to enhancing shareholder value. The
Committee did not meet in fiscal 2016.

The Nominations Committee consists of Messrs. Burish (chair), Kopko and Kleinman. The Board of Directors has
determined that all of the members of the Nominations Committee are “independent” as defined under Nasdaq listing
standards. The purpose of the Nominations Committee is to evaluate and recommend candidates for election as directors,
make recommendations concerning the size and composition of the Board of Directors, develop specific criteria for
director independence, and assess the effectiveness of the Board of Directors. Our Board of Directors has adopted a
charter for the Nominations Committee, which is available on Sonic’s website. The Nominations Committee will review
all candidates in the same manner regardless of the source of the recommendation. In recommending candidates for
election to the Board of Directors, the Nominations Committee reviews each candidate’s qualifications, including
whether a candidate possesses any of the specific qualities and skills desirable in certain members of the Board of
Directors. Evaluations of candidates generally involve a review of background materials, internal discussions and
interviews with selected candidates as appropriate. Generally, the Nominations Committee will consider various criteria
in considering whether to make a recommendation. These criteria include expectations that directors have substantial
accomplishments in their professional backgrounds and are able to make independent, analytical inquiries and exhibit
practical wisdom and mature judgment. Director candidates should possess the highest personal and professional ethics,
integrity and values, be committed to promoting the long-term interest of our stockholders and be able and willing to
devote the necessary time to carrying out their duties and responsibilities as members of the Board. While the Board of
Directors has not adopted a policy regarding diversity, we also believe our directors should come from diverse
backgrounds and experience bases in order to promote the representation of diverse views on the Board of Directors.
Stockholder recommendations of candidates for Board membership will be considered when submitted to Corporate
Secretary, Sonic Foundry, Inc., 222 W. Washington Ave., Madison, WI 53703. When submitting candidates for
nomination to be elected at Sonic's annual meeting of stockholders, stockholders must also follow the notice procedures
and provide the information required by Sonic's bylaws.

In particular, for a stockholder to nominate a candidate for election at the 2018 Annual Meeting of Stockholders, the
nomination must be delivered or mailed to and received by Sonic's Secretary between November 7, 2017 and December
7, 2017 (or, if the 2018 annual meeting is advanced by more than 30 days or delayed by more than 60 days from March
7, 2018, not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close
of business on the later of the 90th day prior to such annual meeting or the tenth calendar day following the date on which
public announcement of the date of the annual meeting is first made). The nomination must include the same information
as is specified in Sonic's bylaws for stockholder nominees to be considered at an annual meeting, including the following:

• The stockholder's name and address and the beneficial owner, if any, on whose behalf the nomination is

proposed;

• The stockholder's reason for making the nomination at the annual meeting, and the signed consent of the

nominee to serve if elected;

• The number of shares owned by, and any material interest of, the record owner and the beneficial owner,

if any, on whose behalf the record owner is proposing the nominee;

• A description of any arrangements or understandings between the stockholder, the nominee and any other

person regarding the nomination; and

•

Information regarding the nominee that would be required to be included in Sonic's proxy statement by the
rules of the Securities and Exchange Commission, including the nominee's age, business experience for the
past five years and any other directorships held by the nominee.

DIRECTORS COMPENSATION

Our directors who are not also our full-time employees, receive an annual retainer of $20,000 in addition to a fee of
$1,500 for attendance at each meeting of the Board of Directors and $1,000 per committee meeting attended. In addition,
Mr. Kleinman receives an Audit Committee annual retainer of $8,000 and a Compensation Committee annual retainer
of $3,000 for his services as chairman of each committee and Mr. Burish receives an annual retainer of $35,000 as
compensation for his services as Chairman of the Board of Directors. The retainers earned by each director in fiscal 2016
were awarded in stock rather than in cash using a value per share calculated by reducing the closing price of the stock on
the date of the 2016 annual meeting by 15%. The discount was intended to approximate the diminution in value created
by restrictions on trading imposed on insiders. The total fee compensation earned by the four non- employee directors
combined in Fiscal 2016 was $175,000. When traveling from out-of-town, the members of the Board of Directors are
also eligible for reimbursement for their travel expenses incurred in connection with attendance at Board meetings and
Board Committee meetings. Directors who are also employees do not receive any compensation for their participation
in Board or Board Committee meetings.

Pursuant to the 2008 Sonic Foundry Non-Employee Amended Directors Stock Option Plan (the “Directors Plan”) we
grant to each non-employee director who is reelected or who continues as a member of the Board of Directors at each
annual stockholders meeting a stock option to purchase 2,000 shares of Common Stock. Further, the chair of our Audit
Committee receives an additional stock option grant to purchase 500 shares of Common Stock per year pursuant to
Sonic’s Non-Employee Amended Directors Stock Option Plan.

The exercise price of each stock option granted was equal to the market price of Common Stock on the date the stock
option was granted. Stock options issued under the Directors Plan vest fully on the first anniversary of the date of grant
and expire after ten years from date of grant. An aggregate of 100,000 shares are reserved for issuance under the Directors
Plan.

If any change is made in the stock subject to the Directors Plan, or subject to any option granted thereunder, the Directors
Plan and options outstanding thereunder will be appropriately adjusted as to the type(s), number of securities and price
per share of stock subject to such outstanding options.

The options and warrants set forth above have an exercise price equal to the fair market value of the underlying
common stock on the date of grant. The term of all such options is ten years.

The following table summarizes cash and equity compensation provided our non-employee directors during the fiscal
year ended September 30, 2016.

Fees Earned
Or Paid In
Cash
($)(1)
(b)

Name
(a)

Mark D. Burish
David C. Kleinman
Frederick H. Kopko
Paul S. Peercy (4)
Brian T. Wiegand

10,500
10,500
4,500
3,500
7,500

Stock
Awards
($)(2)
(c)

60,000
36,000
23,000
22,500
23,000

Option
Awards
($)(3)
(d)

3,340
4,175
3,340
3,340
3,340

Non-Equity
Incentive
Plan Compen-
sation
($)
(e)

—
—
—
—
—

Change in
Pension
Value and
Non-qualified
Deferred
Compen-
sation
Earnings
($)
(f)

—
—
—
—
—

All Other
Compensation
($)
(g)

—
—
—
—
—

Total
($)
(h)

73,840
50,675
30,840
29,340
33,840

(1)
(2)

(3)

The amount reported in column (b) is the total of retainer fees and meeting attendance fees paid in cash.
The amount reported in column (c) is the total of retainer fees and meeting attendance fees awarded in common
stock.
The amount reported in column (d) is the aggregate grant date fair value of options granted during the fiscal year
ended September 30, 2016 in accordance with FASB ASC Topic 718. Each director received an option award
of 2,000 shares on March 3, 2016 at an exercise price of $6.42 with a grant date fair value of $3,340. In addition,
Mr. Kleinman received a grant of 500 shares on March 3, 2016 at an exercise price of $6.42 with a grant date
fair value of $835 in connection with his position as chair of the Audit Committee.

(4) Mr. Peercy retired from the Board in June 2016.

EXECUTIVE OFFICERS OF SONIC

Our executive officers, who are appointed by the Board of Directors, hold office for one-year terms or until their
respective successors have been duly elected and have qualified. There are no family relationships between any of the
executive officers of Sonic.

Gary R. Weis serves as both our Chief Executive and Chief Technology Officer. (See " Directors Continuing in Office
".)

Kenneth A. Minor, age 54, has been our Chief Financial Officer since June 1997, Assistant Secretary from December
1997 to February 2001 and Secretary since February 2001. From September 1993 to April 1997, Mr. Minor was
employed as Vice President and Treasurer for Fruehauf Trailer Corporation, a manufacturer and global distributor of
truck trailers and related aftermarket parts and service where he was responsible for financial, treasury and investor
relations functions. Prior to 1993, Mr. Minor served in various senior accounting and financial positions for public and
private corporations as well as the international accounting firm of Deloitte Haskins and Sells. Mr. Minor is a certified
public accountant and has a B.B.A. degree in accounting from Western Michigan University.

Robert M. Lipps, age 45, has been Executive Vice President of Sales since April 2008, joining Sonic Foundry in April
2006 as Vice President of International Sales and assuming expanded responsibility for U.S. central sales in 2007. Mr.
Lipps leads the company’s global sales organization including oversight of domestic, international and channel sales. He
holds 15 years of sales leadership, business development and emerging market entry expertise in the technology and
manufacturing sectors, including sales and channel management. From January 2004 to March 2006 he served as
General Manager of Natural Log Homes LLC, a New Zealand based manufacturer of log homes. From July 1999 to Dec
2002 he served as Latin America Regional Manager of Adaytum, a software publisher of planning and performance

management solutions, (acquired by Cognos Software, an IBM Company, in January 2003) and from May 1996 to July
1999 he served as International Sales Manager for Persoft, a software publisher of host access and mainframe
connectivity solutions (acquired by Esker software in 1998). Mr. Lipps has a B.S. degree in Marketing from the
University of Wisconsin at La Crosse.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows information known to us about the beneficial ownership of our Common Stock as of January
10, 2017, by each stockholder known by us to own beneficially more than 5% of our Common Stock, each of our
executive officers named in the Summary Compensation Table (“Named Executive Officers”), each of our directors, and
all of our directors and executive officers as a group. Unless otherwise noted, the mailing address for these stockholders
is 222 West Washington Avenue, Madison, Wisconsin 53703.

Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power
with respect to shares. Shares of common stock issuable upon the exercise of stock options or warrants exercisable within
60 days after January 10, 2017, which we refer to as Presently Exercisable Options or Presently Exercisable Stock
Warrants, are deemed outstanding for computing the percentage ownership of the person holding the options but are not
deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated below, to
our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under applicable law. The inclusion of any shares in
this table does not constitute an admission of beneficial ownership for the person named below.

Name of Beneficial Owner(1)

Common Stock

Wealth Trust Axiom LLC (3)
4 Radnor Corp Center, suite 520
Radnor PA 19087

Andrew D. Burish(4)
8020 Excelsior Drive
Madison, WI, 53717

Mark D. Burish(5)
33 East Main St.
Madison, WI 53703

Gary R. Weis(6)

Kenneth A. Minor(7)

Robert M. Lipps(8)

Frederick H. Kopko, Jr.(9)
29 South LaSalle Street
Chicago, IL 60603

David C. Kleinman(10)
1101 East 58th Street
Chicago, IL 60637

Brian T. Wiegand (11)
1600 Aspen Commons
Middleton, WI 53562

All current Executive Officers and Directors as a Group (7

persons)(12)

Number of Shares of
Class
Beneficially Owned

Percent
of Class(2)

513,005

11.6%

473,897

10.6

397,893

337,742

194,466

176,372

52,841

44,971

8.9

7.2

4.2

3.8

1.2

1.0

28,588

1,232,873

24.1%

less than 1%

*
(1) Sonic believes that the persons named in the table above, based upon information furnished by such persons, except
as set forth in notes (3) where such information is based on a Schedule 13G, have, except as set forth in note (3),
sole voting and dispositive power with respect to the number of shares indicated as beneficially owned by them.
(2) Applicable percentages are based on 4,416,423 shares outstanding, adjusted as required by rules promulgated by the

Securities and Exchange Commission.
Information is based on Schedule 13G filed on January 11, 2017 by Albert C. Matt, President of Wealth Trust Axiom
LLC. Based on such information, Wealth Trust Axiom LLC has sole dispositive power but not sole voting power
with respect to such shares.
Includes 38,897 shares subject to Presently Exercisable Common Stock Warrants. Information is based on
information provided to the Company on December 31, 2016.
Includes 35,905 shares subject to presently Exercisable Warrants and 14,000 shares subject to Presently Exercisable
Options.
Includes 257,868 shares subject to Presently Exercisable Options.
Includes 165,547 shares subject to Presently Exercisable Options.
Includes 174,297 shares subject to Presently Exercisable Options.

(3)

(4)

(5)

(6)
(7)
(8)

(9)
Includes 20,000 shares subject to Presently Exercisable Options.
(10) Includes 25,000 shares subject to Presently Exercisable Options.
(11) Includes 10,000 shares subject to Presently Exercisable Options.
(12) Includes an aggregate of 666,712 Presently Exercisable Options.

Introduction

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes our compensation strategy, policies, programs and practices
for the executive officers identified in the Summary Compensation Table. Throughout this proxy statement, we refer
to these individuals, who serve as our Chief Executive Officer, Chief Financial Officer and Executive Vice President
of Sales as the “executive officers.”

The Executive Compensation Committee (“Committee”) establishes and oversees our compensation and employee
benefits programs and approves the elements of total compensation for the executive officers. The day-to-day design
and administration of our retirement and employee benefit programs available to our employees are handled by our
Human Resources and Finance Department employees. The Committee is responsible for reviewing these programs
with management and approving fundamental changes to them.

Overview and Objectives of our Executive Compensation Program

The compensation program for our executive officers is designed to attract, motivate, reward and retain highly
qualified individuals who can contribute to Sonic’s growth with the ultimate objective of increasing stockholder
value. Our compensation program consists of several forms of compensation: base salary, annual bonus, long-term
incentives and limited perquisites and benefits.

Base salary and annual bonus are cash-based while long-term incentives consist of stock option awards. The
Committee does not have a specific allocation goal between cash and equity-based compensation or between annual
and long-term incentive compensation. Instead, the Committee relies on the process described in this discussion and
analysis in its determination of compensation levels and allocations for each executive officer.

The Committee established performance metrics for each of its Named Executive Officers in fiscal 2016 designed to
match Company performance to the amount of incentive compensation paid to such officers following completion of
the fiscal year.

The recommendations of the Chief Executive Officer play a significant role in the compensation-setting process. The
Chief Executive Officer provides the Committee with an annual overall assessment of Sonic’s achievements and
performance, his evaluation of individual performance and his recommendations for annual compensation and long-
term incentive awards. The Committee has discretion to accept, reject or modify the Chief Executive Officer’s
recommendations. The Committee determines the compensation for the Chief Executive Officer in an executive
session.

Market Competitiveness

The Committee’s target is for total cash compensation to average between the 50th and 75th percentile of published
compensation data derived from two sources: (i) a peer group of companies that are in our industry, competitors for
key talent, or with similar financial characteristics; and (ii) published market survey data for companies within our
revenue range. The peer group data was obtained from the most recently filed proxy statement of 14 publicly-traded
technology companies with annual revenues ranging from approximately $25 million to just over $100 million; market
capitalization of approximately $20 million to approximately $200 million and approximately 400 employees or less.
The following companies comprised the peer group for the study: Adesto Technologies, Corp, ARI Network Services
Inc., Asure Software Inc., Autobytel Inc., Bsquare Corporation, Datawatch Corp., FalconStor Software Inc.,
GlobalSCAPE Inc., Glowpoint Inc., GSE Systems Inc., Inuvo Inc., MAM Software Group, Inc., Qumu Corporation
and Smith Micro Software Company. Given competitive recruiting pressures, the Committee retains its discretion to
12

deviate from this target under appropriate circumstances. The Committee periodically receives updates of the
published compensation data.

Pay for Performance

The Committee believes that both long and short term compensation of executive officers should correlate to Sonic’s
overall financial performance. Incentive payouts will be larger with strong performance and smaller if Sonic’s
financial results decline. From time to time, extraordinary Board-approved initiatives in a fiscal year, such as a
restructuring, acquisition, or divestiture, are considered by the Committee in its overall evaluation of Sonic’s
performance.

Peer Group Analysis

Compensation data came from a peer group of fourteen public companies that we consider similar to our market for
sales, or for key talent, or with similar financial or other characteristics such as number of employees. The companies
in the peer group are described above.

Components of Executive Compensation

Base Salary

The Committee seeks to pay the executive officers a competitive base salary in recognition of their job responsibilities
for a publicly held company. As noted above, the target compensation range for an executive’s total cash compensation
(salary and bonus) is between the 50th and 75th percentile of the market data reviewed by the Committee.

As part of determining annual compensation review, the Committee also considers the Chief Executive Officer’s
recommendation regarding individual performance as well as internal equitable considerations.

In evaluating individual performance, the Committee considers initiative, leadership, tenure, experience, skill set for
the particular position, knowledge of industry and business, and execution of strategy in placing the individual within
the range outlined.

The Committee considered base wage changes for Messrs. Weis, Minor and Lipps at a meeting of the Committee held
on December 1, 2016. The Committee increased the base compensation for Messrs. Weis, Minor and Lipps by 3% –
calculating new base wages of $489,883, $301,986 and $249,811, respectively. After its review of all sources of
market data as described above, the Committee believes that the base salaries and the bonuses described are within its
targeted range for total cash compensation.

Annual Performance-Based Variable Compensation

The performance-based variable compensation reported for each executive officer represents compensation that was
earned based on the fiscal 2016 incentive plan. The following describes the methodologies used by the Compensation
Committee to determine the final annual performance-based variable compensation earned by each executive officer:

Selection of Performance Metrics. For fiscal 2016, the Compensation Committee designed a short-term incentive
program (“STIP”) driven by four performance measures that it determined were appropriate to drive desired business
behavior for the Company and would correlate positively with total shareholder return. These measures were the
Company’s results with respect to (1) customer billings, (2) adjusted EBITDA, (3) customer satisfaction, and (4) the
officer’s achievement of certain individual goals. Messrs. Weis, Minor and Lipps were included in the plan. Mr.
Lipps’ short term incentive plan included a separate component based solely on the level of customer billings achieved.

Establishment of Incentive Goals and Payout Approach. The Compensation Committee designed the relationship
between pay and performance to ensure that desired performance would be rewarded with material payouts. Similarly,
13

performance that did not meet the goals would reduce the performance-based variable compensation payout to as low
as zero. In setting the performance levels, the Compensation Committee strived to establish challenging but achievable
goals. The factors considered by the Compensation Committee in assessing the challenge inherent in the goals
included:

•

Management’s internal operating plan; and

Customer satisfaction.

Payout Based on Performance Against Goals. For fiscal 2016 the Company’s performance, as evaluated by the
Compensation Committee, lead to the determination that no objectives were met with regard to financial performance
of the Company but that individual goals and customer satisfaction targets were met. Therefore 40% of the target
bonus amounts were earned under the STIP compensation plan. The STIP earned by Messrs. Weis, Minor and Lipps
were $95,123, $41,047 and $28,289, respectively. Total billings – based incentives paid to Mr. Lipps during fiscal
2016 was $49,848. In order to maximize liquidity, management recommended to the Compensation Committee that
any cash component of the bonus be deferred until the collection of a significant account receivable, expected in April
2017. Management also proposed that the three executive officers be offered a choice to receive, at their election, all
or a portion of their bonus in a form of equity rather than cash, further saving the Company cash. The mechanics of
the program, as proposed by management, is to (1) grant a stock option equal to the amount of bonus the individual
elects to defer, divided by the price of the stock at the time of grant with a vest date one year from the date of grant,
or immediate vesting upon termination of employment for any reason; (2) upon exercise, grant a deferred bonus equal
to the exercise price of the option, and (3) grant a tax gross-up at the time the individual exercises the option and
receives the deferred bonus. The committee approved the recommendations. Messrs. Weis and Minor elected to
receive 50% of their bonus in this form and received, in lieu of payment of their bonus, a stock option grant of 10,012
and 4,320 shares, respectively.

Stock Options

The Committee has a long-standing practice of providing long-term incentive compensation grants to the executive
officers. The Committee believes that such grants, in the form of stock options, help align our executive officers’
interests with those of Sonic’s stockholders. All stock options have been granted under our 1995 Stock Option Plan,
the 1999 Non-Qualified Plan or the 2009 Stock Incentive Plan (“Employee Plans”). All but the 2009 Stock Incentive
Plan are now terminated.

The Committee reviews option grant recommendations by the Chief Executive Officer for each executive officer, but
retains full discretion to accept, reject or revise each recommendation. The Committee’s policy is to grant options on
the date it approves them or such other future date as the Committee may agree at the time of approval. The exercise
price is determined in accordance with the terms of the Employee Plan and cannot be less than the Fair Market Value,
as defined in the Plan, of Sonic’s common stock. The Committee typically grants options once a year, but may grant
options to newly hired executives at other times.

In making its determinations, the Committee considers the number of options or shares owned by the executive
officers.

On December 1, 2016 the Committee approved awards to Messrs. Weis, Minor and Lipps of option grants, effective
two days following the release of results, to purchase 75,053, 41,273 and 41,273 shares of common stock, respectively,
with the strike price equal to the closing price of Sonic’s stock on that date, which was $4.75. Each grant will vest
one third each on the first, second and third anniversaries of the grant.

Health and Welfare Benefits

Our officers are covered under the same health and welfare plans, including our 401(k) plan, as salaried employees.
Employment Agreements

The Company has employment agreements with Messrs. Minor and Lipps. Pursuant to such employment agreements,
Messrs. Minor and Lipps receive annual base salaries subject to increase each year at the discretion of the Board of
Directors. Messrs. Minor and Lipps are also entitled to incidental benefits of employment under the agreements. Each of
the employment agreements provides that a cash severance payment be made upon termination, other than for cause, or
upon death or disability. In each case, such cash severance is equal to the highest cash compensation paid in any of the
last three fiscal years immediately prior to termination. In addition, Messrs. Minor and Lipps will receive immediate
vesting of all previously unvested common stock and stock options and have the right to voluntarily terminate their
employment, and receive the same severance arrangement detailed above following (i) any “person” becoming a “
beneficial” owner of stock of Sonic Foundry representing 50% or more of the total voting power of Sonic Foundry’s then
outstanding stock; or, (ii) Sonic Foundry is acquired by another entity through the purchase of substantially all of its
assets or securities; or (iii) Sonic Foundry is merged with another entity, consolidated with another entity or reorganized
in a manner in which any “person” is or becomes a “beneficial” owner of stock of the surviving entity representing 50%
or more of the total voting power of the surviving entity’s then outstanding stock; and, within two years and ninety days
of any such event, Messrs. Minor or Lipps, as the case may be, is demoted without cause or his title, authority, status or
responsibilities are substantially altered, their salary is reduced or the principal office is more than 50 miles outside the
Madison metropolitan area. Pursuant to the employment agreements, each of Messrs. Minor and Lipps has agreed not
to disclose our confidential information and not to compete against us during the term of his employment agreement and
for a period of one year thereafter. Such non-compete clauses may not be enforceable, or may only be partially
enforceable, in state courts of relevant jurisdictions.

The Company also has an employment agreement with Mr. Weis for his services as Chief Executive Officer and Chief
Technology Officer. Pursuant to the terms of the amended and restated employment agreement, Mr. Weis will receive
an annual base salary subject to increase at the discretion of the Board. Mr. Weis may also receive a performance
bonus at the discretion of the Board.

The employment agreement continues in effect until terminated as set forth therein. In the event Mr. Weis’s
employment is terminated without cause, as defined in the employment agreement, or in the event his employment is
constructively terminated, Mr. Weis will be entitled to receive, in equal bi-weekly installments over a one-year period,
compensation equal to one and five hundredths (1.05) multiplied by the highest cash compensation paid to Mr. Weis
in any of the last three years immediately prior to his termination. In the event of a Change of Control, as defined in
the amended and restated employment agreement, Mr. Weis is entitled to terminate the agreement within one year
following such Change of Control, in which event he shall be entitled to receive, in a lump sum payable within thirty
days of such termination, compensation equal to two and one-tenth (2.1) multiplied by the highest cash compensation
paid to Mr. Weis in any of the last three fiscal years immediately prior to his termination. In any of the above events,
(i) all of Mr. Weis’s unvested stock options and stock grants will vest immediately upon termination, and (ii) Mr. Weis
will receive health insurance continuation as required by COBRA, salary accrued to the date of termination, and any
accrued vacation pay. Mr. Weis has further agreed not to disclose the Company’s proprietary information, and, until
one year following the termination of his employment agreement, not to compete with the Company or solicit the
Company’s employees. Such non-compete clause may not be enforceable, or may be only partially enforceable, in
state courts of relevant jurisdiction.

For illustrative purposes, if Sonic terminated the employment of Mr. Weis (not for cause) on September 30, 2016, Sonic
would be obligated to pay $764,891, representing 1.05 times the cash compensation paid Mr. Weis during fiscal 2014
(fiscal year with highest cash compensation in three year period preceding September 30, 2016) and $1,529,782 if
Mr. Weis elected to terminate his employment on September 30, 2016, following a change of control as defined in the
employment agreement. If Sonic terminated Messrs. Minor and Lipps on September 30, 2016, (not for cause), or if
Messrs. Minor and Lipps elected to terminate their employment following a demotion or alteration of duties on
September 30, 2016, and a change of control as defined in the employment agreements had occurred, Sonic would be
obligated to pay $410,145 and $378,339, respectively (based on fiscal 2014 compensation which was the fiscal year with
highest cash compensation in three year period preceding September 30, 2016). In addition, any non-vested rights of
Messrs. Weis, Minor and Lipps under the Employee Plans, would vest as of the date of employment termination. The

value of accelerated vesting of the options under these circumstances would be $148,000 for Mr. Weis and $82,000 for
both Messrs. Minor and Lipps.

Personal Benefits

Our executives receive a limited number of personal benefits certain of which are considered taxable income to them
and which are described in the footnotes to the section of this Proxy Statement entitled “Summary Compensation
Table ”.

Internal Revenue Code Section 162(m)

Internal Revenue Code Section 162(m) limits the ability of a public company to deduct compensation in excess of $1
million paid annually to each of the Chief Executive Officer and each of the other executive officers named in the
Summary Compensation Table. There are exemptions from this limit, including compensation that is based on the
attainment of performance goals that are established by the Committee and approved by the Company stockholders.
No executive officer was affected by this limitation in fiscal 2016.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of Sonic has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in
the Proxy Statement.

COMPENSATION COMMITTEE

David C. Kleinman, Chair
Mark D. Burish

The following table sets forth the compensation of our principal executive officer, our principal financial officer and our
other executive officer for the fiscal year ended September 30, 2016.

Summary Compensation

Salary
($)
(c)

Bonus
($)
(d)

Stock
Awards
($)
(e)

Option
Awards
($)(1)
(f)

Non-Equity
Incentive Plan
Compensation
($)(2)
(g)

Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings
($)
(h)

Name and Principal
Position
(a)

Gary R. Weis
Chief Executive and
Chief Technology
Officer

Year
(b)

2016
2015
2014

475,615
473,504
452,705

Kenneth A. Minor
Chief Financial Officer
and Secretary

2016
2015
2014

293,190
291,888
280,877

Robert M. Lipps
Executive Vice
President - Sales

2016
2015
2014

235,739
234,692
225,084

—
—
—

157,350
140,596
202,358

95,123
95,123
275,763

84,347
77,328
111,296

41,047
41,047
129,268

76,355
77,328
111,296

93,279
92,485
153,255

—
—
—

All Other
Compen-
sation
($)(3)
(i)

Total
($)
(j)

9,021
10,600
10,400

737,109
719,823
941,226

17,299
17,886
17,774

435,883
428,149
539,215

9,950
9,945
10,988

415,323
414,450
500,623

(1) The option awards in column (f) represent the aggregate grant date fair value computed in accordance with FASB
ASC Topic 718 for stock options granted during the fiscal year. The assumptions and methodology used in
calculating the compensation expense of the option awards are provided in Sonic’s Form 10-K. See Note 1,
“Accounting for Stock Based Compensation” in the Notes to the Consolidated Financial Statements in Sonic’s
Form 10-K. The amounts in this column represent value attributed to the awards at the date of grant and not
necessarily the actual value that will be realized by the executive. There can be no assurance that the options will
ever be exercised (in which case no value will be realized by the executive) or that the value on exercise will equal
the ASC Topic 718 value.

(2) The amounts in column (g) represent cash bonuses which were awarded for performance during the prior fiscal year

based on a pre-established formula.

(3) The amount shown under column (i) for the fiscal year 2016 includes Sonic’s matching contribution under our 401(k)
plan of $9,021, $10,149 and $9,945 for Messrs Weis, Minor and Lipps. Mr. Minor receives $650 per month as a car
allowance of which the taxable personal portions were $7,150. Mr. Lipps receives a car allowance of $700 per
month of which there was no taxable personal portion. Mr. Weis received car and housing allowances totaling
$2,500 per month, of which there was no taxable personal portion.

The following table shows the plan-based awards granted to the Named Executive Officers during fiscal 2016.

Grants of Plan-Based Awards

Name
(a)

Grant
Date
(b)

Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
Target
($)
(d)

Maximum
($)
(e)

Threshold
($)
(c)

Estimated Future Payouts
Under Equity
Incentive
Plan Awards
Target
($)
(g)

Maximum
($)
(h)

Threshold
($)
(f)

All other
stock
awards:
Number of
Shares of
stock or
units
(#)
(i)

All other
option
awards:
Number of
Securities
Underlying
Options
(#)
(j)

Exercise or
base price
of option
awards
($/Sh)
(1)
(k)

Grant
Date fair
Value of
Stock and
option
awards
($)
(2)
(l)

Gary R. Weis
Kenneth A. Minor
Robert M. Lipps

11/5/15 —
11/5/15 —
11/5/15 —

—
—
—

50,574
27,816
27,816

7.17
7.17
7.17

140,596
77,328
77,328

(1) Sonic grants employee stock options with exercise prices equal to the closing stock price on the date of grant.
(2) The amount reported in column (l) represents the grant date fair value of the award following the required FASB
ASC Topic 718 compensation methodology. Grant date fair value is calculated using the Lattice method. See Note
1, “Accounting for Stock Based Compensation” in the Notes to the Consolidated Financial Statements in Sonic’s
Form 10-K for the fiscal year ended September 30, 2016 for an explanation of the methodology and assumptions
used in FASB ASC Topic 718 valuation. With respect to the option grants, there can be no assurance that the options
will ever be exercised (in which case no value will be realized by the executive) or that the value on exercise will
equal the FASB ASC Topic 718 value.

Sonic grants options to its executive officers under our employee stock option plans. As of September 30, 2016, options
to purchase a total of 1,602,822 shares were outstanding under the plans, and options to purchase 366,886 shares remained
available for grant thereunder.

Outstanding Equity Awards at Fiscal Year-End

The following table shows information concerning outstanding equity awards as of September 30, 2016 held by the
Named Executive Officers.

Option Awards

Stock Awards

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
(j)

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other Rights
That Have
Not
Vested
(#)
(i)

Market
Value of
Shares or
Units of
Stock
That
Have
Not
Vested
($)
(h)

Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
(g)

Name
(a)

Gary R. Weis

Kenneth A. Minor

Robert M. Lipps

Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
None

None

Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)
(b)
2,000
2,000
5,000
2,000
2,000
2,000
50,000
73,000
41,000
20,754
0

12,000
6,000
14,120
27,500
40,000
22,550
11,415
0

750
1,500
2,500
10,000
6,000
6,000
14,120
27,500
40,000
22,550
11,415
0

Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)
(c)

0
0
0
0
0
0
0
0
20,500
41,510
50,574

0
0
0
0
0
11,275
22,830
27,816

0
0
0
0
0
0
0
0
0
11,275
22,830
27,816

Option
Exercise
Price
($)
(1)
(e)
37.60
8.00
5.00
5.50
6.90
14.83
8.68
7.80
9.45
9.36
7.17

Option
Expiration Date
(1)
(f)
3/15/2017
3/6/2018
11/3/2018
3/5/2019
3/4/2020
3/3/2021
9/30/2021
10/17/2022
10/28/2023
11/10/2024
11/5/2025

15.50
5.26
15.21
9.46
7.80
9.45
9.36
7.17

37.10
15.50
7.50
7.80
5.30
5.26
15.21
9.46
7.80
9.45
9.36
7.17

12/04/2017
12/2/2019
11/24/2020
10/24/2021
10/17/2022
10/28/2023
11/10/2024
11/5/2025

12/07/2016
12/04/2017
03/10/2018
04/16/2018
11/10/2018
12/2/2019
11/24/2020
10/24/2021
10/17/2022
10/28/2023
11/10/2024
11/5/2025

(1) All options were granted under either our stockholder approved Employee Stock Option Plans or the Non-

Qualified Stock Option Plan. All unexercisable options listed in the table become exercisable over a three-year
period in equal annual installments beginning one year from the date of grant.

The following table shows information concerning option exercises in fiscal 2016 by the Named Executive Officers.

Option Exercises and Stock Vested

Option Awards

Stock Awards

Number of Shares
Acquired on
Exercise
(#)

Value Realized
on Exercise
($)

Number of
Shares Acquired
on Vesting
(#)

Value Realized
on Vesting
($)

None

Equity Compensation Plan Information

Plan category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding
options, warrants
and rights

Number of
securities
remaining
available for
future issuance

(a)

(b)

(c)

Equity compensation plans approved
by security holders (1)

Equity compensation plans not
approved by security holders (2)

1,550,264

$ 8.58

373,389

52,558

12.87

—

Total

1,602,822

$ 9.52

373,389

(1) Consists of the 2009 Stock Incentive Plan, Employee Incentive Stock Option Plan and the Directors Stock Option

Plans. For further information regarding these plans, reference is made to Note 5 of the financial statements.

(2) Consists of the Non-Qualified Stock Option Plan. For further information regarding this plan, reference is made

to Note 5 of the financial statements.

Compensation Committee Interlocks and Insider Participation

The members of the Executive Compensation Committee of Sonic's Board of Directors for fiscal 2016 were those named
in the Executive Compensation Committee Report. No member of the Committee was at any time during fiscal 2016 or at
any other time an officer or employee of Sonic Foundry, Inc.

No executive officer of Sonic Foundry, Inc. has served on the board of directors or compensation committee of any other
entity that has or has had one or more executive officers serving as a member of the Board of Directors of Sonic Foundry.

PROPOSAL TWO: ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS

Introduction

The core of Sonic’s executive compensation policies and practices continues to be to pay for performance. Our
executive officers are compensated in a manner consistent with our strategy, competitive practice, sound corporate
governance principles, and stockholder interests and concerns. We believe our compensation program is strongly
aligned with the long-term interests of our stockholders. We urge you to read the Compensation Discussion and
Analysis section of this proxy statement for additional details on our executive compensation, including our
compensation philosophy and objectives and the 2016 compensation of our Named Executive Officers.

Pursuant to the “Say on Pay” rules enacted pursuant to Section 14A of the Securities Exchange Act, we are asking
you to vote on the adoption of the following resolution:

BE IT RESOLVED by the stockholders of Sonic Foundry, Inc., that the stockholders approve the
compensation of Sonic’s Named Executive Officers as disclosed in the proxy statement pursuant to the SEC’s
compensation disclosure rules.

As an advisory vote, this Proposal is non-binding. Although the vote is non-binding, the Board of Directors and the
Compensation Committee value the opinions of our stockholders, and will consider the outcome of the vote when
making future compensation decisions for our Named Executive Officers.

Vote Required

The affirmative vote of a majority of the shares of Sonic common stock cast at the Annual Meeting is required for
approval of this Proposal.

Recommendation of the Board of Directors

The Board of Directors recommends that the stockholders vote FOR Proposal Two.

PROPOSAL THREE: ADVISORY VOTE ON SELECTION OF FREQUENCY FOR ADVISORY VOTE
ON EXECUTIVE COMPENSATION
PROPOSAL

As part of the “Say on Pay”, the Sonic stockholders may indicate, by a non-binding advisory vote, the frequency
desired at which they will have an advisory vote on the compensation paid to Sonic’s Named Executive Officers. (In
other words, how often a proposal similar to this year’s Proposal Two will be included in the matters to be voted on
at the Annual Meeting.) The choices available under the Say on Pay rules are every year, every other year, or every
third year.

Please mark your proxy card to indicate your preference on this Proposal or your abstention if you wish to abstain. If
you fail to indicate your preference, your shares will be treated as though you chose to abstain on this proposal. A
plurality of the votes cast on this Proposal will determine the frequency selected by the stockholders. The Board of
Directors recommends that you select three years as the desired frequency for a stockholder vote on executive
compensation under the Say on Pay rules.

The frequency selected by the stockholders for conducting Say on Pay voting at the Annual Meetings of the
stockholders of the Company is not a binding determination. However, the frequency selected will be given due
consideration by the Company in its discretion.

PROPOSAL FOUR: PROPOSAL TO AMEND THE 2008 SONIC FOUNDRY EMPLOYEE STOCK
PURCHASE PLAN

The Board of Directors believe that it is in the best interest of Sonic and its stockholders to amend the 2008 Employee
Stock Purchase Plan to increase the number of shares of common stock subject to the plan from 150,000 to 200,000. The
2008 Employee Stock Purchase Plan was approved at the annual stockholders meeting held March 6, 2008 and in the
opinion of the Company, enhanced the interest of employees in the continued success of Sonic and served to align the
interests of the employees and stockholders. In addition, the Board of Directors is of the opinion that employee stock
purchase plans provide an aid in recruiting highly qualified and talented employees. At January 10, 2017 there are 19,039
shares available for issuance under the plan and we typically issue approximately 15,000 shares per year.

For these reasons, the Board of Directors authorized the amendment of the 2008 Employee Stock Purchase Plan (the
"Purchase Plan") to increase the number of shares of common stock subject to the plan from 150,000 to 200,000, subject
to the approval of stockholders at the Annual Meeting.

The following is a summary of the material provisions of the Purchase Plan. This summary is qualified in its entirety by
reference to the specific provisions of the Purchase Plan, the full text of which is attached to this Proxy Statement as
Exhibit 1.

Summary of the Purchase Plan

Common Stock Subject To Plan

Subject to adjustment as provided below, 200,000 shares of Common Stock will be available for issuance under the
Purchase Plan. Shares of Common Stock delivered under the Purchase Plan may be authorized and unissued shares or
reacquired shares. As of January 10, 2017, the fair market value of one share of Common Stock was $4.95.

Participation

Any employee who has completed 90 days of employment with Sonic or any Designated Subsidiary of Sonic on the first
day of each offering period will be eligible to participate in the Purchase Plan. A Designated Subsidiary of Sonic is any
majority-owned subsidiary of Sonic that has been designated by the Board of Directors as eligible to participate in the
Purchase Plan with respect to its Employees. An employee of Sonic or a Designated Subsidiary of Sonic who, after the
grant of an option to purchase, would hold common stock and/or hold outstanding options to purchase stock possessing
5% or more of the total combined voting power or value of Sonic will not be eligible to participate. As of January 10,
2017, approximately 135 employees of Sonic would be eligible to participate in the Purchase Plan.

Purchases Under The Purchase Plan

Sonic will continue to make bi-annual offerings to eligible employees of options to purchase shares of Common Stock
under the Purchase Plan on the first trading day of January and July. Each offering period will continue to be for a period
of six months from the date of offering, and each eligible employee as of the date of offering will continue to be entitled
to purchase shares of Common Stock at a purchase price equal to the lower of 85% of the fair market value of Common
Stock on the first trading day of the offering period or 85% of the fair market value of Common Stock on the last trading
day of the offering period.

Payment for shares of Common Stock purchased under the Purchase Plan will continue to be made by authorized payroll
deductions from an employee's Total Wages. Subject to the terms of the Purchase Plan, eligible employees who desire
to participate in the Purchase Plan will designate a stated whole percentage of their total wages, up to a maximum of
10%, to be deducted from their total wages and held by Sonic until the date of purchase. No participant in the Purchase
Plan is permitted to purchase Common Stock under the Purchase Plan if such option would permit his or her rights to
purchase stock under the Purchase Plan to accrue at a rate that exceeds $25,000 of the fair market value of such shares
(determined as of the date of grant of such right), or that exceeds 1,000 shares, for each calendar year during which any
option granted to such individual under any such plan is outstanding at any time.

A participant has none of the rights or privileges of a stockholder of Sonic (including the right to receive dividends) until
the shares purchased under the Purchase Plan are fully paid for and issued.

Withdrawal

An employee may withdraw from the plan if such request is made at least 30 days prior to the end of a contribution
period. Such withdrawal request and the refund of all cash contributions, without interest, will be made as soon as
administratively feasible and all options will be cancelled. Once terminated, an employee will be eligible for reenrollment
in the plan beginning with the contribution period beginning immediately following the next contribution period.

Termination Of Participation

An employee's participation in the Purchase Plan will be terminated when he or she: (1) voluntarily elects to withdraw
his or her entire account; (2) resigns or is discharged from Sonic and all Designated Subsidiaries of Sonic; or (3) dies.

Administration

The Purchase Plan will continue to be administered by the Compensation Committee of the Board or such other
committee established by the Board of Directors of Sonic (“the Committee”).

Modification and Termination

The Committee may terminate the Purchase Plan at any time or make any amendment or modification it deems advisable.

Adjustments

Appropriate and proportionate adjustments will be made in the number and class of shares available under the Purchase
Plan, and to the rights granted under the Purchase Plan and the prices applicable to such rights, to reflect changes in the
outstanding stock that occur because of stock dividends, stock splits, recapitalizations, reorganizations, liquidations, or
other similar events.

Transferability

A participant's rights under the Purchase Plan are exercisable only by such participant and may not be transferred in any
manner.

Federal Income Tax Consequences

Sonic has been advised that under current law the federal income tax consequences to participants and Sonic of options
granted under the Purchase Plan would generally be as set forth in the following summary. This summary is not a
complete analysis of all potential tax consequences relevant to participants and Sonic and does not describe tax
consequences based on particular circumstances. For these reasons, participants should consult with a tax advisor as to
any specific questions regarding the tax consequences of participation in the Purchase Plan.

It is intended that the option to purchase shares of Common Stock granted under the Purchase Plan will constitute an
option issued pursuant to an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended. If shares are purchased under the Purchase Plan, and no disposition of these shares is made
within two years of the date of grant of the option, or within one year after the purchase of the shares, then no income
will be realized by the employee at the time of the transfer of the shares to such employee. When an employee sells or
otherwise disposes of the shares, or in the event of his death (whenever occurring) while owning such shares, there will
be included in his or her gross income, as compensation, an amount equal to the lesser of: (i) the amount by which the
fair market value of the shares on the first trading day of the offering period exceeds the purchase price for the shares, or
(ii) the amount by which the fair market value at the time of disposition or death exceeds the purchase price per share.
23

Any further gain will be treated for tax purposes as long-term capital gain, provided that the employee holds the shares
for the applicable long-term capital gain holding period after the last day of the offering period applicable to such shares.

No deduction will be allowed to Sonic for federal income tax purposes in connection with the grant or exercise of the
option to purchase shares under the Purchase Plan, provided there is no disposition of shares by a participant within either
the two-year or the one-year periods referred to above. If an employee disposes of the shares within either the two-year
or the one-year periods referred to above, he or she will realize ordinary income in the year of disposition in an amount
equal to the difference between the purchase price and the fair market value of the shares at the time of exercise of the
option, and Sonic will be entitled to a deduction in the same amount. Any difference between the amount received upon
such a disposition and the fair market value of the shares at the time of exercise of the option will be capital gain or loss,
as the case may be.

Plan Benefits

Participation in the Purchase Plan is voluntary and each eligible employee will make his or her own election whether and
to what extent to participate in the plan. It is therefore not possible to determine the benefits or amounts that will be
received in the future by individual employees or groups of employees under the Purchase Plan.

Provision to Purchase Additional Shares of Common Stock by Employees and Directors

Apart from the Plan provisions set forth above, the Committee has the power and authority to allow any Employee or
director to receive Shares in lieu of cash compensation or cash fees. In such event, in order to account for the non-
transferability of any Shares acquired thereunder, the Committee may discount the value of such Shares by up to 15%
of the then Fair Market Value of unvested Shares of Common Stock. This portion of the Plan will allow Employees
and directors the opportunity to acquire Shares in accordance with such special terms and conditions as the Committee
may establish from time to time, which terms and conditions may modify the terms and conditions of the Plan set
forth elsewhere in the Plan. Without limiting the authority of the Committee, the special terms and conditions which
may be established with respect to such Employees and directors who elect to participate in this portion of the Plan,
and which need not be the same for all such Employees and directors, include but are not limited to the right to
participate, procedures for elections to participate, the purchase price of any Shares to be acquired, and the maximum
amount of Shares which may be purchased by any participating Employee or director. Any purchases made pursuant
to the provisions of this portion of the Plan shall not be subject to the requirements of Section 423 of the Code and the
federal income tax consequences set forth above shall not apply thereto.

Vote Required

The amendment of the Purchase Plan requires the approval of a majority of the outstanding shares present and entitled
to vote at the meeting.

The Board of Directors unanimously recommends a vote FOR Proposal 4 to amend the Employee Stock Purchase
Plan.

PROPOSAL FIVE: PROPOSAL TO AMEND THE
2009 STOCK INCENTIVE PLAN

We are asking our stockholders to approve an amendment to the 2009 Stock Incentive Plan to increase the number of
shares of common stock subject to the plan by 900,000 at the Annual Meeting (in this proposal, the “Amended 2009
Plan”). On January 25, 2017, the Board approved the Amended 2009 Plan, subject to stockholder approval.
The purpose of the Amended 2009 Plan is to promote the interests of the Company and its stockholders by
strengthening the Company’s ability to attract and retain experienced and knowledgeable employees and to furnish
additional incentives to those employees upon whose judgment, initiative and efforts the Company largely depends.
The 2009 Plan provides for the grant of up to 1,800,000 stock options. As of September 30, 2016, the Company had

granted options for 1,613,111 shares and had forfeitures totaling 210,143, leaving a balance of 397,032. During the
quarter ended December 31, 2016, the Company granted options for 300,270 shares under the 2009 Plan and cancelled
2,974 options, leaving a balance at December 31, 2016 of 99,736. We recommend approval of the Amended 2009
Plan to provide for an aggregate number of shares that may be subject to awards under the Amended 2009 Plan of
2,700,000.

We presently anticipate that the number of Available Shares under the Amended 2009 Plan will be sufficient for
issuance of awards under our equity compensation for three years. Except with respect to the number of shares of
common stock subject to equity awards, there are no material differences between the prior 2009 Stock Incentive Plan
and the Amended 2009 Plan.

Why You Should Vote for the Amended 2009 Plan

There are a Limited Number of Options Remaining to be Granted Under the 2009 Plan

Equity awards are currently made to officers and employees exclusively from our 2009 Stock Incentive Plan. As of
December 31, 2016, we had a balance of 99,736 options remaining to be granted under our 2009 Stock Incentive Plan.
We currently grant approximately 300,000 options per year. If we do not adopt the Amended 2009 Plan we will be
unable to issue a significant number of equity awards unless our stockholders approve a new stock plan. We anticipate
that we will have difficulty attracting, retaining, and motivating officers and employees if we were unable to make
equity awards to them. In addition, we believe that equity awards are an effective compensation vehicle because they
offer significant potential value with a smaller impact on current income and cash flow. Therefore, we are asking our
stockholders to approve the Amended 2009 Plan.

Equity Incentives are an Important Part of our Compensation Philosophy

Approval of the Amended 2009 Plan is critical to our ongoing effort to create stockholder value. As discussed in the
Compensation Discussion and Analysis earlier in this Proxy Statement, equity-based incentives are an integral part of
our compensation program. We grant stock options to substantially all of our employees. We believe we must continue
to offer a competitive equity compensation plan in order to attract, retain and motivate the talent necessary to
successfully grow the Company.

The Amended 2009 Plan Combines Compensation and Governance Best Practices

Some of the key features of the Plans that are designed to protect our stockholders’ interest and to reflect corporate
governance best practices are as follows:

•

Continued broad-based eligibility for equity awards. We grant equity awards to
substantially all of our employees. By doing so, we link employee interests with stockholder
interests throughout the organization and motivate our employees to act as owners of the
Company.
Reasonable share counting provisions. In general, when awards granted under the Plans
expire or are cancelled, the shares reserved for those awards will be returned to the share
reserve and be available for future issuance under the Plans. However, shares of common
stock received from the exercise of stock options or withheld for taxes will not be returned
to the share reserve.

Option exercise price. Under the Amended 2009 Plan, the exercise price per share of stock
options may not be less than 100% of the fair market value on the date of grant.
Repricing is not allowed. Under the Amended 2009 Plan, repricing of stock options
(including reduction in the exercise price of stock options or replacement of an award with
cash or another award type) is prohibited without prior stockholder approval.

•

Limitations on Amendments. The Amended 2009 Plan requires stockholder approval for
material amendments to the Plan, including (i) a material increase in the benefits accrued to
participants under the Plan, (ii) a material increase in the number of securities that may be
issued under the Plan, (iii) a material expansion of the class of individuals eligible to
participate in the Plan, or (iv) an extension to the term of the Plan.

Description of the Amended 2009 Plan

A description of the principal features of the Amended 2009 Plan is set forth below. The summary is qualified in its
entirety by the detailed provisions of the Amended 2009 Plan, a copy of which is attached to this Proxy Statement as
Exhibit 2.

Purpose. The Amended 2009 Plan is intended to provide incentives to the Company’s officers, directors, and
employees by providing them with opportunities to acquire a direct proprietary interest in the operations and future
success of the Company.

Effective Date. The Amended 2009 Plan will become effective on the date on which it is approved by the stockholders
(the “Effective Date”).

Types of Awards. The Amended 2009 Plan provides for the following types of awards: (i) incentive stock options,
(ii) non-qualified stock options, (iii) restricted stock awards, (iv) restricted stock units, (v) performance stock awards,
(vi) and other stock-based awards (collectively, “Awards”).

Administration. Our Board, or a committee of the Board consisting of at least two members of the Board, will continue
to administer the Amended 2009 Plan. The Board may delegate responsibility for administration of the Plan to
different committees, subject to any limitations the Board deems appropriate. The Board, or any two member
committee of the Board (hereinafter, the “Committee”), has full authority to administer the Plan, including authority
to interpret and construe any relevant provisions of the Plan, to adopt rules and regulations that it deems necessary, to
determine which individuals are eligible to participate and/or receive Awards under the Plan, to determine the amount
and/or number of shares subject to the Award, and to determine the terms of the Award (which need not be identical).
The Committee may delegate its authority to grant Awards under the Amended 2009 Plan to one or more of the
Company’s executive officers to the extent permitted by applicable law, provided the grantees are not executive
officers or directors of the Company.

The Committee has the power to approve the form of Award agreements, and to amend or adopt sub-plans to permit
employees who reside outside the United States to participate in the Amended 2009 Plan. The Committee does not
have authority under the Amended 2009 Plan to reduce the exercise or purchase price of any outstanding Award or to
cancel and re-grant an outstanding Award if such action would reduce the exercise or purchase price of the Award, in
either case, absent prior approval of the stockholders for such an action.

The Board has delegated administration of the 2009 Stock Incentive Plan, and any amendments thereto, including the
Amended 2009 Plan to the Executive Compensation Committee.

Stock Subject to the Amended 2009 Plan. The common stock issued or to be issued under the Amended 2009 Plan
consists of authorized but unissued shares or issued shares that have been reacquired by the Company in any manner.
Subject to adjustment made in connection with a recapitalization, change in control and certain other events set forth
in the Amended 2009 Plan, the maximum number of shares subject to Awards which may be issued pursuant to the
Amended 2009 Plan will be 2,700,000 shares of common stock. In addition, if any Award granted under the Amended
2009 Plan is not exercised or is forfeited, lapses or expires, or otherwise terminates without delivery of any common
stock subject thereto, the shares subject to such Award will again be available for future grants of Awards under the
Plan. The number of shares of common stock available for issuance under the Amended 2009 Plan will not be
increased by any shares tendered or Awards surrendered in connection with the purchase of shares of common stock
upon exercise of an option or any shares of common stock deducted or forfeited from an Award in connection with
our withholding obligations.

Eligibility and Limitations on Grants. Awards under the Amended 2009 Plan may be made to employees, officers,
directors and consultants of the Company or any present or future parent or subsidiary of the Company or other
business venture in which the Company has a substantial interest (“Related Entities”). Awards made to non-employee
directors under the Amended 2009 Plan may only be granted and administered by a committee meeting the
independence requirements of the exchange on which the Company’s common stock is listed.

Terms of Options. The Amended 2009 Plan permits grants of stock options intended to qualify as incentive stock
options (“ISOs”) under Section 422 of the Internal Revenue Code (the “Code”) and stock options that do not qualify
as ISOs (“non-qualified” options). Options granted under the Amended 2009 Plan will be non-qualified options if they
fail to qualify as ISOs or exceed the annual limit on ISOs. Only employees of the Company may receive ISOs. Non-
qualified options may be granted to any persons eligible to receive ISOs and to directors and consultants of the
Company. The exercise price of a stock option may not be less than 100% of the fair market value of the stock subject
to the option on the date of grant (for an incentive stock option, 110% if the optionee is a 10% holder of our common
stock). The term of option will not be longer than ten years (or, in the case of a 10% owner of our common stock, five
years if the option is an ISO) and may be subject to restrictions on transfer.

Options may be exercised in whole or in part with written or electronic notice to the Company’s delegate for receipt
of such notice, accompanied by full payment of the exercise price for the number of shares being purchased. Subject
to the discretion of the Committee, the exercise price may be paid in cash, by check, pursuant to a broker-assisted
cashless exercise, by delivery of other shares of common stock, by a “net exercise arrangement”, or any other form of
legal consideration deemed acceptable by the Committee.

Options generally terminate ninety days after termination of an optionee’s service or as set forth in the option
agreement. The optionee may have longer to exercise when termination is due to disability or death. No option may
be exercised beyond the expiration of its term. The ability to exercise options may be accelerated by the Committee,
subject to compliance with the provisions of the Amended 2009 Plan.

Terms of Restricted Stock. The Amended 2009 Plan permits grants of restricted stock entitling recipients to acquire
shares of the Company’s common stock, subject to the right of the Company to require forfeiture of such shares in the
event that conditions specified by the Committee in the applicable award agreement are not satisfied. Subject to the
provisions of the Amended 2009 Plan, the Committee will determine the terms and conditions of any restricted stock
award, including the grant date and vesting schedule for the award.

Terms of Restricted Stock Units. The Amended 2009 Plan permits awards of restricted stock units entitling recipients
to acquire shares of the Company’s common stock (or the cash equivalent) in the future. Subject to the provisions of
the Amended 2009 Plan, the Committee will determine the terms and conditions of any restricted stock unit award,
including the grant date and vesting schedule for the award.

Other Stock-Based Awards. The Amended 2009 Plan permits awards of shares of the Company’s common stock, and
other awards that are valued by reference to, or are otherwise based on, shares of the Company’s common stock or
property, including awards entitling recipients to receive shares of the Company’s common stock in the future. Such
awards may also be available as a form of payment in the settlement of other awards granted under the Amended 2009
Plan or as payment in lieu of compensation to which a participant is otherwise entitled. Subject to the discretion of the
Committee, the awards may be paid in shares of common stock or cash. Subject to the provisions of the Amended
2009 Plan, the Committee will determine the terms and conditions of such other stock-based awards, including any
purchase price that may be applicable to the award.

Performance Awards. Under the Amended 2009 Plan, certain restricted stock awards, restricted stock unit awards and
other stock-based awards may be subject to the achievement of performance goals. For performance awards that are
intended to qualify as performance-based compensation under Section 162(m) of the Code, the vesting and/or delivery
of shares for such awards will occur upon achievement of one or more of the following objective performance
measures, as determined by the Committee in its discretion: earnings per share, return on average equity or average
assets in relation to a peer group of companies designated by the Committee, earnings, earnings growth, earnings
before interest, taxes and amortization (EBITA), operating income, gross or product margins, revenues, expenses,
stock price, market share, reductions in non-performing assets, return on sales, assets, equity or investment, regulatory

compliance, satisfactory internal or external audits, improvement of financial ratings, achievement of balance sheet or
income statement objectives, net cash provided from continuing operations, stock price appreciation, total shareholder
return, cost control, strategic initiatives, net operating profit after tax, pre-tax or after-tax income, cash flow, or a
combination of one or more of these measures, which may be absolute in their terms or measured against or in
relationship to other companies comparably, similarly or otherwise situated. These performance measures may be
adjusted to exclude the effect of various events that may occur during the performance period, including: extraordinary
items and any other unusual or non-recurring items; discontinued operations; gains or losses on the dispositions of
discontinued operations; the cumulative effects of changes in accounting principles; the writedown of any asset; and
charges for restructuring and rationalization programs. In addition, such performance measures:

•

may vary by participant and may be different for different performance awards;

may be particular to a participant or the department, branch, line of business, subsidiary or
other unit in which the participant works and may cover such period as may be specified by
the Committee; and
shall be set by the Committee within the time period prescribed by, and shall otherwise
comply with the requirements of Section 162(m) of the Code.

Notwithstanding any other provision of the Plan, the Committee may adjust downwards, but not upwards, the cash or
number of shares payable pursuant to performance awards intended to qualify as performance-based compensation
under 162(m) of the Code, and the Committee may not waive the achievement of the applicable performance measures
except in the case of the death or disability of the participant or a change in control of the Company.

Awards that are not intended to qualify as performance-based compensation under 162(m) of the Code may be based
on these or such other performance measures as the Committee may determine.

Adjustments and Recapitalization. In the event that any change is made to the shares of common stock issuable under
the Amended 2009 Plan, whether through merger, consolidation, stock split, stock dividend, extraordinary cash
dividend, recapitalization, combination of shares, exchange of shares, or other similar event, then appropriate
adjustments will be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number
and/or class of securities and, if applicable, price per share in effect under each outstanding Award under the Plan,
and (iii) the maximum number of shares issuable to one individual in a calendar year under the Plan.

Change in Control Provisions. In the event of a change in control of the Company, outstanding Awards may be
assumed, continued or substituted by the successor corporation. If the successor corporation does not assume, continue
or substitute such Awards, then all Awards held by a participant, immediately prior to the effectiveness of the change
in control, will become fully vested and exercisable.

Notwithstanding the foregoing, in the event of a change in control, all outstanding Awards held by the participant will,
immediately prior to the effectiveness of the change in control, become vested and exercisable as to an additional
number of shares equal to the number of shares that would have become vested and exercisable on the date twelve
months after the effectiveness of the change in control. If the participant has been employed by the Company for less
than twelve months immediately prior to the change in control, the number of vested and exercisable shares will be
increased by the number of shares that would have become vested and exercisable on the date six months after the
consummation of the change in control. In addition, if, within six months following the change in control, the successor
corporation terminates the employment of a participant without cause, all Awards held by the participant will become
fully vested and exercisable.
Under the Amended 2009 Plan, a “change in control” generally means any of the following events: (i) a person (as
defined by Sections 13(d) and 14(d) of the Exchange Act, as amended) becomes the beneficial owner of securities
representing 35% or more of the combined voting power of the Company’s then outstanding securities; (ii) the
Company’s incumbent directors cease to constitute a majority of the Board; (iii) a consummated merger or
consolidation of the Company with any other corporation; or (iv) the stockholders approve a plan of liquidation or
dissolution or an agreement for the sale of all or substantially all of the Company’s assets.

Term and Amendment of the Plan. The Amended 2009 Plan is scheduled to expire ten years from the Effective Date
of the 2009 Stock Incentive Plan. The Board may amend or modify the Amended 2009 Plan in any respect to the
extent the amendment or modification does not adversely affect a holder’s rights under any outstanding Award without
the holder’s consent; however, stockholder approval is required for any amendment that (i) materially increases the
benefits accrued to participants under the Plan, (ii) materially increases the number of securities which may be issued
under the Plan, (iii) materially expands the class of individuals eligible to participate in the Plan, or (iv) extends the
term of the Plan. In addition, certain amendments may, as determined by the Board in its discretion, require
stockholder approval pursuant to applicable laws, rules or regulations, including any applicable exchange on which
our common stock is listed.

Tax Withholding. Participants in the Amended 2009 Plan are responsible for the payment of any foreign, federal or
state tax that we are required by law to withhold upon any exercise or vesting of an Award. Subject to the discretion
of the Committee, participants may satisfy such tax obligations by delivery of shares of common stock, including
shares retained from the Award creating the tax obligations, valued at their fair market value. The Company may, to
the extent permitted by law, deduct such tax obligations from any payment of any kind otherwise due to the participant.

Federal Income Tax Consequences

The following is a summary of the principal U.S. federal income tax consequences to participants and the Company
with respect to participation in the Amended 2009 Plan. It does not describe all federal tax consequences under the
Amended 2009 Plan, nor does it discuss state, local or foreign tax consequences.

Incentive Stock Options. An optionee who is granted an incentive stock option does not recognize taxable income at
the time the option is granted or upon its exercise, although the exercise is an adjustment item for alternative minimum
tax purposes and may subject the optionee to the alternative minimum tax. Upon a disposition of the shares more than
two years after grant of the option and more than one year after the exercise of the option, any gain or loss is treated
as long-term capital gain or loss. If these holding periods are not satisfied, the optionee recognizes ordinary income at
the time of disposition equal to the difference between the exercise price and the lower of (a) the fair market value of
the shares at the date of the option exercise or (b) the sale price of the shares. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated as ordinary income is treated as long-term or short-
term capital gain or loss, depending on the holding period. Unless limited by Section 162(m) of the Code, we are
generally entitled to a deduction in the same amount as the ordinary income recognized by the optionee.

Nonstatutory Stock Options. No taxable income is recognized by an optionee upon the grant of a nonstatutory stock
option. Upon exercise, the optionee will recognize ordinary income equal to the excess of the fair market value of the
purchased shares on the exercise date over the exercise price paid for those shares. Assuming we comply with
Section 162(m) of the Code, we will be entitled to an income tax deduction in the tax year in which the optionee
recognizes the ordinary income. When the optionee disposes of shares granted as a nonstatutory stock option, any
difference between the sale price and the optionee’s exercise price, to the extent not recognized as taxable income as
provided above, is treated as long-term or short-term capital gain or loss, depending on the holding period.
Restricted Stock. A grantee who is awarded restricted stock will not recognize any taxable income for federal income
tax purposes in the year of the award, provided that the shares of common stock are subject to restrictions (that is, the
restricted stock is nontransferable and subject to a substantial risk of forfeiture). However, the grantee may elect under
Section 83(b) of the Code to recognize compensation in the year of the award in an amount equal to the fair market
value of the common stock on the date of the award (less the purchase price, if any), determined without regard to the
restrictions. If the grantee does not make such a Section 83(b) election, the fair market value of the common stock on
the date the restrictions lapse (less the purchase price, if any) will be treated as compensation income to the grantee
and will be taxable in the year the restrictions lapse and dividends paid while common stock is subject to restrictions
will be subject to withholding taxes. If we comply with the restrictions of Section 162(m) of the Code, we will be
entitled to a tax deduction in the same amount and generally at the same time as the grantee recognizes ordinary
income.

Restricted Stock Units. There are no immediate tax consequences of receiving an award of restricted stock units under
the Amended 2009 Plan. A grantee who is awarded restricted stock units will be required to recognize ordinary income
in an amount equal to the fair market value of shares issued to such grantee at the end of the restriction period or, if
later, the payment date. If we comply with the restrictions of Section 162(m) of the Code, we will be entitled to a tax
deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Performance Awards. The award of a performance award will have no federal income tax consequences for us or the
grantee. The payment of the award is taxable to a grantee as ordinary income. If we comply with the restrictions of
Section 162(m) of the Code, we will be entitled to a tax deduction in the same amount and generally at the same time
as the grantee recognizes ordinary income.

Section 280(G). To the extent payments that are contingent on a change in control are determined to exceed certain
Code limitations, they may be subject to a 20% nondeductible excise tax and our deduction with respect to the
associated compensation expense may be disallowed in whole or in part.

Section 409A. The Company intends for awards granted under the Amended 2009 Plan to comply with Section 409A
of the Code.

New Plan Benefits

Because the Amended 2009 Plan will not be effective unless and until it is approved by the stockholders, no Awards
will be granted under the 2009 Plan in excess of the current share limit until approved. The participants and types of
Awards under the Amended 2009 Plan are subject to the discretion of the Committee and, as a result, the benefits or
amounts that will be received by any participant or groups of participants if the Amended 2009 Plan is approved are
currently not determinable. As of January 10, 2017 there were three executive officers, four non-employee directors,
and approximately 135 employees who are eligible to participate in the Amended 2009 Plan. As of the Record Date,
the closing price per share of our common stock was $4.95.

General

The amendment of the 2009 Stock Incentive Plan requires the approval of a majority of the outstanding shares entitled
to vote at the Annual Meeting.

Recommendation of the Board of Directors

The Board of Directors unanimously recommends a vote FOR proposal 5, to amend the 2009 Stock Incentive Plan.

PROPOSAL SIX: PROPOSAL TO AMEND THE
2008 SONIC FOUNDRY NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

The Board of Directors recommends amending the 2008 Sonic Foundry Non-Employee Directors Stock Option Plan
(the “2008 Plan”) by increasing the shares that may be issued pursuant to the plan from 100,000 to 150,000 (the
“Amended Directors Stock Option Plan”).

The purpose of the Amended Directors Stock Option Plan is to promote the interests of Sonic and its stockholders by
strengthening Sonic’s ability to attract and retain experienced and knowledgeable non-employee directors and to
encourage them to acquire an increased proprietary interest in Sonic. The Amended Directors Stock Option Plan is
intended to increase the number of shares pursuant to the plan in order to provide sufficient shares for further grants.
The 2008 Plan provided for the grant of up to 100,000 stock options, of which 101,500 were granted under the plan
and 8,000 expired, leaving a balance of 6,500 available for grant.

The Amended Directors Stock Option Plan will continue to be administered by the Board of Directors. The Amended
Directors Stock Option Plan will continue to provide for a grant of an option to each non-employee director 1) upon
his initial appointment to the Board, 2) to each non- employee director who is reelected or who is continuing in offices
as a member of the Board after the adjournment of each annual meeting and 3) in the Board’s discretion, other grants
to one or more Non-Employee Directors from time to time. Each option grant pursuant to 1) or 2) above is effective
to purchase 2,000 shares of Common Stock at an exercise price equal to the fair market value on the date of grant.
Other option grants will be in amounts as determined by the Board.

Common Stock that may be issued under the Amended Directors Stock Option Plan pursuant to options shall not
exceed in the aggregate One Hundred Thousand (150,000) shares of Common Stock. Except with respect to the
number of shares of common stock subject to issuance, there are no material differences between the 2008 Plan and
the Amended Directors Stock Option Plan.

Summary of the Amended Directors Stock Option Plan

The following is a summary of the material provisions of the Amended Directors Stock Option Plan. This summary
is qualified in its entirety by reference to the specific provisions of the Amended Directors Stock Option Plan, the full
text of which is attached to this Proxy Statement as Exhibit 3.

All options granted under the Amended Directors Stock Option Plan are non- statutory — not intended to qualify
under Section 422 of the Code, as amended. The federal income tax consequences are similar to those described above
with respect to the grant of a non-qualified stock option.

Payment of the option exercise price may be in cash, by delivery of previously owned Common Stock, by any other
legally permissible means acceptable to the Board at the time of the grant of the option (including cashless exercise,
subject to applicable legal restrictions), or by a combination of such means.

If an optionee ceases to be a director before an option vests, the option will terminate, other than in the case of death,
disability or resignation required as a condition of a change in control, in which case all outstanding options granted
as of the date of termination shall vest and immediately become exercisable. Each option expires ten years from the
date of its grant or earlier in certain circumstances such as death or disability. Options are not transferable at any time
except in certain circumstances such as transfers to family members. Options that are forfeited or terminated will again
be available for grant. Shares may be authorized but unissued, currently held or reacquired shares. The Board of
Directors may amend, terminate or suspend the Plan at any time.

Plan Benefits

Under the 2008 Plan, each of the three non-employee directors received options to purchase 2,000 shares of Common
Stock upon initial appointment to the Board and each non-employee director has received and pursuant to the
Amended Directors Stock Option Plan, will continue to receive options to purchase an additional 2,000 shares of
Common Stock after the adjournment of each annual stockholders meeting. However, no dollar value is assigned to
the options because their exercise price is the fair market value of the common stock on the date of grant.

General

The amendment of the 2008 Plan requires the approval of a majority of the outstanding shares entitled to vote at the
Annual Meeting.

The Board of Directors unanimously recommends a vote FOR Proposal 6, amending the 2008 Plan.

PROPOSAL SEVEN: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors, upon the recommendation of the Audit Committee, has appointed the firm of Baker Tilly
Virchow Krause LLP (“BT”) as independent auditors to audit our financial statements for the year ending September 30,
2017, and has further directed that management submit the selection of independent public accountants for ratification
by the stockholders at the annual meeting. Representatives of BT are expected to be present at the annual meeting to
respond to stockholders' questions and to have the opportunity to make any statements they consider appropriate.

Stockholder ratification of the selection of BT as our independent auditors is not required by our Bylaws or otherwise.
However, the Board is submitting the selection of BT to the stockholders for ratification as a matter of good corporate
practice. If the stockholders fail to ratify the selection, the Board and the Audit Committee will reconsider whether or
not to retain that firm. Even if the selection is ratified, the Board and the Audit Committee in their discretion may direct
the appointment of a different independent accounting firm at any time during the year if they determine that such a
change would be in the best interests of Sonic and its stockholders.

The ratification of the appointment of BT as independent public accountants requires the approval of a majority of the
votes cast at the Annual Meeting.

Recommendation of Board of Directors

The Board of Directors unanimously recommends a vote FOR proposal 7 ratifying the appointment of BT as
independent auditors for Sonic Foundry.

Relations with Independent Auditors

The Company, upon the recommendation of its audit committee has selected Baker Tilly Virchow Krause, LLP (“BT”)
as its independent auditor for the fiscal year ending September 30, 2017.

Audit services performed by BT for Fiscal 2016 and 2015 consisted of the examination of our financial statements,
review of fiscal quarter results, and services related to filings with the Securities and Exchange Commission (SEC). We
also retained BT to perform certain audit related services associated with the audit of our benefit plan. All fees paid to
BT were reviewed, considered for independence and upon determination that such payments were compatible with
maintaining such auditors’ independence, approved by Sonic’s audit committee prior to performance.

Fiscal Years 2016 and 2015 Audit Firm Fee Summary

During fiscal years 2016 and 2015, we retained our principal accountant, Baker Tilly Virchow Krause LLP to provide
services in the following categories and amounts:

Audit Fees
Audit Related
Tax Fees

Years Ended September 30,
2016
2015
$188,970
$191,207
12,400
12,300
—
—

All of the services described above were approved by Sonic’s audit committee prior to performance. The Audit
Committee may, in its discretion, delegate to one or more of its members the authority to pre-approve any audit or non-
audit services to be performed by the independent auditors, provided that any such approvals are presented to the Audit
Committee at its next scheduled meeting. The audit committee has determined that the payments made to its independent
accountants for these services are compatible with maintaining such auditors’ independence.

REPORT OF THE AUDIT COMMITTEE 1

The Audit Committee's role includes the oversight of our financial, accounting and reporting processes, our system of
internal accounting and financial controls and our compliance with related legal and regulatory requirements, the
appointment, engagement, termination and oversight of our independent auditors, including conducting a review of their
independence, reviewing and approving the planned scope of our annual audit, overseeing the independent auditors' audit
work, reviewing and pre-approving any audit and non-audit services that may be performed by them, reviewing with
management and our independent auditors the adequacy of our internal financial controls, and reviewing our critical
accounting policies and the application of accounting principles. The Audit Committee held five meetings during fiscal
2016.

Messrs. Kleinman, Burish and Wiegand meet the rules of the SEC for audit committee membership and are "independent"
as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and under Nasdaq listing standards. A
copy of the Audit Committee Charter is available on Sonic’s website.

As set forth in the Audit Committee Charter, management of Sonic is responsible for the preparation, presentation and
integrity of Sonic’s financial statements and for the effectiveness of internal control over financial reporting.
Management and the accounting department are responsible for maintaining Sonic’s accounting and financial reporting
principles and internal controls and procedures designed to assure compliance with accounting standards and applicable
laws and regulations. The independent auditors are responsible for auditing Sonic’s financial statements and expressing
an opinion as to their conformity with generally accepted accounting principles.

We have reviewed and discussed with our independent auditors, BT, matters required to be discussed pursuant to
Auditing Standard No. 16 (Communications with Audit Committees) as promulgated by the Public Company Accounting
Oversight Board. We have received from the auditors a formal written statement describing the relationships between
the auditor and Sonic that might bear on the auditor's independence consistent with applicable requirements of the Public
Company Accounting Oversight Board. We have discussed with BT matters relating to its independence, including a
review of audit related fees, and considered the compatibility of non-audit services with the auditors' independence.

The members of the Audit Committee are not full-time employees of Sonic and are not performing the functions of
auditors or accountants. As such, it is not the duty or responsibility of the Audit Committee or its members to conduct
“field work” or other types of auditing or accounting reviews or procedures or to set auditor independence standards.
Members of the Committee necessarily rely on the information provided to them by management and the independent
accountants. Accordingly, the Audit Committee’s considerations and discussions referred to above do not assure that the
audit of Sonic’s financial statements has been carried out in accordance with generally accepted auditing standards, that
the financial statements are presented in accordance with generally accepted accounting principles or that Sonic’s auditors
are in fact “independent”.

We have reviewed and discussed with management and BT the audited financial statements. We discussed with BT the
overall scope and plans of their audit. We met with BT, with and without management present, to discuss results of their
examination and the overall quality of Sonic’s financial reporting.

1 The material in this report is not “soliciting material”, is not deemed filed with the SEC, and is not to be incorporated
by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language
in such filing.

Based on the reviews and discussions referred to above and our review of Sonic’s audited financial statements for fiscal
2016, we recommended to the Board that the audited financial statements be included in the Annual Report on Form 10-
K for the fiscal year ended September 30, 2016, for filing with the SEC effective December 22, 2016.
Respectfully submitted,

AUDIT COMMITTEE
David C. Kleinman, Chair
Mark D. Burish
Brian T. Wiegand

CERTAIN TRANSACTIONS

Frederick H. Kopko, Jr., a director and stockholder of Sonic Foundry, is a partner in McBreen & Kopko. Pursuant to
the 1997 Directors' Stock Option Plan, Mr. Kopko has been granted options to purchase 2,000 shares of Common
Stock at an exercise price of $37.60 and was granted options to purchase 18,000 shares of Common Stock at exercise
prices ranging from $5.50 to $14.83 pursuant to the 2008 Non-Employee Directors Plan. During fiscal 2016, we paid
the Chicago law firm of McBreen & Kopko certain compensation for legal services rendered subject to standard billing
rates.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires Sonic's officers and directors, and persons who own
more than ten percent of the Common Stock, to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant to Rule 16a-
3 under the Exchange Act during our most recent fiscal year, to Sonic Foundry's knowledge, all reporting persons
complied with all applicable filing requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended.

Code of Ethics

Sonic has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K) that applies to its principal executive,
financial and accounting officers. Sonic Foundry will provide a copy of its code of ethics, without charge, to any
investor who requests it. Requests should be addressed in writing to Mr. Kenneth Minor, Corporate Secretary, 222
West Washington Ave, Madison, WI 53703.

COMMUNICATIONS WITH THE BOARD OF DIRECTORS

Any stockholder who desires to contact our Board or specific members of our Board may do so electronically by
sending an email to the following address: directors@sonicfoundry.com. Alternatively, a stockholder can contact our
Board or specific members of our Board by writing to: Secretary, Sonic Foundry Incorporated, 222 West Washington
Avenue, Madison, WI 53703.

Each communication received by the Secretary will be promptly forwarded to the specified party following normal
business procedures. The communication will not be opened but rather will be delivered unopened to the intended
recipient. In the case of communications to the Board or any group or committee of Directors, the Secretary will open
the communication and will make sufficient copies of the contents to send to each Director who is a member of the
group or committee to which the envelope is addressed.

STOCKHOLDER PROPOSALS FOR 2018 ANNUAL MEETING OF STOCKHOLDERS

Requirements for Stockholder Proposals to be Considered for Inclusion in Sonic's Proxy Materials.
Stockholders of Sonic may submit proposals on matters appropriate for stockholder action at meetings of Sonic's
stockholders in accordance with Rule 14a-8 promulgated under the Securities Exchange Act of 1934. For such
proposals to be included in Sonic's proxy materials relating to its 2018 Annual Meeting of Stockholders, all applicable
requirements of Rule 14a-8 must be satisfied and such proposals must be received by Sonic no later than the
anniversary date of 120 days prior to the date of this proxy statement (September 29, 2017). Such proposals should be
delivered to Corporate Secretary, Sonic Foundry, Inc., 222 West Washington Avenue, Madison, Wisconsin 53703.

Requirements for Stockholders Proposals to be Brought Before the Annual Meeting.
Sonic's bylaws provide that, except in the case of proposals made in accordance with Rule 14a-8, for stockholder
nominations to the Board of Directors or other proposals to be considered at an annual meeting of stockholders, the
stockholder must have given timely notice thereof in writing to the Secretary not less than ninety nor more than one
hundred twenty calendar days prior to the anniversary of the date on which Sonic held its immediately preceding
annual meeting of stockholders. To be timely for the 2018 Annual Meeting of Stockholders, a stockholder's notice
must be delivered or mailed to and received by Sonic's Secretary at the principal executive offices of Sonic between
November 7, 2017 and December 7, 2017. However, in the event that the annual meeting is advanced by more than
30 days or delayed by more than 60 days from March 7, 2018, to be timely, notice by the stockholders must be so
received not earlier than the close of business on the 120th day prior to such annual meeting and not later than the
close of business on the later of the 90th day prior to such annual meeting or the tenth calendar day following the date
on which public announcement of the date of the annual meeting is first made. In no event will the public
announcement of an adjournment of an annual meeting of stockholders commence a new time period for the giving
of a stockholder's notice as provided above. A stockholder's notice to Sonic's Secretary must set forth the information
required by Sonic's bylaws with respect to each matter the stockholder proposes to bring before the annual meeting.

In addition, the proxy solicited by the Board of Directors for the 2018 Annual Meeting of Stockholders will confer
discretionary authority to vote on (i) any proposal presented by a stockholder at that meeting for which Sonic has not
been provided with notice on or prior to the anniversary date of 45 days prior to the date of this proxy statement
(December 13, 2017) and (ii) any other proposal, if the 2018 proxy statement briefly describes the matter and how
management's proxy holders intend to vote on it, and if the stockholder does not comply with the requirements of Rule
14a-4(c)(2) under the Securities Exchange Act of 1934. Notwithstanding the above, all stockholder proposals must
comply with the provisions of Sonic’s bylaws.

OTHER MATTERS

The Board of Directors has at this time no knowledge of any matters to be brought before this year's Annual Meeting
other than those referred to above. However, if any other matters properly come before this year's Annual Meeting, it is
the intention of the persons named in the proxy to vote such proxy in accordance with their judgment on such matters.

GENERAL

A copy of our Annual Report to Stockholders for the fiscal year ended September 30, 2016 is being mailed, together with
this Proxy Statement, to each stockholder. Additional copies of such Annual Report and of the Notice of Annual Meeting,
this Proxy Statement and the accompanying proxy may be obtained from us. We will, upon request, reimburse brokers,
banks and other nominees, for costs incurred by them in forwarding proxy material and the Annual Report to beneficial
owners of Common Stock. In addition, directors, officers and regular employees of Sonic and its subsidiaries, at no
additional compensation, may solicit proxies by telephone, telegram or in person. All expenses in connection with
soliciting management proxies for this year's Annual Meeting, including the cost of preparing, assembling and mailing
the Notice of Annual Meeting, this Proxy Statement and the accompanying proxy are to be paid by Sonic.

Sonic will provide without charge (except for exhibits) to any record or beneficial owner of its securities, on written
request, a copy of Sonic's Annual Report on Form 10-K filed with the Securities and Exchange Commission for
the fiscal year ended September 30, 2016, including the financial statements and schedules thereto. Exhibits to
said report, and exhibits to this proxy statement, will be provided upon payment of fees limited to Sonic's
reasonable expenses in furnishing such exhibits. Written requests should be directed to Investor Relations, 222
West Washington Avenue, Madison, Wisconsin 53703. We also make available, free of charge, at the “Investor
Information” section of our website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our
current reports on Form 8-K, our proxy statement, amendments and exhibits to such reports as soon as
practicable after the filing of such reports, exhibits and proxy statements with the Securities and Exchange
Commission.

In order to assure the presence of the necessary quorum at this year's Annual Meeting, and to save Sonic the expense of
further mailings, please date, sign and mail the enclosed proxy promptly in the envelope provided. No postage is
required if mailed within the United States. The signing of a proxy will not prevent a stockholder of record from voting
in person at the meeting.

By Order of the Board of Directors,

January 26, 2017

Kenneth A. Minor, Secretary

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

FORM 10-K

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal period ended September 30, 2016
OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-30407

SONIC FOUNDRY, INC.
(Exact name of registrant as specified in its charter)

MARYLAND
(State or other jurisdiction of incorporation or organization)

39-1783372
(I.R.S. Employer Identification No.)

222 W. Washington Ave, Madison, WI 53703
(Address of principal executive offices)

(608) 443-1600
(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common stock par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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  No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes  No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Non-accelerated filer

 Accelerated filer
 Smaller reporting company




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 

The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s
most recently completed second fiscal quarter was approximately $25,112,000.

The number of shares outstanding of the registrant’s common equity was 4,411,559 as of December 9, 2016.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference into Part III. A definitive
Proxy Statement pursuant to Regulation 14A will be filed with the Commission no later than January 28, 2017.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

TABLE OF CONTENTS

PART I

PART II

Business

Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures

Properties
Legal Proceedings

Selected Consolidated Financial Data

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data:
Item 8.
Report of Baker Tilly Virchow Krause, LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information

PART III

Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.

Principal Accounting Fees and Services

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

This annual report on Form 10-K (this "Report") contains statements that are considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and its rules and regulations (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended, and its rules and regulations (the "Exchange Act"). When used in this Report, the words
“anticipate”, “expect”, “plan”, “believe”, “seek”, “estimate” and similar expressions are intended to identify such forward-looking
statements. These are statements that relate to future periods and include, but are not limited to, statements about the features, benefits and
performance of our Rich Media products, our ability to introduce new product offerings and increase revenue from existing products,
expected expenses including those related to selling and marketing, product development and general and administrative, our beliefs
regarding the health and growth of the market for our products, anticipated increase in our customer base, expansion of our products
functionalities, expected revenue levels and sources of revenue, expected impact, if any, of legal proceedings, the adequacy of liquidity and
capital resources, and expected growth in business. Forward-looking statements are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, market acceptance for
our products, our ability to attract and retain customers and distribution partners for existing and new products, our ability to control our
expenses, our ability to recruit and retain employees, the ability of distribution partners to successfully sell our products, legislation and
government regulation, shifts in technology, global and local business conditions, our ability to effectively maintain and update our products
and service portfolio, the strength of competitive offerings, the prices being charged by those competitors, and the risks discussed elsewhere
herein. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any such statement is based.

ITEM 1. BUSINESS

PART I

Who We Are
Sonic Foundry, Inc. (NASDAQ: SOFO) (the "Company") is the trusted global leader for video capture, management and
webcasting solutions in education, business and government. Mediasite transforms communications, training, education and
events for more than 4,300 customers in over 65 countries. Sonic Foundry is a leader in Aragon Research’s Globe™ for Video
Content Management, winner of Frost & Sullivan’s Global Market Share Leadership Award in Lecture Capture Solutions for
seven consecutive years, a leader in Forrester’s Enterprise Video Platforms and Webcasting Wave™ and a challenger in Gartner’s
Magic Quadrant™ for enterprise video content management.

Sonic Foundry, Inc. was founded in 1991, incorporated in Wisconsin in March 1994 and merged into a Maryland corporation of
the same name in October 1996. Our executive offices are located at 222 West Washington Ave., Madison, Wisconsin 53703 and
our telephone number is (608) 443-1600. Our Sonic Foundry International B.V. ("Sonic Foundry International") (formerly Media
Mission B.V.) office is located in the Netherlands, and our Mediasite K.K. ("Mediasite KK" or "MSKK") office is located in
Japan. Our corporate website is www.sonicfoundry.com. In the “Investors” section of our website we make available, free of
charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports
required to be filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable
after the filing of such reports with the Securities and Exchange Commission.

Challenges We Address
Every organization faces a fundamental need to share information and communicate efficiently. Universities and colleges connect
instructors with students to educate and prepare the next generation. Businesses strive for effective communication and
collaboration among employees to provide value to customers. Government agencies must keep partners, stakeholders and
constituents informed to operate effectively. And yet, communication and e-learning challenges remain, including how to:

Improve learners’ academic and professional success

•
• Keep geographically-dispersed audiences and mobile teams connected
• Boost productivity and overall organizational knowledge
• Reduce logistical and financial impacts of day-to-day communications

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Sonic Foundry Solutions
Sonic Foundry transforms the way organizations share and use information with these video solutions:

Mediasite Video Platform
Mediasite Video Platform is a scalable on-premises solution to publish, stream, manage, search and analyze all video. With
Mediasite Video Platform, enterprises and education institutions:

•
•
•

Stream live and on-demand video to any device
Create an enterprise or campus YouTube with Mediasite Showcase
Automatically publish video to their learning management system (LMS), content management system (CMS),
training portal or any website
Deepen engagement and improve learning with polls, ask-a-question, surveys and other interactive tools
Search everything with fully indexed audio, video and slide content
Monitor who is watching what videos when to measure learner engagement and outcomes

•
•
•
• Centrally manage and secure any video

Mediasite Video Cloud
Mediasite Video Cloud is a secure, reliable SaaS (Software as a Service) solution offering the same capabilities as Mediasite
Video Platform to publish, stream, manage, search and analyze all video. Customers conveniently host and manage all of their
content with Mediasite Video Cloud, or use as needed for large events to divert heavy viewing traffic from their on-premises
Mediasite Video Platform. Our co-located and high availability data center and experienced team successfully manage customers’
cloud-based video streaming in secure, fault-tolerant environment.

Mediasite Capture Solutions
Valuable knowledge and expertise is shared every minute, but what’s the best way to capture that knowledge before it evaporates
into thin air? Mediasite provides flexible options to record and upload any video-based content from anywhere.
• My Mediasite: My Mediasite makes it a snap for instructors, employees and students to create great looking videos,
screencasts and slideshows from their computers or mobile devices. From demos and video training to flipped classes,
lectures and assignments, everything to record, upload, manage and publish personal videos is in one simple-to-use tool,
requiring no pro video skills.

• Mediasite RL Recorders: The RL Series of built-in room appliances uses schedule-based capture and advanced audio/video
integration to fully automate video and content recording in lecture halls, training rooms, simulation labs and auditoriums.
Instructors and speakers teach and present as they are most comfortable, free from technology worries and confident that
everything they say and show is captured.

• Mediasite Catch: Our latest video capture solution, Mediasite Catch, provides a scalable, economical solution to extend
video capture to any classrooms on campus, even if they’re not equipped with extensive audio/video capabilities. Combining
the reliability of Mediasite’s recorder-based scheduling automation with the affordability and simplicity of podium-based
software, Mediasite Catch provides faculty a worry-free classroom recording experience.

• Mediasite ML Recorders: Anyone can be a video producer with the ML Series of portable recording solutions to capture
and stream broadcast-quality video. Designed for on-the-go webcasting, hybrid events, guest speakers and conferences,
Mediasite ML’s lightweight design moves easily from location to location and can be set up and ready to record in only a
few minutes.

• Mediasite Join: Real-time video is how today’s best teams, businesses and schools collaborate, exchange ideas and get
things done. But too often great ideas, subject matter expertise and important details are forgotten or left behind when a video
call ends. Mediasite Join automatically records video and web conferences, transforming them into valuable, searchable
video on demand. As a cloud service, it’s the easiest way to capture and preserve any video call or meeting.

Mediasite Events
Mediasite Events is a leading global provider of live and on-demand webcasting services for conferences, hybrid events and high-
profile broadcasts, supplying turnkey streaming solutions for hundreds of events each year. Fortune 500 companies, universities,

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

associations, sporting events and charitable organizations use Mediasite Events to produce high-quality online event experiences.
With Mediasite Events, customers:
• Expand their audience reach by streaming to those that cannot attend in person
• Maximize event ROI by generating additional revenue streams from video recordings
• Differentiate themselves from competing events
• Bolster training and communication effectiveness with interactive video and audience engagement tools
• Build stronger teams and deepen morale
• Save travel time and money
•

Improve retention and learning outcomes

Mediasite Services
Organizations maximize their return on video with these additional Mediasite Services:
• Advanced Integration Services: The value of Mediasite grows when customers’ video assets and streaming workflows
seamlessly integrate with the systems that drive their online learning, training or communication strategies. Mediasite
Advanced Integration Services provides the resources and expertise to incorporate Mediasite video creation, management
and delivery processes into existing or planned application platforms, infrastructures and workflows. Leveraging Mediasite’s
open architecture and application programming interfaces (APIs), Sonic Foundry developers collaborate with customers to
scope, design and implement a Mediasite solution tailored to their unique requirements.
Installation Services: Sonic Foundry provides on-site consulting and installation services to help customers optimize
deployments and efficiently integrate Mediasite within existing AV and IT infrastructures, processes and workflows.

•

• Training Services: Expert Sonic Foundry trainers provide the necessary knowledge transfer so organizations feel confident
in using, managing and leveraging Mediasite’s capabilities. On-site training is customized to specific requirements and skill
levels, while online training provides convenient anytime access to a web-based catalog of training modules.

Mediasite Customer Assurance
Standard and Premium Customer Assurance plans give customers peace of mind knowing that they have access to expert technical
skills at the level they need.

With a Mediasite Standard Customer Assurance plan, customers are entitled to:
• Software upgrades and updates for Mediasite Video Platform and Mediasite Capture Solutions
• Unlimited technical support assistance
• Mediasite Recorder hardware warranty extension
• Advanced Mediasite Recorder replacement
• Authorized access to the Mediasite Customer Assurance Portal for 24/7 case management, software downloads,

documentation, the Mediasite Knowledge Base and other technical resources

• Authorized access to the Mediasite Community for online training videos, customer-exclusive webcasts, peer-to-peer best

practice sharing and more

Premium Customer Assurance clients receive the most comprehensive access to Sonic Foundry’s world-class technical expertise
by selecting the services that are of greatest value to their organization. A customized Premium Plan includes everything in the
Standard Plan, plus any combination of these services:

• Mediasite Monitoring Service with near real time monitoring of all Mediasite assets, proactive incident notification and
Sonic Foundry support response for critical issues, exceptions and anticipated issues that may impact day-to-day
Mediasite operations

• Priority technical support with queue bypass and support case escalation
• Proactive Mediasite version administration and management
• On-site provisioning of Mediasite Recorders to be used in the event of a hardware failure
• Quarterly Mediasite roadmap discussions with Sonic Foundry’s executive team

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Nearly all of our customers purchase a Customer Assurance plan when they purchase Mediasite Video Platform or Mediasite
Capture Solutions.

Annual service contracts for Mediasite Video Cloud, include a Standard Customer Assurance plan.

What Sets Mediasite Apart?
For enterprises to maximize their return on video, it takes more than capturing, storing and streaming content. The true impact
and power of video is realized when content is transformed into highly interactive learning experiences rich with searchable
metadata and detailed viewing statistics. Mediasite provides:

• Complete platform addressing the entire video lifecycle - From content creation and delivery to retention and
management. Mediasite’s portfolio of video solutions provides customers maximum flexibility and scalability to develop a
comprehensive enterprise video strategy.
Interactive, consistent playback experiences across devices - Mediasite involves the viewer in their online video
experience with polls, bookmarks, sharing, ask-a-question, resource links and more. Plus, Mediasite’s consistent playback
experience across all devices significantly reduces learning curves and accelerates adoption and content mastery.

•

• Auto-indexing and powerful video search - As a video search pioneer for over a decade, we have substantial experience
in search precision. Mediasite SmartSearch automatically makes all videos as searchable as text, so keywords can be found
anywhere - in audio, slides, handwriting, video or tags.

• Deep viewership analytics - Mediasite’s powerful video analytics and built-in reports show exactly who is watching what
and when. It’s the deep insight users need to understand viewing behaviors and engagement, to measure video’s impact and
value and make informed decisions.

• Unmatched support network - Sonic Foundry and the growing Mediasite Community provide a reliable, collaborative
support network for all Mediasite customers. Our worldwide network of field-based system engineers and responsive
customer care ensure that customers have resources committed to their success. Plus, with nearly 2,000 active customers, the
Mediasite Community is one of the most vibrant and growing user communities for video, webcasting, lecture capture and
e-learning. Members share ideas and get feedback year-round from community experts through a private online portal,
customer-exclusive webcasts and unrivaled networking and learning opportunities at Unleash, the global Mediasite User
Conference and other regional customer events.

Sonic Foundry Solutions in Higher Education:
Among post-secondary institutions, Mediasite is used for all academic and campus environments, including:
• Lecture capture
• Flipped classroom instruction: students view lectures from home and use classroom time for discussion
• Blended, hybrid and distance learning
• Continuing education
• Campus YouTube
• Special events: commencement, guest speakers, sporting events, etc.
• Faculty training and development
• Student video projects
• Recruitment and admissions
• University business: leadership meetings, alumni relations, outreach

Improves student learning outcomes

Higher education institutions consistently report that Mediasite:
•
• Keeps their institution competitive by supporting higher enrollment and/or tuition without new classrooms
• Empowers faculty with technology supporting new teaching pedagogies both in the classroom and online
• Boosts campus outreach, recruitment efforts and awareness of campus events
• Helps campuses manage, secure and search all campus video

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

To remain relevant, colleges and universities are striving to differentiate themselves through technical leadership as a means to
attract tech-savvy students, while balancing their campus technology improvements with systems that faculty will embrace and
adopt. As a result, the education market is restructuring and increasing investments around online learning.

Historically, graduate programs and STEM (science, technology, engineering and math)-oriented degree programs in schools of
medicine, nursing, engineering or business have comprised the majority of our academic customer base. We are now experiencing
heightened market demand for academic video within undergraduate and community college programs as well.

According to the Babson Survey Research Group, Pearson and Online Learning Consortium report, Online Report Card: Tracking
Online Education in the United States (February 2016), distance education enrollment is rising, with 5.8 million students taking
at least one distance course. More than 71% of academic leaders rate the learning outcomes in online education as the same or
superior to those in face-to-face instruction. The report states that 35.6% of academic leaders called blended/hybrid outcomes
“superior” and somewhat superior in 2015, up from 32.8% in 2014.

Frost & Sullivan analysts report that the academic lecture capture market is “characterized by seismic shifts in the technological
demands of students, growing institutional adoption of online programs to increase student enrollment, the increasing use of
multi-source video capture to enrich user experience, and deeper in-video metadata schema to improve searchability.” Further,
they estimate the lecture capture market is expected to grow at a compound annual growth rate (CAGR) of 20.6% from 2015 to
2022. (Global Lecture Capture Analysis report, 2016).

The visible integration of video-based learning into core university applications like learning management systems (LMSes) and
the success of bundled online learning technology solutions are two healthy indicators for the widespread adoption of campus
video. LMSes like Canvas by Instructure, Brightspace™, Blackboard®, Moodle and Sakai are ubiquitous in the education
enterprise. As the foundation for e-learning, these systems are rapidly evolving to be students’ single-source portal for all course-
related materials including recorded lecture and assignment videos. Mediasite’s packaged LMS integrations and support for the
Learning Tools Interoperability (LTI) standard, address the need to make learning content accessible to students when and where
they need it. Similarly, video management platforms are emerging as repositories for campus’ media-centric content. These
platforms provide additional opportunities through which to make Mediasite content accessible to faculty, staff and students.

Sonic Foundry Solutions in the Enterprise:
Executives, event planners and line-of-business managers for human resources, talent development, sales, marketing, and
customer service are pushing for more video in their organizations to improve communication, collaboration and results.

Mediasite has numerous applications within medium to large corporate, healthcare and government enterprises:

In corporate enterprises it is used for:
• Executive communications: town hall meetings, all-hands meetings
• Workforce development: onboarding and training, HR communications, policy documentation
• Secure corporate YouTube
• Sales, marketing and customer support
•
• Conferences and events: user group, sales and annual meetings

Investor relations: earnings calls, analyst briefings, annual reports

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

In health-related enterprises it is used for:
• Continuing medical education, medical conferences and seminars
• Grand rounds, simulations and procedural training
• Pharmaceutical and new product education Caregiver and patient education
• Emergency response coordination and public health announcements
• Research and collaboration

Inter- and intra-agency communications

In government agencies it is used for:
• Training and compliance
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• Legislative proceedings
• Constituent outreach, committee meetings, public safety announcements
• Relief work, military coordination, emergency preparedness

Through interviews across these verticals, enterprise customers report that Mediasite:
• Expands training and communications opportunities
• Cuts travel and meeting expenses
• Boosts efficiency by allowing participants to watch when it’s convenient to avoid interruptions and increase retention
• Helps build stronger teams through direct management and employee communications

Aragon Research reports that rich media assets that are produced in marketing webinars, webcasts, training, sales communications
and other interactions are growing at explosive rates. In its March 2014 research note, Manage Interactive Content with Video
Content Management, the firm predicts that “by 2016, interactive presentations and video documents will be accepted formats
for basic knowledge transfer,” and “by year-end 2018, video documents will replace text documents as the leading form of digital
content.”

Future Direction
Video management, webcasting and lecture capture are becoming an everyday part of the way people work and learn. We strive
to shorten the time it takes to not only capture and distribute information but to also transform video into more interactive,
discoverable content with rich management, search and analytics capabilities. As a company, we are helping create and manage
the video libraries of tomorrow. Our ongoing innovations focus on supporting this vision by:
• Advancing enterprise video content management to accommodate organizations’ existing digital video assets, content

•

generated from third-party video sources and the corresponding metadata associated with those video assets.
Introducing new applications to easily publish, search and retrieve videos from a video library as well as expanding and
automating Mediasite’s powerful multi-modal search capabilities.

• Offering the industry’s widest variety of content capture solutions capable of scaling economically across entire organizations

and allowing anyone, on any device, to capture and share their knowledge or expertise.

• Delivering content capture solutions that test the limits of recording, synchronizing and playing back multiple high definition

video sources.

• Supporting consistent, interactive content playback experiences across all viewing devices.
• Deepening integration with core enterprise platforms including collaborative platforms like video and web conferencing,
learning and course management systems (LMS/CMS), content management systems and student information systems (SIS).
Introducing market-driven innovations to our Mediasite Video Cloud offering.

•

Segment Information

We have determined that in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 280-10, Segment Reporting, we operate in three operating segments, however these segments meet the
criteria for aggregation for reporting purposes as one reporting segment as of September 30, 2016.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Billings and Distribution

Our services are typically billed and collected in advance of providing the service which requires minimal cost to perform in the
future. Billings, which are a non-GAAP measure, are a better indicator of customer activity and cash flow than revenue is, in
management’s opinion, and is therefore used by management as a key operational indicator. Billings is computed by combining
revenue with the change in unearned revenue.

Our largest individual customers are typically value added resellers (“VARs”) and distributors since the majority of our end users
require additional complementary products and services which we do not provide. Accordingly, in fiscal 2016 and 2015 one
master distributor, Synnex Corporation (“Synnex”), contributed 14 percent and 10 percent, respectively, of total world-wide
billings. A second master distributor, Starin Marketing, Inc. (“Starin”), contributed 13 percent and 12 percent of total world-wide
billings in fiscal 2016 and 2015, respectively. As master distributors, Synnex and Starin fulfill transactions to VARs, end users
and other distributors. No other customer represented over 10 percent of billings in 2016 or 2015.

Sales

We sell and market our offerings through a sales force that manages a channel of value-added resellers, system integrators,
consultants and distributors. These third party representatives specialize in understanding both audio/video systems and IT
networking. In fiscal 2016, we utilized three master distributors in the U.S. and approximately 225 resellers, and sold our products
to over 1,375 total end users. Our focus has been primarily in the United States and primarily to customers we have identified as
having the greatest potential for high use; that is, organizations with presenters, trainers, lecturers, marketers, event planners and
leaders who have a routine need to communicate to many people in higher education, government, health and certain corporate
markets. Despite our historical attention on the United States market, reseller, customer interest and sales outside the United
States has grown and accordingly, we made two international acquisitions in fiscal 2014 in the Netherlands and Japan,
significantly increasing our international headcount in sales, operations, technical and administrative positions. To date, we have
sold our products to customers in over 65 countries outside the United States. Total non-GAAP billings for Mediasite product and
support outside the United States totaled 38 percent and 41 percent in fiscal 2016 and 2015, respectively.

Market expansion: Over half our revenue is realized from the education market. Recent trends including the economic recovery
are driving more students, particularly adult learners, to seek online education options. Similarly, demand for lecture capture
within undergraduate, community college and blended learning programs is demonstrating growth. This development represents
an emerging trend beyond the traditional academic customer base for the company, which has primarily consisted of post-
graduate, distance learning and technical degree programs.

For our higher education as well as corporate, government and association clients, we anticipate economic conditions will expand
market demand for more outsourced services versus licensed sales. Over the last two years, the company has made extensive
capital and technology investments to advance its services model with turnkey event webcasting, a comprehensive cloud-based
Software as a Service (SaaS) datacenter, and e-commerce capabilities that position us well to deliver more diversified business
services.

With Mediasite Events, we continue to see growing demand for conference webcasting and hybrid events (conferences which
combine both face-to-face meeting and viewing over the web). These event-based communication, education and training
applications, combined with outsourced webcasting services, are expected to drive the company’s corporate sales activities going
forward.

Repeat orders: Many customers initially purchase a small number of Mediasite Recorders to test or pilot in a department, school
or business unit. A successful pilot project and the associated increase in webcasting demand from other departments or schools

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

leads to follow up, multiple Recorder orders as well as increased Mediasite Video Platform or Mediasite Video Cloud capacity.
In fiscal 2016, 90 percent of billings were to preexisting customers compared to 83 percent of billings in fiscal 2015.

Renewals: As is typical in the industry, we offer annual support and maintenance service contract extensions for a fee to our
customer base. Nearly all customers purchase a Customer Assurance plan with their initial Mediasite Recorders and Mediasite
Video Platform, and the majority renew their contracts annually.

Marketing

In the enterprise, our marketing strategy is based on a cross-industry approach with programs targeting a blend of IT and line of
business decision makers responsible for video initiatives in corporate communications, training and development, live
webcasting and/or corporate events. The addition of Mediasite Join to our family of enterprise video solutions boosts demand
generation marketing to specifically target use cases for streaming and managing the rapidly growing amount of unified
communication and collaboration (UCC)-generated video. The medical/healthcare, pharmaceutical and technology segments are
particularly strong enterprise markets for us.

Across higher education institutions, Mediasite maintains its market leadership position for scalable and affordable lecture capture
and video management. Our marketing focuses on professional schools of business, academic health, law and engineering.
Mediasite Join provides new demand generation opportunities as UCC technologies are the basis of many distance learning
programs.

Spanning both education and enterprise are marketing programs targeting continuing education. Across these two macro markets
we maintain a balanced blend of new demand generation and customer nurturing, to drive Mediasite expansion and add-on
business in existing accounts.

Our integrated marketing strategy leverages:

• Customer success stories regularly shared through our best practices webinar series, Enterprise Video Awards program,

speaking placements at industry events, email marketing, industry guest columns and blog

• Thought leadership content created and curated from customer successes, Sonic Foundry subject matter experts (SMEs)

and industry experts in the form of ebooks, whitepapers, videos, best practice toolkits and more

• The Mediasite Community, a vibrant online community of 2000+ users and its companion community events including
the global Mediasite User Conference, Unleash; Mediasite Summits in Europe and Australia/New Zealand; and year-
round regional chapter meetings

Sonic Foundry also has field sales/support offices in Europe, Japan and China to deliver its marketing message and execute
region-specific marketing programs.

Operations

We contract with a third party to build the hardware for our Mediasite Recorders and purchase quantities sufficient to fill specific
customer orders, including purchases of inventory by resellers. Quantities are maintained in inventory by the third party provider
and shipped directly to the end customer or reseller. The hardware manufacturer provides a limited one-year warranty on the
hardware, which we pass on to our customers who purchase a Mediasite Customer Assurance support and maintenance plan. We
believe there are alternative sources of manufacturing for our recorders and believe there are numerous additional sources and
alternatives to the existing production process. We have experienced delays in production of our products and component parts
used in our products in the past and expect to continue to maintain excess quantities of inventory in the future to mitigate the risk
of such delays. To date, we have not experienced any material returns due to product defects.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

OTHER INFORMATION

Competition

Various vendors provide lecture capture, enterprise webcasting or video content management capabilities, but few offer an end-
to-end solution that addresses all phases of the video content lifecycle (capture, delivery, transformation and management) in a
single platform like Mediasite.

Lecture capture solutions designed specifically for higher education differ in their technology approach.

• Appliance- or room-based lecture capture provides a fully integrated system with complete recording automation for
live or on-demand content. The automated, pre-scheduled workflow results in the greatest faculty and staff adoption and
largest volumes of recorded content in the shortest amount of time.

• Software-based lecture capture that resides on a podium or computer in the classroom also captures and publishes rich

media content, but relies on campus- or user-supplied hardware.

• Desktop capture tools reside on individual users’ laptops or computers allowing them to record user-generated content.

Few lecture capture vendors, offer a mix of all lecture capture approaches to best suit customers’ needs. Most vendors, including
Crestron, Panopto and Tegrity, support only one approach to lecture capture. Likewise, a very small number of vendors provide
an integrated platform like Mediasite to archive and manage video and rich media recorded with their solution. Most rely on a
third-party platform, typically the institution’s learning or course management system, to publish, search and secure content.

Enterprise video management solutions (e.g. Kaltura, Qumu) serve as centralized media repositories that facilitate the delivery,
publishing and management of on-demand video. Unlike Mediasite, most platforms do not include a video capture, webcasting
or live streaming component, but instead ingest or import video-based content captured by other third-party devices or solutions.
Also, most other platforms focus on ingesting video-only content rather than rich video which combines multiple synchronous
video and/or slide streams into an interactive media experience.

Some current and potential customers develop their own home-grown lecture capture, webcasting or video content solutions
which may also compete with Mediasite. However, we often find many of these organizations are now looking for a commercial
solution that offers comprehensive management capabilities, requires fewer resources and internal maintenance and delivers a
less cumbersome workflow.

Intellectual Property

The status of United States patent protection in the Internet industry is not well defined and will evolve as the U.S. Patent and
Trademark Office grants additional patents. Currently three U.S patents have been issued to us and we may seek additional
patents in the future. We do not know if any future patent application will result in any patents being issued with the scope of the
claims we seek, if such patents are issued at all. We do not know whether our patents which have been issued or any patents we
may receive in the future will be challenged, invalidated or be of any value. It is difficult to monitor unauthorized use of
technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States,
and our competitors may independently develop technology similar to ours. We will continue to seek patent and other intellectual
property protections, when appropriate, for those aspects of our technology that we believe constitute innovations providing
significant competitive advantages. Any future, patent applications may not result in the issuance of valid patents.

Our success depends in part upon our rights to proprietary technology. We rely on a combination of copyright, trade secret,
trademark and contractual protection to establish and protect our proprietary rights. We have registered three U.S. and four
foreign country trademarks. We require our employees to enter into confidentiality and nondisclosure agreements upon
commencement of employment. Before we will disclose any confidential aspects of our services, technology or business plans

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

to customers, potential business distribution partners and other non-employees, we routinely require such persons to enter into
confidentiality and nondisclosure agreements. In addition, we require all employees, and those consultants involved in the
deployment of our services, to agree to assign to us any proprietary information, inventions or other intellectual property they
generate, or come to possess, while employed by us. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our services or technology. These precautions may not prevent misappropriation
or infringement of our intellectual property.

Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. In addition, we may be
subject to claims of alleged infringement of patents and other intellectual property rights of third parties or may be required to
defend against alleged infringement claims filed against our customers due to indemnification agreements. We may be unaware
of filed patent applications which have not yet been made public and which relate to our services.

Intellectual property claims may be asserted against us in the future. Intellectual property litigation is expensive and time-
consuming and could divert management’s attention away from running our business. Intellectual property litigation could also
require us to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements,
if required, may not be available on acceptable terms, if at all. Our failure or inability to develop non-infringing technology or
license the proprietary rights on a timely basis would harm our business.

Research and Development

We believe that our future success will depend in part on our ability to continue to develop new business, and to enhance our
existing business. Accordingly, we invest a significant amount of our resources in research and development activities. During
the fiscal years ended September 30, 2016 and 2015, we spent $6.8 million and $6.3 million, respectively, on internal research
and development activities in our business. These amounts represent 18% and 17%, respectively, of total revenue in each of those
years. The increase reflects our decision to accelerate development on identified new products as well as enhancements to existing
products.

Global Expansion

We acquired Sonic Foundry International in the Netherlands and Mediasite KK in Japan in fiscal 2014. With these acquisitions,
we significantly expanded our global market reach in the Asia-Pacific Region and Europe, and accelerate our commitment to
enterprise video communication world-wide.

Employees

At September 30, 2016 and 2015, we had 205 and 202 full-time employees, respectively. Our employees are not represented by
a labor union, nor are they subject to a collective bargaining agreement. We have never experienced a work stoppage and believe
that our employee relations are satisfactory.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

ITEM 1A. RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT
DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS THAT WE ARE
NOT PRESENTLY AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OR ALL OF THESE RISKS. THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE SIGNIFICANTLY DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.

Economic conditions could materially adversely affect the Company.

Fiscal 2016 has continued to show some weakness in domestic markets and global uncertainties exist in many areas of focus for
us including the United Kingdom, Japan and the Middle East. Many of our customers rely on local, state or Federal government
funding, both domestically and international. Japan experienced a decline in its gross domestic product in 2013, 2014 and 2015.
While it appears Japanese government subsidies are again supporting growth in higher education, any future delay or elimination
of government programs will have a negative impact on our operations in Japan. Any continuing unfavorable economic conditions
could continue to negatively affect, our business, operating results or financial condition, which could in turn affect our stock
price. Weak economic conditions and the resulting impact on the availability of public funds along with the possibility of state
and local budget cuts and reduced university enrollment could lead to a reduction in demand for our products and services. In
addition, a prolonged economic downturn could cause insolvency of key suppliers resulting in product delays, inability of
customers to obtain credit to finance purchases of the Company’s products and inability or delay of our channel partners and
other customers to pay accounts receivable owed to us.

Economic conditions may have a disproportionate effect on the sale of our products.

Many of our customers will look at the total A/V equipment and labor cost to outfit a typical conference room or lecture hall as
one amount for budgetary purposes. Consequently, although our products represent only a portion of the total cost, the cost of the
entire project of outfitting a room or conference hall may be considered excessive and may not survive budgetary constraints.
Alternatively, our resellers may modify their quotes to end customers by eliminating our products or substituting less expensive
products supplied by our competitors in order to win opportunities within budget constraints. Event service partners may similarly
suggest that customers eliminate recording and webcasting as a means of reducing event cost. Consequently, declines in spending
by government, educational or corporate institutions due to budgetary constraints may have a disproportionate impact on the
Company and result in a material adverse impact on our financial condition.

We may need to raise additional capital.

At September 30, 2016, we had cash of $1.8 million, $1.6 million of which was in our foreign operations. There was a remaining
amount of $2.3 million available under our line of credit facility with Silicon Valley Bank at September 30, 2016, with $1.6
million outstanding and a credit limit of $3.9 million in total. The Company has historically financed its operations primarily
through cash from sales of equity securities, and to a limited extent, cash from operations and through bank credit facilities. The
Company has a history of operating losses and while it generated cash from operations of $1.7 million and recorded adjusted
Earnings Before Interest, Taxes, Depreciation, and Amortization ("adjusted EBITDA") of $1.0 million in fiscal 2016, the majority
of those proceeds went to repayment of debt. Our adjusted EBITDA measure additionally adds back stock compensation expense
from the SEC definition of EBITDA. While the Company expects to increase revenue in fiscal 2017 and manage expense growth
to a level less than anticipated growth in revenues, we cannot ensure that revenue will grow as anticipated and, if revenue is
determined to be growing at a rate less than anticipated, it may be too late to reduce expenses for fiscal 2017. If the funds held

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

by our foreign subsidiaries are needed for our operations in the United States, the repatriation of some of these funds to the United
States could require payment of additional U.S. taxes.

We may evaluate further operating or capital lease opportunities or incur additional term debt to finance equipment purchases or
other uses of cash in the future and will utilize the Company’s revolving line of credit to support working capital needs. While
the Company anticipates that it will be in compliance with all provisions of our debt facilities, there can be no assurance that the
existing debt facilities will be available or that additional financing will be available or on terms acceptable to the Company.

If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt would also
have rights, preferences or privileges senior to those of existing holders of our common stock. If we raise additional equity, the
terms of such financing may dilute the ownership interests of current investors and cause our stock price to fall significantly. We
may not be able to secure financing upon acceptable terms, if at all. If we cannot raise funds on acceptable terms, we may not be
able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business, operating results, and financial condition. The Company
believes its cash position and available credit is adequate to accomplish its business plan through at least the next twelve months.

We have a history of losses.

Our investments in growing revenues have generated losses in most years. Despite our plans to grow revenue to a greater extent
than expenses in fiscal 2017 and beyond, we may not realize sufficient revenues to reach or sustain profitability on a quarterly or
annual basis. For the year ended September 30, 2016, we had a gross margin of $28.0 million on revenue of $38.0 million with
which to cover selling, marketing, product development and general and administrative costs. Our selling, marketing, product
development and general and administrative costs have historically been a significant percentage of our revenue, due partly to
the expense of developing leads, the relatively long period required to convert leads into sales associated with selling products
that are not yet considered “mainstream” technology investments and the cost of developing and maintaining those products.
Fluctuations in profitability or failure to maintain profitability have and will likely impact the price of our stock in the future.

Currency exchange rate fluctuations could result in higher costs and decreased margins and earnings.

The functional currency of our foreign subsidiaries in the Netherlands is the Euro and in Japan is the Japanese Yen. They are
subject to foreign currency exchange rate risk. The conversion rate of the Yen to the US Dollar rose from 98 at the start of fiscal
2014 when we acquired Mediasite K.K., to approximately 125 in mid fiscal 2015 and now is approximately 104. Similarly, at the
beginning of fiscal 2014 when we acquired Sonic Foundry International B.V., the Euro was trading at .79 to the US Dollar, rose
to approximately .95 in mid fiscal 2015 and is now at approximately .90 compared to the US Dollar. The strength of the dollar
impacted our ability to export profitably to other countries such as those in the European Union and Japan in fiscal 2015 and early
2016, and may return to those levels. Any increase in the exchange rate of the U.S. Dollar compared to the Euro or the Japanese
Yen will impact our future operating results and financial position.

Multiple unit deals are needed for continued success.

We need to sell multiple units to educational, corporate and government institutions in order to sell most efficiently and remain
profitable. In fiscal 2016 and fiscal 2015, 90% and 83% of revenue was generated by sales to existing customers, respectively. In
particular, sales of multiple units to corporate customers have lagged behind results achieved in the higher education market;
consequently, we have allocated more resources to the higher education market. While we have addressed a strategy to leverage
existing customers and close multiple unit transactions, a customer may choose not to make expected purchases of our products.
The failure of our customers to make expected purchases will harm our business.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Manufacturing disruption or capacity constraints would harm our business.

We subcontract the manufacture of our recorders to one third-party contract manufacturer. Although we believe there are multiple
sources of supply from other contract manufacturers as well as multiple suppliers of component parts required by our contract
manufacturer, a disruption of supply of component parts or completed products, even if short term, would have a material negative
impact on our revenues. Many component parts currently have long delivery lead times or cease production of certain components
with limited notice in which to evaluate or obtain alternate supply, requiring conservative estimation of production requirements.
Lengthening lead times, product design changes and other third party manufacturing disruptions have caused delays in delivery.
In order to compensate for supply delays, we have sourced components from off-shore locations, used cross component parts,
paid significantly higher prices or premium fees to expedite delivery for short supply components, and currently hold substantially
larger quantities of inventory than in the past. Many of these strategies have increased our costs or require substantial resources
to maintain and may not be sufficient to ensure against a product shortage. We depend on our subcontract manufacturer to produce
our products efficiently while maintaining high levels of quality. Any manufacturing or component defects, delay in production
or changes in product features will likely cause customer dissatisfaction and may harm our reputation. Moreover, any
incapacitation of the manufacturing site due to destruction, natural disaster or similar events could result in a loss of product
inventory. As a result of any of the foregoing, we may not be able to meet demand for our products, which could negatively affect
revenues in the quarter of the disruption or longer depending upon the magnitude of the event, and could harm our reputation.

We could lose revenues if there are changes in the spending policies or budget priorities for government funding of colleges,
universities, schools and other education providers.

Most of our customers and potential customers are public colleges, universities, schools and other education providers who
depend substantially on government funding. Accordingly, any general decrease, delay or change in federal, state or local funding
for colleges, universities, schools and other education providers could cause our current and potential customers to reduce or
delay their purchases of our products and services, or to decide not to renew service contracts, either of which could cause us to
lose revenues. In addition, a specific reduction in governmental funding support for products such as ours would also cause us to
lose revenues. Unfavorable economic conditions may result in further budget cuts and lead to lower overall spending, including
information technology spending, by our current and potential clients, which may cause our revenues to decrease.

If a sufficient number of customers do not accept our products, our business may not succeed.

The use of video as a mainstream communication tool and the market for content management software is in an early stage. We
cannot predict how the market for our products will develop, and part of our strategic challenge will be to convince enterprise
customers of the productivity, improved communications, cost savings, suitability and other benefits of our products. In higher
education the decision to include lecture capture technology in the classroom is often influenced by the professor teaching the
class, who sometimes views lecture capture technology as a threat to their job. The market for content delivery solutions is very
complex, includes many products and solutions that address various aspects of customer needs and as a result it is often difficult
for customers and channel partners to understand how our products and services compare. Further, corporate customers may use
video as a tool, but may choose to rely upon their own IT infrastructure and resources to manage their video content. Because
many companies generally are predisposed to maintaining control of their IT systems and infrastructure, there may be resistance
to using software as a service provided by a third party. Our future revenue and revenue growth rates will depend in large part on
our success in delivering these products effectively, creating market acceptance for these products and meeting customer’s needs
for new or enhanced products. If we fail to do so, our products will not achieve widespread market acceptance, and we may not
generate sufficient revenue to offset our product development and selling and marketing costs, which will hurt our business.

We may not be able to innovate to meet the needs of our target market.

Our future success will continue to depend upon our ability to develop new products, product enhancements or service offerings
that address future needs of our target markets and to respond to these changing standards and practices. The success of new
products, product enhancements or service offerings depend on several factors, including the timely completion, quality and

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

market acceptance of the product, enhancement or service. Our fiscal 2017 business plan includes an expectation for improved
revenue growth from our corporate segment associated with the impact of new products and enhancements to existing products
that better meet the needs of many corporations and their interest in comprehensive solutions. There can be no assurance that we
will be successful in achieving our expected growth in the corporate market. Our revenue could be reduced if we do not capitalize
on our current market leadership by timely development of innovative new products, product enhancements or service offerings
that will increase the likelihood that our products and services will be accepted in preference to the products and services of our
current and future competitors.

If our marketing and lead generation efforts are not successful, our business will be harmed.

We believe that continued marketing efforts will be critical to achieve widespread acceptance of our products. Our marketing
campaigns may not be successful given the expense required. For example, failure to adequately generate and develop sales leads
could cause our future revenue growth to decrease. In addition, our inability to generate and cultivate sales leads into large
organizations, where there is the potential for significant use of our products, could have a material effect on our business. We
may not be able to identify and secure the number of strategic sales leads necessary to help generate marketplace acceptance of
our products. If our marketing or lead-generation efforts are not successful, our business and operating results will be harmed.

The length of our sales and deployment cycles are uncertain, which may cause our revenue and operating results to vary
significantly from quarter to quarter and year to year.

During our sales cycle, we spend considerable time and expense providing information to prospective customers about the use
and benefits of our products without generating corresponding revenue. Our expense levels are relatively fixed in the short-term
and based in part on our expectations of future revenue. Therefore, any delay in our sales cycle could cause significant variations
in our operating results, particularly because a relatively small number of customer orders represent a large portion of our revenue.

Our largest potential sources of revenue are educational institutions, large corporations and government entities that often require
long testing and approval processes before making a decision to purchase our products, particularly when evaluating our products
for inclusion in new buildings under construction, high dollar transactions or competitive bids. In general, the process of selling
our products to a potential customer may involve lengthy negotiations, collaborations with consultants, designers and architects,
time consuming installation processes and changes in network infrastructure in excess of what we or our VARs are able to provide.
In addition, educational institutions that started with small pilots are committing to more complex installations and expanding to
include undergraduate classrooms, which, due to the increased size of these types of transactions, typically require a longer sales
cycle. Also, our enterprise accounts are less motivated by seasonal sales and promotions, and therefore are frequently difficult to
finalize. As a result of these factors, our sales and deployment cycles are unpredictable. Our sales and deployment cycles are also
subject to delays as a result of customer-specific factors over which we have little or no control, including budgetary constraints,
existing infrastructure technical issues and internal approval procedures, particularly with customers or potential customers that
rely on government funding.

Our products are aimed toward a broadened user base within our key markets and these products are relatively early in their
product life cycles. We cannot predict how the market for our products will develop, and part of our strategic challenge will be
to convince targeted users of the productivity, improved communications and test scores, cost savings and other benefits.
Accordingly, it is likely that delays in our sales cycles with these products will occur and this could cause significant variations
in our operating results.

Sales of some of our products have experienced seasonal fluctuations which have affected sequential growth rates for these
products, particularly in our first fiscal quarter. For example, there is generally a slowdown for sales of our products in the higher
education and corporate markets in the first fiscal quarter of each year. Seasonal fluctuations could negatively affect our business,
which could cause our operating results to fall short of anticipated results for such quarters. As such, we believe that quarter-to-

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

quarter comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as
an indication of future performance.

Our operating results are hard to predict as a significant amount of our sales typically occur at the end of a quarter and the
mix of product and service orders may vary significantly.

Revenue for any particular quarter is extremely difficult to predict with any degree of certainty. We typically ship products within
a short time after we receive an order and therefore, we do not have an order backlog with which to estimate future revenue. In
addition, orders from our channel partners are based on the level of demand from end-user customers. Any decline or uncertainty
in end-user demand could negatively impact end-user orders, which could in turn significantly negatively affect orders from our
channel partners in any given quarter. Accordingly, our expectations for both short and long-term future revenue is based almost
exclusively on our own estimate of future demand based on the pipeline of sales opportunities we manage, rather than on firm
channel partner orders. Our expense and inventory levels are based largely on these estimates. In addition, our events business is
particularly unpredictable and subject to variation due to the short time-frame between when we learn of an opportunity and when
the event occurs. Further, the majority of our product orders are received in the last month of a quarter; thus, the unpredictability
of the receipt of these orders could negatively impact our future results. We historically have received all or nearly all our channel
partner orders in the last month of a quarter and often in the last few days of the quarter. Accordingly, any significant shortfall in
demand for our products or services in relation to our expectations, even if the result was a short term delay in orders, would have
an adverse impact on our operating results.

We have experienced growing demand for our hosting and event services as well as a growing preference from our customers in
purchasing our annually licensed software. As a result, we have seen an increase in service billings and recurring revenue as a
percentage of total billings. We expect this trend to continue which we expect to improve predictability of revenue and gross
margins but will delay the impact on revenue of any increase or decrease in billings during any particular quarter. We subcontract
for some services required by our events customers, such as onsite management labor and closed captioning. We typically charge
for such services at a lower margin than other services. The percentage of billings represented by services, provided either directly
or indirectly, is also likely to fluctuate from quarter to quarter due to seasonality of event services and other factors. Since content
hosting and support services are typically billed in advance of providing the service, revenue is initially deferred, leading to
reduced current period revenue with a corresponding negative impact to profits or losses in periods of significant increase in the
percentage of our billings for deferred services.

The market price of our common stock may be subject to volatility

The trading prices of the securities of technology companies have been highly volatile. Factors affecting the market price of our
common stock include:

• Variations in our operating results, earnings per share, cash flows from operating activities, deferred revenue and other

financial metrics and non-financial metrics, and how those results compare to investor expectations;

• Our announcement of actual results for a fiscal period that are higher or lower than expected results or our announcement
of revenue or earnings guidance that is higher or lower than expected, including as a result of difficulty forecasting
seasonal variations in our financial condition and operating results;

• Changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to follow

our common stock;

• Announcements of technological innovations, new services or service enhancements, strategic alliances or significant

agreements by us or by our competitors;

• Announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions

involving us or our competitors;

• Announcements of customer additions and customer cancellations or delays in customer purchases;
• Recruitment or departure of key personnel;

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

• Disruptions in our service due to computer hardware, software, network or data center problems;
• The economy as a whole, market conditions in our industry and the industries of our customers;
• The issuance of shares of common stock by us, whether in connection with an acquisition or a capital raising

transaction;

• Low trading volumes of our shares and inconsistent trading activity;
•
• Any other factors discussed herein.

Issuance of debt and other convertible securities; and

In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market
price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market
price of our common stock might also decline in reaction to events that affect other companies within, or outside, our industry
even if these events do not directly affect us.

We are subject to risks associated with our channel partners’ product inventories and product sell-through.

We sell a significant amount of our products to strategic audio video (A/V) distributors such as Synnex Corporation, Starin
Marketing, Inc., and Stampede Presentation Products, Inc. as well as other international distributors and channel partners who
maintain their own inventory of our products for sale to dealers and end-users. If these channel partners are unable to sell an
adequate amount of their inventory of our products in a given quarter to dealers and end-users or if channel partners decide to
decrease their inventories for any reason, such as a long-term continuation or increase, in global economic uncertainty and
downturn in technology spending, the volume of our sales to these channel partners and our revenue would be negatively affected.
In addition, if channel partners decide to purchase more inventory, due to product availability or other reasons, than is required
to satisfy end-user demand or if end-user demand does not keep pace with the additional inventory purchases, channel inventory
could grow in any particular quarter, which could adversely affect product revenue in the subsequent quarter. In addition, we also
face the risk that some of our channel partners have inventory levels in excess of future anticipated sales. If such sales do not
occur in the time frame anticipated by these channel partners for any reason, these channel partners may substantially decrease
the amount of product they order from us in subsequent periods, which would harm our business.

If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely affected.

We provide three of our distributors with stock balancing return rights, which generally permit our distributors to return products,
subject to ordering an equal dollar amount of alternate products. We also provide price protection rights to these distributors.
Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors if
we lower our prices for those products within a specified time period. To cover our exposure to these product returns and price
adjustments, we establish reserves based on our evaluation of historical product trends and current marketing plans. However, we
cannot be assured that our reserves will be sufficient to cover our future product returns and price adjustments. If we inadequately
forecast reserves, it may compromise our ability to recognize revenue to these distributors at the time of shipment. As a result,
we would not be able to recognize revenue until these three distributors sell the inventory to the final end user, which would have
a material adverse effect on revenues in the period covered by that change.

We depend in part on the success of our relationships with third-party resellers and integrators.

Our success depends on various third-party relationships, particularly in our non-higher education business, with certain
international geographies and our events services operations. The relationships include third party resellers as well as system
integrators that assist with implementations of our products and sourcing of our products and services. Identifying partners,
negotiating and documenting relationships with them and maintaining their relationships require significant time and resources
from us. In addition, our agreements with our resellers and integrators are typically non-exclusive and do not prohibit them from
working with our competitors or from offering competing products or services. We have limited control, if any, as to whether
these strategic partners devote adequate resources to promoting, selling and implementing our products as compared to our
competitor’s products. Our competitors may be effective in providing incentives to third parties to favor their products or services.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the
marketplace or to maintain or grow our revenue could be impaired and our operating results would suffer.

Our cash flow could fluctuate due to the potential difficulty of collecting our receivables.

A significant portion of our sales are fulfilled by VARs, regional distributors or master distributors. As an example, 28% of our
billings in fiscal 2016 were to Synnex Corporation, Starin Marketing Inc., and Stampede Presentation Products, Inc., three master
distributors who fulfill demand from other distributors, VARs or end-users. While our VARs typically maintain payment terms
consistent with other end-users, our master distributors have longer payment terms and a delay in payment may occur as a result
of a number of factors including changes in demand, general economic factors, financial performance, inventory levels or disputes
over payments. Any delay from Synnex, Starin, Stampede or other large distributors or VARs, could have a material impact on
the collections of our receivables during a particular quarter.

We offer credit terms to some of our international customers; however, payments tend to go beyond terms in certain countries
and advances allowable on accounts receivable from international customers under our revolving line of credit are calculated
using a lower advance rate than domestic receivables and are limited to $1 million. Therefore, as Europe, Asia and other
international regions grow, accounts receivable balances will likely increase as compared to previous years and our ability to
finance the increase will be limited.

Supporting our existing and growing customer base and implementing large customer deployments could strain our personnel
resources and infrastructure, and if we are unable to scale our operations and increase productivity, customer satisfaction
and our business will be harmed.

Frequent enhancements to our software puts pressure on our customers to install, maintain and train their personnel on its use.
Further, frequent releases of the software can lead to less product stability. As a result, our customer care and engineering resources
have come under, and are expected in the future to come under significant pressure in providing the high-quality of technical
support our customers expect during periods of high demand. We may be unable to respond quickly enough to accommodate
short-term increases in customer demand for support services. Increased customer demand for these services, without
corresponding revenues, could increase costs and adversely affect our operating results. In addition, our sales process is highly
dependent on our applications and business reputation and on positive recommendations from our existing customers. Any failure
to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely
affect our reputation, our ability to sell our products and services to existing and prospective customers, and our business,
operating results and financial position.

As we target more of our sales efforts at larger initial transactions, we face increasingly complex deployments requiring substantial
technical and management resources, including in some cases significant product customization and integration with other
applications or hardware. Customers making large expenditures for our products and services typically have higher expectations
of product and service operability and response time if issues arise. Some of these customers have asked us to host their content
and have significant amounts of legacy content to transfer to our datacenter. Such increased activity and storage demand on our
data centers put additional strain on our personnel and hosting infrastructure. Our hosting customers typically require a high level
of access, data security and need to capture and store multiple high definition streams. Such requirements require costly
enhancements to our infrastructure. High demand on technical and management resources to manage large transactions distract
personnel from existing customers, development of new products and other important activities which could lead to potential
customer dissatisfaction, product development delays or other issues associated with the distraction.

If a customer is not satisfied with the quality of work performed by us or a third party or with the type of services or solutions
delivered, then we could incur additional costs to address the situation and delay recognition of revenue, the profitability of that
work might be impaired, and the customer’s dissatisfaction with our services could damage our ability to obtain additional work

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

from that customer. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may further
damage our business by affecting our ability to compete for new business with current and prospective customers.

Accounting regulations and related interpretations and policies, particularly those related to revenue recognition, cause us to
defer revenue recognition into future periods for all or portions of our products and services.

Revenue recognition for our products and services is complex and subject to multiple sources of authoritative guidance, some of
which are new, as well as varied interpretations and implementation practices for such rules. These rules require us to apply
judgment in determining revenue recognition In certain situations, we may have to defer the entire amount of revenue from a
transaction, even when the product has already shipped. This may occur when the customer has delayed payment on the
transaction, or in certain other circumstances, such as when we agree to extend payment terms on other invoices from such
customer. In addition, we always defer revenue when services are included in a transaction, and not performed. Other factors that
are considered in revenue recognition include those such as vendor specific objective evidence (VSOE), best estimate of selling
price and the inclusion of other services and contingencies to payment terms. We expect that we will continue to defer portions
or, in certain circumstances with respect to a particular customer, all of our product or service billings because of these factors,
and to the extent that management’s judgment is incorrect it could result in an increase in the amount of revenue deferred in any
one period. The amounts deferred may be significant and may vary from quarter to quarter depending on, among other factors,
compliance with payment terms, the mix of products sold, combination of products and services sold together or contractual
terms.

Additional changes in authoritative guidance, including the interpretation of "Revenue from Contracts with Customers (Topic
606)", or changes in practice in applying such rules could also cause us to defer the recognition of revenue to future periods or
recognize lower revenue.

Because most of our service contracts are renewable on an annual basis, a reduction in our service renewal rate could
significantly reduce our revenues.

Our clients have no obligation to renew their content hosting agreements, customer support contracts or other annual service
contracts after the expiration of the initial period, which is typically one year, and some clients have elected not to do so. A decline
in renewal rates could cause our revenues to decline. We have limited historical data with respect to rates of renewals, so we
cannot accurately predict future renewal rates. Our renewal rates may decline or fluctuate as a result of a number of factors,
including client dissatisfaction with our products and services, our slow response to customer technical inquiries, our failure to
update our products to maintain their attractiveness in the market, deteriorating economic conditions or budgetary constraints or
changes in budget priorities faced by our clients.

Because we generally recognize revenues ratably over the term of our service contracts, downturns or upturns in service
transactions will not be fully reflected in our operating results until future periods.

We recognize most of our revenues from service contracts monthly over the terms of their agreements, which are typically
12 months, although terms have ranged from less than one month to 48 months. As a result, much of the service revenue we
report in each quarter is attributable to agreements entered into during previous quarters. Consequently, a decline in sales, client
renewals or market acceptance of our products in any one quarter will not necessarily be fully reflected in the revenues in that
quarter and will negatively affect our revenues and profitability in future quarters. This ratable revenue recognition also makes it
difficult for us to rapidly increase our revenues through additional sales in any period, as revenues from new clients must be
recognized over the applicable agreement term.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

There is a great deal of competition in the market for our products, which could lower the demand for our products and have
a negative impact on our operations.

The market for our products and services is intensely competitive, dynamic and subject to rapid technological change. The
intensity of the competition and the pace of change are expected to increase in the future. Increased competition is likely to result
in price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business.
Competitors vary in size and in the scope and breadth of the products and services offered, many of which have greater financial
resources, greater name recognition, more employees and greater financial, technical, marketing, public relations and distribution
resources than we have. In addition, new competitors with greater financial resources may arise through partnerships, distribution
agreements, mergers, acquisitions or other types of transactions at any time. In particular, large companies have begun to make
investments in and/or partner with smaller companies to enter the lecture capture and video management markets.

Lecture capture solutions designed specifically for higher education differ in their technology approach.

• Software-based lecture capture that resides on a podium or computer in the classroom also captures and publishes rich

media content, but relies on campus- or user-supplied hardware.

• Desktop capture tools reside on individual users’ laptops or computers allowing them to record user-generated content.

The competitive environment may require us to make changes in our products, pricing, licensing, services, or marketing to
maintain and extend our current technology. Price concessions or the emergence of other pricing, licensing, and distribution
strategies or technology solutions of competitors may reduce our revenue, margins or market share. Other changes we have to
make in response to competition could cause us to expend significant financial and other resources, disrupt our operations, strain
relationships with partners, release products and enhancements before they are thoroughly tested or result in customer
dissatisfaction, any of which could harm our operating results and stock price.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Our business is susceptible to risks associated with international operations.

International product and service billings ranged from 38% to 41% of our total billings in each of the past two years and are
expected to continue to account for a significant portion of our business in the future, particularly as a result of growth in the
operations of businesses acquired in fiscal 2014 in the Netherlands and Japan. International sales are subject to a variety of risks,
including:

• Difficulties in establishing and managing international subsidiaries, distribution channels and operations;
• Difficulties in selling, servicing and supporting overseas products, translating products into foreign languages and

compliance with local hardware requirements;

• Difficulties in managing the demands of large international deployments, many of which distract key sales personnel from

opportunities in other parts of the world;

• Challenges associated with management transition;
• Challenges related to language or cultural differences;
• The uncertainty of laws and enforcement in certain countries, such as China, relating to the protection of intellectual

property or requirements for product certification, protection of personal data or other restrictions;

• Competitive pressure impacting other parts of the world;
• Multiple and possibly overlapping tax structures;
• Currency and exchange rate fluctuations;
• Difficulties in collecting accounts receivable in foreign countries, including complexities in documenting letters of

credit;

• Economic or political changes in international markets;
• Restrictions on access to the Internet; and
• Difficulty in complying with international employment related requirements

We may need to make acquisitions or form strategic alliances or partnerships in order to remain competitive in our market,
and recent acquisitions, strategic alliances or partnerships, including the acquisition of Mediasite KK and Sonic Foundry
International, could be difficult to integrate, disrupt our business and dilute stockholder value.

We completed the acquisitions of Mediasite KK in Japan and MediaMission (now Sonic Foundry International) in the Netherlands
in fiscal 2014. As a result of these acquisitions, we are integrating products, services, dispersed operations, management systems
and very different cultures. In the future, we may acquire or form strategic alliances or partnerships with other businesses in order
to remain competitive or to acquire new technologies. Acquisitions and investments involve numerous risks, including:

• The potential failure to achieve the expected benefits of the combination or acquisition;
• Difficulties in and the cost of integrating operations, technologies, services and personnel;
• Diversion of financial and managerial resources from existing operations;
• Risk of entering new markets in which we have little or no experience or where competitors may have stronger market

positions;

• Potential write-offs of acquired assets or investments, and potential financial and credit risks associated with acquired

customers;

Inability to generate sufficient revenue to offset acquisition or investment costs;

• Potential loss of key employees;
•
• The inability to maintain relationships with customers and partners of the acquired business;
• The difficulty of transitioning the acquired technology onto our existing platforms and maintaining the security standards

consistent with our other services for such technology;

• Potential unknown liabilities associated with the acquired businesses;
• Unanticipated expenses related to acquired technology and its integration into existing technology;

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

• Negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired
intangible assets, fixed assets and deferred compensation, and the loss of acquired deferred revenue and unbilled deferred
revenue;

• Delays in customer purchases due to uncertainty related to any acquisition;
• The need to implement controls, procedures and policies at the acquired company;
• Challenges caused by distance, language and cultural differences;
•

In the case of foreign acquisitions, the challenges associated with integrating operations across different cultures and
languages and currency, technological, employee and other regulatory risks and uncertainties in the economic, social and
political conditions associated with specific countries; and

• The tax effects of any such acquisitions.

Our failure to successfully manage the acquisitions of Mediasite KK and Sonic Foundry International, or other future acquisitions,
strategic alliances or partnerships could seriously harm our operating results. In addition, our stockholders would be diluted if we
finance the future acquisitions, strategic alliances or partnerships by incurring convertible debt or issuing equity securities.

If potential customers or competitors use open source software to develop products that are competitive with our products and
services, we may face decreased demand and pressure to reduce the prices for our products.

The growing acceptance and prevalence of open source software may make it easier for competitors or potential competitors to
develop software applications that compete with our products, or for customers and potential customers to internally develop
software applications that they would otherwise have licensed from us. One of the aspects of open source software is that it can
be modified or used to develop new software that competes with proprietary software applications, such as ours. Such competition
can develop without the degree of overhead and lead time required by traditional proprietary software companies. As open source
offerings become more prevalent, customers may defer or forego purchases of our products, which could reduce our sales and
lengthen the sales cycle for our products or result in the loss of current customers to open source solutions. If we are unable to
differentiate our products from competitive products based on open source software, demand for our products and services may
decline, and we may face pressure to reduce the prices of our products, which would hurt our profitability. If our use of open-
source is challenged and construes unfavorably, our operating results could be adversely impacted.

We use open source software in our application suite. Although we monitor our use of open source software closely, the terms of
many open source licenses have not been interpreted by United States courts, and there is risk that such licenses could be construed
in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we
could be required to re-engineer our technology or to discontinue offering all or a portion of our products in the event re-
engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and
financial condition.

Our customers may use our products to share confidential and sensitive information, and if our system security is breached,
our reputation could be harmed and we may lose customers.

Our customers may use our products and services to share confidential and sensitive information, the security of which is critical
to their business. Third parties may attempt to breach our security for customer hosted content or the networks of our customers.
Malicious third-parties may also conduct attacks designed to temporarily deny customers access to our services. Customers may
take inadequate security precautions with their sensitive information and may inadvertently make that information public. We
may be liable to our customers or subject to fines for a breach in security, and any breach could harm our reputation and cause us
to lose customers. In addition, customers are vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other
resources to further protect against security breaches or to resolve problems caused by any breach, including litigation-related
expenses if we are sued.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic
or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.

Regulation related to the provision of services on the Internet is increasing, as federal, state and foreign governments continue to
adopt new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information,
including health data. In some cases foreign data privacy laws and regulations, such as the European Union’s Data Protection
Directive, and the country-specific regulations that implement that directive, also govern the processing of personal information.
While our European customers can confirm our participation in the EU Privacy Shield program as support that we comply with
the European Union Directive on the protection of personal data, they may still have concerns about our processing of personal
data and may decide note to host content with us. Further, laws are increasingly aimed at the use of personal information for
marketing purposes, such as the European Union’s e-Privacy Directive, and the country-specific regulations that implement that
directive. Such laws and regulations are subject to differing interpretations and may be inconsistent among jurisdictions. These
and other requirements could reduce demand for our solutions, restrict our ability to support our customers, or even offer our
services and solutions in certain locations. We expect to acquire software and hardware in fiscal 2017 in order to enhance our
ability to defend and to detect intrusions to our network infrastructure. These enhancements will be expensive and require
significant staff time to deploy and develop, and there is no assurance that they will be effective.

In addition to government activity, privacy advocacy and other industry groups have established or may establish new self-
regulatory standards that may place additional burdens on us. Many of our customers in the European Union face increasingly
complex procurement requirements that have delayed some projects and caused us not to be successful in winning other
opportunities. If we are unable to maintain these certifications or meet these standards, it could adversely affect our ability to
provide our solutions to certain customers and could harm our business.

Our customers and potential customers do business in a variety of industries, including financial services, the public sector,
healthcare and telecommunications. Regulators in certain industries have adopted and may in the future adopt regulations or
interpretive positions regarding the use of cloud computing and other outsourced services. The costs of compliance with, and
other burdens imposed by, industry-specific laws, regulations and interpretive positions may limit customers’ use and adoption
of our services and reduce overall demand for our services.

The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of
our service and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance.

Furthermore, concerns regarding data privacy may cause the users of our customers’ data to resist providing the data necessary
to allow our customers to use our service effectively. Even the perception that the privacy of personal information is not
satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services, and could limit
adoption of our cloud-based solutions.

Operational failures in our network infrastructure could disrupt our remote hosting services, cause us to lose clients and sales
to potential clients and result in increased expenses and reduced revenues.

Unanticipated problems affecting our network systems could cause interruptions or delays in the delivery of the hosting services
we provide to some of our clients. We are not equipped to provide full disaster recovery to all of our hosted clients. If there are
operational failures in our network infrastructure that cause interruptions, slower response times, loss of data or extended loss of
service for our remotely hosted clients, we may be required to issue credits or pay penalties, current clients may terminate their
contracts or elect not to renew them and we may lose sales to potential clients. We have recently acquired additional hardware
and systems, expect to make more significant investments in hardware (primarily for storage) and outsourced most aspects of our
network infrastructure to three providers. As a result, we are reliant on third parties for network availability so outages may be
outside our control and we may need to acquire additional hardware in order to provide an appropriate level of redundancy
required by our customers.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

We license technology from third parties. If we are unable to maintain these licenses, our operations and financial condition
may be negatively impacted.

We license technology from third parties. The loss of, our inability to maintain, or changes in material terms of these licenses
could result in increased cost or delayed sales of our software and services, or may cause us to remove features from our products
or services. We anticipate that we will continue to license technology from third parties in the future. This technology may not
continue to be available on commercially reasonable terms, if at all. Although we do not believe that we are substantially
dependent on any individual licensed technology, some of the component technologies that we license from third parties could
be difficult for us to replace. The impairment of these third-party relationships, especially if this impairment were to occur in
unison, could result in delays in the delivery of our software and services until equivalent technology, if available, is identified,
licensed and integrated. This delay could adversely affect our operating results and financial condition.

The technology underlying our products and services is complex and may contain unknown defects that could harm our
reputation, result in product liability or decrease market acceptance of our products.

The technology underlying our products is complex and includes software that is internally developed, software licensed from
third parties and hardware purchased from third parties. These products have, and will in the future, contain errors or defects,
particularly when first introduced or when new versions or enhancements are released. We may not discover defects that affect
our current or new applications or enhancements until after they are sold and our insurance coverage may not be sufficient to
cover our exposure. Any defects in our products and services could:

• Damage our reputation;
• Cause our customers to initiate product liability suits against us;
•
• Cause customers to cancel orders, ask for partial refunds or potential customers to purchase competitive products or

Increase our product development resources;

services;

• Delay release or market acceptance of our products, or otherwise adversely impact our relationships with our customers;

and

• Cause us to allocate valuable engineering resources to fix our existing products, which may cause us to allocate fewer

resources toward developing new products, or toward adding features to our existing products.

If we are viewed only as a commodity supplier, our margins and valuations will shrink.

We need to provide value-added services in order to avoid being viewed as a commodity supplier. This entails building long-term
customer relationships and developing features that will distinguish our products. Our technology is complex and is often
confused with other products and technologies in the market place, including video conferencing, streaming and collaboration.

We have developed lower cost hardware, software products and cloud solutions to better address that market segment. Such
products have more limited features compared to our existing products. While we believe we can preserve the market for our full-
featured products due to differentiation between the two and migration to full featured products, release of lower cost products
could reduce gross margin and demand for products sold at higher prices. Potential large scale deployments of our products often
include the lower cost products we sell, putting greater pressure on gross margin due to expectations for greater volume discounts.

If we fail to build long-term customer relationships and develop features that distinguish our products in the market place, our
margins will shrink and our stock may become less valuable to investors.

Our success depends upon the proprietary aspects of our technology.

Our success and ability to compete depend to a significant degree upon the protection of our proprietary technology. We currently
have three U.S. patents that have been issued to us. We may seek additional patents in the future. However, it is possible that:

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

• Any patents acquired by or issued to us may not be broad enough to protect us.
• Any issued patent could be successfully challenged by one or more third parties, which could result in our loss of the right

to prevent others from exploiting the inventions claimed in those patents.

• Current and future competitors may independently develop similar technology, duplicate our services or design around

any of our patents.

• Effective patent protection, including effective legal-enforcement mechanisms against those who violate our patent-

related assets, may not be available in every country in which we do or plan to do business.

• We may not have the resources to enforce our patents or may determine the potential benefits are not worth the cost and

risk of ultimately being unsuccessful.

We also rely upon trademark, copyright and trade secret laws, which may not be sufficient to protect our intellectual property.

We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as
confidentiality agreements and licenses, to establish and protect our technology. We have registered three U.S. and four foreign
country trademarks. These forms of intellectual property protection are critically important to our ability to establish and maintain
our competitive position. However, it is possible that:

• Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights.
• Laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or to deter others
from developing similar technologies, particularly in foreign countries where the laws may not protect our proprietary
rights as fully or as readily as Unites States laws. Our recent growth in activities in China will likely increase this risk.
• There have been attacks on certain patent systems, increasing the likelihood of changes to established laws, including in
the United States. We cannot predict the long-term effects of any potential changes, which could be detrimental to our
licensing program.

• Effective trademark, copyright and trade secret protection, including effective legal-enforcement mechanisms against
those who violate our trademark, copyright or trade secret assets, may be cost prohibitive or unavailable or limited in
foreign countries.

• Contractual agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other
proprietary information.

• Other companies may claim common law trademark rights based upon state or foreign laws that precede the federal

registration of our marks.

• Policing unauthorized use of our services and trademarks is difficult, expensive and time-consuming, and we may be

unable to determine the extent of any unauthorized use.

Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to
benefit from our technology without paying us for it, which would significantly harm our business.

If other parties bring infringement or other claims against us, we may incur significant costs or lose customers.

Other companies may obtain patents or other proprietary rights that would limit our ability to conduct our business and could
assert that our technologies infringe their proprietary rights. We have incurred substantial costs to defend against such claims in
the past and could incur legal costs in the future, even if without merit, and intellectual property litigation could force us to cease
using key technology, obtain a license or redesign our products. In the course of our business, we may sell certain systems to our
customers, and in connection with such sale, we may agree to indemnify these customers from claims made against them by third
parties for patent infringement related to these systems, which could harm our business.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be
impaired.

Our future success depends upon the continued service of our key management, technical, sales and other critical personnel,
particularly our Chief Executive Officer. Most of our officers and other key personnel are employees-at-will, and we cannot
assure that we will be able to retain them. Key personnel have left our company in the past, sometimes to accept employment
with companies that sell similar products or services to existing or potential customers of ours. There will likely be additional
departures of key personnel from time to time in the future and such departures could result in additional competition, loss of
customers or confusion in the marketplace. As we seek to replace such departures, or expand our business, the hiring of qualified
sales, technical and support personnel has been difficult due to the limited number of qualified professionals. The loss of any key
employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases,
the successful implementation and completion of company initiatives and the results of our operations. In addition, we do not
have life insurance policies on any of our key employees. If we lose the services of any of our key employees, the integration of
replacement personnel could be time consuming, may cause disruptions to our operations and may be unsuccessful.

We face risks associated with government regulation of the internet and related legal uncertainties.

Currently, few existing laws or regulations specifically apply to the Internet, other than laws generally applicable to businesses.
Many Internet-related laws and regulations, however, are pending and may be adopted in the United States, in individual states
and local jurisdictions and in other countries. These laws may relate to many areas that impact our business, including encryption,
network and information security, and the convergence of traditional communication services, such as telephone services, with
Internet communications, taxes and wireless networks. These types of regulations could differ between countries and other
political and geographic divisions both inside and outside the United States. Non-U.S. countries and political organizations may
impose, or favor, more and different regulation than that which has been proposed in the United States, thus furthering the
complexity of regulation. In addition, state and local governments within the United States may impose regulations in addition
to, inconsistent with, or stricter than federal regulations. The adoption of such laws or regulations, and uncertainties associated
with their validity, interpretation, applicability and enforcement, may affect the available distribution channels for, and the costs
associated with, our products and services. The adoption of such laws and regulations may harm our business.

Exercise of outstanding options and warrants will result in further dilution.

The issuance of shares of common stock upon the exercise of our outstanding options and warrants will result in dilution to the
interests of our stockholders, and may reduce the trading price of our common stock.

At September 30, 2016, we had 135 thousand outstanding warrants and 1.6 million of outstanding stock options granted under
our stock option plans, 1.2 million of which are immediately exercisable.

To the extent that these stock options are exercised, dilution to the interests of our stockholders will likely occur. Additional
options and warrants may be issued in the future at prices not less than 85% of the fair market value of the underlying security
on the date of grant. Exercises of these options, or even the potential of their exercise may have an adverse effect on the trading
price of our common stock. The holders of our options are likely to exercise them at times when the market price of the common
stock exceeds the exercise price of the securities. Accordingly, the issuance of shares of common stock upon exercise of the
options will likely result in dilution of the equity represented by the then outstanding shares of common stock held by other
stockholders. Holders of our options can be expected to exercise or convert them at a time when we would, in all likelihood, be
able to obtain any needed capital on terms, which are more favorable to us than the exercise terms provided, by these options.

Our ability to utilize our net operating loss carryforwards may be limited.

The use of our net operating loss carryforwards may have limitations resulting from certain future ownership changes, time
limitations or other factors under the Internal Revenue Code and other taxing authorities.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

If our net operating loss carryforwards are limited, and we have taxable income which exceeds the available net operating loss
carryforwards for that period, we would incur an income tax liability even though net operating loss carryforwards may be
available in future years prior to their expiration. Any such income tax liability may adversely affect our future cash flow, financial
position and financial results.

Our business is subject to changing regulations regarding corporate governance and public disclosure that will increase both
our costs and the risk of noncompliance.

As a publicly traded company we are subject to significant regulations, including the Sarbanes-Oxley Act of 2002. While we have
developed and instituted a corporate compliance program based on what we believe are the current best practices and continue to
update the program in response to newly implemented regulatory requirements and guidance, we cannot assure that we are or
will be in compliance with all potentially applicable regulations.

Although our non-affiliate market capitalization was less than $75 million at March 31, 2016 and we were therefore not required
to have an auditor attestation on our internal controls over financial reporting for fiscal 2016, SEC rules may in the future require
us to have such an attestation if our non-affiliate market capitalization exceeds a certain threshold. We have found material
weaknesses in our internal control over financial reporting in the past and cannot assure that in the future our management or our
auditors, will not find additional material weaknesses in connection with our internal control over financial reporting pursuant to
Section 404 of the Sarbanes-Oxley Act. We also cannot assure that we could correct all such weaknesses to allow our management
to attest that we have maintained effective internal controls over financial reporting as of the end of our fiscal year in time to
enable our independent registered public accounting firm to attest that such assessment will have been fairly stated in our Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission or attest that we have maintained effective internal
control over financial reporting as of the end of our fiscal year. If we fail to comply with any of these regulations, we could be
subject to a range of regulatory actions, fines, or other sanctions or litigation. In addition, the disclosure of any material weakness
in our internal control over financial reporting could have a negative impact on our stock price.

Provisions of our charter documents and Maryland law could also discourage an acquisition of our company that would
benefit our stockholders.

Provisions of our articles of incorporation and by-laws may make it more difficult for a third party to acquire control of our
company, even if a change in control would benefit our stockholders. Our articles of incorporation authorize our board of directors,
without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that
adversely affect or dilute the voting power of the holders of common stock. Furthermore, our articles of incorporation provide
for a classified board of directors, which means that our stockholders may vote upon the retention of only one or two of our five
directors each year. Moreover, Maryland corporate law restricts certain business combination transactions with “interested
stockholders” and limits voting rights upon certain acquisitions of “control shares.”

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal office is located in Madison, Wisconsin in a leased facility of approximately 26,000 square feet. The building serves
as our corporate headquarters, accommodating our general and administrative, product development and selling and marketing
departments. We believe this facility is adequate for our needs. The current lease term for this office expires on December 31,
2018.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Our operations in Japan are managed in Tokyo, Japan in a leased facility of approximately 9,874 square feet with a term expiring
on December 31, 2020. The facility includes sales, technical and administrative functions. The rent for the remainder of the lease
period is approximately $41 thousand per month.

Our European operations are managed in Utrecht, Netherlands in a leased facility of approximately 3,886 square feet with a term
expiring on January 31, 2019. The facility includes sales, technical and administrative functions. The rent for the remainder of
the lease period is approximately $5 thousand per month.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock was initially traded on the American Stock Exchange under the symbol “SFO,” beginning with our initial
public offering in April of 1998. On April 24, 2000, our common stock began trading on the NASDAQ Global Market under the
symbol “SOFO.” Effective September 16, 2009, we transferred the listing of our common stock to the NASDAQ Capital Market.
The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported
on the NASDAQ Global or Capital Markets.

Year Ended September 30, 2017:
First Quarter (through December 9, 2016)
Year Ended September 30, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended September 30, 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Dividends

High

Low

5.92 $

8.25
6.98
8.51
6.50

10.57
9.90
10.47
9.38

4.50

5.00
4.28
5.76
5.75

7.22
7.35
5.98
5.30

The Company has not paid any cash dividends and does not intend to pay any cash dividends in the foreseeable future. The
Company is prohibited from paying any cash dividends pursuant to the terms of the loan and security agreement with Silicon
Valley Bank.

Holders

At December 9, 2016, there were 238 common stockholders of record and approximately 4,000 total shareholders. Many shares
are held by brokers and other institutions on behalf of shareholders.

Equity Compensation Plan Information

Plan category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding
options, warrants
and rights

Number of
securities
remaining
available for
future issuance

(a)

(b)

(c)

Equity compensation plans approved by security holders
(1)
Equity compensation plans not approved by security
holders (2)
Total

1,550,264

52,558
1,602,822 $

8.58

12.87
9.52

373,389

—
373,389

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

(1) Consists of the 2009 Stock Incentive Plan, Employee Incentive Stock Option Plan and the Directors Stock Option Plans.

For further information regarding these plans, reference is made to Note 5 of the financial statements.

(2) Consists of the Non-Qualified Stock Option Plan. For further information regarding this plan, reference is made to Note

5 of the financial statements.

The graph below compares the cumulative total stockholder return on our common stock from September 30, 2011 through and
including September 30, 2016 with the cumulative total return on The NASDAQ Stock Market (US only) and the RDG
Technology Composite. The graph assumes that $100 was invested in our common stock on September 30, 2011 for each of the
indexes and that all dividends were reinvested. Unless otherwise specified, all dates refer to the last day of each month presented.
The comparisons in the graph below are based on historical data, with our common stock prices based on the closing price on the
dates indicated, and are not intended to forecast the possible future performance of our common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

*$100 invested on 9/30/11 in stock or index, including reinvestment of dividends Fiscal year ending September 30.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial and operating data were derived from our consolidated financial statements. The selected financial data set
forth below is qualified in its entirety by, and should be read in conjunction with, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our financial statements and notes thereto appearing elsewhere in this annual
report on Form 10-K (in thousands except per share data).

Years Ended September 30,
2014

2013

2015

Statement of Operations Data:
Revenue

Cost of revenue

Gross margin
Operating expenses

Income (loss) from operations
Gain on investment in Mediasite KK

Equity in earnings from investment in
Mediasite KK
Other income (expense), net

Interest expense, net

Provision for income taxes

Net income (loss)

2016

37,975 $
9,985
27,990
30,266

(2,276 )
—

—

(178 )

(594 )

(269 )

36,459 $
10,635
25,824
29,916

(4,092 )
—

—
46
(372 )

(107 )

35,830 $
10,275
25,555
28,637

(3,082 )
1,390

38
173
(231 )

(1,104 )

2012

26,090
7,246
18,844
18,735
109
—

420

(132 )
—
(240 )
157
0.04
0.04

27,756 $
7,696
20,060
20,698

(638 )
—

209

(123 )
—
(240 )

(792 ) $

(0.20 ) $

Basic net income (loss) per common share $

Diluted net income (loss) per common share $

(0.76 ) $

(1.04 ) $

(0.67 ) $

(3,317 ) $

(4,525 ) $

(2,816 ) $

Weighted average common shares:
– Basic

– Diluted

Balance Sheet Data at September 30:
Cash and cash equivalents
Working capital

Total assets

Long-term liabilities

Stockholders’ equity

4,389,421
4,389,421
2016

4,332,576
4,332,576
2015

4,174,191
4,174,191
2014

3,932,692
3,932,692
2013

3,857,161
3,907,888
2012

1,794 $
(2,645 )
33,158
7,249
6,516

1,976 $
(618 )
34,803
8,435
7,803

4,344 $
18
34,623
7,268
11,315

3,482 $
2,575
24,333
3,585
10,704

4,478
3,332
22,821
3,748
10,539

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The financial and business analysis below provides information that Sonic Foundry, Inc. (the “Company”) believes is relevant to
an assessment and understanding of the Company’s consolidated financial position and results of operations. This financial and
business analysis should be read in conjunction with the consolidated financial statements and related notes.

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 1, Item 1A of this Form 10-K), “Quantitative and Qualitative
Disclosures about Market Risk” (Part II, Item 7A of this Form 10-K), and in this Item 7. 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 technology leader in the emerging web communications marketplace, providing video content
management and distribution for education, business and government. Using the Mediasite webcasting platform and webcast
services of the Company’s events team, the Company empowers its customers to advance how they share knowledge online,
using video webcasts to bridge time and distance, enhance learning outcomes and improve performance.

Critical Accounting Policies

We have identified the following as critical accounting policies to our Company and have discussed the development, selection
of estimates and the disclosure regarding them with the audit committee of the board of directors:

Impairment of long-lived assets;

• Revenue recognition, allowance for doubtful accounts and reserves;
•
• Valuation allowance for net deferred tax assets; and
• Accounting for stock-based compensation.

Revenue Recognition, Allowance for Doubtful Accounts and Reserves

General

Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales
price is fixed or determinable and collectability is reasonably assured. Revenue is deferred when undelivered products or services
are essential to the functionality of delivered products, customer acceptance is uncertain, significant obligations remain, or the
fair value of undelivered elements is unknown. Typically, the Company does not offer customers the right to return product, other
than for exchange or repair pursuant to a warranty or stock rotation. The Company’s policy is to reduce revenue if it incurs an
obligation for price rebates or other such programs during the period the obligation is reasonably estimated to occur. The following
policies apply to the Company’s major categories of revenue transactions.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Products

Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the customer or
upon customer acceptance if non-delivered products or services are essential to the functionality of delivered products. Under the
terms and conditions of the sale, this occurs at the time of shipment to the customer. Product revenue currently represents sales
of our Mediasite recorders and Mediasite related products such as our server software and other software licenses. If a license is
time-based, the revenue is recognized over the term of the license agreement.

Services

The Company sells support and content hosting contracts to our customers, typically one year in length, and records the related
revenue ratably over the contractual period. Our support contracts cover phone and electronic technical support availability over
and above the level provided by our distributors, software upgrades on a when and if available basis, advance hardware
replacement and an extension of the standard hardware warranty from 90 days to one year. The manufacturers the Company
contracts with to build the units provide a limited one-year warranty on the hardware. The Company also sells installation,
training, event webcasting, and customer content hosting services. Revenue for those services is recognized when performed in
the case of installation, training and event webcasting services. Occasionally, the Company will sell customization services to
enhance the server software. Revenue from those services is recognized when performed, if perfunctory, or under contract
accounting. Service amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue until the
revenue recognition criteria are met.

Revenue Arrangements that Include Multiple Elements

Sales of software, with or without installation, training, and post customer support fall within the scope of the software revenue
recognition rules. Under the software revenue recognition rules, the fee from a multiple-deliverable arrangement is allocated to
each of the undelivered elements based upon vendor-specific objective evidence (VSOE), which is limited to the price charged
when the same deliverable is sold separately, with the residual value from the arrangement allocated to the delivered element.
The portion of the fee that is allocated to each deliverable is then recognized as revenue when the criteria for revenue recognition
are met with respect to that deliverable. If VSOE does not exist for all of the undelivered elements, then all revenue from the
arrangement is typically deferred until all elements have been delivered to the customer.

In the case of the Company’s hardware products with embedded software, the Company has determined that the hardware and
software components function together to deliver the product’s essential functionality, and therefore, the revenue from the sale of
these products is accounted for under the revenue recognition rules for tangible products whereby the fee from a multiple-
deliverable arrangement is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-
price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the
customer on a stand-alone basis. A delivered item that does not qualify as a separate unit of accounting is combined with the other
undelivered items in the arrangement and revenue is recognized for those combined deliverables as a single unit of accounting.
The selling price used for each deliverable is based upon VSOE if available, from third-party evidence (TPE) if VSOE is not
available, and best estimate of selling price (ESP) if neither VSOE nor TPE are available. TPE is the price of the Company’s or
any competitor’s largely interchangeable products or services in stand-alone sales to similarly situated customers. ESP is the price
at which the Company would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions
and entity-specific factors. All revenue arrangements, excluding the sale of all software-only products and associated services,
have been accounted for under this guidance.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

with consideration for market conditions, such as the impact of competition and geographic considerations, and entity-specific
factors, such as the cost of the product and the Company’s profit objectives. Management believes that ESP is reflective of
reasonable pricing of that deliverable as if priced on a stand-alone basis. When a sales transaction includes deliverables that are
divided between Accounting Standards Codification (ASC) Topic 605 and ASC Subtopic 985-605, the Company allocates the
selling price using the relative selling price method whereas value is allocated using an ESP for software developed using a
percent of list price approach. The other deliverables are valued using ESP or VSOE as previously discussed.

While the pricing model, currently in use, captures all critical variables, unforeseen changes due to external market forces may
result in a revision of the inputs. These modifications may result in the consideration allocation differing from the one presently
in use. Absent a significant change in the pricing inputs or the way in which the industry structures its deals, future changes in
the pricing model are not expected to materially affect our allocation of arrangement consideration.

Management has established VSOE for hosting services. Billings for hosting are spread ratably over the term of the hosting
agreement, with the typical hosting agreement having a term of 12 months, with renewal on an annual basis. The Company sells
most hosting contracts without the inclusion of products. When the hosting arrangement is sold in conjunction with product, the
product revenue is recognized immediately while the remaining hosting revenue is spread ratably over the term of the hosting
agreement. The selling price is allocated between these elements using the relative selling price method. The Company uses ESP
for development of the selling price for hardware products with embedded software.

The Company also offers hosting services bundled with events services. The Company uses VSOE to establish relative selling
prices for its events services. The Company recognizes events revenue when the event takes place and recognizes the hosting
revenue over the term of the hosting agreement. The total amount of the arrangement is allocated to each element based on the
relative selling price method.

Reserves

The Company reserves for stock rotations, price adjustments, rebates, and sales incentives to reduce revenue and accounts
receivable for these and other credits granted to customers. Such reserves are recorded at the time of sale and are calculated based
on historical information (such as rates of product stock rotations) and the specific terms of sales programs, taking into account
any other known information about likely customer behavior. If actual customer behavior differs from our expectations, it may
compromise our ability to recognize revenue to these distributors at the time of shipment. Also, if the Company determines that
it can no longer accurately estimate amounts for stock rotations and sales incentives, the Company would not be able to recognize
revenue until resellers sell the inventory to the final end user.

Credit Evaluation and Allowance for Doubtful Accounts

We assess the realization of our receivables by performing ongoing credit evaluations of our customers’ financial condition.
Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations
due to deterioration of its financial viability, credit ratings or bankruptcy. Our reserve requirements are based on the best facts
available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts
determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of
factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience.

Impairment of long-lived assets

Goodwill has an indefinite useful life and is recorded at cost and not amortized but, instead, tested at least annually for impairment.
We assess the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair
value of these assets is less than the carrying value. If a qualitative assessment is used and the Company determines that the fair
value of goodwill is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative
impairment test will be performed. If goodwill is quantitatively assessed for impairment, a two-step approach is applied. First,

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

the Company compares the estimated fair value of the goodwill to its carrying value. The second step, if necessary, measures the
amount of impairment, if any, by comparing the implied fair value of goodwill to its carrying value.

In fiscal 2016 and 2015, we performed the two-step goodwill test and determined that the fair value of goodwill was more than
the carrying value. For purposes of the fiscal 2016 and 2015 tests, goodwill balances are evaluated within three separate reporting
units. The Company has recognized no impairment charges as of September 30, 2016 or as of September 30, 2015.

If we had determined that the fair value of goodwill is less than its carrying value, based upon the annual test or the existence of
one or more indicators of impairment, we would then measure impairment based on a comparison of the implied fair value of
goodwill with the carrying amount of goodwill. To the extent the carrying amount of goodwill is greater than the implied fair
value of goodwill, we would record an impairment charge for the difference.

Long-lived assets and intangible assets other than goodwill are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows
attributable to that asset. For the years ended September 30, 2016 and 2015, no events or changes in circumstances occurred that
required this analysis.

Valuation allowance for net deferred tax assets

Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. We do not provide for
U.S. income taxes on the undistributed earnings of our foreign subsidiaries, which we consider to be permanently invested outside
of the U.S.

We make judgments regarding the realizability of our deferred tax assets. The balance sheet carrying value of our net deferred
tax assets is based on whether we believe that it is more likely than not that we will generate sufficient future taxable income to
realize these deferred tax assets after consideration of all available evidence. We regularly review our deferred tax assets for
recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing
temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive and
negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative
evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for
positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh
objective negative evidence of recent financial reporting losses. Generally, cumulative loss in recent years is a significant piece
of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.

As of September 30, 2016 and 2015, valuation allowances have been established for all U.S. and for certain foreign deferred tax
assets which we believe do not meet the “more likely than not” criteria for recognition. If we are subsequently able to utilize all
or a portion of the deferred tax assets for which a valuation allowance has been established, then we may be required to recognize
these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to our results
of operations in the period in which the benefit is determined.

Accounting for stock-based compensation

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

options granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is based
on the U.S. Treasury yields in effect at the time of grant. Forfeitures are based on actual behavior patterns.

All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted
for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more
reliably measured.

RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated
financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.

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.

Revenue in fiscal 2016 totaled $38.0 million, compared to $36.5 million in fiscal 2015, an increase of 4%. Revenue consisted of
the following:

• Product and other revenue from the sale of Mediasite recorder units and server software decreased from $16.3 million in
fiscal 2015 to $16.2 million in fiscal 2016. Revenue for 208 recorders delivered in Q4-2015 to an international customer
was deferred at September 30, 2016 and the units are not included in the units sold figures shown below. The average
sales price per unit improved in fiscal 2016 while total units sold decreased as compared to fiscal 2015 during which both
the average sales price per unit and the number of units sold were impacted by two large discounted deals to international
customers for over 250 units.

Units sold
Rack to mobile ratio

Average sales price, excluding support (000’s)

Refresh Units

2016
1,474
5.9 to 1

$7.9

426

2015
1,977
5.8 to 1

$7.3

465

• 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, event and content hosting services. Services revenue
increased from $20.2 million in fiscal 2015 to $21.7 million in fiscal 2016 due primarily to an increase in hosting revenues
as compared to fiscal 2015. In addition, revenue related to support contracts on Mediasite recorder units increased
compared to fiscal 2015. At September 30, 2016, $14.1 million of revenue was deferred, of which we expect to recognize
$12.8 million in the next twelve months, including approximately $4.5 million in the quarter ending December 31, 2016.
At September 30, 2015, $12.7 million of revenue was deferred.

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

Gross Margin

Total gross margin in fiscal 2016 was $28.0 million or 74% compared to $25.8 million or 71% in fiscal 2015. Gross margin
percentage improved over year over year mainly due to revenue increases in software and support contracts, which have higher
margins. The significant components of cost of revenue include:

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

• Material and freight costs for Mediasite recorders. Costs for fiscal 2016 Mediasite recorder hardware and other costs
totaled $3.8 million compared to $5.3 million in fiscal 2015. Freight costs were $278 thousand, and labor and allocated
costs were $1.6 million in fiscal 2016 compared to $276 thousand and $1.3 million, respectively, in fiscal 2015. The
remaining $750 thousand in fiscal 2016 and $632 thousand in fiscal 2015 relate to material and freight costs for Sonic
Foundry International and MSKK.

• Services costs. Staff wages and other costs allocated to cost of service revenues were $2.0 million in fiscal 2016 and $1.9
million in fiscal 2015, respectively, resulting in gross margin on services of 84% in fiscal 2016 and fiscal 2015,
respectively. The remaining $1.5 million in fiscal 2016 and $1.3 million in fiscal 2015 relate to costs of providing content
hosting, events and technical support services at Sonic Foundry International and MSKK.

The Company expects the gross margin percentage to remain consistent or slightly increase in fiscal 2017 as a result of an expected
increase in software revenue and a slight decrease in the cost of certain products.

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.

Selling and marketing expense decreased $215 thousand, or 1%, from $18.0 million in fiscal 2015 to $17.8 million in fiscal 2016.
Fluctuations in the major categories include:

• Advertising and tradeshow expenses decreased $180 thousand.
• Overall costs allocated to selling & marketing decreased by $119 thousand, primarily as a result of a decrease in facilities

expenses (G&A) and an increase in selling & marketing expenses allocated to cost of goods sold.

• Selling and marketing expenses for Sonic Foundry International and MSKK accounted for $312 thousand and $2.8
million, respectively in fiscal 2016, an aggregate increase of $160 thousand from the prior year. The increase is mainly
due to the impact of foreign currency exchange rates in fiscal 2016.

At September 30, 2016, we had 132 employees in selling and marketing, a decrease from 134 employees at September 30, 2015.
Of the 132 employees in selling and marketing at September 30, 2016, 45 are employed by our foreign subsidiaries. We anticipate
minimal growth in selling and marketing headcount in fiscal 2017.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities, finance, legal,
human resources and information technology departments, as well as other expenses not fully allocated to functional areas.

G&A expenses remained consistent at $5.6 million in both fiscal 2016 and fiscal 2015. Fluctuations in major categories include:

Increase in compensation and benefits of $196 thousand related to an increase in headcount during the year.

•
• Decrease in facilities expenses of $219 thousand, primarily due to an increase in hosting expenses allocated to cost of

•

revenue.
Increase in costs allocable to G&A of $54 thousand, primarily as a result of higher expenses related to computer and office
supplies.

• G&A expenses for Sonic Foundry International and MSKK accounted for $156 thousand and $884 thousand, respectively

in fiscal 2016, an aggregate decrease of $46 thousand from the prior year.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

At September 30, 2016, we had 27 full-time employees in G&A, an increase from 25 full-time employees at September 30, 2015.
Of the 27 employees in G&A at September 30, 2016, 11 are employed by our foreign subsidiaries. We do not anticipate growth
in G&A headcount in fiscal 2017.

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.

Product development expenses increased $572 thousand, or 9%, from $6.3 million in fiscal 2015 to $6.8 million in fiscal 2016.
Fluctuations include:

•

Increase in compensation and benefits of $366 thousand due to a higher average headcount during the year and an increase
in compensation rates.

• Professional services increase of $144 thousand, mainly due to the use of outsourced development.
• Costs allocated from G&A increased by $28 thousand.
• Product development expenses for Sonic Foundry International and MSKK accounted for $389 thousand and $51
thousand, respectively for fiscal 2016, an aggregate increase of $14 thousand from the prior year related to the subsidiaries.

At September 30, 2016, we had 46 full-time employees in product development compared to 43 employees at September 30,
2015. Of the 46 employees in product development at September 30, 2016, 8 are employed by our foreign subsidiaries. There
were no software development efforts in fiscal 2016 or 2015 that qualified for capitalization. We anticipate slight growth in
product development headcount in fiscal 2017.

Other Income and Expense, Net

Interest expense for the twelve months ended September 30, 2016 increased $222 thousand compared to fiscal 2015 due primarily
to higher rate debt outstanding with Partners for Growth IV, L.P. (“PFG”) and other related costs. Included in interest expense for
fiscal 2016 is $88 thousand of expense related to the discounts and related accretion on the PFG Loan and Warrant Debt. There
was $27 thousand of expense related to the discounts and related accretion on the PFG Loan and Warrant Debt included in interest
expense in fiscal 2015.

During the twelve months ended September 30, 2016, a gain of $57 thousand was recorded related to the fair value remeasurement
on the derivative liability associated with the PFG Loan and Warrant Debt. In the twelve months ended September 30, 2015, a
gain of $11 thousand was recorded related to the fair value remeasurement on the derivative liability associated with the PFG
Loan and Warrant Debt.

In the twelve months ended September 30, 2016, a foreign currency gain of $3 thousand was realized related to re-measurement
of the subordinated notes payable related to the Company’s foreign subsidiaries. In the twelve months ended September 30, 2015,
a foreign currency gain of $202 thousand was recorded related to the remeasurement.

Provisions Related to Income Taxes

The Company records a non-cash deferred tax liability related to tax amortization of goodwill acquired in 2001. The income tax
benefit related to this amortization was $240 thousand for both fiscal 2016 and fiscal 2015, respectively.

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 into US dollars
at period end exchange rates whiles revenues and expenses are translated using average rates for the period. Gains and losses

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

from the translation are deferred and included in accumulated other comprehensive loss on the consolidated statements of
operations.

For the year ended September 30, 2016, the Company’s foreign currency translation adjustment was a gain of $939 thousand
compared to a loss of $701 thousand in the year ended September 30, 2015. The gain in fiscal 2016 is attributable to the
strengthening in the Japanese Yen and the Euro compared to the US dollar during the period as compared to fiscal 2015.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are its cash, revolving line of credit, and in fiscal 2016, cash from operating activities.
During fiscal 2016, the Company generated $1.7 million of cash from operating activities compared with $3.1 million of cash
used for operating activities in fiscal 2015. The increase in cash generated from operating activities was primarily due to the
Company’s reduced net loss and an increase in cash generated from decreased working capital, predominantly a decrease in
accounts receivable in fiscal 2016 rather than an increase recorded in fiscal 2015.

Capital expenditures for property and equipment were $339 thousand in fiscal 2016 compared to $722 thousand in fiscal 2015.

The Company used $1.6 million of cash for financing activities during fiscal 2016, mainly as a result of net payments on the line
of credit and notes payable. The Company generated proceeds of $1.6 million in fiscal 2015 due to net proceeds on the line of
credit and proceeds from equity transactions, including issuance of common stock and warrants, and exercise of common stock
options.

At September 30, 2016, the Company had a $4.0 million revolving line of credit with Silicon Valley Bank. The line of credit
bears interest at prime rate plus 1.25%. At September 30, 2016, outstanding borrowings were $1.6 million. The highest balance
on the line of credit during the year was $3.26 million. At September 30, 2016, there was a remaining amount of $2.3 million
available under the line of credit for advances. At September 30, 2015, outstanding borrowings were $1.4 million.

At September 30, 2016, the Company had $1.1 million of notes payable with Silicon Valley Bank and $1.3 million of notes
payable, net of warrant debt discounts, with PFG. At September 30, 2015, the Company had $1.9 million outstanding related to
notes payable with Silicon Valley Bank and $1.4 million of notes payable, net of warrant debt discounts, with PFG. The Company
used cash for a net $1.2 million in payments on notes during the twelve months ended September 30, 2016 compared to cash used
for a net $558 thousand in payments on notes in the same period of fiscal 2015. These amounts include payments on subordinated
notes payable as a result of the acquisitions completed in fiscal 2014. In connection with the Loan and Security Agreement and
Warrant with PFG, amortization expense of $71 thousand related to the debt discount was incurred as a non-cash interest expense
in fiscal 2016. In fiscal 2015, amortization expense of $22 thousand was recorded related to the debt discount with PFG.

At September 30, 2016 approximately $1.6 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 twelve months. We will likely evaluate operating and capital lease opportunities to finance equipment purchases in the future
and anticipate utilizing the Company’s revolving line of credit to support working capital needs. We may also seek additional
equity financing, or issue additional shares previously registered in our available shelf registration, although we currently have
no plans to do so.

Contractual Obligations

The following summarizes our contractual obligations at September 30, 2016 and the effect those obligations are expected to
have on our liquidity and cash flow in future periods (in thousands):

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Contractual Obligations:

Product purchase commitments
Operating lease obligations
Capital lease obligations (a)
Notes payable (a)
Subordinated notes payable (a)

Total

Less than
1 Year

Years
2-3

Years
4-5

Over
5 years

782 $

— $

4,000
551
2,630
93

1,341
307
1,789
93

2,001
214
841
—

— $
658
27
—
—

—
—
3
—
—

(a) Includes fixed and determinable interest payments

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments

Pursuant to Item 305 of Regulation S-K, the Company, as a smaller reporting company, is not required to provide the information
required by this item.

Interest Rate Risk

Our cash equivalents, which consist of overnight money market funds, are subject to interest rate fluctuations, however, we
believe this risk is minimal due to the short-term nature of these investments.

At September 30, 2016, $2.7 million of the Company’s $4.3 million in outstanding debt is variable rate. We do not expect that an
increase in the level of interest rates would have a material impact on our Consolidated Financial Statements. We monitor our
positions with, and the credit quality of, the financial institutions that are party to any of our financial transactions.

Foreign Currency Exchange Rate Risk

The functional currency of our foreign subsidiaries in the Netherlands is the Euro and in Japan is the Japanese Yen. They are
subject to foreign currency exchange rate risk. Any increase or decrease in the exchange rate of the U.S. Dollar compared to the
Euro or Japanese Yen will impact our future operating results and financial position.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders, Audit Committee and Board of Directors
Sonic Foundry, Inc. and Subsidiaries
Madison, WI

We have audited the accompanying consolidated balance sheets of Sonic Foundry, Inc. and Subsidiaries (the “Company”) as of
September 30, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity,
and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Sonic Foundry, Inc. and Subsidiaries as of September 30, 2016 and 2015, and the results of their operations and cash flows for
the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Baker Tilly Virchow Krause, LLP

Madison, Wisconsin
December 22, 2016

Sonic Foundry, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share data)

September 30,

2016

2015

Assets
Current assets:

Cash and cash equivalents
Accounts receivable, net of allowances of $225 and $150
Inventories
Prepaid expenses and other current assets

Total current assets

Property and equipment:

Leasehold improvements
Computer equipment
Furniture and fixtures

Total property and equipment
Less accumulated depreciation and amortization

Property and equipment, net

Other assets:

Goodwill
Customer relationships, net of amortization of $723 and $457
Software development costs, net of amortization of $533 and $429
Product rights, net of amortization of $287 and $164
Other intangibles, net of amortization of $236 and $190
Other long-term assets

Total assets
Liabilities and stockholders’ equity
Current liabilities:

Revolving line of credit
Accounts payable
Accrued liabilities
Unearned revenue
Current portion of capital lease and financing arrangements
Current portion of notes payable and warrant debt, net of discounts
Current portion of subordinated note payable

Total current liabilities

Long-term portion of unearned revenue
Long-term portion of capital lease and financing arrangements
Long-term portion of notes payable and warrant debt, net of discounts
Long-term portion of subordinated note payable
Derivative liability, at fair value
Other liabilities
Deferred tax liability

Total liabilities
Commitments and contingencies
Stockholders’ equity:

1,794 $
11,646
1,904
1,404
16,748

879
5,837
825
7,541
5,510
2,031

11,310
1,882
—
385
76
726
33,158 $

1,772 $
961
1,883
12,834
283
1,567
93
19,393
1,257
231
871
—
67
259
4,564
26,642

Preferred stock, $.01 par value, authorized 500,000 shares; none issued
5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation
preference at par), authorized 1,000,000 shares, none issued
Common stock, $.01 par value, authorized 10,000,000 shares; 4,424,275 and 4,376,456
shares issued and 4,411,559 and 4,363,740 shares outstanding
Additional paid-in capital
Accumulated deficit

—

44
197,064
(190,214 )

1,976
12,659
2,385
927
17,947

904
5,852
837
7,593
4,785
2,808

10,853
1,872
104
508
112
599
34,803

1,818
2,026
1,666
11,359
211
1,299
186
18,565
1,325
196
2,080
92
109
311
4,322
27,000

—

44
195,973
(186,897 )

Sonic Foundry, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share data)

Accumulated other comprehensive loss
Receivable for common stock issued
Treasury stock, at cost, 12,716 shares

Total stockholders’ equity

Total liabilities and stockholders’ equity

(183 )
(26 )
(169 )
6,516
33,158 $

(1,122 )
(26 )
(169 )
7,803
34,803

See accompanying notes to the consolidated financial statements.

Sonic Foundry, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share data)

Revenue:
Product

Services

Other

Total revenue
Cost of revenue:
Product

Services

Total cost of revenue

Gross margin
Operating expenses:
Selling and marketing

General and administrative

Product development

Total operating expenses

Loss from operations
Non-operating income (expenses):
Interest expense, net

Other income (expense), net

Total non-operating income (expenses)

Loss before income taxes
Provision for income taxes

Net loss

Loss per common share:
Basic net loss per common share

Diluted net loss per common share

Weighted average common shares – Basic

– Diluted

See accompanying notes to the consolidated financial statements.

Years Ended September 30,

2016

2015

15,823 $
21,734
418
37,975

6,459
3,526
9,985
27,990

17,801
5,628
6,837
30,266
(2,276 )

(594 )

(178 )

(772 )

(3,048 )
(269 )

(3,317 ) $

(0.76 ) $

4,389,421
4,389,421

15,884
20,160
415
36,459

7,406
3,229
10,635
25,824

18,016
5,635
6,265
29,916
(4,092 )

(372 )
46

(326 )

(4,418 )
(107 )

(4,525 )

(1.04 )

(1.04 )
4,332,576
4,332,576

Sonic Foundry, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)

Net loss

Foreign currency translation adjustment

Comprehensive loss

See accompanying notes to the consolidated financial statements.

Years Ended September 30,

2016

2015

(3,317 ) $
939
(2,378 ) $

(4,525 )
(701 )

(5,226 )

Sonic Foundry, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)

Common
stock

Additional
paid-in
capital

Accumulat
ed
deficit

Accumulated
other
comprehensive
loss

Receivable
for
common
stock issued

Treasury
stock

Total

(421 ) $
—
—

—

(701 )
—

(26 ) $
—
—

(169 ) $
—
—

11,315
963
710

—

—
—

—

—
—

(1,122 ) $
—

(26 ) $
—

(169 ) $
—

—

939
—

—

—
—

—

—
—

(183 ) $

(26 ) $

(169 ) $

(701 )

(4,525 )
7,803
847

244

—

939

(3,317 )
6,516

Balance, September 30, 2014 $
Stock compensation

Issuance of common stock

Exercise of common stock
options
Foreign currency translation
adjustment
Net loss

Balance, September 30, 2015 $
Stock compensation

Issuance of common stock and
warrants
Exercise of common stock
options
Foreign currency translation
adjustment
Net loss

Balance, September 30, 2016 $

43 $ 194,260 $ (182,372 ) $
—
1

963
709

—
—

—

—
—
—
—
44 $ 195,973 $ (186,897 ) $
—

(4,525 )

847

—

244

—

—
—
—
—
44 $ 197,064 $ (190,214 ) $

(3,317 )

—

See accompanying notes to the consolidated financial statements.

Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(in thousands)

Operating activities
Net loss

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Amortization of other intangibles

Depreciation and amortization of property and equipment

Loss on sale of fixed assets

Provision for doubtful accounts

Deferred taxes

Stock-based compensation expense related to stock options and warrants

Remeasurement gain on subordinated debt

Remeasurement gain on derivative liability

Changes in operating assets and liabilities:

Accounts receivable

Inventories

Prepaid expenses and other current assets

Accounts payable and accrued liabilities

Other long-term liabilities

Unearned revenue

Net cash provided by (used in) operating activities

Investing activities
Purchases of property and equipment

Net cash used in investing activities

Financing activities
Proceeds from notes payable

Proceeds from line of credit

Payments on notes payable

Payments on line of credit

Payment of debt issuance costs

Proceeds from issuance of common stock and warrants

Proceeds from exercise of common stock options

Payments on capital lease and financing arrangements

Net cash provided by (used in) financing activities
Changes in cash and cash equivalents due to changes in foreign currency

Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental cash flow information:

Interest paid

Income taxes paid, foreign

Non-cash financing and investing activities:

Property and equipment financed by capital lease or accounts payable

Debt discount

Stock issued for board of director's fees

Warrants issued for investor relations services

See accompanying notes to the consolidated financial statements.

Years Ended
September 30,

2016

2015

(3,317 ) $

(4,525 )

652
1,553
72
75
341
861
(3 )
(58 )

1,341
514
(532 )
(966 )
(60 )
1,243
1,716

(339 )
(339 )

500
17,845
(1,693 )
(17,958 )
(36 )
66
—
(278 )
(1,554 )
(5 )
(182 )
1,976
1,794 $

529 $
27

402
16
164
14

669
1,599
—
57
53
963
(202 )

(11 )

(4,379 )

(344 )
169
111
(86 )
2,800

(3,126 )

(722 )

2,336
8,535
(2,894 )

(6,727 )

(122 )
710
41
(252 )
1,627
(147 )

(2,368 )
4,344
1,976

424
31

292
179
—
—

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

1. Basis of Presentation and Significant Accounting Policies

Business

Sonic Foundry, Inc. (the Company) is in the business of providing enterprise solutions and services for the web communications
market.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,
Sonic Foundry Media Systems, Inc., Sonic Foundry International B.V. (formerly Media Mission B.V.) and Mediasite K.K. All
significant intercompany transactions and balances have been eliminated. The name change for the subsidiary formerly known
as Media Mission B.V. occurred in October 2016.

Prior to January 2014, the Company owned approximately 26% of Mediasite KK and accounted for its investment under the
equity method of accounting. On January 14, 2014, the Company purchased the remaining 74% of Mediasite KK.

Reclassifications

Reclassifications have been made to the September 30, 2015 financial statements to conform to the September 30, 2016
presentation. These reclassifications had no effect on the Company’s net loss or stockholders’ equity as previously reported.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America
(US GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expense during the period. Actual results could differ from those estimates.

Revenue Recognition

General

Products

Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the customer or
upon customer acceptance if non-delivered products or services are essential to the functionality of delivered products. Under the
terms and conditions of the sale, this occurs at the time of shipment to the customer. Product revenue currently represents sales
of our Mediasite recorder and Mediasite related products such as our server software and other software licenses. If a license is
time-based, the revenue is recognized over the term of the license agreement.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Services

Revenue Arrangements that Include Multiple Elements

The selling prices used in the relative selling price allocation method are as follows: (1)the Company’s products and services are
based upon VSOE and (2) hardware products with embedded software, for which VSOE does not exist, are based upon ESP. The
Company does not believe TPE exists for any of these products and services because they are differentiated from competing
products and services in terms of functionality and performance and there are no competing products or services that are largely
interchangeable. Management establishes ESP for hardware products with embedded software using a cost plus margin approach
with consideration for market conditions, such as the impact of competition and geographic considerations, and entity-specific
factors, such as the cost of the product and the Company’s profit objectives. Management believes that ESP is reflective of
reasonable pricing of that deliverable as if priced on a stand-alone basis. When a sales transaction includes deliverables that are
divided between Accounting Standards Codification (ASC) Topic 605 and ASC Subtopic 985-605, the Company allocates the
selling price using the relative selling price method whereas value is allocated using an ESP for software developed using a
percent of list price approach. The other deliverables are valued using ESP or VSOE as previously discussed.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

While the pricing model, currently in use, captures all critical variables, unforeseen changes due to external market forces may
result in a revision of the inputs. These modifications may result in the consideration allocation differing from the one presently
in use. Absent a significant change in the pricing inputs or the way in which the industry structures its transactions, future changes
in the pricing model are not expected to materially affect our allocation of arrangement consideration.

Management has established VSOE for hosting services. Billings for hosting are spread ratably over the term of the hosting
agreement, with the typical hosting agreement having a term of 1 year, with renewal on an annual basis. The Company sells most
hosting contracts without the inclusion of products. When the hosting arrangement is sold in conjunction with product, the product
revenue is recognized immediately while the remaining hosting revenue is spread ratably over the term of the hosting agreement.
The selling price is allocated between these elements using the relative selling price method. The Company uses ESP for
development of the selling price for hardware products with embedded software.

Reserves

Shipping and Handling

The Company’s shipping and handling costs billed to customers are included in other revenue. Costs related to shipping and
handling are included in cost of revenue and are recorded at the time of shipment to the customer.

Concentration of Credit Risk and Other Risks and Uncertainties

As of September 30, 2016, of the $1.8 million in cash and cash equivalents, $185 thousand is deposited with 2 major U.S. financial
institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. The Company has
not experienced any losses on such amounts and believes that it is not exposed to any significant credit risk on these balances.
The remaining $1.6 million of cash and cash equivalents is held by our foreign subsidiaries in financial institutions in Japan and
the Netherlands and held in their local currency. The cash held in foreign financial institutions is not guaranteed.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

We had billings for Mediasite product and support services as a percentage of total billings to one distributor of approximately
14% in 2016 and 10% in 2015 and to a second distributor of approximately 13% in 2016 and 12% in 2015 . At September 30,
2016 and 2015, these two distributors represented 28% and 22% of total accounts receivable, respectively.

Currently all of our product inventory purchases are from one third-party contract manufacturer. Although we believe there are
multiple sources of supply from other contract manufacturers as well as multiple suppliers of component parts required by the
contract manufacturers, a disruption of supply of component parts or completed products, even if short term, would have a
material negative impact on our revenues. At September 30, 2016 and 2015, this supplier represented 40% and 49%, respectively,
of total accounts payable. We also license technology from third parties that is embedded in our software. We believe there are
alternative sources of similar licensed technology from other third parties that we could also embed in our software, although it
could create potential programming related issues that might require engineering resources.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents. As of September 30, 2016, of the $1.8 million aggregate cash and cash equivalents held by the Company, the amount
of cash and cash equivalents held by our foreign subsidiaries was $1.6 million. If the funds held by our foreign subsidiaries were
needed for our operations in the United States, the repatriation of some of these funds to the United States could require payment
of additional U.S. taxes.

Trade Accounts Receivable

The majority of the Company’s accounts receivable are due from entities in, or distributors or value added resellers to, the
education, corporate and government sectors. Credit is extended based on evaluation of a customer’s financial condition and,
generally, collateral is not required. Accounts receivable are typically due within 30 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are
considered to be past due. The Company determines its allowance by considering a number of factors, including the length of
time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its
obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off
accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the
allowance for doubtful accounts. Interest is not accrued on past due receivables.

Inventory Valuation

Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units. Inventory of
completed units and spare parts are carried at the lower of cost or market, with cost determined on a first-in, first-out basis.

Inventory consists of the following (in thousands):

Raw materials and supplies
Finished goods

Capitalized Software Development Costs

September 30,

2016

2015

149 $

1,755
1,904 $

254
2,131
2,385

Software development costs incurred in conjunction with product development are charged to research and development expense
until technological feasibility is established. Thereafter, until the product is released for sale, software development costs are
capitalized and reported at the net realizable value of the related product. Typically the period between achieving technological
feasibility of the Company’s products and the general availability of the products has been short. Consequently, software

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

development costs qualifying for capitalization are typically immaterial and are generally expensed to research and development
costs. During 2013, the Company’s My Mediasite product release required software capitalization since there was a longer period
between technological feasibility and the general availability of the product. Upon product release, the amortization of software
development costs is determined annually as the greater of the amount computed using the ratio of current gross revenues for the
products to their total of current and anticipated future gross revenues or the straight-line method over the estimated economic
life of the products, expected to be three years. Amortization expense of software development costs of $104 thousand and $178
thousand is included in Cost of Revenue – Product for each of the years ending September 30, 2016 and 2015, respectively. The
gross amount of capitalized external and internal development costs was $533 thousand at September 30, 2016 and 2015. There
were no software development efforts that qualified for capitalization for the years ended September 30, 2016 or 2015,
respectively.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method for financial reporting purposes.
The estimated useful lives used to calculate depreciation are as follows:

Leasehold improvements
Computer equipment
Furniture and fixtures

Impairment of Long-Lived Assets

Years

5 to 10 years
3 to 5 years
5 to 7 years

In fiscal 2016 and 2015, we performed the two-step goodwill test and determined that the fair value of goodwill is more than the
carrying value. For purposes of the fiscal 2016 and 2015 tests, goodwill balances are evaluated within three separate reporting
units. The Company has recognized no impairment charges as of September 30, 2016 or as of September 30, 2015.

If we had determined that the fair value of goodwill was less than its carrying value, based upon the annual test or the existence
of one or more indicators of impairment, we would then measure impairment based on a comparison of the implied fair value of
goodwill with the carrying amount of goodwill. To the extent the carrying amount of goodwill is greater than the implied fair
value of goodwill, we would record an impairment charge for the difference.

Comprehensive Loss

Comprehensive loss includes disclosure of financial information that historically has not been recognized in the calculation of
net income. Our comprehensive loss encompasses net loss and foreign currency translation adjustments. Assets and liabilities of
international operations that have a functional currency that is not in U.S. dollars are translated into U.S. dollars at year-end

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

exchange rates, and revenue and expense items are translated using weighted average exchange rates. Any adjustments arising on
translation are included in shareholders’ equity as an element of accumulated other comprehensive loss.

Advertising Expense

Advertising costs included in selling and marketing, are expensed when the advertising first takes place. Advertising expense was
$403 thousand and $655 thousand for years ended September 30, 2016 and 2015, respectively.

Research and Development Costs

Research and development costs are expensed in the period incurred, unless they meet the criteria for capitalized software
development costs.

Income Taxes

The Company also accounts for the uncertainty in income taxes related to the recognition and measurement of a tax position and
measurement of a tax position taken or expected to be taken in an income tax return. The Company follows the applicable
accounting guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure related
to the uncertainty in income tax positions.

Fair Value of Financial Instruments

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s goodwill, intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part
of a business combination, individually or with a group of other assets. These nonfinancial assets were initially measured and
recognized at amounts equal to the fair value determined as of the date of acquisition. Fair value measurements of reporting units
are estimated using an income approach involving discounted or undiscounted cash flow models that contain certain Level 3
inputs requiring management judgment, including projections of economic conditions and customer demand, revenue and
margins, changes in competition, operating costs, working capital requirements, and new product introductions. Fair value
measurements of the reporting units associated with the Company’s goodwill balances are estimated at least annually at the
beginning of the fourth quarter of each fiscal year for purposes of impairment testing. Fair value measurements associated with

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

the Company’s intangible assets and other long-lived assets are estimated when events or changes in circumstances such as market
value, asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable.

In determining the fair value of financial assets and liabilities, the Company currently utilizes market data or other assumptions
that it believes market participants would use in pricing the asset or liability in the principal or most advantageous market, and
adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When
considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between
observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible
to the Company at the measurement date.

Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable
inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at measurement date.

The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the
lowest priority to Level 3.

Financial Liabilities Measured at Fair Value on a Recurring Basis

The initial fair values of PFG debt and warrant debt (see Note 3) were based on the present value of expected future cash flows
and assumptions about current interest rates and the creditworthiness of the Company (Level 3). The fair value of the bifurcated
conversion feature represented by the warrant derivative liability, which is measured at fair value on a recurring basis is 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 similar to those described for share-based compensation which were generally observable (Level 2).

Financial liabilities measured at fair value on a recurring basis are summarized below (in thousands):

September 30, 2016

Derivative liability

September 30, 2015

PFG debt, net of discount
Warrant debt
Derivative liability

Level 1

Level 2

Level 3

Total
Fair Value

— $

67 $

— $

Level 1

Level 2

Level 3

Total
Fair Value

— $
—
—
— $

— $
—
109
109 $

1,347 $
63
—
1,410 $

1,347
63
109
1,519

Included below is a summary of the changes in our Level 3 fair value measurements (in thousands):

Balance as of September 30, 2015
Activity during the period:

Disbursement of Tranche 2, net of discount
Payments to PFG
Change in fair value

Balance as of September 30, 2016

PFG Debt, net
of discount

Warrant
Debt

1,347 $

462
(655 )
71
1,225 $

22
—
17
102

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Financial Instruments Not Measured at Fair Value

The Company’s other financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable
and debt instruments, excluding the PFG debt. The book values of cash and cash equivalents, accounts receivable, debt (excluding
the PFG debt) and accounts payable are considered to be representative of their respective fair values. The carrying value of
capital lease obligations and debt (excluding the PFG debt), including the current portion, approximates fair market value as the
variable and fixed rate approximates the current market rate of interest available to the Company.

Legal Contingencies

In June 2014, the Company entered into a settlement agreement with Astute Technology, LLC (“Astute”). The key terms of the
agreement were: 1) a grant of a non-revocable license of Astute patents to the Company; 2) a grant of a fully paid, non-refundable
license of certain Sonic Foundry patents to Astute; 3) both Astute and our customer agreed to identify three meetings they
currently capture that the other party will not seek or respond to any request for proposal; and 4) a payment of $1.35 million to
Astute. Pursuant to the settlement agreement, the payments were made in three equal amounts with the first paid in June 2014,
the second paid in October 2014 and the final installment paid in March 2015. The Company contributed $1.1 million of the
$1.35 million payable to Astute with our customer paying the residual amount. Of the $1.1 million, $428 thousand related to prior
use and was recorded as a charge to income during fiscal 2014. The remaining $672 thousand was recorded as a product right
asset, which is being amortized, on a straight-line basis, over the remaining life of the patents, through 2020. Future amounts due
to Astute were accrued for as of the time of settlement.

No legal contingencies were recorded for the either of the years ended September 30, 2016 or 2015, respectively.

Stock-Based Compensation

The Company uses a lattice valuation model to account for all employee stock options granted. The lattice valuation model is a
more flexible analysis to value options because of its ability to incorporate inputs that change over time, such as actual exercise
behavior of option holders. The Company uses historical data to estimate the option exercise and employee departure behavior
in the lattice valuation model. Expected volatility is based on historical volatility of the Company’s stock. The Company considers
all employees to have similar exercise behavior and therefore has not identified separate homogeneous groups for valuation. The
expected term of options granted is derived from the output of the option pricing model and represents the period of time that
options granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is based
on the U.S. Treasury yields in effect at the time of grant. Forfeitures are based on actual behavior patterns. The expected exercise
factor and forfeiture rates are calculated using historical exercise and forfeiture activity for the previous three years.

The fair value of each option grant is estimated using the assumptions in the following table:

Expected life
Risk-free interest rate

Expected volatility

Expected forfeiture rate

Expected exercise factor

Expected dividend yield

Common Stock Warrants

Years Ending September 30,

2016
4.9 – 5.0 years
0.84%-1.23%

2015
4.8 – 5.0 years
0.96%-1.05%

53.8%-57.2%

45.5%-50.0%

10.3 %-11.8%

10.7 %-12.0%

1.35-1.44

1.40-1.43

—%

On December 22, 2014, the company issued 74,802 warrants to two individuals, one of which is the Chairman of the Company’s
Board of Directors, in combination with the sale of a like number of shares of common stock. These warrants were immediately
exercisable, expire five years after the date of issuance and have an exercise price of $14.00. The remaining contractual life of

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

these outstanding warrants as of September 30, 2016 was 3.23 years. The fair value of the warrants was determined using the
lattice model and the same inputs as those used for valuing the Company’s stock option fair value. The fair value of the warrants
was $133 thousand at the date of issuance. The Company determined that the warrants are freestanding and do not fall within the
scope of ASC 480 or ASC 815. The warrants were recorded in conjunction with the stock issued.

See Note 3, Credit Arrangements for disclosures on additional warrants issued during fiscal 2015.

Per Share Computation

Basic earnings (loss) per share has been computed using the weighted-average number of shares of common stock outstanding
during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. In periods where
the Company reports net income, diluted net income per share is computed using common equivalent shares related to outstanding
options and warrants to purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net
income (loss). The following table sets forth the computation of basic and diluted weighted average shares used in the earnings
per share calculations:

Denominator for basic earnings (loss) per share

-weighted average common shares

Effect of dilutive options and warrants (treasury method)

Denominator for diluted earnings (loss) per share
-adjusted weighted average common shares

Options and warrants outstanding during each year, but not included in the
computation of diluted earnings (loss) per share because they are antidilutive

Recent Accounting Pronouncements

Years Ending
September 30,

2016

2015

4,389,421
—

4,332,576
—

4,389,421

4,332,576

1,737,624

1,560,211

In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2014-09,
“Revenue from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue
recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue
recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-
specific guidance, in current U.S. generally accepted accounting principles. The FASB subsequently issued a one-year deferral
of the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the
deferral, the guidance is effective for annual reporting periods beginning after December 15, 2017. Subsequently, the FASB issued
ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations" ("ASU 2016-08");
ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing"
("ASU 2016-10"); and ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients" ("ASU 2016-12"). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU
2014-09. We are currently evaluating the timing of adopting and the related impact, if any, it may have on our financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which
amends the current presentation of debt issuance costs in the financial statements. ASU 2015-03 requires that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt
liability, consistent with debt discounts, instead of as an asset. The amendments are to be applied retrospectively and are effective
for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015,
but early adoption is permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s
condensed consolidated financial statements.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

In April 2015, the FASB issued ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”). The amendments in ASU 2015-05
provide guidance to customers about whether a cloud computing arrangement includes a software license. The amendments in
ASU 2015-05 are effective for fiscal years beginning after December 15, 2015, and interim periods within those years. Early
adoption is permitted. The guidance may be applied either prospectively to all arrangements entered into or materially modified
after the effective date or retrospectively. The Company does not believe the implementation of this standard will result in a
material impact to its financial statements.

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330)" ("ASU 2015-11"). The amendments in ASU 2015-11
require an entity to measure inventory at the lower of cost and net realizable value. The amendments in ASU 2015-11 are effective
for fiscal years beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. The
amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual
reporting period. The Company does not believe the implementation of this standard will result in a material impact to its financial
statements.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805)" ("ASU 2015-16"). ASU 2015-16
simplifies the accounting for measurement-period adjustments. The amendments in ASU 2015-16 are effective for fiscal years
beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied
prospectively to adjustments to provisional amounts that occur after the effective date of the ASU with earlier application
permitted for financial statements that have not been issued. The Company is currently evaluating this guidance, but it does not
have an impact on previous acquisitions.

In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740)", ("ASU 2015-17"). ASU 2015-17 simplifies the
presentation of deferred income taxes. The amendments in ASU 2015-17 are effective for financial statements issued for annual
periods beginning after December 15, 2016, including interims periods within those annual periods. The amendments may be
applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company does
not believe the implementation of this standard will result in a material impact to its financial statements.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10)", ("ASU 2016-01"). ASU
2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The
amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the
beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values
should be applied prospectively to equity investments that exist at the date of the adoption. The Company is currently evaluating
this guidance and its impact to the financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", ("ASU 2016-02"). ASU 2016-02 aims to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. The amendments in ASU 2016-02 are effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years, for public entities. Early application of the
amendment is permitted. The Company is currently reviewing this guidance and its impact to the financial statements.

In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815)", ("ASU 2016-05"). ASU 2016-05 clarifies
the effect of novation related to a derivative instrument. The amendments in ASU 2016-05 are effective for fiscal years beginning
after December 15, 2016, and interim periods within those fiscal years. An entity has the option to apply the amendments in ASU
2016-05 on either a prospective or a modified retrospective basis. The Company is currently evaluating this guidance and its
impact to the financial statements.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

In March 2016, the FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815)", ("ASU 2016-06"). ASU 2016-06 clarify
the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt
instruments are clearly and closely related to their debt hosts. The amendments in ASU 2016-06 are effective for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years. Entities should apply the amendments on a
modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are
effective. The Company is currently evaluating this guidance and its impact to the financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718)", ("ASU 2016-09"). ASU 2016-
09 simplifies the accounting for share-based payment transactions. The amendments in ASU 2016-09 are effective for annual
periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating
this guidance and its impact to the financial statements.

In May 2016, the FASB issued ASU 2016-11, "Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)",
("ASU 2016-11"). ASU 2016-11 rescinds SEC paragraphs pursuant to the SEC Staff Announcement, "Rescission of Certain SEC
Staff Observer Comments upon Adoption of Topic 606", and the SEC Staff Announcement, "Determining Whether the Host
Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity", announced at the March
3, 2016 Emerging Issues Task Force (EITF) meeting. The effective dates in ASU 2016-11 coincide with the effective dates of
Topic 606 (ASU 2014-09) and ASU 2014-16. The Company is currently evaluating the impact of adopting ASU 2014-09 and
related amendments, such as ASU 2016-11, to determine the impact, if any, it may have on our financial statements. The Company
previously reviewed ASU 2014-16 and determined that is it not applicable.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)", ("ASU 2016-15"). ASU 2016-15
addresses classification of certain cash receipts and cash payments within the statement of cash flows. The amendments are
effective for fiscal years beginning after December 15, 2017, and interim periods with those fiscal years. The Company is
currently evaluating this guidance and its impact to the financial statements.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740)", ("ASU 2016-16"). ASU 2016-16 prohibits the
recognition of current and deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. The
amendment in ASU 2016-16 are effective for annual reporting periods beginning after December 15, 2017, including interim
reporting periods within those annual reporting periods. The Company is currently evaluating this guidance and its impact to the
financial statements.

Accounting standards that have been issued but are not yet effective by the FASB or other standards-setting bodies that do not
require adoption until a future date, which are not discussed above, are not expected to have a material impact on the Company’s
financial statements upon adoption.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

2. Commitments

The Company leases certain equipment under capital lease and financing agreements expiring through January 2022. Such leases
are included in fixed assets with a cost of $1.3 million and accumulated depreciation of $827 thousand at September 30, 2016.
Minimum lease payments, including principal and interest, are summarized in the table below.

Fiscal Year (in thousands)

Capital

2017
2018
2019
2020
2021
Thereafter
Total payments
Less interest

Total

307
156
58
14
13
3
551
(37 )
514

The Company leases certain facilities and equipment under operating lease agreements expiring at various times through
December 31, 2020. Total rent expense on all operating leases was approximately $1.6 million and $1.1 million for the years
ended September 30, 2016 and 2015, respectively.

In November 2011, the Company occupied office space related to a lease agreement entered into on June 28, 2011. The lease
term is from November 2011 through December 2018. The lease includes a tenant improvement allowance of $613 thousand that
was recorded as a leasehold improvement liability and is being amortized as a credit to rent expense on a straight-line basis over
the lease term. At September 30, 2016, the unamortized balance was $182 thousand.

The following is a schedule by year of future minimum lease payments under operating leases:

Fiscal Year (in thousands)

Operating

2017
2018
2019
2020
2021
Thereafter

Total

1,341
1,287
714
526
132
—
4,000

The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At
September 30, 2016, the Company has an obligation to purchase $782 thousand of Mediasite product, which is not recorded on
the Company’s Consolidated Balance Sheet.

The Company enters into license agreements that generally provide indemnification against intellectual property claims for its
customers as well as indemnification agreements with certain service providers, landlords and other parties in the normal course
of business. The Company has not incurred any material costs as a result of such indemnifications, or accrued any liabilities
related to such obligations in the consolidated financial statements, except as noted above related to Astute (Note 1).

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

3. Credit Arrangements

Silicon Valley Bank

The Company and its wholly owned subsidiary, Sonic Foundry Media Systems, Inc. (the “Companies”) entered into that certain
Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated as of June 27, 2011, as amended
by those certain First, Second, Third, Fourth, and Fifth Amendments, dated as of May 31, 2013, January 10, 2014, March 31,
2014, January 27, 2015, and May 13, 2015 (the Second Amended and Restated Loan Agreement, as amended by the First, Second,
Third, Fourth and Fifth Amendments, collectively, the “Second Amended and Restated Loan Agreement”). The Second Amended
and Restated Loan Agreement provides for a revolving line of credit in the maximum principal amount of $4,000,000. Interest
accrues on the revolving line of credit at the variable per annum rate equal to the Prime Rate (as defined) plus one and-one quarter
percent (1.25%) which currently equates to 4.75%. The Second Amended and Restated Loan Agreement provides for an advance
rate on domestic receivables of 80%, and an advance rate on foreign receivables of 75% of the lesser of (x) Foreign Eligible
Accounts (as defined) or (y) $1,000,000. The maturity date of the revolving credit facility is January 31, 2017. Under the Second
Amended and Restated Loan Agreement, a term loan was entered into on January 27, 2015 in the original principal amount of
$2,500,000 which accrues interest at the variable per annum rate equal to the Prime Rate (as defined) plus two and three-quarters
percent (2.75%) (which currently equates to an interest rate of 6.25%) and is to be repaid in 36 equal monthly principal payments,
beginning in February 2015. The Second Amended and Restated Loan Agreement also required Sonic Foundry to comply with
certain financial covenants, including (i) a liquidity financial covenant, which required minimum Liquidity (as defined), tested
with respect to the Company only (excluding the subsidiaries) of at least (x) 1.35:1.00 for each month-end that was not the last
day of a fiscal quarter, and (y) 1.50:1.00 for each month-end that was the last day of a fiscal quarter, and (ii) a covenant that
required the Debt Service Coverage Ratio (as defined) to be at or greater than 1.0:1 for the quarter ending June 30, 2015, 1.25:1
for the quarter ending September 30, 2015 and 1.50:1 for the quarter ending December 31, 2015 and thereafter (with the change
in the deferred revenue included in the numerator of the ratio).

On October 5, 2015, the Companies entered into a Sixth Amendment to the Second Amended and Restated Loan and Security
Agreement (the “Sixth Amendment”), with Silicon Valley Bank. Under the Sixth Amendment: (i) the Liquidity covenant was
modified to require minimum Liquidity (as defined) with respect to the Company only, on a monthly basis, of at least 1.5:1.0 at
the last day of each month, replacing the previous Liquidity requirement of 1.35:1.0 for each month-end that is not the last day
of a fiscal quarter, and 1.5:1.0 for each month-end that is the last day of a fiscal quarter, and (ii) the Minimum Debt Service
covenant was replaced with a requirement to maintain, commencing September 30, 2015, a Minimum EBITDA, as defined, on a
trailing six month period, of at least $1.00 plus the net change in Deferred Revenue, as defined, with such covenant measured as
of the last day of each fiscal quarter.

On February 8, 2016, the Companies entered into a Seventh Amendment to the Second Amended and Restated Loan and Security
Agreement (the "Seventh Amendment") with Silicon Valley Bank. The Seventh Amendment: (i) waived existing default under
the Second Amended Agreement by virtue of the Company's failure to comply with the minimum EBITDA financial covenant
for the compliance period ended December 31, 2015 and (ii) updated the definition of eligible foreign accounts to include
additional countries.

On December 9, 2016, the Companies entered into an Eighth Amendment to the Second Amended and Restated Loan and Security
Agreement (the "Eighth Amendment") with Silicon Valley Bank. The Eighth Amendment: (i) extends the revolving line of credit
maturity date to January 31, 2019, (ii) increases maximum subsidiary indebtedness allowable to $1,000,000 outstanding at any
one time and (iii) provides for a "streamline period", during which bank reporting is due monthly when a streamline period is in
effect and weekly when a streamline period is not in effect.

At September 30, 2016, a balance of $1.1 million was outstanding on the term loans with Silicon Valley Bank, with an effective
interest rate of six-and-one-quarter percent (6.25%). At September 30, 2016, a balance of $1.6 million was outstanding on the
revolving line of credit with Silicon Valley Bank, with an effective interest rate of four-and-three-quarters percent (4.75%). At

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

September 30, 2015, a balance of $1.9 million was outstanding on the term loans with Silicon Valley Bank and a balance of $1.4
million was outstanding on the revolving line of credit. At September 30, 2016, there was a remaining amount of $2.3 million
available under the line of credit facility for advances.

The Second Amended Agreement, as amended, contains events of default that include, among others, non-payment of principal
or interest, inaccuracy of any representation or warranty, violation of covenants, bankruptcy and insolvency events, material
judgments, cross defaults to certain other indebtedness, and material adverse changes. The occurrence of an event of default could
result in the acceleration of the Companies’ obligations under the Second Amended Agreement, as amended. At September 30,
2016, the Company was in compliance with all covenants in the Second Amended Agreement, as amended.

Pursuant to the Second Amended Agreement, as amended, the Companies pledged as collateral to Silicon Valley Bank
substantially all non-intellectual property business assets. The Companies also entered into an Intellectual Property Security
Agreement with respect to intellectual property assets.

Partners for Growth IV, L.P.

On May 13, 2015, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with
Partners for Growth IV, L.P. (“PFG”), (the “Loan and Security Agreement”).

The Loan and Security Agreement provides for a Term Loan in the amount of $2,000,000, which can be disbursed in two (2)
Tranches as follows: Tranche 1 was drawn in the amount of $1,500,000 shortly after execution thereof; and Tranche 2 in the
amount of $500,000, was drawn on December 15, 2015.

Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan was payable interest only until
November 30, 2015. Beginning on December 1, 2015, principal is due in 30 equal monthly principal installments, plus accrued
interest, continuing until May 1, 2018, when the principal balance is to be paid in full. Tranche 2 of the Term Loan is payable in
29 equal monthly principal installments, plus accrued interest, beginning January 1, 2015 and continuing until May 1, 2018.

The principal of the Term Loan may be prepaid at any time after May 13, 2016 without a prepayment fee.

Coincident with execution of the Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”) with
PFG. Pursuant to the terms of the Warrant, the Company issued to PFG a warrant to purchase up to 50,000 shares of common
stock of the Company at an exercise price of $9.66 per share, subject to certain adjustments, of which 37,500 were exercisable
with the disbursement of Tranche 1 and 12,500 became exercisable with the disbursement under Tranche 2. Pursuant to the
Warrant, PFG is also entitled, under certain conditions, to require the Company to exchange the Warrant for the sum of $200,000.
Each warrant issued has an exercise term of 5 years from the date of issuance. On August 12, 2015, the Company and PFG entered
into a waiver agreement to waive a then existing covenant default and to change the exercise price of the aforementioned warrants
from $9.66 per share to $6.80 per share.

The warrants can be settled for cash in the event of acquisition of the company, any liquidation of the company, or expiration of
the warrant. The Company has determined the cash payment date to be the expiration date (May 14, 2020). Due to the fixed
payment amount on the expiration date, the warrant structure is in substance a debt arrangement (the “Warrant Debt”) with a zero
interest rate, a fixed maturity date and a feature that makes the debt convertible to common stock. The Warrant Debt had a fair
value of $58 thousand. The derivative had a fair value of $120 thousand. The conversion feature is an embedded derivative; thus,
for accounting purposes, the conversion feature is bifurcated and accounted for separately from the PFG Debt and Warrant Debt
as a derivative liability measured at fair value at each reporting period.

As of September 30, 2016, the estimated fair value of the derivative liability associated with the warrants issued in connection
with the Loan and Security Agreement, was $67 thousand. The change in the fair value of the derivative liability between the
issuance date and September 30, 2016, was recorded as a gain of $69 thousand included in the other income (expense).

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

The proceeds from the Loan and Security Agreement were allocated between the PFG Debt and the Warrant Debt (inclusive of
its conversion feature) based on their relative fair value on the date of issuance which resulted in initial carrying values of $1.322
million and $178 thousand, respectively. The conversion feature of $178 thousand is treated together as a debt discount on the
PFG Debt and will be accreted to interest expense under the effective interest method over the three-year term of the PFG Debt
and the five-year term of the Warrant Debt. For fiscal 2016, the Company recorded accretion of discount expenses associated
with the warrants issued with the PFG loan of $17 thousand as well as $71 thousand related to amortization of the debt discount.
For fiscal 2015, the Company recorded accretion of discount expense associated with the warrants issued with the PFG loan of
$5 thousand as well as $22 thousand related to amortization of the debt discount.

The fair values of term debt and warrant debt are based on the present value of expected future cash flows and assumptions about
current interest rates and the creditworthiness of the Company (Level 3). At December 14, 2015, the carrying amounts of the
Company’s term debt and warrant debt totaled $1.322 million and $178 thousand, respectively. At December 14, 2015, the
Company’s term debt and warrant debt were recorded at fair value. At September 30, 2016, the derivative liability was remeasured
at fair value. The fair value of the bifurcated conversion feature represented by the warrant derivative liability is 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 similar to those described previously for share-based compensation which were generally observable (Level 2).

On October 5, 2015, the Company and PFG entered into a Modification No. 1 to the Loan and Security Agreement (“Modification
No. 1”). Under Modification No. 1: (i) the Liquidity covenant was modified to require minimum Liquidity (as defined) with
respect to the Company only, on a monthly basis, of at least 1.5:1.0 at the last day of each month, replacing the previous Liquidity
requirement of 1.35:1.0 for each month-end that is not the last day of a fiscal quarter, and 1.5:1.0 for each month-end that is the
last day of a fiscal quarter, and (ii) the Minimum Debt Service covenant was replaced with a requirement to maintain, commencing
September 30, 2015, a Minimum EBITDA, as defined, on a trailing six month period, of at least $1.00 plus the net change in
Deferred Revenue, as defined, with such covenant measured as of the last day of each fiscal quarter.

At September 30, 2016, a balance of $1.3 million was outstanding on the term debt with PFG, with an effective interest rate of
ten-and-three-quarters percent (10.75%). At September 30, 2015, a balance of $1.5 million with outstanding on the term debt
with PFG.

The Term Loan is collateralized by substantially all the Company’s assets, including intellectual property, subject to a first lien
held by Silicon Valley Bank, The Term Loan requires compliance with the same financial covenants as set forth in the loan from
Silicon Valley Bank. At September 30, 2016, the Company was in compliance with all covenants in the Loan and Security
Agreement, as amended.

Other Indebtedness

At September 30, 2016, no balance was outstanding on the notes payable to Mitsui Sumitomo Bank. The outstanding balance
was $25 thousand at September 30, 2015. At September 30, 2016, a balance of $198 thousand was outstanding on the line of
credit with Mitsui Sumitomo Bank. At September 30, 2015, a balance of $418 thousand was outstanding on the line of credit.
The notes and credit facility are both related to Mediasite K.K., and both accrue an annual interest rate of approximately one-
and-one half percent (1.575%).

At September 30, 2016, a balance of $93 thousand was outstanding on the subordinated note payable related to the acquisition of
Sonic Foundry International, with an annual interest rate of six-and-one half percent (6.5%). The outstanding balance was $278
thousand at September 30, 2015.

At September 30, 2016 and 2015, no balance was outstanding on the subordinated payable related to the acquisition of Mediasite
KK after paying off the outstanding balance in January 2015.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

The annual principal payments on the notes payable to SVB and PFG are as follows:

Fiscal Year (in thousands)
2017
2018
Less warrant debt & discount

Total

1,640
816
(18 )
2,438

The annual principal payments on the subordinated notes payable related to the acquisition of Sonic Foundry International are as
follows:

Fiscal Year (in thousands)
2017

Total

4. Accrued Liabilities

Accrued liabilities consists of the following (in thousands):

Accrued compensation
Accrued expenses

Accrued interest & taxes

Other accrued liabilities

Total

93
93

September 30,

2016

2015

1,258 $
365
257
3
1,883 $

1,166
221
186
93
1,666

The Company accrues expenses as they are incurred. Accrued compensation includes wages, vacation, commissions and bonuses.
Accrued expenses is mainly related to stock compensation, professional fees and amounts owed to suppliers. Other accrued
liabilities is made up of employee-related expenses. At September 30, 2015, other accrued liabilities included $87 thousand in
dividends payable to the sellers and current employees of its wholly owned subsidiary, Sonic Foundry International B.V. These
amounts were accrued prior to the Company’s acquisition. At September 30, 2016, no balance was outstanding as the dividends
were paid in full in fiscal 2016.

5. Stock Options and Employee Stock Purchase Plan

On March 5, 2009, Stockholders approved adoption of the 2009 Stock Incentive Plan (the “2009 Plan”). The 2009 Plan, beginning
October 1, 2009, replaced two former employee stock option plans that terminated coincident with the effectiveness of the 2009
Plan. On March 7, 2012, Stockholders approved an amendment to increase the number of shares of common stock subject to this
plan by 600,000 and to increase the number of shares for the directors’ stock option plan by 50,000 shares. On March 6, 2014,
Stockholders approved an amendment to increase the number of shares of common stock subject to the 2009 Plan by 800,000 to
an aggregated total of 1,800,000 shares of common stock. The Company maintains a directors’ stock option plan under which
options may be issued to purchase up to an aggregate of 100,000 shares of common stock. Each non-employee director, who is
re-elected or who continues as a member of the board of directors on each annual meeting date and on each subsequent meeting

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

of Stockholders, will be granted options to purchase 2,000 shares of common stock under the directors’ plan, or at other times or
amounts at the discretion of the Board of Directors.

Each option entitles the holder to purchase one share of common stock at the specified option price. The exercise price of each
option granted under the plans was set at the fair market value of the Company’s common stock at the respective grant date.
Options vest at various intervals and expire at the earlier of termination of employment, discontinuance of service on the board
of directors, ten years from the grant date or at such times as are set by the Company at the date of grant.

The Company has applied a graded (tranche-by-tranche) attribution method and expenses share-based compensation on an
accelerated basis over the vesting period of the share award, net of estimated forfeitures.

The number of shares available for grant under these stockholder approved plans at September 30, is as follows:

Shares available for grant at September 30, 2014
Options granted

Options forfeited

Shares available for grant at September 30, 2015
Options granted

Options forfeited

Shares available for grant at September 30, 2016

Qualified
Employee
Stock Option
Plans

Director
Stock Option
Plans

853,766
(307,119 )
39,384
586,031
(233,381 )
14,239
366,889

19,500
(10,500 )
8,000
17,000
(10,500 )
—
6,500

The following table summarizes information with respect to outstanding stock options under all plans:

Outstanding at beginning of year
Granted

Exercised

Forfeited

Outstanding at end of year

Exercisable at end of year

Years Ended September 30,

2016

2015

Weighted
Average
Exercise
Price

10.03
7.16
6.74
11.02
9.51

Options
1,449,409 $
243,881
(2,968 )

(87,500 )
1,602,822 $
1,062,837

Weighted
Average
Exercise
Price

10.31
9.22
7.27
11.27
10.03

Options
1,240,941 $
317,619
(11,117 )

(98,034 )
1,449,409 $
885,777

Weighted average fair value of options granted during
the year

2.62

3.18

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

The options outstanding at September 30, 2016 have been segregated into three ranges for additional disclosure as follows:

Exercise Prices

$ 4.50 to $9.87
10.00 to 15.50

21.40 to 46.90

Options
Outstanding
at
September 30,
2016
1,245,264
330,900
26,658
1,602,822

Options Outstanding
Weighted
Average
Remaining
Contractual
Life

Options Exercisable

Weighted
Average
Exercise
Price

Options
Exercisable at
September 30,
2016

Weighted
Average
Exercise
Price

6.70 $
5.49

0.38

8.17
12.33
37.18

773,336 $
262,843
26,658
1,062,837

8.15
12.79
37.18

As of September 30, 2016, there was $696 thousand of total unrecognized compensation cost related to non-vested stock-based
compensation, with total forfeiture adjusted unrecognized compensation costs of $562 thousand. The cost is expected to be
recognized over a weighted-average life of 1.6 years.

A summary of the status of the Company’s non-vested shares under all plans at September 30, 2016 and for the year then ended
is presented below:

Non-vested shares at October 1, 2015
Granted
Vested
Forfeited

Non-vested shares at September 30, 2016

Weighted Average
Grant Date
Fair Value

563,632 $
243,881
(253,304 )
(14,224 )
539,985 $

4.46
2.72
3.45
3.34
3.21

Stock-based compensation recorded in the year ended September 30, 2016 was $847 thousand. Stock-based compensation
recorded in the year ended September 30, 2015 was $963 thousand. There was no cash received from exercises under all stock
options plans and warrants for the year ended September 30, 2016. Cash received from exercises under all stock option plans and
warrants for the years ended September 30, 2015 was $41 thousand. There were no tax benefits realized for tax deductions from
option exercises for the years ended September 30, 2016 and 2015. The Company currently expects to satisfy stock-based awards
with registered shares available to be issued.

The Company also has an Employee Stock Purchase Plan (Purchase Plan) under which an aggregate of 150,000 common shares
may be issued. The Shareholders approved an amendment to increase the number of shares of common stock subject to the plan
from 100,000 to 150,000 at the Company’s annual meeting in March 2014. All employees who have completed 90 days of
employment with the Company on the first day of each offering period and customarily work twenty hours per week or more are
eligible to participate in the Purchase Plan. An employee who, after the grant of an option to purchase, would hold common stock
and/or hold outstanding options to purchase stock possessing 5% or more of the total combined voting power or value of the
Company will not be eligible to participate. Eligible employees may make contributions through payroll deductions of up to 10%
of their compensation. No participant in the Purchase Plan is permitted to purchase common stock under the Purchase Plan if
such option would permit his or her rights to purchase stock under the Purchase Plan to accrue at a rate that exceeds $25,000 of
the fair market value of such shares, or that exceeds 1,000 shares, for each calendar year. The Company makes a bi-annual offering
to eligible employees of options to purchase shares of common stock under the Purchase Plan on the first trading day of January
and July. Each offering period is for a period of 6 months from the date of the offering, and each eligible employee as of the date
of offering is entitled to purchase shares of common stock at a purchase price equal to the lower of 85% of the fair market value
of common stock on the first or last trading day of the offering period. A total of 23,708 shares are available to be issued under

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

the plan. There were 14,708 and 14,067 shares purchased by employees during fiscal 2016 and 2015, respectively. The Company
recorded stock compensation expense under this plan of $19 and $22 thousand during fiscal 2016 and 2015, respectively. Cash
received from issuance of stock under this plan was $66 and $85 thousand during fiscal 2016 and 2015, respectively.

6. Income Taxes

The provision for income taxes consists of the following (in thousands):

Current tax expense U.S.
Current tax expense (benefit) foreign

Deferred income tax expense

Provision for income taxes

Years Ended September 30,

2016

2015

136 $
133
—
269 $

137
(30 )
—
107

U.S. and foreign components of income (loss) before income taxes were as follows (in thousands):

U.S.
Foreign

Income (loss) before income taxes

Years Ended September 30,

2016

2015

(3,504 ) $
456
(3,048 ) $

(4,122 )
(296 )

(4,418 )

The reconciliation of income tax expense (benefit) computed at the appropriate country specific rate to income tax expense
(benefit) is as follows (in thousands):

Income tax expense (benefit) at statutory rate
State income tax expense (benefit)

Foreign tax activity

R&D tax credit expiration

Permanent differences, net

Adjustment of temporary differences to income tax returns

Change in valuation allowance

Income tax expense

Years Ended September 30,

2016

2015

(1,036 ) $
(130 )
9
—
274
—
1,152

269 $

(1,502 )
(131 )
56
—
523
189
972
107

The significant components of the deferred tax accounts recognized for financial reporting purposes are as follows (in thousands):

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Deferred tax assets:
Net operating loss and other carryforwards

Common stock options

Unearned revenue

Other

Total deferred tax assets
Deferred tax liabilities:

Fixed assets

Other

Total deferred tax liabilities

Net deferred tax asset

Valuation allowance

Equity gains on investment in Mediasite KK

Customer relationships

Goodwill amortization

Net deferred tax liability for goodwill and intangible assets amortization

September 30,

2016

2015

34,563 $
1,134
389
423
36,509

—
(144 )

(144 )

36,365
(36,299 )

(916 )

(718 )

(2,930 )

(4,498 ) $

36,492
961
439
63
37,955

(149 )

(157 )

(306 )

37,649
(37,525 )

(916 )

(716 )

(2,690 )

(4,198 )

The Company has a $66 thousand and $124 thousand deferred tax asset at September 30, 2016 and 2015, respectively, recorded
within the prepaid expenses and other current assets line on the consolidated balance sheet and is primarily related to net operating
losses of MSKK.

At September 30, 2016, the Company had net operating loss carryforwards of approximately $95 million for U.S. Federal and
$43 million for state tax purposes. For Federal tax purposes, the carryforwards expire in varying amounts between 2019 and 2036.
For state tax purposes, the carryforwards expire in varying amounts between 2016 and 2035. Utilization of the Company’s net
operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss
carryforwards before utilization. In addition, the Company has research and development tax credit carryforwards of
approximately $418 thousand, which expire in varying amounts between 2019 and 2020.

The Company maintains an additional paid-in-capital (APIC) pool which represents the excess tax benefits related to share-based
compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the
available APIC pool, the Company records the excess as income tax expense in its consolidated statements of income. For fiscal
2016 and fiscal 2015, the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these
deficiencies did not affect its results of operations. At September 30, 2016, the Company has $1.1 million of net operating loss
carry forwards for which a benefit would be recorded in APIC when realized.

Earnings of the Company’s foreign subsidiaries are generally subject to U.S. taxation upon repatriation to the U.S. and the
Company’s tax provision reflects the related incremental U.S. tax except for certain foreign subsidiaries whose unremitted
earnings are considered to be indefinitely reinvested. No deferred tax liability has been recognized with regard to the remittance
of such earnings after MSKK and Sonic Foundry International BV acquisitions were completed. Because of the availability of
U.S. foreign tax credits, it is likely no U.S. tax would be due if such earnings were repatriated. At September 30, 2016, unremitted
earnings of $1.4 million for foreign subsidiaries were deemed to be indefinitely reinvested.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Beginning with an acquisition in fiscal year 2002, the Company has amortized Goodwill for tax purposes over a 15 year life. Tax
amortization is not applicable to the goodwill from the foreign acquisitions that took place during fiscal 2014 since the foreign
goodwill is non-deductible for US federal tax purposes.

The difference between the book and tax balance of certain of the company’s goodwill creates a deferred tax liability and an
annual tax expense. Because of the long term nature of the goodwill timing difference, tax planning strategies cannot be utilized
with respect to the deferred tax liability. The Company’s tax rate differs from the expected tax rate each reporting period as a
result of the aforementioned items. The balance of the Deferred Tax Liability was $4.6 million at September 30, 2016 and $4.3
million at September 30, 2015, respectively. The Company recorded a deferred tax liability related to the Customer Relationship
intangibles value acquired as part of the purchase of Sonic Foundry International BV and Mediasite KK. The Company also
recorded tax expense related to the “step-up” gain on its original equity investment in Mediasite KK. The Company has some
other temporary differences related to its Mediasite KK subsidiary.

In accordance with accounting guidance for uncertainty in income taxes, the Company has concluded that a reserve for income
tax contingencies is not necessary. The Company’s practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. The Company had no accruals for interest and penalties on the Company’s Condensed Consolidated
Balance Sheets at September 30, 2016 or September 30, 2015 and has not recognized any interest or penalties in the Condensed
Consolidated Statements of Operations for either of the twelve month periods ended September 30, 2016 or 2015.

The Company is subject to taxation in the U.S., Netherlands, Japan and various state jurisdictions. All of the Company’s tax years
are subject to examination by the U.S., Dutch, Japanese and state tax authorities due to the carryforward of unutilized net operating
losses.

7. Savings Plan

The Company’s defined contribution 401(k) savings plan covers substantially all employees meeting certain minimum eligibility
requirements. Participating employees can elect to defer a portion of their compensation and contribute it to the plan on a pretax
basis. The Company may also match certain amounts and/or provide additional discretionary contributions, as defined. The
Company made matching contributions of $426 thousand and $402 thousand during the years ended September 30, 2016 and
2015, respectively. The Company made no additional discretionary contributions during 2016 and 2015.

8. Goodwill and Other Intangible Assets

Goodwill and intangible assets that have indefinite useful lives are recorded at cost and are not amortized but, instead, tested at
least annually for impairment. The Company assesses the impairment of goodwill on an annual basis or whenever events or
changes in circumstances indicate that the fair value of these assets is less than the carrying value.

The Company performs annual goodwill impairment test as of July 1, and tested goodwill recognized in connection with the
acquisitions of Mediasite, Sonic Foundry International and Mediasite KK and determined it was not impaired. For purposes of
the test, goodwill on the Company’s books is evaluated within three separate reporting units.

The changes in the carrying amount of goodwill for the years ended September 30, 2016 and 2015, respectively, are as follows:

Balance as of September 30, 2014
Foreign currency translation adjustment

Balance as of September 30, 2015
Foreign currency translation adjustment
Balance as of September 30, 2016

11,185
(332 )
10,853
457
11,310

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

The following tables present details of the Company’s total intangible assets at September 30, 2016 and 2015:

(in thousands)

Amortizable:

Loan origination fees

Customer relationships

Software development costs

Product rights

Non-amortizable goodwill

Total

(in thousands)

Amortizable:

Loan origination fees

Customer relationships

Software development costs

Product rights

Non-amortizable goodwill

Total

Life
(years)

Gross

Accumulated
Amortization
at
September 30,
2016

Balance at
September 30,
2016

3 $

312 $

2,605
533
672
4,122
11,310
15,432 $

236 $
723
533
287
1,779
—
1,779 $

76
1,882
—
385
2,343
11,310
13,653

Life
(years)

Gross

Accumulated
Amortization
at
September 30,
2015

Balance at
September 30,
2015

3 $

302 $

2,329
533
672
3,836
10,853
14,689 $

190 $
457
429
164
1,240
—
1,240 $

112
1,872
104
508
2,596
10,853
13,449

449
406
362
302
273
551
2,343

Estimated amortization expense for each of the five subsequent fiscal years is expected to be (in thousands):

Fiscal Year (in thousands)
2017
2018
2019
2020
2021
Thereafter

Total

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

9. Related-Party Transactions

The Company incurred fees of $126 thousand and $122 thousand during the years ended September 30, 2016 and 2015,
respectively, to a law firm whose partner is a director and stockholder of the Company. The Company had accrued liabilities for
unbilled services to the same law firm of $45 and $25 thousand at September 30, 2016 and 2015, respectively.

As of September 30, 2016 and 2015, the Company had a loan outstanding to an executive totaling $26 thousand. The loan is
collateralized by Company stock.

On December 22, 2014, the company issued 74,802 warrants to two individuals in combination with the sale of a like number of
shares of common stock, one of which is the Chairman of the Company’s Board of Directors. These warrants were immediately
exercisable, expire 5 years after the date of issuance and have an exercise price of $14.00.

As of September 30, 2016, the Company had no outstanding balance related to management fees and dividends payable to the
sellers of and current employees of its wholly-owned subsidiary, Sonic Foundry International B.V. The outstanding balance was
$114 thousand at September 30, 2015.

10. Segment Information

The following summarizes revenue by geographic region (in thousands):

United States
Europe and Middle East
Asia
Other

Total

11. Customer Concentration

Years Ended
September 30,

2016

2015

22,686 $
4,843
8,760
1,686
37,975 $

20,396
7,594
6,518
1,951
36,459

In the fiscal year ended September 30, 2016 and 2015, two distributors represented 27% and 22% of total revenue, respectively.
At September 30, 2016 and 2015, these two distributors represented 28% and 22% of total accounts receivable, respectively.

12. Legal Proceedings

From time to time, the Company is subject to legal proceedings or claims arising from its normal course of operations. The
Company accrues for costs related to loss contingencies when such costs are probable and reasonably estimable. As of
September 30, 2016, the Company is not aware of any material pending legal proceedings or threatened litigation that would have
a material adverse effect on the Company’s financial condition or results of operations.

13. Quarterly Financial Data (unaudited)

The following table sets forth selected quarterly financial information for the years ended September 30, 2016 and 2015. The
operating results are not necessarily indicative of results for any future period.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Quarterly Financial Data

(in thousands except per
share data)

Revenue
Gross margin

Income (loss) from
operations
Net income (loss)

Basic and diluted net
income (loss) per share

14. Subsequent Events

Q4-’16

Q3-’16

Q2-’16

Q1-’16

Q4-’15

9,455 $
7,102

9,817 $
7,235

9,612 $
7,273

9,091 $
6,380

Q2-’15

Q3-’15
9,056 $ 10,556 $
6,450

7,088

Q1-’15
8,741
6,070

8,106 $
6,216

(493 )

(847 )

(452 )

(552 )

(214 )

(711 )

(1,117 )

(908 )

(1,207 )

(1,222 )

(885 )

(921 )

(1,072 )

(1,350 )

(1,227 )

(1,032 )

(0.19 ) $

(0.13 ) $

(0.16 ) $

(0.28 ) $

(0.21 ) $

(0.31 ) $

(0.24 )

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Based on evaluations at September 30, 2016, our principal executive officer and principal financial officer, with the participation
of our management team, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15
(e) and 15d-15 (e) under the Securities Exchange Act) and determined that our disclosure controls and procedures were effective.
Disclosure controls and procedures ensure that information required to be disclosed by us in reports that we file or submit under
the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC, and that material information relating to the Company is accumulated and communicated to management,
including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding
required disclosures.

Limitations on the effectiveness of Controls and Permitted Omission from Management’s Assessment

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human
error and the circumvention or overriding of controls. Accordingly, even effective internal controls can only provide reasonable
assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rules 13a-15(f).

Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in the 2013 Internal Control- Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “2013 COSO Framework”) on May 14, 2013. The 2013 COSO Framework outlines the 17 underlying
principles and the following fundamental components of a company’s internal control: (i) control environment, (ii) risk
assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. The 2013 Framework was adopted
in the fiscal year ended September 30, 2015.

Changes in Internal Control Over Financial Reporting

We have not made any change to our internal control over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by Item 10 of Form 10-K with respect to directors and executive officers is incorporated herein by
reference to the information contained in the section entitled “Proposal One: Election of Directors” and “Executive Officers of
Sonic”, respectively, in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Company’s 2016 Annual Meeting of Stockholders, which will be filed no later
than January 28, 2017 (the “Proxy Statement”).

Item 405 of Regulation S-K calls for disclosure of any known late filings or failure by an insider to file a report required by
Section 16(a) of the Securities Act. This information is contained in the Section entitled “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.

Item 401 of Regulation S-K calls for disclosure of whether or not the Company has a financial expert serving on the audit
committee of its Board of Directors, and if so who that individual is. This information is contained in the Section entitled
“Meetings and Committees of Directors” in the Proxy Statement and is incorporated herein by reference.

Item 407 of Regulation S-K calls for disclosure of whether or not the Company has an audit committee and a financial expert
serving on the audit committee of the Board of Directors, and if so, who that individual is. Item 407 also requires disclosure
regarding the Company’s nominating committee and the director nomination process. This information is contained in the section
entitled “Meetings and Committees of Directors” in the Proxy Statement and is incorporated herein by reference.

Sonic Foundry has adopted a code of ethics that applies to all officers and employees, including Sonic Foundry’s principal
executive officer, its principal financial officer, and persons performing similar functions. This code of ethics is available, without
charge, to any investor who requests it. Requests should be addressed in writing to Mr. Kenneth A. Minor, Corporate Secretary,
222 West Washington Avenue, Madison, Wisconsin 53703.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated herein by reference to the information contained in the sections
entitled “Directors Compensation”, “Executive Compensation and Related Information” and “Compensation Committee
Interlocks and Insider Participation” in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS

The information required by Item 12 of Form 10-K is incorporated herein by reference to the information contained in the sections
entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement. Information related to
equity compensation plans is set forth in Item 5 herein.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2016

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 of Form 10-K is incorporated herein by reference to the information contained in the section
entitled “Certain Transactions” and “Meetings and Committees of Directors” in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated herein by reference to the information contained in the section
entitled “Ratification of Appointment of Independent Auditors – Fiscal 2015 and 2016 Audit Fee Summary” in the Proxy
Statement.

SONICFOUNDRY.COM

©2016 Sonic Foundry, Inc. All rights reserved. Sonic Foundry and the Sonic Foundry logo are registered trademarks of Sonic
Foundry, Inc. Mediasite and the Mediasite logo are registered trademarks of Sonic Foundry, Inc. All other trademarks are
the property of their respective owners.