Sonic Foundry Inc. Annual Report 2018

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FY2018 Annual Report · Sonic Foundry Inc.

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2 0 1 8 A N N U A L R E P O R T

P O W E R I N G

A S M A R T E R ,

M O R E

C O N N E C T E D

W O R L D

Dear Fellow Shareholders,

This is my first annual letter to shareholders, and I’ve been looking forward to

the opportunity to share my thoughts on Sonic Foundry – our challenges, op-

portunities and our plans to rebuild the business. Regaining and expanding

the trust of our customers, our team and you, our shareholders is paramount.

Though I have been in my position for a short time, I intend to prove to you

that walking the walk and living up to expectations are core values for me,

and I am excited for what lies ahead.

There is no doubt that we have a very solid foundation, and that begins in

house. I spent a great deal of time in my first 60 days as CEO meeting with

all employees to identify individual strengths and listen to their input. It was

a very encouraging exercise, and I’m proud to say we have an incredibly re-

sourceful, passionate and collaborative team in place. I’m honored to lead

them going forward and am confident they’ll get the job done.

Before I talk about where we’re going, let’s look at where we’ve been over the past year.

2018 in Review
Our strategy to make video creation more accessible, powerful and easy has been resonating very well with our

largest customer base — higher education — as Mediasite is continually selected by leading educational institutions

around the globe. Sonic Foundry continues to be the market leader, with more customers and higher revenue than

our competitors, a fact that is supported by the independent research of industry analysts like Wainhouse Research

and Frost & Sullivan who cover our market.

By increasing the breadth and depth of our offerings and expanding our product leadership in mission critical,

wide-scale campus video adoption, we’ve secured numerous new Mediasite customers including Iqra University in

Pakistan, Deakin University in Australia, Cuyahoga Community College in Ohio and University of the Witwatersrand,

Johannesburg in South Africa.

Among the new customers are a number of key wins from our competitors from this past year. Leading the way

were several large-scale deployments which helped shore up our belief that we have the best offering to revolu-

tionize the modern academic experience. Schools like Texas A&M College of Engineering, Florida Atlantic Univer-

sity and University of North Texas Health Sciences Center have all reported tens of thousands of video views in a
short time with Mediasite.

In our efforts to make progress across the entire campus footprint, long term customers have expanded into other

professional schools, including Duquesne University Law, University of Chicago Booth School of Business and

Duke Engineering. We also see an increasing number of customers in emerging markets such as India and China.

It’s exciting to see all the innovative ways schools and organizations globally are finding to use Mediasite.

With this appetite for adoption, customers are increasingly looking at us to provide additional service offerings. Over

the past year we formalized a customer success initiative to promote more effective product use. When our customers

can better realize Mediasite’s benefits, they’re more likely to stick with us and expand. Whether they rely on our cus-

tomer success team, our managed services or our cloud solutions, these customers are finding Mediasite an economi-

cally sensible way to accomplish their online video needs without adding internal personnel or equipment.

As higher education and enterprises mature to expect flawless user experiences, we plan to place more emphasis on

our cloud offering. This is a trend we expect will accelerate as it clearly matches the preference of our existing users.

This past year we saw our Mediasite Join video and web conference capture and management solution find a new

home in the fast-growing unified communications space. The workplace and classrooms are increasingly becoming

more collaborative and geographically dispersed, and a lot of valuable knowledge is being shared across distance

via video and web conferences in heterogeneous environments. We’re seeing demand strengthen for the ability to

intelligently capture, manage and route that knowledge. The medical/healthcare, pharmaceutical and technology

segments are particularly strong enterprise markets for Mediasite Join, which will continue to be a primary focus for

us over the next year.

Our integration with IBM Watson speech-to-text technology gives our customers deeper insights into their video

content. This integration enables new workflows to create cleaner video transcripts, something especially important

in higher education where accessibility requirements are high. We plan to continue to focus on and expand upon

this exciting area in the coming year and see endless possibilities for how artificial intelligence can enhance our

customers’ video experiences.

Strategic Perspective
Even as we celebrate these positive trends, our past performance cannot be ignored. We have fallen short of our

revenue-growth targets for several years, and our quarterly numbers have been unsatisfactory from a profitability

standpoint. These dynamics have translated directly into poor shareholder value.

To remedy this, I decided to refocus our resources and trim our cost base. That will help drive us to profitability with

urgency, while working to support our customers and refine our long-term strategy.

Our number one priority is to sustainably grow the top line of the business. By listening to the evolving needs and

desires of our customers we can continue to be creative and add functions, features and services to Mediasite

while attracting new customers and expanding existing ones. Traditionally we’ve leveraged our technology as a

platform. Moving forward, we’re exploring adding a more solutions-based approach to make even more customers

successful with their Mediasite rollout and foster additional growth.

As we look at the next three to five years, we need to be better at creating our own markets. We’re exploring

how we can apply our best-in-class solutions and services beyond our important commitment to the existing

customer base.

Continued success means meaningful expansion of our customer relationships, bringing new high-impact solutions

to the market and delivering a support backbone to ensure the success of our customers at every step.

We have a fantastic team in place that will be able to respond to what comes our way in the marketplace. I’m opti-

mistic about our position and our ability to impact our destiny and look forward to the journey.

Sincerely,

Michael Norregaard

CEO

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held September 12, 2019

The Annual Meeting of Stockholders of SONIC FOUNDRY, INC., a Maryland corporation (“Sonic”) will be held at
the Overture Center for the Arts, Wisconsin Studio, 201 State Street, Madison, Wisconsin 53703 on September 12, 2019
at 9:00 a.m. local time, for the following purposes:

To elect two directors to hold office for the terms set forth herein and until their successors are duly elected and
qualified.
To ratify the appointment of Wipfli LLP as our independent auditors for the fiscal year ending September 30,
2019.

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 and, Series A Preferred Stock, at the close of business on July 22, 2019 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
August 2, 2019

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.

─────────────────────────────────────

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

PROXY STATEMENT

August 2, 2019

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 Nelson A. Murphy and David F. Slayton, for terms expiring in 2024;

FOR the ratification of the appointment of Wipfli LLP as independent auditors of Sonic for the fiscal year ending
September 30, 2019.

In the event that the nominees 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 August 8, 2019.

Each holder of Common Stock 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 July 22, 2019 (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 6,758,865 shares of Common Stock, held by approximately 3,100 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 stock issued, outstanding and entitled to vote at the Annual Meeting,
present in person or represented by proxy, shall constitute a quorum at the Annual Meeting. The election of Directors
require a plurality of the votes present and entitled to vote. Therefore, the two directors who receive the highest vote
total will be elected. Neither an abstention nor a withheld vote will affect the outcome of the election. The ratification
of the appointment of Wipfli 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 wipfli, LLP as our independent auditor is considered a
discretionary matter.

DATE, TIME AND PLACE OF ANNUAL MEETING

The Annual Meeting will be held on September 12, 2019 at 9:00 a.m. (Central time) at the Overture Center for the
Arts, Wisconsin Studio, 201 State Street, Madison, Wisconsin 53703.

PROPOSAL ONE: ELECTION OF DIRECTORS

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 not be less than three or more than twelve. The currently authorized number of directors
is six. The seats on the Board of Directors currently held by David F. Slayton and Nelson A. Murphy are designated as
Class I Board seats, with terms expiring at the Annual Meeting. The Board of Directors has nominated Nelson A. Murphy
and David F. Slayton as Class I Directors for election at the Annual Meeting.

If elected at the Annual Meeting, Messrs. Murphy and Slayton would serve until the 2024 Annual Meeting until their
successors are elected and qualified or until their earlier death, resignation or removal.

The election of Messrs. Murphy and Slayton require a plurality of the votes present and entitled to vote.

Nominees for Director for a Five-Year term expiring on the 2024 Annual Meeting

Nelson A. Murphy

Mr. Murphy, age 59, has been a Director since November 2017. Since January 2015, Mr. Murphy has been the
Executive VP, Finance & Operations for Catawba College, a private liberal arts college. From August 2013 to June
2015 Mr. Murphy was VP, International Finance at Syniverse Technologies, Inc. in Luxembourg, a provider of
mobile technologies, and from October 2010 to August 2013 served as VP – Finance, Defensive Systems Division at
Northrop Grumman Corporation, a global security company. Previously, Mr. Murphy served in various senior
finance roles at AT&T including responsibility for finance in operations located in Europe, the Middle East and
Latin America. Mr. Murphy has a B.S. in Accounting from Wake Forest University.

David F. Slayton

Mr. Slayton, age 50, has been a Director since November 2017. Since April 2013, Mr. Slayton has been the Chief
Financial Officer of Ovative Group, a digital media agency and analytics firm. From July 2008 to March 2013, Mr.
Slayton was co-founder, Executive Vice President – CFO and a member of the board of Alice.com, an e-commerce retail
marketplace. Prior to his service at Alice.com, Mr. Slayton served in senior financial management roles at numerous
companies including as Chief Financial Officer at Shavlik Technologies from June 2005 to July 2008, Managing Director
and co-founder at Haviland Partners Inc. from August 2003 to February 2005 and as Chief Financial of NameProtect Inc.
from July 2000 to July 2003. Mr. Slayton earned a BS in Economics from the Massachusetts Institute of Technology
2

(June 1991) and an MBA in Business Administration from Harvard University (June 1996).

The members of the Board of Directors unanimously recommend a vote FOR the election of Messrs. Murphy and
Slayton as Class I Directors.

DIRECTORS CONTINUING IN OFFICE

Mark D. Burish

Term Expires in 2020
(Class II Director)

Mr. Burish, age 66, 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, Madison, WI, which he co-founded in 1983. He is
President and principal owner of Steakhouse, LLC, a chain of steakhouse restaurants and co-founder and principal of
MB Solutions, a pharmaceutical company. He sits on the board of Forward Health Group, a healthcare analytics
software company and serves as a director of Monona Bank, a Madison based banking Company. Mr. Burish also
presently serves on the board of VIP Crowd, an online business that rewards customers, employees, prospects, and
networks for helping grow and improve their business. Previously, Mr. Burish was the founder, CEO and owner of
Our House Senior Living, LLC, Milestone Senior Living, LLC and Milestone Management Services, LLC which he
started in 1997. Our House Senior Living was sold in 2010 and Milestone was sold in 2017. 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 64, 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. He also serves on the board of Mercury Air Group Inc. subsidiaries,
as well as on the board of managers of Altathera Pharmaceuticals LLC. 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.

Brian T. Wiegand

Term Expires in 2022
(Class IV Director)

Mr. Wiegand, age, 50, 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 Gravy, Inc.,
a video platform for brands and influencers to host live mobile shopping parties to drive brand engagement and
impulse purchases. 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 presently serves on the board of VIP Crowd, an online
business that rewards customers, employees, prospects, and networks for helping grow and improve their business.
Mr. Wiegand attended the University of Wisconsin – Madison.

Gary R. Weis

Term Expires in 2023
(Class V Director)

Mr. Weis, age 72, served as Chief Executive Officer from March 2011 until April 2019, Chief Technology Officer
from September 2011 to April 2019 and a Director of Sonic since February 2004. Presently, he serves as a senior
advisor to the Company. 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.

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 served as CEO of the
Company from March 2011 to April 2019. 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.
Mr. Murphy has significant experience in finance and accounting both in the higher education field as well as with
technology companies and Mr. Slayton has substantial financial experience in growing technology companies.

Director Independence

CORPORATE GOVERNANCE

Although the Company’s stock is no longer listed on the NASDAQ Stock Market (“NASDAQ”), the Company intends
to comply with most of the listing requirements for such market and all of the requirements of the OTC Markets,
where the Company’s stock is currently quoted. Both NASDAQ and the OTC Markets require 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, Nelson A. Murphy, David F. Slayton 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.

Board Leadership Structure and Role in Risk Oversight

Mark D. Burish serves as Non-Executive Chairman of the Board and Michael Norregaard serves as our Chief
Executive 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 six times during Fiscal 2018. 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 2018.

The Board of Directors has three standing committees, the Audit Committee, the Executive Compensation Committee
and the Nominations Committee. The Board of Directors also established a special committee of independent and
disinterested members to investigate, evaluate and negotiate on behalf of the Board with respect to various corporate
transactional opportunities with which the Board may from time to time be presented, as well as to consider and negotiate
the terms of transactions by Mark D. Burish, the Company’s chair.

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. Murphy (chair), Slayton
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. 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 experience serving in senior financial roles at several companies
as well as his degree in accounting and designation as a certified public accountant, Mr. Murphy meets the definition of
audit committee financial expert as that term is defined under the rules of the Securities and Exchange Commission. The
members of the Audit Committee also meet the Nasdaq Stock Market requirements regarding the financial sophistication
and the financial literacy of members of the Audit Committee.

The Compensation Committee consists of Messrs. Burish (chair) and Wiegand. 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. A copy of the charter of the Compensation Committee is available on Sonic’s website.

The Nominations Committee consists of Messrs. Burish (chair) and Wiegand. 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 2020 Annual Meeting of Stockholders, the
nomination must be delivered or mailed to and received by Sonic's Secretary between May 14, 2020 and June 13, 2020
(or, if the 2020 annual meeting is advanced by more than 30 days or delayed by more than 60 days from September 12,
2020, 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, will receive reduced compensation from prior years with an
annual retainer of $10,000 (down from $20,000) in addition to a fee of $750 for attendance at each meeting of the Board
of Directors (down from $750) and $500 per committee meeting attended (down from $1,000). Special independent and
disinterested committee members will continue to be paid a fee of $1,000 for each meeting attended. In addition, the
chair of the Audit Committee receives an Audit Committee annual retainer of $4,000 and the chair of the Compensation
Committee receives a $1,500 Compensation Committee annual retainer. Mr. Burish receives an annual retainer of
$17,500 as compensation for his services as Chair of the Board of Directors. The total fee compensation earned by the
five non- employee directors combined in Fiscal 2018 was $227,160. 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 150,000 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, 2018.

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

—
—
4,500
—
—

Stock
Awards
($)(2)
(c)

67,000
30,000
45,095
38,425
35,000

Option
Awards
($)(3)
(d)

1,360
1,360
1,700
1,360
1,360

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

—
—
—
—
—

Name
(a)

Mark D. Burish
Frederick H. Kopko
Nelson A. Murphy
David F. Slayton
Brian T. Wiegand

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

—
—
—
—
—

All Other
Compensation
($)
(g)

—
—
—
—
—

Total
($)
(h)

68,360
31,360
51,295
39,785
36,360

(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, 2018 in accordance with FASB ASC Topic 718. Each director received an option award
of 2,000 shares on May 17, 2018 at an exercise price of $2.24 with a grant date fair value of $1,360. In addition,
Mr. Murphy received a grant of 500 shares on May 17, 2018 at an exercise price of $2.24 with a grant date fair
value of $340 in connection with his position as chair of the Audit Committee.

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.

Michael Norregaard, age 58, has been Chief Executive Officer since May 2019 and joined the Company in January
2013. During Mr. Norregaard’s tenure with the Company he served in various sales and operations roles including as
Chief Operating Officer, Vice President of Business Development and Senior Vice President of Sales Operations. From
2007 to January 2013 Mr. Norregaard served as Managing Director / Divisions Director Outsourcing Services for Logica
PLC, a multinational IT and management consulting company headquartered in the United Kingdom. Prior to his role
with Logica, Mr. Norregaard held various other executive roles in European technology companies as well as client
manager and sales executive at IBM and general manager at AT&T. Mr. Norregaard has a Bachelor of Business from
the Copehagen Business School and a Master of Social Economics from the University of Copenhagen.

Kenneth A. Minor, age 57, has been our Chief Financial Officer since June 1997, Assistant Secretary from December
1997 to February 2001 and Secretary since February 2001. Effective October 1, 2019, Mr. Minor will transition from
Chief Financial Officer to Senior Financial Advisor and will, among other things, continue to coordinate the preparation
of the Company’s financial statements and certify financial statements filed with the SEC. 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 48, 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 July 22,
2019, 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 July 22, 2019, 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

Mark D. Burish(3)
33 East Main St.
Madison, WI 53703

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

Wealth Trust Axiom LLC (5)
4 Radnor Corp Center, suite 520
Radnor PA 19087

Gary R. Weis(6)

Kenneth A. Minor(7)

Robert M. Lipps(7)

Frederick H. Kopko, Jr.(8)
209 west Jackson, Suite 900
Chicago, IL 60603

Brian T. Wiegand (9)
1600 Aspen Commons
Middleton, WI 53562

David F. Slayton(10)
701 Washington Ave N., Suite 400
Minneapolis, MN 55401

Nelson A. Murphy(11)
2300 W. Innes St.
Salisbury, NC 28144

Michael Norregaard(12)

Number of Shares of
Class
Beneficially Owned

Percent
of Class(2)

2,211,783

32.5%

1,080,845

15.4

352,435

302,440

161,834

120,430

91,532

84,385

65,274

50,592

21,229

5.2

4.3

2.4

1.8

1.4

1.2

1.0

All current Executive Officers and Directors as a Group (9

3,109,502

42.5%

persons)(13)

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 note (5) where such information is based on a Schedule 13G, have, except as set forth in note (5), sole
voting and dispositive power with respect to the number of shares indicated as beneficially owned by them.
(2) Applicable percentages are based on 6,758,865 shares outstanding, adjusted as required by rules promulgated by the

Securities and Exchange Commission.
Includes 35,905 shares subject to presently Exercisable Warrants and 18,000 shares subject to Presently Exercisable
Options.
Includes 271,455 shares subject to Presently Exercisable Common Stock Warrants.

(3)

(4)

(5)

(6)
(7)
(8)

Information is based on Schedule 13G filed on January 7, 2019 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 206,554 shares subject to Presently Exercisable Options.
Includes 118,355 shares subject to Presently Exercisable Options.
Includes 20,000 shares subject to Presently Exercisable Options, and include all shares owned by Neltjeberg Bay
Enterprises LLC, which is controlled and owned by Mr. Kopko.
(9)
Includes 14,000 shares subject to Presently Exercisable Options.
(10) Includes 4,500 shares subject to Presently Exercisable Options.
(11) Includes 4.000 shares subject to Presently Exercisable Options.
(12) Includes 15,416 shares subject to Presently Exercisable Options.
(13) Includes an aggregate of 555,086 Presently Exercisable Options and warrants.

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 “Named 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 2018 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 12 publicly-traded
technology companies with annual revenues ranging from approximately $10 million to just under $100 million;
market capitalization from approximately $10 million to approximately $200 million and approximately 300
employees or less. The following companies comprised the peer group for the study: Adesto Technologies, Corp,
Asure Software 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 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 twelve 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 met on February 1, 2019 for consideration of base wage changes for Messrs. Weis, Minor and Lipps
which have been frozen since December 1, 2016. At the recommendation of management, the Committee agreed to
reduce compensation for Messrs. Weis and Minor and Lipps. Base wages for Messrs. Weis and Minor were reduced
to $350,000 and $250,000 on an annual basis from $489,880 and $301,986, respectively. Base wages for Mr. Lipps
were maintained at $242,810 but his incentive compensation was capped at $7,190 on an annual basis. After its review
of all sources of market data as described above, the Committee believes that the base salaries and the bonuses
described are below its targeted range for total cash compensation. Mr. Norregaard was appointed Chief Operating
Officer in March 2019 and Chief Executive Officer in May 2019 and received an annual base salary of $231,750. In
July 2019 the Board agreed to increase the annual base wage for Mr. Norregaard to $281,750, subject to final
negotiation of his amended employment agreement.

Annual Performance-Based Variable Compensation

The performance-based variable compensation reported for each executive officer represents compensation that was
earned based on incentive plans. 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 2018, 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 and (2) adjusted EBITDA. 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.

Payout Based on Performance Against Goals. For fiscal 2018 the Company’s performance, as evaluated by the
Compensation Committee, lead to the determination that none of the objectives were met with regard to financial
performance of the Company and therefore, no incentives were earned under the STIP compensation plan. Total
billings – based incentives paid to Mr. Lipps during fiscal 2018 was $68,862. No variable compensation plan was
approved for fiscal 2019.

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.

No additional option grants were made to Messrs. Weis, Minor and Lipps following the end of fiscal 2018. At a
compensation committee meeting held February 1, 2019, the executive management team proposed cancelling certain
vested stock options they held in order to make them available for future employee grants. The impact was to cancel
175,764 options for Mr. Weis and 109,690 options each for Messrs. Minor and Lipps. The committee accepted the
management recommendation and authorized cancelation immediately.

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. Norregaard, Minor and Lipps. Pursuant to such employment
agreements, Messrs. Norregaard, Minor and Lipps receive annual base salaries subject to increase each year at the
discretion of the Board of Directors. Messrs. Norregaard, 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.
Norregaard, 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. Norregaard, 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. Norregaard, 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.

For illustrative purposes, if Sonic terminated Messrs. Minor, Norregaard and Lipps on September 30, 2018, (not for
cause), or if Messrs. Minor, Norregaard and Lipps elected to terminate their employment following a demotion or
alteration of duties on September 30, 2018, and a change of control as defined in the employment agreements had
occurred, Sonic would be obligated to pay $334,237, $232,186 and $329,018, respectively (based on fiscal 2016
compensation which was the fiscal year with highest cash compensation in three year period preceding September 30,
2018 for Messrs. Minor and Lipps and fiscal 2018 for Mr. Norregaard). In addition, any non-vested rights of
Messrs. Weis, Minor, Norregaard 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 $122,000 for Mr. Weis,
$13,000 for Mr. Norregaard and $67,000 for both Messrs. Minor and Lipps.

In July 2019, the Board approved a change to the employment agreement for Mr. Minor that includes the resignation of
Mr. Minor from all his positions with the Company effective September 30, 2019 pursuant to a retirement and transition
agreement. Such agreement provides that Minor will provide transitional assistance to the Company, and is subject to
final negotiation and execution. Pursuant to the transition agreement Mr. Minor will receive $200,000 over the year
ending September 30, 2020 unless he elects to have the Company provide health insurance coverage to him, in which
case he will receive $185,000 over the period. In addition, Mr. Minor’s options will fully vest and not expire by virtue of
the termination of Mr. Minor’s active employment but rather his termination will be considered to be September 30, 2020
for determination of expiration of his options. In addition, a non-recourse note payable by Mr. Minor to the Company in
the original amount of $25,000 will be forgiven. Mr. Minor will also continue to provide services to the Company in
connection with the preparation and certification of financial statements and other related financial matters pursuant to a
consulting agreement which provides for a monthly fee of $7,500.

In July 2019, the Board agreed to increase the base salary of Mr. Norregaard from $231,750 to $281,750 and change the
calculation of severance from an amount equal to the highest cash compensation during the last three fiscal years to his
base compensation at the time of is severance.

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 2018.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of Sonic Foundry 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 Company’s 2019 Proxy Statement included in the Company’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2018, as amended and filed in a Form 10-K.
Proxy Statement.

COMPENSATION COMMITTEE

Mark D. Burish, Chair
Brian T. Wiegand

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, 2018.

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)(4)

Gary R. Weis
Chief Executive and
Chief Technology
Officer

Year
(b)

2018
2017
2016

489,880
487,136
475,615

Kenneth A. Minor
Chief Financial Officer
and Secretary

2018
2017
2016

301,990
300,298
293,190

Robert M. Lipps
Executive Vice
President - Sales

2018
2017
2016

242,810
241,450
235,739

—
—
—

—
89,143
157,350

—
—
95,123

—
49,028
76,355

—
—
41,047

—
49,028
76,355

68,862
61,997
93,279

—
—
—

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

Total
($)
(j)

4,304
7,537
9,021

494,184
583,819
737,109

17,548
13,826
17,299

319,538
363,152
435,883

8,614
6,149
9,950

320,286
358,624
415,323

(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 2018 includes Sonic’s matching contribution under our 401(k)
plan of $4,304, $10,398 and $8,614 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.

(4) Mr. Norregaard was appointed Chief Operating Officer on March 4, 2019 and Chief Executive Officer on April 22,

2019, following the retirement of Mr. Weis as Chief Executive Officer.

The following table shows the plan-based awards granted to the Named Executive Officers during fiscal 2018.

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

1/17/18 —
1/17/18 —
1/17/18 —

—
—
—

92,857
51,071
51,071

2.49
2.49
2.49

89,143
49,028
49,028

(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, 2018 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, 2018, options
to purchase a total of 2,029,741 shares were outstanding under the plans, and options to purchase 739,259 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, 2018 held by the
Named Executive Officers.

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)

Option Awards

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

None

Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)
(b)
5,000
2,000
2,000
2,000
50,000
73,000
61,500
62,264
33,716
25,014
92,857
6,000
14,120
27,500
40,000
33,825
34,245
18,546
13,758
51,071

6,000
14,120
27,500
40,000
33,825
34,245
18,546
13,758
51,071

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

0
0
0
0
0
0
0
0
16,858
50,028
0
0
0
0
0
0
0
9,273
27,515
0

0
0
0
0
0
0
9,273
27,515
0

Option
Exercise
Price
($)
(1)
(e)
5.00
5.50
6.90
14.83(2)
8.68(2)
7.80
9.45(2)
9.36(2)
7.17
4.75
2.49
5.26
15.21(2)
9.46(2)
7.80
9.45(2)
9.36(2)
7.17
4.75
2.49

5.26
15.21(2)
9.46(2)
7.80
9.45(2)
9.36(2)
7.17
4.75
2.49

Option
Expiration Date
(1)
(f)
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
12/27/2026
1/17/2028
12/2/2019
11/24/2020
10/24/2021
10/17/2022
10/28/2023
11/10/2024
11/5/2025
12/27/2026
1/17/2028

12/2/2019
11/24/2020
10/24/2021
10/17/2022
10/28/2023
11/10/2024
11/5/2025
12/27/2026
1/17/2028

Name
(a)

Gary R. Weis

Kenneth A. Minor

Robert M. Lipps

(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.

(2) Denotes option cancelled February 1, 2019

The following table shows information concerning option exercises in fiscal 2018 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

Weighted average
exercise price of
outstanding
options

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

2,011,241

6.93

695,759

18,500
2,029,741 $

5.90
7.03

—

695,759

(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 2018 were those named
in the Executive Compensation Committee Report. No member of the Committee was at any time during fiscal 2018 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: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors, upon the recommendation of the Audit Committee, has appointed the firm of Wipfli LLP
(“Wipfli”) as independent auditors to audit our financial statements for the year ending September 30, 2019, and has
further directed that management submit the selection of independent public accountants for ratification by the
stockholders at the annual meeting. Representatives of Wipfli 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 Wipfli as our independent auditors is not required by our Bylaws or otherwise.
However, the Board is submitting the selection of Wipfli 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 Wipfli 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 2 ratifying the appointment of Wipfli as
independent auditors for Sonic Foundry.

Relations with Independent Auditors

The Company, upon the recommendation of its audit committee has selected Wipfli, LLP (“Wipfli”) as its independent
auditor for the fiscal year ending September 30, 2019.

On April 2, 2019, the Company, upon the recommendation of its audit committee, notified Baker Tilly Virchow Krause
(“BT”) that it had selected an alternative auditor for the fiscal year commenced October 1, 2018, and appointed Wipfli,
LLP (“Wipfli”) as its independent auditor for that fiscal year.

During the years ended September 30, 2018 and 2017 and through April 22, 2019, neither the Company nor its audit
committee consulted Wipfli with respect to the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on our financial statements, as defined in
Item 304(a)(2)(i) of Regulation S-K, for which was concluded an important factor considered by the Company in
reaching a decision as to the accounting, auditing or financial reporting issue. Likewise, neither the Company nor
the audit committee consulted Wipfli regarding any matter that was the subject of a disagreement or a reportable
event, as defined in Item 304(a)(2)(ii) of Regulation S-K.

As stated in Proposal 2, the Board has selected Wipfli to serve as our independent auditors for the fiscal year ending
September 30, 2019.

Audit services performed by BT for Fiscal 2018 and 2017 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 2018 and 2017 Audit Firm Fee Summary

During fiscal years 2018 and 2017, 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,
2018
2017
$327,186
360,237
13,222
13,200
—
—

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
2018.

Messrs. Murphy, Slayton 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 predecessor 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.

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.

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.

Based on the reviews and discussions referred to above and our review of Sonic’s audited financial statements for fiscal
2018, 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, 2018, for filing with the SEC effective March 15, 2019.
Respectfully submitted,

AUDIT COMMITTEE
Nelson A. Murphy, Chair
David F. Slayton
Brian T. Wiegand

CERTAIN TRANSACTIONS

On November 7, 2017, the Company entered into an Agreement with Mark Burish, the Chair of the Company,
("Burish"), such that Burish waived his right to convert any of his holdings of Series A Preferred into common stock
until shareholder approval has been obtained, and also to waive his right to vote his shares of Series A Preferred Stock
to approve the issuance of the Series A Preferred Stock.

On November 9, 2017, the Company sold to Burish $500 thousand of shares of Preferred Stock, Series A, at $762.85
per share. Burish beneficially owns more than 5% of the Company’s common stock. All sales of Preferred Stock,
Series A, were approved by a special committee of disinterested directors.

On January 19, 2018, the Company and a director entered into a Subscription Agreement (the “Subscription
Agreement”). Pursuant to the Subscription Agreement, (i) on January 19, 2018, Burish purchased a
10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash; and (ii) on February 15, 2018,
Burish purchased an additional 10.75% Convertible Secured Promissory Note for $500,000 in cash (each, a “Note”,
and collectively, the “Notes”).

On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient
to comply with rules and regulations of Nasdaq, the Notes were automatically converted into 1,902 shares of Series
A Preferred stock. The number of shares was determined by dividing the total principal and accrued interest due on
each Note by $542.13 (the “Conversion Rate”).

On April 16, 2018, the Company issued 232,558 shares of common stock to an affiliated party. The shares were issued
at a price of $2.15 per share, representing the closing price on April 13, 2018. On April 16, 2018, the closing price of
the Company’s common stock was $2.18 per share. The affiliated party also received warrants to purchase

232,558 shares of common stock at an exercise price of $2.50 per share, respectively, which expire on April 16, 2025.

On November 15, 2018, 718 shares of Preferred Stock, Series A were automatically converted by the Company into
169,741 shares of common stock. The amount of shares converted represents all preferred shares issued on November
9, 2017, including related dividends.

On January 4, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "Promissory Note")
pursuant to which Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash. The terms of the
Promissory Note were ratified by the special committee of independent and disinterested directors as being in the best
interest of the Company and its shareholders.

Interest accrued and outstanding principal on the Promissory Note is due and payable on January 4, 2020.

The Promissory Note may be prepaid at any time without penalty.

The Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.

On January 31, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "January 31, 2019
Promissory Note") pursuant to which Burish purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash.

Interest accrued and outstanding principal on the January 31, 2019 Promissory Note is due and payable on January
31, 2020.

The January 31, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the
Company by issuing common stock to Burish, with each share valued at $1.30 per share.

The January 31, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019,
as detailed below.

The Disinterested Directors also ratified as fair and in the best interest of the Company and its shareholders the
transaction on February 14, 2019, between Sonic Foundry, Inc. and Burish, whereby Burish purchased a 9.25%
Unsecured Promissory Note for $1,000,000 in cash (the "February 14, 2019 Promissory Note").

Interest accrued and outstanding principal on the February 14, 2019 Promissory Note is due and payable on February
14, 2020.

The February 14, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the
Company by issuing common stock to Burish, with each share valued at $1.30 per share.

The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019,
as detailed below.

On April 25, 2019, Burish exercised his warrant to purchase 728,155 shares of common stock of the Company at an
exercise price of $1.18 per share, which was entered into coincident with the execution of the Note Purchase
Agreement on February 28, 2019. The special committee of disinterested directors approved the issuance of the
warrant coincident with the execution of a note purchase agreement with Burish.

On May 17, 2019, 2,080 shares of Preferred Stock Series A were automatically converted by the Company into
491,753 shares on common stock. The amount of shares converted represents all preferred shares issued on May 17,
2018, including related dividends.

Burish beneficially owns more than 5% of the Company’s common stock. The affiliated party beneficially owns more
than 5% of the Company's common stock. All transactions with Burish and with the affiliated party were approved by
the Disinterested Directors.

Frederick H. Kopko, Jr., a director and stockholder of Sonic Foundry, is a partner in McBreen & Kopko. Pursuant to
the 2008 Non-Employee Directors Plan, Mr. Kopko was granted options to purchase 20,000 shares of Common Stock
at exercise prices ranging from $2.24 to $14.83. During fiscal 2018, 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 2020 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 2020 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 (April 9, 2020). 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 2020 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
May 14, 2020 and June 13, 2020. However, in the event that the annual meeting is advanced by more than 30 days or
delayed by more than 60 days from September 12, 2020, 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 2020 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 (June
23, 2020) and (ii) any other proposal, if the 2019 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, 2018 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, 2018, 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,

August 2, 2019

Kenneth A. Minor, Secretary

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

FORM 10-K

(Mark One)

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

For the fiscal period ended September 30, 2018
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

39-1783372

(State or other jurisdiction of incorporation or organization)

(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 ý

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 ý

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 ý 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 ý 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 ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth
company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Non-accelerated filer

Accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

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 $8,661,176.

The number of shares outstanding of the registrant’s common equity was 5,278,778 as of March 12, 2019.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2019 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 for required sections.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

TABLE OF CONTENTS

PART I

PAGE NO.

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Item 3.

Item 4.

Properties

Legal Proceedings

Mine Safety Disclosures

PART II

Item 5.

Item 6.

Item 7.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Selected Consolidated Financial Data

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Consolidated Financial Statements and Supplementary Data:

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 (Deficit)

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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.

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

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accounting Fees and Services

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

PART I

ITEM 1. BUSINESS

Who We Are

Sonic Foundry (OTC Pink Sheets:SOFO) (the “Company”) is the global leader for video capture, management and streaming
solutions. Trusted by more than 4,900 educational institutions, corporations, health organizations and government entities in
over 65 countries, its Mediasite Video Platform quickly and cost-effectively automates the capture, management, delivery and
search of live and on-demand streaming videos.

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, 2018

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 quizzing, annotations, comments, polls, 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 it 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 a 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 RL Mini: The Mini provides the automation and high-quality capture Mediasite is known for in a compact,
affordable device, ensuring even more students never miss a lecture. With the Mini, there’s no need for AV in the room.
Instructors simply plug in their laptop and camera and start teaching. The plug-and-play device makes it easy to build or
expand an automated lecture capture programs in community colleges, vocational-tech schools, small departments and even
K12 classrooms.

• Mediasite Catch: 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

• 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.

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,
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 Monitoring Service: Customers get 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.

Mediasite Customer Care
Standard and Enhanced Customer Care 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 Care 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 Care 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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Enhanced Customer Care 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. The Enhanced Plan includes everything in the Standard Plan,
plus any combination of these services:
• Priority technical support with queue bypass and support case escalation
• Proactive Mediasite version administration and management
• Mediasite roadmap discussions with Sonic Foundry’s executive team
• Exclusive training and an annual call with a Mediasite consultant

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

Annual service contracts for Mediasite Video Cloud include a Standard Customer Care 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 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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

• 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

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.

Frost & Sullivan analysts report that the academic lecture capture market is “characterized by growing cloud-based deployments,
enormous shifts in the technological demands of students, growing use of data analytics to measure student engagement, 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 crossed $270 million in revenue in 2017. (Global Academic
Lecture Capture Systems Market report, 2018)

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, 2018

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
•
• 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

Wainhouse Research reports that healthcare organizations are making increased investments in streaming video, which is poised
for explosive growth. In an August 2017 survey, nearly 9 out of 10 (89%) healthcare respondents described streaming video as
an effective tool for communicating work-related information. In addition, 77% percent said online training sessions can match
or exceed the opportunities in the traditional classroom setting. “Healthcare managers are embracing emerging technologies (like
streaming video) that can help them communicate with their teams more effectively,” the firm wrote. (Prescribing New Solutions
for Communications in Healthcare, 2017)

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.

•

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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, 2018.

Billings and Distribution

Our services are typically billed and collected in advance of providing the service. 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 2018 and 2017 one
master distributor, Synnex Corporation (“Synnex”), contributed 6% and 11%, respectively, of total world-wide billings. A second
master distributor, Starin Marketing, Inc. (“Starin”), contributed 11% and 15% of total world-wide billings in fiscal 2018 and
2017, respectively. As master distributors, Synnex and Starin fulfill transactions to VARs, end users and other distributors. No
other customer represented over 10% of billings in 2018 or 2017.

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 2018, we utilized two master distributors in the U.S. and approximately 250 resellers, and sold our products
to over 1,225 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 36% and 43% in fiscal 2018 and 2017, respectively.

Market expansion: Over two-thirds of 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 streaming. 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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
leads to follow up, multiple Recorder orders, as well as, increased Mediasite Video Platform or Mediasite Video Cloud capacity.
In fiscal 2018, 91% of billings were to preexisting customers compared to 92% of billings in fiscal 2017.

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 Care 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, 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 personnel 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 Care 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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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 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 four 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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
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, 2018 and 2017, we spent $7.1 million and $7.2 million, respectively, on internal research
and development activities in our business. These amounts represent 21% and 20%, respectively, of total revenue in each of those
years. The decrease is a result of flat spending as well as a decrease in revenue compared to last year.

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, 2018 and 2017, we had 198 and 188 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.

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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

We may need to raise additional capital.

At September 30, 2018, we had cash of $1.2 million, $1.1 million of which was in our foreign operations. There was a remaining
amount of $3.4 million available under our line of credit facility with Silicon Valley Bank at September 30, 2018, with $621
thousand outstanding and a credit limit of $4.0 million in total. The credit facility with Silicon Valley Bank expired on January
31, 2019. In addition, $500 thousand on the term facility with Partners for Growth was subsequently disbursed on November 8,
2018. The Company has a history of losses and 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 goal to increase
revenue in fiscal 2019 and maintain flat operating expense, in an effort to reach an adjusted EBITDA breakeven point. We cannot
ensure that revenue will grow as anticipated and, if revenue is determined to be growing at a rate less than anticipated and expenses
are not sufficiently reduced, our line of credit may not be sufficient to support working capital needs, and our ability to develop,
maintain, and sell our products could be negatively impacted. Our financial condition may, in the future, cause us to be in non-
compliance with the provisions of our debt facilities. If our debt facilities are not sufficient to support working capital needs, our
financial condition causes us to be in non-compliance with certain provisions of our debt facilities, we may have to borrow
additional money from other debt providers or raise additional equity capital.

On February 28, 2019, a special committee of independent and disinterested directors (“Disinterested Directors”) unanimously
authorized us to enter into a Note Purchase Agreement (“NPA”) with Mark Burish, the Chairman of the Board of the Company,
for $5.0 million in cash. Following extended negotiations with an independent third party for a similar financing (“Independent
Third-Party Financing”) that was not consummated, the Disinterested Directors engaged in extensive deliberations and
negotiations with its Chairman for an alternative financing. The Disinterested Directors approved the alternative financing on
terms and conditions as set forth in the NPA, which it believes is fair and superior to the Independent Third-Party Financing, and
is in the best interest of the Company and its stockholders.

In the event we need to borrow additional money or raise additional equity capital, we may not be able to do so on acceptable
terms and conditions. If we are in non-compliance with the covenants of our existing debt facility, other lenders may be unwilling
to lend us capital and we may not be able to raise equity from independent investors. In that event, we may seek to raise money
from entities that are affiliated with the Company, as we have done in the past. However, most investors will require that their
investment be in the form of convertible preferred stock or convertible debt. It is also likely that access to capital will be limited
due to the time constraints associated with the need for capital, and the Company may need to rely on its Chairman, Mark Burish,
to provide additional capital on terms reasonable and acceptable to the independent members of the Board of Directors.

As a result of the non-cash goodwill and other intangible assets impairment charges recorded in fiscal 2018, the Company is no
longer able to satisfy the NASDAQ requirement to maintain $2.5 million of stockholders' equity. On December 18, 2018, the
Board of Directors approved the voluntary transfer of its common stock from the NASDAQ Stock Exchange to the OTCQB
Market ("the "QTCQB"). The OTCQB Market is operated by OTC Markets Group, a centralized electronic quotation service for
over-the-counter-securities. The Company ceased trading on NASDAQ at the close of business on December 28, 2018 and began
trading on the OTCQB on December 31, 2018 under its current trading symbol "SOFO". The Company ceased trading on the
OTCQB at the close of business on February 15, 2019 and began trading on the OTC Pink Sheets on February 18, 2019 under its
current trading symbol "SOFO". The Company has remained a reporting company under the Securities Exchange Act of 1934, as
amended, notwithstanding its voluntary withdrawal from the NASDAQ. As a result of the Company's inability to satisfy the
NASDAQ requirements, its ability to raise equity capital may be adversely affected.

In the event we are able to 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. In the event we
are able to 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 debt or equity financing upon acceptable terms, if at all. If we

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

cannot raise funds on acceptable terms, our business, operating results, and financial condition could be negatively impacted. The
Company believes its cash position and available credit is adequate to accomplish its business plan through at least the next
twelve months.

If the funds held 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.

Our common stock is subject to low trading volume and broad price swings.

Our common stock is quoted on the OTC Market (“OTC Pink Sheets”) administered by the Financial Industry Regulatory
Authority under the symbol “SOFO” since December 31, 2018. Prior to that our common stock was traded on the NASDAQ
exchange under the same symbol. Trading of our stock on the NASDAQ exchange has often been subject to very low volumes,
broad price swings and often at times with no company news. Stocks traded on the OTC Pink Sheets are often characterized by
similar behavior so the price of our stock is likely to continue to be volatile. Due to recent price levels of our common stock,
needs for additional capital may cause substantial dilution to existing shareholders.

Provisions of our charter documents and Maryland law could also discourage an acquisition of our company that would
benefit our stockholders and our insiders control a substantial percentage of our stock.

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.” In addition, even when there are no interested
stockholders involved in a transaction, Maryland law requires that a transaction involving a merger, consolidation, transfer of
assets, or share exchange, must be approved by the affirmative vote of at least two-thirds of the Company’s stockholders.

Our executive officers and directors together beneficially own, on an “as converted basis”, over 40% of our outstanding common
stock, and Mark Burish, individually, owns 33% on an as converted basis. As a result, these stockholders, if they act together or
in a block, or individually in the case of Burish, could have significant influence over most matters that require approval by our
stockholders, including the approval of significant corporate transactions, even if other stockholders oppose them. This
concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other
stockholders may view as beneficial. In the event additional capital is provided by executive officers or directors, then, due to the
low price levels of our common stock, control by such executive officers or directors may substantially increase.

We have a history of losses.

Our investments in growing revenues have generated losses in most years. Despite our plans to grow revenue and maintain flat
expenses in fiscal 2019, we may not realize sufficient revenues to reach or sustain profitability on a quarterly or annual basis. For
the year ended September 30, 2018, we had a gross margin of $24.9 million on revenue of $34.5 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.

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 2018 and fiscal 2017, 91% and 92% of billings were 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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

existing customers, better address the needs of potential new 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.

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

Part of our strategic challenge is 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.

Manufacturing disruption or capacity constraints would harm our business.

We subcontract the manufacturing of our recorders to a 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. Likewise, we are susceptible to any material change in terms; such as pricing, level of services performed
or changes to payment terms by our contract manufacturer. 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 the past. 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 converted inventory from one version to another. We have typically maintained greater amounts of
inventory as insurance against delays but currently hold substantially lower quantities of inventory in order to improve liquidity.
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 despite frequent changes in configuration and scheduling imposed by us. 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 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 on a timely basis. The
success of new products, product enhancements or service offerings depend on several factors, including the timely completion,
quality and market acceptance of the product, enhancement or service. Our fiscal 2019 business plan includes an expectation for
revenue contribution from both new and existing customers associated with the introduction of lower priced hardware and
software recorders in locations that can’t support our more comprehensive solutions. There can be no assurance that we will be
successful in achieving our revenue expectations from these new products or that we are able to retain existing customers in our
more comprehensive solutions. 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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

products and services will be accepted in preference to the products and services of our current and future competitors. Some of
our prospective customers may delay the purchase of our products or services until certain features are completed, may require
custom development of certain features as part of the purchase decision, or may condition additional payments tied to completion
of such features. Prioritizing such custom features can be difficult to adapt to other customers and distracts our engineering team
from implementing features required by other customers.

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 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.

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 has, and will
likely continue to result in price reductions, reduced gross margins and may result in 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.

• 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.

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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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. If our retention rates decrease, we may need to provide more incentives, reduce
pricing or generate greater lead generation through marketing in order to increase revenues, all of which could reduce profitability.

Our business is susceptible to risks associated with international operations.

International product and service billings ranged from 36% to 43% 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 and imposition of tariffs or quotas;
• 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

Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, may have a material adverse
impact on our business, operating results and financial condition.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

The U.S. government has indicated its intent to adopt a new approach to trade policy and in some cases to renegotiate, or
potentially terminate, certain existing bilateral or multi-lateral trade agreements, such as the U.S.-Mexico-Canada Agreement and
the North American Free Trade Agreement ("NAFTA"). It has also initiated tariffs on certain foreign goods and has raised the
possibility of imposing significant, additional tariff increases or expanding the tariffs to capture other types of goods. In response,
certain foreign governments have imposed retaliatory tariffs on goods that their countries import from the U.S. Changes in U.S.
trade policy could result in one or more foreign governments adopting responsive trade policies that make it more difficult or
costly for us to do business in or import our products from those countries. This in turn could require us to increase prices to our
customers, which may reduce demand, or, if we are unable to increase prices, result in lowering our margin on products sold.

We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar
restrictions upon the import or export of our products in the future, nor can we predict future trade policy or the terms of any
renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence
of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact
demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could have a material
adverse effect on our business, operating results and financial condition.

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-
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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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
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.

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 history and the pipeline of sales opportunities we manage, rather than
on firm channel partner orders. The mix of product demand varies significantly from quarter to quarter, further complicating our
estimated product needs. 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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 and Starin
Marketing, 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, dissatisfaction with inventory turn rates or profitability 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 two 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 certain 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.

Economic conditions could materially adversely affect the Company.

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. The Japanese government provides subsidies to support higher education from time to time but has not been
consistent. 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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 General Data
Protection Regulation that was enacted in May 2018, and an amended Act on the Protection of Personal Information in Japan,
impose new obligations directly on us both as a data controller and a data processor, as well as on many of our customers. These
new laws may require us to make changes to our services and/or our customers to meet the new legal requirements, and may also
increase our potential liability exposure through higher potential penalties for non-compliance. Further, laws such as the European
Union’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes, and the
tracking of individuals’ online activities. These new or proposed laws and regulations are subject to differing interpretations and
may be inconsistent among jurisdictions. These and other requirements could reduce demand for our services, require us to take
on more onerous obligations in our contracts, restrict our ability to store, transfer and process data or, in some cases, impact our
ability to offer our services in certain locations or our customers' ability to deploy our solutions globally. For example, ongoing
legal challenges in Europe to the mechanisms allowing companies to transfer personal data from the European Economic Area to
the United States could result in further limitations on the ability to transfer data across borders, particularly if governments are
unable or unwilling to reach new or maintain existing agreements that support cross-border data transfers, such as the EU-U.S.
and Swiss-U.S. Privacy Shield framework. Additionally, certain countries have passed or are considering passing laws requiring
local data residency. The costs of compliance with, and other burdens imposed by, privacy laws, regulations and standards may
limit the use and adoption of our services, reduce overall demand for our services, make it more difficult to meet expectations
from or commitments to customers, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which
we close sales transactions, any of which could harm our business.

We likely will need to acquire software and hardware 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 and outsourced most aspects of our network infrastructure
to multiple providers. We also rely on Internet systems and infrastructure to operate our business and provide our services. 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. These hardware, data, and
cloud computing platforms may not be available at reasonable terms or prices.

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. Further, there are third-party applications our products and services are dependent on, or integrate with, such
as operating systems and learning management systems. These integrations require specialized knowledge that is difficult and
expensive to maintain. Failure to maintain compatibility with such applications or identification of 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/or

• 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.
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, 17% of our
billings in fiscal 2018 were to Synnex Corporation and Starin Marketing Inc., two 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. Our distributor
in China has been unsuccessful in building a team to address demand in China, is under-funded and, significantly behind in their
payments to us causing us to record approximately $326 thousand and $200 thousand of bad debt in fiscal 2018 and 2017. Any
delay from Synnex, Starin, 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, exclude certain countries and are limited to $1.0 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.

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

In the past, the trading prices of the securities of technology companies have been highly volatile, although volatility has declined
substantially in the last several years and in 2018. 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;
• 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;

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

• The issuance of shares of common stock and preferred stock by us, whether in connection with an acquisition or a

capital raising transaction;

Issuance of debt, changes to, defaults or non-renewal of debt facilities and other convertible securities;

• Low trading volumes of our shares and inconsistent trading activity;
•
• Failure to meet NASDAQ requirements; and
• Any other factors discussed herein.

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.

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. See Note 1 - Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-
K) for further discussion.

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 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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 is 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.

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.

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 varied from about 106 to
approximately 114 during fiscal 2018. Similarly, the Euro varied from about .87 to approximately .80 to the US Dollar during
fiscal 2018. The strength of the dollar impacts our ability to export profitably to other countries, and will likely continue to
fluctuate. Any increase in the exchange rate of the US Dollar compared to the Euro or the Japanese Yen will impact our future
operating results and financial position.

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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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 the more cost-conscious
customers. 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, develop features that distinguish our products in the market place and address
the market for lower function and cost solutions, 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 four U.S. patents that have been issued to us. We may seek additional patents in the future. However, it is possible that:

• 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

• 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.

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;
• 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 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.

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. Certain countries have implemented, or may implement, legislative and technological actions that either
do or can effectively regulate access to the Internet, including the ability of Internet Service Providers to limit access to specific
websites or content. 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, 2018, we had 370 thousand outstanding warrants and 2.0 million of outstanding stock options granted under
our stock option plans, 1.7 million of which are immediately exercisable.

While nearly all outstanding warrants and options are currently priced above the market price of our common stock, dilution to
the interests of our stockholders will likely occur if or when they are exercised. 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 or other
factors under the Internal Revenue Code and other taxing authorities. The Tax Cuts and Jobs Act of 2017 changed both the federal
deferred tax value of the net operating loss carryforwards and the rules of utilization of federal net operating loss carryforwards.
The Tax Cuts and Jobs Act of 2017 lowered the corporate tax rate from 35% to 21% effective for our 2018 fiscal year. For net
operating loss carryforwards generated in years prior to 2018, there is no annual limitation on the utilization and the carryforward
period remains at 20 years. However, net operating loss carryforwards generated in years after 2017 will only be available to
offset 80% of future taxable income in any single year but will not expire.

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, 2018 and we were therefore not required
to have an auditor attestation on our internal controls over financial reporting for fiscal 2018, 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.

On June 28, 2018, the SEC adopted amendments that raise the thresholds in the smaller reporting company ("SRC") definition,
thereby expanding the number of smaller reporting companies eligible to comply with the scaled disclosure requirements in
several Regulation S-K and Regulation S-X items. The amended definition of a smaller reporting company reduces the likelihood
that the Company would be required to have auditor attestation on our internal controls over financial reporting in future periods.

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,
2021. The rent for the remainder of the lease period is approximately $60 thousand per month.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 $39 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, 2022. The facility includes sales, technical and administrative functions. The rent for the remainder of
the lease period is approximately $6 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, 2018

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.
Effective December 31, 2018, we transferred the listing of our common stock to the OTCQB Market under the symbol "SOFO".
Effective February 18, 2019, we transferred the listing of our common stock to the OTC Pink Sheets under the symbol "SOFO".
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 Capital Market, the OTCQB Market, and the OTC Pink Sheets.

Year Ended September 30, 2019:
First Quarter
Second Quarter (through March 12, 2019)
Year Ended September 30, 2018:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended September 30, 2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Dividends

High

Low

1.71
1.77

3.87
3.18
2.91
2.32

5.92
5.35
5.25
4.13

0.60
0.62

2.05
2.20
2.01
1.51

3.75
4.50
3.72
3.03

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.

Unregistered Sale of Equity Securities and Use of Proceeds

On January 19, 2018, the Company and a director entered into a Subscription Agreement (the “Subscription Agreement”).
Pursuant to the Subscription Agreement, (i) on January 19, 2018, the director purchased a 10.75% Convertible Secured
Subordinated Promissory Note for $500,000 in cash; and (ii) on February 15, 2018, the director purchased an additional 10.75%
Convertible Secured Subordinated Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the “Notes”).

On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply
with rules and regulations of NASDAQ, the Notes were automatically converted into 1,902 shares of Series A Preferred stock.
The number of shares was determined by dividing the total principal and accrued interest due on each Note by $542.13 (the
“Conversion Rate”).

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

common stock was $2.18 per share. The affiliated party also received warrants to purchase 232,558 shares of common stock at
an exercise price of $2.50 per share, respectively, which expire on April 16, 2025.

On June 8, 2018, 905 shares of Preferred Stock, Series A,were automatically converted by the Company into 213,437 shares of
common stock. The amount of shares converted represents all preferred shares issued on May 30, 2017 and June 8, 2017, including
related dividends.

On August 23, 2018, 717 shares of Preferred Stock, Series A were automatically converted by the Company into 169,485 shares
of common stock. The amount of shares converted represents all preferred shares issued on August 23, 2017.

The Company relied on Section 4(a)(2) of the Securities Act of 1933, as amended, to issue the Notes and stock, inasmuch as the
director and the affiliated party both received from the Company information that registration would provide and neither the
Company nor any person acting on its behalf offered or sold the Notes or stock by any form of general solicitation or general
advertising.

Holders

At March 12, 2019, there were 226 common stockholders of record and approximately 2,700 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

Weighted average
exercise price of
outstanding
options

Number of
securities
remaining
available for
future issuance

(a)

(b)

(c)

2,011,241

6.93

695,759

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

—
695,759
(1) Consists of the 2009 Stock Incentive Plan, Employee Incentive Stock Option Plan and the Directors Stock Option Plans.

18,500
2,029,741 $

5.90
7.03

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, 2013 through and
including September 30, 2018 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, 2013 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

*$100 invested on 9/30/13 in stock or index, including reinvestment of dividends fiscal year ending September 30.

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).

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Statement of Operations Data:
Revenue
Cost of revenue

Gross margin
Operating expenses
Impairment of goodwill & intangible assets

Loss from operations

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

Interest expense, net
Benefit (provision) for income taxes

Net loss

Dividends on preferred stock
Net loss attributable to shareholders

Basic net loss per common share
Diluted net loss per common share
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

$
$

2018

2017

2016

2015

2014

Years Ended September 30,

34,544 $
9,656
24,888
29,118
11,809
(16,039 )
—

—
142
(601 )
4,332
(12,166 ) $

(257 ) $
(12,423 ) $

(2.67 ) $
(2.67 ) $

36,000 $
9,867
26,133
30,091
600
(4,558 )
—

—

(65 )

(495 )
79
(5,039 ) $

(169 ) $
(5,208 ) $

(1.17 ) $
(1.17 ) $

37,975 $
9,985
27,990
30,266
—
(2,276 )
—

—

(178 )

(594 )
(269 )

(3,317 ) $
— $
(3,317 ) $

(0.76 ) $
(0.76 ) $

36,459 $
10,635
25,824
29,916
—
(4,092 )
—

—
46
(372 )
(107 )

(4,525 ) $
— $
(4,525 ) $

(1.04 ) $
(1.04 ) $

35,830
10,275
25,555
28,637
—
(3,082 )
1,390

38
173
(231 )
(1,104 )

(2,816 )
—
(2,816 )

(0.67 )
(0.67 )

4,655,520
4,655,520
2018

4,436,333
4,436,333
2017

4,389,421
4,389,421
2016

4,332,576
4,332,576
2015

4,174,191
4,174,191
2014

1,189 $
(5,765 )
13,583
3,451
(6,458 )

1,211 $
(4,833 )
28,356
8,147
3,118

1,794 $
(3,720 )
33,082
7,249
6,516

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

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

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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Overview

Sonic Foundry, Inc. is the trusted global leader for video capture, management and streaming solutions. Trusted by educational
institutions, corporations and government entities, Mediasite Video Platform quickly and cost-effectively automates the capture,
management, delivery and search of live and on-demand streaming video and rich media. Mediasite transforms communications,
training, education and events for our customers.

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.

We currently are evaluating the impact of a new standard related to revenue recognition, which we anticipate will have a material
impact on our consolidated financial statements. See Note 1 - Accounting Policies of the Notes to Financial Statements (Part II,
Item 8 of this Form 10-K) for further discussion.

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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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.

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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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. Allowance
for doubtful accounts for accounts receivable and financing receivables was $1.0 million at September 30, 2018 and $575
thousand at September 30, 2017.

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, the Company compares the estimated
fair value of the reporting unit to which goodwill is allocated to its carrying value. The amount of impairment, if any, is equal to
the amount by which the carrying value of the reporting unit exceeds its fair value.

For purposes of the fiscal 2018 and 2017 tests, goodwill balances are evaluated within three separate reporting units. In fiscal
2018, we performed a quantitative analysis and determined that the fair value of all three of the Company's reporting units is less
than its carrying value. The Company recognized an impairment charge of $10.4 million, or the remaining balance of goodwill,
as of September 30, 2018. In fiscal 2017, we performed a quantitative analysis and determined that the fair value of one of the
Company's reporting units is less than its carrying value, and that the fair value of the remaining reporting units is greater than
their respective carrying values. The Company recognized an impairment charge of $600 thousand as of September 30, 2017.

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 year ended September 30, 2018, it was determined that changes in circumstances were present,
primarily the decline in the Company's market capitalization during the fiscal year and past performance. For the year ended
September 30, 2018, the Company determined that intangible assets, consisting of customer relationships and product rights,
were impaired and recognized an impairment charge of $1.4 million. For the year ended September 30, 2017, it was determined
that changes in circumstances were present, primarily the decline in the Company's market capitalization during the fiscal year.
However, after performing analysis of undiscounted cash flows attributable to our long-lived assets along with other relevant
factors, such as the continued use of the assets, it was determined that, for the year ended September 30, 2017, there was no

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

impairment of long-lived and intangible assets other than goodwill. Key assumptions utilized in the analysis of undiscounted cash
flows for each asset or asset group being tested included 1) whether cash flows were attributable solely to the asset or group, or
to an entire reporting unit; and 2) the useful lives of the asset or asset group. Forecasts used in the analysis were also consistent
with those used in determining fair value of reporting units during goodwill impairment testing.

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, 2018 and 2017, 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

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 homogenous 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.

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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 2018 totaled $34.5 million, compared to $36.0 million in fiscal 2017, a decrease of 4%. Revenue consisted of
the following:

• Product and other revenue from the sale of Mediasite recorder units and server software decreased from $14.9 million in
fiscal 2017 to $12.3 million in fiscal 2018. Prior year product revenue included a large sales-type lease transaction with a
customer in Japan as well as software revenue recorded pursuant to another large international transaction originally billed
in Q4-2015. The average sales price per unit decreased in fiscal 2018 primarily due to an increase in sales of lower-cost
versions including the new mini recorder model as well as the Company's RL 220. Lower-cost units shipped in the current
fiscal year were 811 compared to 541 last year.

Units sold
Rack to mobile ratio

Average sales price, excluding support (000’s)
Refresh Units

2018
1,507
13.9 to 1

$5.9
421

2017
1,544
9.1 to 1

$7.1
457

• 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 $21.1 million in fiscal 2017 to $22.2 million in fiscal 2018 due primarily to an increase in events revenue
as well as a slight increase in customer support contract revenues as compared to fiscal 2017. At September 30, 2018,
$13.3 million of revenue was deferred, of which we expect to recognize $11.6 million in the next twelve months, including
approximately $4.6 million in the quarter ending December 31, 2018. At September 30, 2017, $14.3 million of revenue
was deferred.

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

Gross Margin

Total gross margin in fiscal 2018 was $24.9 million or 72% compared to $26.1 million or 73% in fiscal 2017. The significant
components of cost of revenue include:

• Material and freight costs for Mediasite recorders. Costs for fiscal 2018 Mediasite recorder hardware and other costs
totaled $3.2 million compared to $3.5 million in fiscal 2017. Freight costs were $262 thousand, and labor and allocated
costs were $1.5 million in fiscal 2018 compared to $259 thousand and $1.7 million, respectively, in fiscal 2017. The
remaining $217 thousand in fiscal 2018 and $644 thousand in fiscal 2017 relate to material and freight costs for Sonic
Foundry International and MSKK. The reduction in material and freight costs related to the subsidiaries is a result of a
decrease of 74 units sold year over year as well as the trend in mix of recorders sold toward a greater number of lower
cost versions.

• Services costs. Staff wages and other costs allocated to cost of service revenues were $1.9 million in fiscal 2018 and $1.9
million in fiscal 2017, resulting in gross margin on services of 80% in fiscal 2018 and 82% in fiscal 2017, respectively.
The remaining $2.5 million in fiscal 2018 and $1.8 million in fiscal 2017 relate to costs of providing content hosting,
events and technical support services at Sonic Foundry International and MSKK. The increase in services costs for Sonic

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Foundry International and MSKK is a result of a $911 thousand increase in services revenues for the subsidiaries year
over year.

The Company expects the gross margin percentage to remain consistent or slightly increase in fiscal 2019 mainly as a result of
an expected increase in software and services revenue.

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 $1.3 million, or 8%, from $16.9 million in fiscal 2017 to $15.6 million in fiscal 2018.
Fluctuations in the major categories include:

• Public relations expense decreased by $65 thousand.
• Salary, commissions and benefits expenses decreased by $900 thousand as a result of reduced headcount for Sonic
Foundry only (as shown below, headcount at our foreign subsidiaries increased) as well as lower commissions due to
lower sales than fiscal 2017.

• Expenses related to business meetings decreased by $88 thousand as a result of strategic initiatives implemented during

the second half of fiscal 2017.

• Selling and marketing expenses for Sonic Foundry International and MSKK accounted for $431 thousand and $2.5

million, respectively in fiscal 2018, an aggregate decrease of $159 thousand from the prior year.

At September 30, 2018, we had 122 employees in selling and marketing, an increase from 119 employees at September 30, 2017.
Of the 122 employees in selling and marketing at September 30, 2018, 57 are employed by our foreign subsidiaries. We do not
anticipate growth in selling and marketing headcount in fiscal 2019.

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 increased by $413 thousand, or 7%, to $6.4 million in fiscal 2018 from $5.9 million in fiscal 2017. Fluctuations
in major categories include:

Increase in compensation and benefits of $165 thousand due to an increase in compensation rates and benefits.
•
• Professional services increased by $158 thousand primarily due to an increase in legal and audit related expenses.
• Supplies expense increased $103 thousand due to European hosting infrastructure upgrade.
• G&A expenses for Sonic Foundry International and MSKK accounted for $179 thousand and $883 thousand, respectively

in fiscal 2018, an aggregate decrease of $13 thousand from the prior year.

At September 30, 2018, we had 27 full-time employees in G&A, an increase from 26 full-time employees at September 30, 2017.
Of the 27 employees in G&A at September 30, 2018, 10 are employed by our foreign subsidiaries. We do not anticipate growth
in G&A headcount in fiscal 2019.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 decreased $96 thousand, or 1%, from $7.2 million in fiscal 2017 to $7.1 million in fiscal 2018.
Fluctuations include:

Increase in compensation and benefits of $291 thousand related primarily to our international quality assurance team.

•
• Professional services decreased by $414 thousand due to decreased use of outsourced development.
• Recruiting costs decreased by $62 thousand due to less turnover.
• Product development expenses for Sonic Foundry International and MSKK accounted for $419 thousand and $290
thousand, respectively for fiscal 2018, an aggregate increase of $67 thousand from the prior year related to the subsidiaries.

At September 30, 2018, we had 49 full-time employees in product development compared to 43 employees at September 30,
2017. Of the 49 employees in product development at September 30, 2018, 11 are employed by our foreign subsidiaries. There
were no software development efforts in fiscal 2018 or 2017 that qualified for capitalization. We do not anticipate growth in
product development headcount in fiscal 2019.

Impairment of Goodwill & Intangible Assets

The Company recorded an impairment loss of $10.4 million for goodwill related to all three reporting units during the quarter
ended September 30, 2018. This non-cash loss was primarily due to the fall in the Company's stock price and the decrease of our
market capitalization and past performance. As a consequence, management forecasts were revised and additional risk factors
were applied. The Company also recorded an impairment loss of $1.4 million for intangible assets, consisting of customer
relationships and product rights, during the quarter ended September 30, 2018.

The Company recognized an impairment loss of $600 thousand for goodwill related to the Mediasite KK reporting unit during
the quarter ended September 30, 2017. This non-cash loss was primarily due to delays in expected growth related to partner
relationships in Japan, resulting in revenues and operating cash flows being lower than expected for the reporting unit in fiscal
2017. As a consequence, management forecasts were revised and additional risk factors were applied. There was no impairment
charge related to the remaining intangible assets during fiscal 2017.

The Company's operating loss, net of the one-time impairment charges, was $4.2 million in fiscal 2018 and $4.0 million in fiscal
2017. Net loss, net of the one-time impairment charges and the benefit from the write-off of the related deferred tax liability, was
$3.4 million in fiscal 2018 and $4.4 million in fiscal 2017.

Other Income and Expense, Net

Interest expense for fiscal 2018 increased $106 thousand compared to fiscal 2017, which includes $31 thousand of interest and
$71 thousand of debt discount amortization related to a note payable funded during the fiscal year that was converted to preferred
stock.

The Company recorded $77 thousand of interest expense during fiscal 2018 related to the accretion of discounts on the PFG IV
Loan and Warrant Debt with PFG IV. There was $95 thousand of expense related to the discounts and related accretion on the
PFG Loan and Warrant Debt included in interest expense in fiscal 2017. The accretion of the discount was impacted by early
settlement of the put feature of the warrants which occurred upon the close of the PFG V loan.

During the year ended September 30, 2018, a gain of $12 thousand was recorded related to the fair value remeasurement on the
derivative liability associated with the PFG IV Loan and Warrant Debt. In the year ended September 30, 2017, a gain of $55
thousand was recorded related to the fair value remeasurement on this derivative liability.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

The Company recorded $6 thousand of interest expense during fiscal 2018 related to the accretion of discounts on the PFG V
loan and Warrant Debt. The Company recorded no accretion of discount expense related to this loan and warrant debt during
fiscal 2017.

During fiscal 2018, a gain of $14 thousand was recorded related to the fair value remeasurement on the derivative liability
associated with the PFG V Loan and Warrant Debt. No gain or loss related to the fair value measurement was recorded during
fiscal 2017.

In the year ended September 30, 2018, no foreign currency exchange gain or loss was recorded related to re-measurement of the
subordinated notes payable related to the Company's foreign subsidiaries. In the year ended September 30, 2017, a foreign
currency loss of $6 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 $8 thousand in fiscal 2018 and 2017, respectively. The remaining balance of the deferred
tax liability related to goodwill was fully written off as of September 30, 2018 as a result of the impairment.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax
law and includes provisions that affect our business. The TCJA reduces the U.S. federal statutory tax rate from 35% to 21%
effective January 1, 2018. The TCJA was effective in the second quarter of fiscal year 2018 and the effective tax rate for the
quarter ended December 31, 2017 is a blended rate reflecting the anticipated benefit of the three quarters of federal tax rate
reductions for fiscal 2018. During fiscal 2018, we recorded an income tax benefit of $4.3 million, with $1.5 million resulting
from the application of TCJA to existing deferred tax balances based on reasonable estimates for those tax effects and $3.0 million
resulting from the write-off of the deferred tax liability associated with goodwill and customer relationships as a result of the full
impairment. The deemed repatriation of undistributed foreign earnings is not expected to result in a material change to our
financial results.

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

For the year ended September 30, 2018, the Company’s foreign currency translation adjustment was a loss of $81 thousand
compared to a loss of $412 thousand in the year ended September 30, 2017. The loss in fiscal 2018 is attributable to the weakening
in the Japanese Yen and the Euro compared to the U.S. dollar during the period as compared to fiscal 2017.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are its cash and debt and equity financing. During fiscal 2018, the Company used
$638 thousand of cash from operating activities compared with $671 thousand of cash generated from operating activities in
fiscal 2017. The Company had an increase in net loss in fiscal 2018 as compared to fiscal 2017 of $7.1 million, mainly due to the
full impairment of goodwill and intangible assets of $11.8 million recorded in Q4-2018. The change in net cash flow from
operating activities was primarily a result of changes in deferred tax liability and changes in unearned revenue, the latter of which
includes a write-off of $1.5 million that occurred in Q2-2018. For additional information on the write-off, see Financing
Receivables section of Note 1.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Capital expenditures for property and equipment were $840 thousand in fiscal 2018 compared to $839 thousand in fiscal 2017.

The Company generated $1.5 million of cash from financing activities during fiscal 2018, primarily due to proceeds from the
issuance of term debt of $2.0 million with PFG V. In addition, the Company issued two convertible notes totaling $1.0 million in
Q2-2018, which were fully converted to preferred stock in May 2018. The Company also received $500 thousand as a result of
issuing preferred stock in Q1-2018 and $500 thousand from the issuance of common stock and 232,558 warrants during Q3-2018.
These transactions were partially offset by debt and capital lease payments of $1.3 million. For the same period in fiscal 2017,
the Company used $474 thousand of cash from financing activities, mainly due to line of credit proceeds, that were more than
offset by term debt payments.

At September 30, 2018, 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 2.00%. Collections from accounts receivable are directly applied to the outstanding obligations
under the revolving line of credit. At September 30, 2018, the outstanding balance was $621 thousand. The highest balance on
the line of credit during the year was $3.1 million. At September 30, 2018, there was a remaining amount of $3.4 million available
under the line of credit for advances. At September 30, 2017, outstanding borrowings were $1.6 million.

Historically, the Company has relied on the ability to draw proceeds as needed from its revolving line of credit with Silicon Valley
Bank to fund operations. At September 30, 2018, we had a balance of $621 thousand outstanding on this line of credit, which
matures January 31, 2019. The Company does not plan to renew the line of credit prior to the maturity date.

At September 30, 2018, a balance of $264 thousand was outstanding on the line of credit with Mitsui Sumitomo Bank.
At September 30, 2017, a balance of $417 thousand was outstanding on the line of credit. The notes and credit facility are both
related to Mediasite K.K., and both accrue interest at an annual rate of approximately one-and-one half percent (1.5%).

At September 30, 2018, the Company had $1.9 million outstanding, net of warrant debt and debt discounts, related to notes
payable with PFG V. The Company received proceeds of $3.0 million from loan agreements with a director and PFG V, and made
payments of $815 thousand on term debt related to PFG IV and SVB (both of which are paid in full) resulting in net proceeds
of $2.2 million from notes during the fiscal 2018 compared to net payments of $1.7 million on notes in the fiscal 2017. The
Company also fully converted $1.0 million of subordinated debt due to that same director into preferred stock shares, which did
not and will not require cash settlement.

At September 30, 2018 approximately $1.1 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.

On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement with a director of the Company for $5.0
million in cash.

See Note 14 - Subsequent Events for additional information on this transaction.

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 leases opportunities to finance equipment purchases in the
future and anticipate utilizing proceeds from the recently issued promissory notes to support working capital needs. We may also
seek additional equity financing, or issue additional shares previously registered in our available shelf registration and there are
no assurances that these will be on terms acceptable to the Company.

Contractual Obligations

The following summarizes our contractual obligations at September 30, 2018 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, 2018

Contractual Obligations:

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

Total

Less than
1 Year

Years
2-3

Years
4-5

Over
5 years

745 $

— $

3,614
458
2,464

1,248
265
855

2,164
191
1,609

— $
202
2
—

—
—
—
—

(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, 2018, $621 thousand of the Company’s $2.8 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, 2018

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

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Sonic Foundry, Inc. and Subsidiaries (the "Company") as of
September 30, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and
cash flows for each of the two years in the period ended September 30, 2018, and the related notes (collectively referred to as the
"consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company at September 30, 2018 and 2017, and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 2018, in conformity with accounting principles generally accepted in the
United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. 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,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting 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.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2014.

/s/ BAKER TILLY VIRCHOW KRAUSE, LLP

Madison, Wisconsin
March 15, 2019

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

September 30,

2018

2017

Assets
Current assets:

Cash and cash equivalents
Accounts receivable, net of allowances of $524 and $375
Financing receivables, current, net of allowances of $526 and $200
Inventories
Investment in sales-type lease, current
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 $1,256 and $990
Product rights, net of amortization of $534 and $411
Financing receivables, long-term
Investment in sales-type lease, long-term
Other long-term assets

Total assets
Liabilities and stockholders’ equity (deficit)
Current liabilities:

Revolving lines 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

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
Derivative liability, at fair value
Other liabilities
Deferred tax liability

Total liabilities
Commitments and contingencies
Stockholders’ equity (deficit):

Preferred stock, $.01 par value, authorized 500,000 shares; none issued
9% Preferred stock, Series A, voting, cumulative, convertible, $.01 par value (liquidation
preference of $1,000 per share), authorized 4,500 shares; 2,678 and 1,510 shares issued
and outstanding, respectively, at amounts paid in

5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation
preference at par), authorized 1,000,000 shares, none issued

1,189 $
7,418
100
1,027
150
941
10,825

1,105
5,718
1,099
7,922
6,009
1,913

—
—
—
181
249
415
13,583 $

885 $

1,610
1,609
11,645
248
593
16,590
1,691
187
1,357
14
202
—
20,041

—

1,651

—

1,211
7,903
925
986
148
1,085
12,258

1,041
6,101
789
7,931
6,181
1,750

10,455
1,505
261
1,310
407
410
28,356

2,065
1,314
1,387
11,332
256
737
17,091
2,970
244
123
12
372
4,426
25,238

—

1,280

—

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

Common stock, $.01 par value, authorized 10,000,000 shares; 5,113,400 and 4,470,791
shares issued and 5,100,684 and 4,458,075 shares outstanding
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Receivable for common stock issued
Treasury stock, at cost, 12,716 shares

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

51
200,130
(207,419 )
(676 )
(26 )
(169 )
(6,458 )
13,583 $

45
197,836
(195,253 )
(595 )
(26 )
(169 )
3,118
28,356

See accompanying notes to the consolidated financial statements.

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

Years Ended September 30,

2018

2017

12,311 $
22,233
34,544

5,231
4,425
9,656
24,888

15,622
6,354
7,142
11,809
40,927
(16,039 )

(601 )
142
(459 )

(16,498 )
4,332
(12,166 ) $
(257 )
(12,423 ) $

14,883
21,117
36,000

6,097
3,770
9,867
26,133

16,912
5,941
7,238
600
30,691
(4,558 )

(495 )

(65 )

(560 )

(5,118 )
79
(5,039 )
(169 )
(5,208 )

(2.67 ) $

4,655,520
4,655,520

(1.17 )

(1.17 )
4,436,333
4,436,333

Revenue:
Product and other
Services

Total revenue
Cost of revenue:
Product and other
Services

Total cost of revenue
Gross margin
Operating expenses:
Selling and marketing
General and administrative

Product development
Impairment of goodwill and intangible assets

Total operating expenses

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

Other income (expense), net

Total non-operating expenses

Loss before income taxes
Income tax benefit

Net loss
Dividends on preferred stock
Net loss attributable to common stockholders
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.

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,

2018

2017

(12,166 ) $
(81 )
(12,247 ) $

(5,039 )
(412 )
(5,451 )

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

Preferred
stock

Common
stock

Additional
paid-in
capital

Accumulate
d
deficit

Accumulated
other
comprehensive
loss

Receivable
for
common
stock issued

Treasury
stock

Total

Balance,
September 30, 2016
Stock compensation
Issuance of preferred
stock
Issuance of common
stock
Preferred stock
dividends
Foreign currency
translation adjustment
Net loss

Balance,
September 30, 2017
Stock compensation
Issuance of preferred
stock
Conversion of
preferred stock
Issuance of common
stock
Beneficial conversion
feature on convertible
debt
Preferred stock
dividends
Foreign currency
translation adjustment
Net loss

Balance,
September 30, 2018 $

—
—

1,250

—

—
—

1,280
—

1,531

(1,390 )

—

230

—
—

44
—

$ 197,064
754

—

—
—

—

(30 )

—
—

45
—

$ 197,836
476

—

—
—

—

1,386

592

(230 )

—
—

(190,214 ) $

—

(5,039 )

(195,253 ) $

—

(12,166 )

(183 ) $
—

(26 ) $
—

(169 ) $ 6,516
754

—

(412 )
—

(595 ) $
—

—

(81 )
—

—

—
—

—

1,250

—

—
—

(412 )

(5,039 )

(26 ) $
—

(169 ) $ 3,118
476

—

—
—

—

1,531

—

594

—

—
—

(81 )

(12,166 )

1,651

$ 200,130

(207,419 ) $

(676 ) $

(26 ) $

(169 ) $ (6,458 )

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

Impairment of goodwill and intangible assets

Loss on sale of fixed assets

Provision for doubtful accounts - including financing receivables

Deferred taxes

Stock-based compensation expense related to stock options and warrants

Conversion of accrued interest to preferred stock

Beneficial conversion feature recognized on debt converted to preferred stock

Remeasurement gain on subordinated debt

Remeasurement gain on derivative liability

Changes in operating assets and liabilities:

Accounts receivable

Financing receivables

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 lines of credit

Payments on notes payable

Payments on lines of credit

Payments of debt issuance costs

Payments to settle put on term debt

Proceeds from issuance of preferred stock and common stock

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 year

Cash and cash equivalents at end of year

Supplemental cash flow information:

Interest paid

Income taxes paid, foreign

Non-cash financing and investing activities:

Years Ended
September 30,

2018

2017

(12,166 ) $

(5,039 )

621
1,118
11,809
—
475
(4,450 )
476
31
70
—
(28 )

348
1,630
(41 )
290
268
(169 )
(920 )
(638 )

(840 )
(840 )

3,000
22,236
(815 )
(23,422 )
(97 )
(200 )
1,094
(298 )
1,498
(42 )
(22 )
1,211
1,189 $

409 $
370

555
1,422
600
8
349
(103 )
622
—
—
(6 )

(55 )

1,613
(558 )
904
89
(109 )
129
250
671

(839 )

—
23,257
(1,727 )

(22,928 )

(26 )
—
1,298
(348 )

(474 )
59

(583 )
1,794
1,211

505
111

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

Property and equipment financed by capital lease or accounts payable

Debt discount

Stock issued for board of director's fees

Deemed dividend for beneficial conversion feature of preferred stock

Preferred stock dividend paid in additional shares

Subordinated note payable converted to preferred stock

See accompanying notes to the consolidated financial statements.

460
127
—
28
230
1,000

341
—
133
139
30
—

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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.

Services

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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

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, 2018, of the $1.2 million in cash and cash equivalents, $118 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 $1.1 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.

We had billings for Mediasite product and support services as a percentage of total billings to one distributor of approximately
6% in 2018 and 11% in 2017 and to a second distributor of approximately 11% in 2018 and 15% in 2017. At September 30, 2018
and 2017, these two distributors represented 28% and 23% 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, 2018 and 2017, this supplier represented 29% and 27%, 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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, 2018, of the $1.2 million aggregate cash and cash equivalents held by the Company, the amount
of cash and cash equivalents held by our foreign subsidiaries was $1.1 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.

Financing Receivables
Financing receivables consist of customer receivables resulting from the sale of the Company's products and services, primarily
software and long-term customer support contracts, and are presented net of allowance for losses. The Company has a single
portfolio consisting of fixed-term receivables, which is further segregated into two classes based on products, customer type, and
credit risk evaluation.

The Company generally determines its allowance for losses on financing receivables at the customer class level by considering a
number of factors, including the length of time financing receivable are past due, historical and anticipated experience, the
customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The
Company writes-off financing receivables when they become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for financing receivable losses. Interest is not accrued on past due receivables. There
was an allowance of $526 thousand and $200 thousand at September 30, 2018 and 2017, respectively.

The Company's financing receivables are aggregated into the following categories:

Long-term customer support contracts: These contracts are typically entered into in conjunction with sale-type lease
arrangements, over the life of which the Company agrees to provide support services similar to those offered within
Mediasite Customer Care plans. Contract terms range from 3-5 years, and payments are generally due from the customer
annually on the contract anniversary. There was $281 thousand and $384 thousand of receivables outstanding for long-
term customer support contracts as of September 30, 2018 and 2017, respectively. All amounts due were current as of
the balance sheet date and there are no credit losses expected to be incurred related to long-term support contracts.

Product receivables: Amounts due primarily represent sales of perpetual software licenses to a single international
distributor on invoices outstanding for product delivered from March 2016 through June 2017. There was $2.1 million
receivable as of September 30, 2017, $1.5 million of which was deferred for revenue recognition purposes due to a
history of delayed payment. As of September 30, 2018, the deferred balance related to this receivable was zero as it was
fully allowed for as a loss. The Company delivered $901 thousand of product to this customer and received payment of
$726 thousand in fiscal 2017. As a result of the circumstances described, the entire allowance for losses on financing
receivables of $526 thousand is considered attributable to this class of customer as of September 30, 2018.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Financing receivables consisted of the following (in thousands) as of:

Customer support contracts, current and long-term, gross
Product receivables, gross
Allowance for losses on financing receivables

September 30,
2018

September 30,
2017

281 $
526
(526 )
281 $

384
2,051
(200 )
2,235

Investment in Sales-Type Lease

The Company has entered into sales-type lease arrangements with certain customers, consisting of recorders leased with terms
ranging from 3-5 years. All amounts due are current as of the balance sheet date.

Investment in sales-type leases consisted of the following (in thousands) as of:

Investment in sales-type lease

Inventory Valuation

September 30,
2018

September 30,
2017

$
$

399 $
399 $

555
555

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 net realizable value, 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,

2018

358 $
669
1,027 $

2017

156
830
986

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
development costs qualifying for capitalization are typically immaterial and are generally expensed to research and development
costs. There was no amortization expense in either of the years ending September 30, 2018 or 2017, respectively. The gross
amount of capitalized external and internal development costs was $533 thousand at September 30, 2018 and 2017. There were
no software development efforts that qualified for capitalization for the years ended September 30, 2018 or 2017, respectively.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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

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

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 year ended September 30, 2018, it was determined that changes in circumstances were present,
primarily the decline in the Company's market capitalization during the fiscal year. For the year ended September 30, 2018, the
Company determined that intangible assets, consisting of customer relationships and product rights, were impaired and recognized
an impairment charge of $1.4 million. For the year ended September 30, 2017, it was determined that changes in circumstances
were present, primarily the decline in the Company's market capitalization during the fiscal year and past performance. However,
after performing analysis of undiscounted cash flows attributable to our long-lived assets along with other relevant factors, such
as the continued use of the assets, it was determined that there was no impairment of long-lived and intangible assets other than
goodwill. Key assumptions utilized in the analysis of undiscounted cash flows for each asset or asset group being tested included
1) whether cash flows were attributable solely to the asset or group, or to an entire reporting unit; and 2) the useful lives of the
asset or asset group. Forecasts used in the analysis were also consistent with those used in determining fair value of reporting
units during goodwill impairment testing.

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
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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Advertising Expense

Advertising costs included in selling and marketing, are expensed when the advertising first takes place. Advertising expense was
$451 thousand and $479 thousand for years ended September 30, 2018 and 2017, 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 and the public company
guideline method 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 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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, 2018

Derivative liability

September 30, 2017

Derivative liability

Level 1

Level 2

Level 3

Total
Fair Value

— $

14 $

— $

Level 1

Level 2

Level 3

Total
Fair Value

— $

12 $

— $

Included below is a summary of the changes in our Level 3 fair value measurements (in thousands):

PFG IV
Debt, Net
of Discount

Warrant
Debt, PFG IV

PFG V Debt,
Net of
Discount

Balance as of September 30, 2017
Activity during the period:

Disbursement of Tranche 1, net of discount
Payments to PFG
Change in fair value

Balance as of September 30, 2018

491 $

123 $

(538 )
47
— $

(200 )
77
— $

Warrant
Debt, PFG V
—

— $

1,873
—
32
1,905 $

97
—
6
103

Financial Instruments Not Measured at Fair Value

The Company’s other financial instruments consist primarily of cash and cash equivalents, accounts receivable, investment in
sales-type lease, financing receivables, accounts payable and debt instruments, excluding the PFG debt. The book values of cash

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

and cash equivalents, accounts receivable, investment in sales-type lease, 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. In Q4-2018, product rights were determined to be fully impaired and fully
written off. See Note 8, Goodwill and Other Intangible Assets, for additional information on the impairment.

No legal contingencies were recorded for either of the years ended September 30, 2018 or 2017, 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

Years Ending September 30,

2017
2018
4.7 - 4.9 years
4.3 - 4.4 years
1.08%-1.51%
1.79%-2.75%
60.62%-63.49% 56.98%-62.21%
12.53%-14.58% 10.17%-11.72%

1.00-1.17

—%

1.29-1.35
—%

Common Stock Warrants
On April 16, 2018, the Company issued 232,558 shares of common stock to an affiliated party. The shares were issued at a price
of $2.15 per share, representing the closing price on April 13, 2018. On April 16, 2018, the closing price of the Company’s
common stock was $2.18 per share. The affiliated party also received warrants to purchase 232,558 shares of common stock at
an exercise price of $2.50 per share, respectively, which expire on April 16, 2025.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Preferred stock and dividends
In May 2017, the Company created a new series of preferred stock entitled "9% Cumulative Voting Convertible Preferred Stock,
Series A" (the "Preferred Stock, Series A"). One thousand shares were authorized with a stated value and liquidation preference
of $1,000 per share. In August 2017, 1,500 additional shares were authorized for an aggregated total of 2,500 shares. In May
2018, 2,000 additional shares were authorized for an aggregated total of 4,500 shares. Holders of the Preferred Stock, Series A
will receive monthly dividends at an annual rate of 9%, payable in additional shares of Preferred Stock, Series A. Dividends
declared on the preferred stock are earned monthly as additional shares and accounted for as a reduction to paid-in capital since
the Company is currently in an accumulated deficit position. Each share of Preferred Stock, Series A is convertible into that
number of shares of common stock determined by dividing $4.23 into the liquidation amount. A total of 2,678 and 1,510 shares
of Preferred Stock, Series A were issued and outstanding as of September 30, 2018 and 2017, respectively.

The Company considered relevant guidance when accounting for the issuance of preferred stock, and determined that the
preferred shares meet the criteria for equity classification. Dividends accrued on preferred shares will be shown as a reduction to
net income (or an increase in net loss) for purposes of calculating earnings per share.

On May 17, 2018, $1.0 million of subordinated convertible debt was fully converted into 1,902 shares of Preferred Stock, Series
A, following approval by the stockholders of the Company of the conversion sufficient to comply with rules and regulations of
NASDAQ. See Note 4 related to accounting for the conversion.

On June 8, 2018, 905 shares of Preferred Stock, Series A were automatically converted by the Company into 213,437 shares of
common stock. The amount of shares converted represents all preferred shares issued on May 30, 2017 and June 8, 2017, including
related dividends.

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

Liquidity

Years Ending
September 30,

2018

2017

4,655,520
—

4,436,333
—

4,655,520

4,436,333

2,399,901

1,940,245

At September 30, 2018 approximately $1.1 million of cash and cash equivalents was held by the Company’s foreign subsidiaries.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement with a director of the Company for $5.0
million in cash.

See Note 14 - Subsequent Events for additional information on this transaction.

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 leases opportunities to finance equipment purchases in the
future and anticipate utilizing proceeds from the recent note purchase agreement to support working capital needs. We may also
seek additional equity financing, or issue additional shares previously registered in our available shelf registration and there are
no assurances that these will be on terms acceptable to the Company.

Recent Accounting Pronouncements

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.

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 adopted this standard as of October 1, 2017, and it did not have a material impact on the
Company's financial position or results of operations.

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
adopted this standard as of October 1, 2017, and it did not have a material impact on the Company's financial position or results
of operations.

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

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 2016-06, "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 adopted this standard as of October 1, 2017, and it did not have a material impact on the Company's
financial position or results of operations.

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 adopted this standard
as of October 1, 2017, and it did not have a material impact on the Company's financial position or results of operations.

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): Intra-Entity Transfers of Assets Other Than
Inventory", ("ASU 2016-16"). ASU 2016-16 improves the accounting for the income tax consequences of intra-entity transfers
of assets other than inventory. The amendments in this update are effective for fiscal years 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.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718)", ("ASU 2017-09"). The
amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting in Topic 718. The amendments in ASU 2017-09 are effective for annual
reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.
The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815)", ("ASU 2017-11"). This update was issued to address complexities in accounting for
certain equity-linked financial instruments containing down round features. The amendment changes the classification analysis
of these financial instruments (or embedded features) so that equity classification is no longer precluded. The amendments in
ASU 2017-11 are effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods
within those annual reporting periods. Early adoption is permitted. The Company is in the process of assessing the impact, if any,
of this ASU on its consolidated financial statements.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases", ("ASU 2018-10"). The standard
clarifies certain topics related to previously issued Topic 842. The amendments in ASU 2018-10 are not yet effective, but early
adopton is permitted. For entities that have not yet adopted Topic 842, the effective date and transition requirements will be the
same as the effective date and transition requirements in Topic 842. The Company is currently evaluating this guidance and its
impact to the financial statements.

In August 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements", ("ASU 2018-11"). The ASU is
intended to reduce costs and ease implementation of the leases standard for financial statement preparers. ASU 2018-11 provides
a new transition method and a practical expedient for separating components of a contract. For entities that have not adopted
Topic 842 before the issuance of this ASU, the effective date and transition requirements for the amendments in this update related
to separating components of a contract are the same as the effective date and transition requirements in ASU 2016-02. The
Company is currently evaluating this guidance and its impact to the financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurements", ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements
on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the ASU will have
a significant impact on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between
Topic 808 and Topic 606", ("ASU 2018-18"). ASU 2018-18 provides guidance on whether certain transactions between
collaborative arrangement participants should be accounted for with revenue under Topic 606. For public business entities, the
amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Early adoption is permitted. The Company is currently reviewing 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.

New Accounting Pronouncements Not Yet Effective

In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized
when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the
nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. The guidance permits
two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or
retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the
modified retrospective method).

The Company will adopt the new standard, effective October 1, 2018, using the modified retrospective method applied to those
contracts which were not substantially completed as of October 1, 2018. The most significant impact of the standard on the
Company's financial statements relates to multi-year software licenses for certain customers which will accelerate the recognition
of revenue. We expect to recognize an adjustment to retained earnings reflecting the cumulative impact for the accounting changes
related to multi-year software licenses and contract acquisition costs upon adoption of these new standards.

There are also certain considerations related to internal control over financial reporting that are associated with implementing
Topic 606. We are evaluating our internal control framework over revenue recognition to identify any changes that may need to
be made in response to the new guidance. We will have completed the design and implementation of the appropriate controls to
obtain and disclose the information required under Topic 606 in our first quarter of 2019. In addition, disclosure requirements

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the
current guidance.

2. Commitments

Capital Lease and Financing Agreements

The Company leases certain equipment under capital lease and financing agreements expiring through January 2022. Capital
leases that are currently outstanding on equipment included in fixed assets have a cost of $1.3 million and accumulated
depreciation of $892 thousand at September 30, 2018. Minimum lease payments, including principal and interest, are summarized
in the table below.

Fiscal Year (in thousands)

Capital

2022
Total payments
Less interest

Total

Operating Leases

2019 $
2020
2021

265
143
48
2
458
(25 )
433

The Company leases certain facilities and equipment under operating lease agreements expiring at various times through
December 31, 2022. Total rent expense on all operating leases was approximately $1.2 million and $1.3 million for the years
ended September 30, 2018 and 2017, respectively.

In November 2011, the Company occupied office space related to a lease agreement entered into on June 28, 2011. The inital
lease term was from November 2011 through December 2018 and in Q3 2018, the lease was extended for three years through
December 31, 2021. There are two additional three year extensions included in the initial lease agreement. 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, 2018, the unamortized balance was $7
thousand.

In October 2016, the Company also occupied office space related to a lease agreement entered into on August 1, 2016. The lease
term is from October 2016 through December 2020. The lease includes five months of free rent of $130 thousand that was
recorded as a deferred rent liability and is being amortized as a credit to rent expense on a straight-line basis over the lease term.
At September 30, 2018 and 2017, the unamortized balance was $75 thousand and $110 thousand, respectively.

The following is a schedule by year of future minimum lease payments under operating leases:

Fiscal Year (in thousands)
2019
2020
2021
2022
Total

Other Commitments

Operating

1,248
1,252
912
202
3,614

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite product. At
September 30, 2018, the Company has an obligation to purchase $745 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).

3. Credit Arrangements

Silicon Valley Bank

The Company and its wholly owned subsidiary, Sonic Foundry Media Systems, Inc. (the “Companies”) entered into the Second
Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated June 27, 2011, as amended by the First,
Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth Amendments, dated May 31, 2013, January 10, 2014,
March 31, 2014, January 27, 2015, May 13, 2015, October 5, 2015,February 8, 2016, December 9, 2016, March 22, 2017, and
May 10, 2017 (the Second Amended and Restated Loan Agreement, as amended by the First, Second, Third, Fourth, Fifth, Sixth,
Seventh, Eighth, Ninth, and Tenth 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 two percent
(2.00%), which currently equates to 7.25%. 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, 2019. 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 accrued interest at the variable per annum rate equal to the Prime Rate (as defined) plus two and three-quarters percent,
and was to be repaid in 36 equal monthly principal payments, beginning in February 2015. The Second Amended and Restated
Loan Agreement also requires Sonic Foundry to comply with certain financial covenants, including (i) a liquidity financial
covenant, which requires minimum Liquidity (as defined), tested with respect to the Company only, on a monthly basis, of at
least 1.60:1.00 for each month-end that is not the last day of a fiscal quarter, and 1.75:1.00 for each month-end that is the last day
of a fiscal quarter, and (ii) a covenant that requires the Company to achieve, commencing with the period ending September 30,
2017, and continuing each quarterly period thereafter, measured as of the last day of each fiscal quarter, on a trailing six (6) month
basis ending as of the date of measurement, (a) EBITDA (negative EBITDA) plus (b) the net change in Deferred Revenue (as
defined) during such measurement period, of at least Zero Dollar ($0.00). Collections from accounts receivable are directly
applied to the outstanding obligations under the revolving line of credit.

On December 22, 2017, the Company entered into an Eleventh Amendment to the Second Amended and Restated Loan and
Security Agreement (the “Eleventh Amendment”) with Silicon Valley Bank. Under the Eleventh Amendment: the Minimum
EBITDA covenant was modified to require Minimum EBITDA (as defined) plus the net change in Deferred Revenue, (i) for the
period ending December 31, 2017, measured on a trailing three (3) month basis, to be no less than negative ($1,900,000); (ii) for
the quarterly period ending March 31, 2018, measured on a trailing three (3) month basis, to be no less than Zero Dollars, and
(iii) for the quarterly period ending June 30, 2018, and each quarterly period thereafter, in each case measured on a trailing six
month basis, to be no less than Zero Dollars.

On May 11, 2018, the Company entered into a Twelfth Amendment to the Second Amended and Restated Loan and Security
Agreement (the “Twelfth Amendment”) with Silicon Valley Bank, which waived the minimum EBITDA covenant as defined
under the Eleventh Amendment. Under the Twelfth Amendment: the Minimum EBITDA covenant was modified to require

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Minimum EBITDA (as defined) plus the net change in Deferred Revenue, (i) for the quarterly period ending June 30, 2018,
measured on a trailing six (6) month basis, to be no less than negative ($1,100,000); (ii) for the quarterly period ending September
30, 2018, measured on a trailing six (6) month basis, to be no less than $500,000, and (iii) for the quarterly period ending
December 31, 2018, measured on a trailing six (6) month basis, to be no less than negative ($250,000), and (iv) for the quarterly
period ending March 31, 2019, measured on a trailing three (3) month basis, to be no less than negative ($250,000). The Twelfth
Amendment also requires Sonic Foundry to comply with certain financial covenants, including (i) funding of tranche 1 of the
PFG V note in the amount of $2,000,000 prior to June 30, 2018, and (ii) funding of tranche 2 of the PFG V note in the amount of
$500,000 prior to December 31, 2018.

At September 30, 2018, there was no balance outstanding on the term loan with Silicon Valley Bank. There was a balance of $621
thousand outstanding on the revolving line of credit with an effective interest rate of seven-and-one-quarter percent (7.25%). At
September 30, 2017, a balance of $278 thousand was outstanding on the term loans with Silicon Valley Bank and a balance of
$1.6 million was outstanding on the revolving line of credit. At September 30, 2018, there was a remaining amount of $3.4 million
available under the line of credit facility for advances.

The Second Amended and Restated 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, 2018, the Company was in compliance with all financial covenants.

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.

Historically, the Company has relied on the ability to draw proceeds as needed from its revolving line of credit with Silicon Valley
Bank to fund operations. At September 30, 2018, we had a balance of $621 thousand outstanding on this line of credit, which
matured on January 31, 2019 and was paid in full. The Company did not renew the line of credit.

On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement with a director of the Company for $5.0
million in cash.

See Note 14 - Subsequent Events for additional information on this transaction.

The Company used the proceeds from the notes issued under the Note Purchase Agreement to replace the revolving line of credit
with Silicon Valley Bank, which matured on January 31, 2019.

Partners for Growth IV, L.P.

On May 13, 2015, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2015 Loan and Security Agreement”)
with Partners for Growth IV, L.P. (“PFG”), (the “Loan and Security Agreement”).

The 2015 Loan and Security Agreement provided for a Term Loan in the amount of $2,000,000, which was 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 bore 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 was due in 30 equal monthly principal installments, plus accrued
interest, continuing until May 1, 2018, when the principal balance was paid in full. Tranche 2 of the Term Loan was payable in
29 equal monthly principal installments, plus accrued interest, beginning January 1, 2015 and continued until May 1, 2018.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Coincident with execution of the 2015 Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”)
with PFG IV. Pursuant to the terms of the Warrant, the Company issued to PFG IV 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 IV 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 IV 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 could have been settled for cash in the event of acquisition of the company, any liquidation of the company, or
expiration of the warrant. The Company 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 $80 thousand at the time of issuance. The derivative had a fair value of $136 thousand. The conversion
feature is an embedded derivative; thus, for accounting purposes, the conversion feature is bifurcated and accounted for
separately from the PFG IV Debt and Warrant Debt as a derivative liability measured at fair value at each reporting period. The
warrants were settled for cash in the amount of $200 thousand in May 2018 upon entering into a new loan agreement with PFG
V.

On December 28, 2017, the Company and PFG IV entered into a Modification No. 4 to the 2015 Loan and Security Agreement
(“Modification No. 4”). Modification No. 4: the Minimum EBITDA covenant was modified to require Minimum EBITDA (as
defined) plus the net change in Deferred Revenue (i) for the period ending December 31, 2017, measured on a trailing three (3)
month basis, to be no less than negative ($1,900,000); (ii) for the quarterly period ending March 31, 2018, measured on a trailing
three (3) month basis, to be no less than Zero Dollars, and (iii) for the quarterly period ending June 30, 2018, and each quarterly
period thereafter, in each case measured on a trailing six month basis, to be no less than Zero Dollars.

At September 30, 2018, the estimated fair value of the derivative liability associated with the warrants issued in connection with
the 2015 Loan and Security Agreement, was zero as a result of the $200 thousand cash settlement in May 2018, compared to $12
thousand at September 30, 2017. The change in the fair value of the derivative liability during fiscal 2018 was recorded as a gain
of $12 thousand included in other income (expense).

The proceeds from the 2015 Loan and Security Agreement were allocated between the PFG IV 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 $1.8 million and $216 thousand, respectively. The conversion feature of $216 thousand is treated together as a debt
discount on the PFG IV Debt and was accreted to interest expense under the effective interest method over the three-year term of
the PFG IV Debt and the five-year term of the Warrant Debt. For fiscal 2018, the Company recorded accretion of discount expense
associated with the warrants issued with the PFG IV loan of $77 thousand as well as $47 thousand related to amortization of the
debt discount. For fiscal 2017, the Company recorded accretion of discount expense associated with the warrants issued with the
PFG IV loan of $21 thousand as well as $73 thousand related to amortization of the debt discount. At September 30, 2018, the
fair values of the PFG IV Debt and Warrant Debt (inclusive of its conversion feature) were each zero, as the PFG IV Debt was
paid in full as of May 1, 2018 and the Warrant Debt was settled on May 14, 2018.

At September 30, 2018, there was no balance outstanding on the term debt with PFG IV. At September 30, 2017, a balance of
$491 thousand with outstanding on the term debt with PFG IV, net of discount.

On May 11, 2018, Sonic Foundry, Inc., entered into a Loan and Security Agreement (the “2018 Loan and Security Agreement”)
with Partners for Growth V, L.P. (“PFG V”), (the “Loan and Security Agreement”).

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

The 2018 Loan and Security Agreement provides for a Term Loan in the amount of $2,500,000, which was disbursed in two
(2) Tranches as follows: Tranche 1 was disbursed on May 14, 2018 in the amount of $2,000,000; and Tranche 2 in the amount
of $500,000, was disbursed on November 8, 2018.

Each tranche of the Term Loan bears interest at 10.75% per annum. Tranche 1 of the Term Loan is payable interest only until
November 30, 2018. Thereafter, principal is due in 30 equal monthly principal installments, plus accrued interest, beginning
December 1, 2018 and continuing until May 1, 2021, when the principal balance is to be paid in full. Tranche 2 of the Term Loan
is payable using the same repayment schedule as Tranche 1. Upon maturity, Sonic Foundry is required to pay PFG V a cash fee
of $150,000.

The principal of the Term Loan may be prepaid at any time, provided that Sonic Foundry pays to PFG V a prepayment fee equal
to 1% of the principal amount prepaid, if the prepayment occurs in the first year from disbursement of Tranche 1.

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.

Coincident with execution of the 2018 Loan and Security Agreement, the Company entered into a Warrant Agreement (“Warrant”)
with PFG V. Pursuant to the terms of the Warrant, the Company issued to PFG V a warrant to purchase up to 66,000 shares of
common stock of the Company at an exercise price of $2.57 per share, subject to certain adjustments. Pursuant to the Warrant,
PFG V is also entitled, under certain conditions, to require the Company to exchange the Warrant for the sum of $250,000.

At September 30, 2018, the estimated fair value of the derivative liability associated with the warrants issued in connection with
the Loan and Security Agreement, was $14 thousand. The change in the fair value of the derivative liability during fiscal 2018
was recorded as a gain of $14 thousand, included in the other income (expense).

The proceeds from the Loan and Security Agreement were allocated between the PFG V Debt and the Warrant Debt (inclusive of
its conversion feature) based on their relative fair value on the date of issuance which resulted in carrying values of $1.9
million and $127 thousand, respectively. The warrant debt of $127 thousand is treated together as a debt discount on the PFG V
Debt and will be accreted to interest expense under the effective interest method over the three-year term of the PFG V Debt and
the five-year term of the Warrant Debt. During fiscal 2018, the Company recorded accretion of discount expense associated with
the warrants issued with the PFG V loan of $6 thousand, as well as $17 thousand related to amortization of the debt discount.
At September 30, 2018, the fair values of the PFG V Debt and the Warrant Debt (inclusive of its conversion feature) were $1.9
million and $117 thousand, respectively. In addition, the Company agreed to pay PFG V a cash fee of up to $150,000 payable
upon maturity (the “back-end fee”), which will be earned ratably over the three year term of the PFG V loan. During fiscal 2018,
the Company recorded interest expense of $19 thousand associated with recognition of the back-end fee.

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 September 30, 2018, 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).

At September 30, 2018, a gross balance of $1.9 million was outstanding on the term debt with PFG V, net of discount, with an
effective interest rate of ten-and-three-quarters percent (10.75%). At September 30, 2017, there was no balance outstanding with
PFG V.

See Note 14 - Subsequent Events for additional information related to PFG.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Other Indebtedness

At September 30, 2018, a balance of $264 thousand was outstanding on the line of credit with Mitsui Sumitomo Bank. At
September 30, 2017, a balance of $417 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%).

On January 19, 2018, the Company and a director entered into a Subscription Agreement (the “Subscription Agreement”)’
Pursuant to the Subscription Agreement, (i) on January 19, 2018, the director purchased a 10.75% Convertible Secured
Subordinated Promissory Note for $500,000 in cash; and (ii) on February 15, 2018, the director purchased an
additional 10.75% Convertible Secured Subordinated Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the
“Notes”).

On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply
with rules and regulations of NASDAQ and the Securities and Exchange Commission, the Notes were automatically converted
into 1,902 shares of Series A Preferred stock. The number of shares was determined by dividing the total principal and accrued
interest due on each Note by $542.13 (the “Conversion Rate”).

At September 30, 2018, there was no balance outstanding on the Notes.

In the year ended September 30, 2018, no foreign currency gain or loss was realized related to re-measurement of the subordinated
notes payable related to the Company’s foreign subsidiaries. In the year ended September 30, 2017, a foreign currency gain of $6
thousand was recorded related to the remeasurement.

The annual principal payments on the note payable to PFG V are as follows:

Fiscal Year (in thousands)
2019
2020
2021

Total

4. Accrued Liabilities

Accrued liabilities consists of the following (in thousands):

Accrued compensation
Accrued expenses
Accrued interest & taxes
Other accrued liabilities

Total

September 30,

2018

2017

972 $
359
223
55
1,609 $

667
800
533
2,000

871
211
288
17
1,387

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.

5. Stock Options and Employee Stock Purchase Plan

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.
On March 7, 2017, Stockholders approved an amendment to increase the number of shares of common stock subject to the 2009
Plan by 900,000 to an aggregated total of 2,700,000 shares of common stock. Stockholders also approved an increase in the
number of shares for the directors' stock option plan of 50,000. The Company maintains a directors’ stock option plan under
which options may be issued to purchase up to an aggregate of 150,000 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 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, 2016
Stockholder approval to increase shares
Options granted

Options forfeited

Shares available for grant at September 30, 2017
Options granted
Options forfeited

Shares available for grant at September 30, 2018

Qualified
Employee
Stock Option
Plans

366,889
900,000
(312,020 )
53,521
1,008,390
(398,749 )
86,118
695,759

Director
Stock Option
Plans

6,500
50,000
(8,500 )
—
48,000
(14,500 )
10,000
43,500

The following table summarizes information with respect to outstanding stock options under all plans:

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Outstanding at beginning of year
Granted
Exercised
Forfeited

Outstanding at end of year

Exercisable at end of year
Weighted average fair value of options granted during
the year

Years Ended September 30,

2018

2017

Weighted
Average
Exercise
Price

8.33
2.49
4.75
9.82
7.04

Options

1,805,443 $
413,249
(14,332 )
(174,619 )
2,029,741 $
1,349,021

Weighted
Average
Exercise
Price

9.51
4.73
—
14.62
8.33

Options

1,602,822 $
320,520
—
(117,899 )
1,805,443 $
1,260,609

0.95

1.82

The options outstanding at September 30, 2018 have been segregated into three ranges for additional disclosure as follows:

Exercise Prices

$2.18 to $4.88
5.00 to 9.81
10.00 to 15.21

Options Outstanding

Options Exercisable

Options
Outstanding
at
September 30,
2018

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Options
Exercisable at
September 30,
2018

Weighted
Average
Exercise
Price

680,427
1,104,389
244,925
2,029,741

8.87 $
4.84
4.26

3.39
8.20
11.93

97,343 $

1,024,813
226,865
1,349,021

4.72
8.26
12.06

As of September 30, 2018, there was $475 thousand of total unrecognized compensation cost related to non-vested stock-based
compensation, with total forfeiture adjusted unrecognized compensation costs of $359 thousand. The cost is expected to be
recognized over a weighted-average life of 1.9 years.

A summary of the status of the Company’s non-vested shares under all plans at September 30, 2018 and for the year then ended
is presented below:

Non-vested shares at October 1, 2017
Granted
Vested
Forfeited
Non-vested shares at September 30, 2018

Weighted Average
Grant Date
Fair Value

544,834 $
413,249
(258,938 )
(18,425 )
680,720 $

2.42
0.95
2.47
1.73
1.46

Stock-based compensation recorded in the year ended September 30, 2018 was $477 thousand. Stock-based compensation
recorded in the year ended September 30, 2017 was $611 thousand. There was no cash received from exercises under all stock
options plans and warrants for the years ended September 30, 2018 or 2017. There were no tax benefits realized for tax deductions
from option exercises for the years ended September 30, 2018 and 2017. The Company currently expects to satisfy stock-based
awards with registered shares available to be issued.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

The Company also has an Employee Stock Purchase Plan (Purchase Plan) under which an aggregate of 200,000 common shares
may be issued. The Stockholders approved an amendment to increase the number of shares of common stock subject to the plan
from 150,000 to 200,000 at the Company’s annual meeting in March 2017. 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 47,867 shares are available to be issued under
the plan. There were 12,794 and 13,046 shares purchased by employees during fiscal 2018 and 2017, respectively. The Company
recorded stock compensation expense under this plan of $8 thousand and $12 thousand during fiscal 2018 and 2017, respectively.
Cash received from issuance of stock under this plan was $27 thousand and $48 thousand during fiscal 2018 and 2017,
respectively.

At September 30, 2018, we had 370 thousand outstanding warrants and 2.0 million of outstanding stock options granted under
our stock option plans, 1.7 million of which are immediately exercisable.

6. Income Taxes

Benefit for income taxes consists of the following (in thousands):

Current income tax expense (benefit)
Current income tax expense foreign

Deferred income tax benefit
Benefit for income taxes

Years Ended September 30,

2018

2017

$
$

— $
101 $

(4,433 )
(4,332 ) $

—
17
(96 )
(79 )

U.S. and foreign components of loss before income taxes were as follows (in thousands):

U.S.
Foreign

Loss before income taxes

Years Ended September 30,

2018

2017

(16,934 ) $
436
(16,498 ) $

(5,225 )
107
(5,118 )

The reconciliation of income tax expense (benefit) computed at the appropriate country specific rate to income tax benefit is as
follows (in thousands):

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

Income tax benefit at statutory rate
State income tax benefit
Foreign tax activity

R&D tax credit expiration
Permanent differences, net

Adjustment of temporary differences to income tax returns
Change in valuation allowance

Tax rate change
Other

Income tax benefit

Years Ended September 30,

2018

2017

(4,111 ) $
(823 )
101
—
771
—
1,285
(1,545 )
(10 )

(4,332 ) $

(1,800 )
(192 )
41
—
469
—
1,403
—
—
(79 )

The significant components of the deferred tax accounts recognized for financial reporting purposes are as follows (in thousands):

Deferred tax assets:
Net operating loss and other carryforwards
Common stock options

Unearned revenue
Other

Total deferred tax assets
Deferred tax liabilities:

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 asset (liability) for goodwill and intangible assets amortization

September 30,

2018

2017

24,262 $
919
510
369
26,060

(103 )

25,957
(25,881 )
—
—
—
76 $

35,529
1,246
520
650
37,945

(146 )

37,799
(37,702 )
(916 )

(570 )
(2,940 )

(4,329 )

The Company has a $76 thousand and $97 thousand deferred tax asset at September 30, 2018 and 2017, respectively, recorded
within the prepaid expenses and other current assets and other long-term assets lines on the consolidated balance sheet and is
primarily related to net operating losses of MSKK.

At September 30, 2018, the Company had net operating loss carryforwards of approximately $102 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 2038.
For state tax purposes, the carryforwards expire in varying amounts between 2018 and 2038. 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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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
2018 and fiscal 2017, 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, 2018, 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. At September 30, 2018,
unremitted earnings of $1.0 million for foreign subsidiaries were deemed to be indefinitely reinvested.

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 $0 thousand at September 30, 2018 and $4.4
million at September 30, 2017, respectively. The remaining balance of the deferred tax liability related to goodwill was fully
written off as of September 30, 2018 as a result of the impairment. 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.

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, 2018 or September 30, 2017 and has not recognized any interest or penalties in the Condensed
Consolidated Statements of Operations for either of the years ended September 30, 2018 or 2017.

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.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (the "Tax Act"). The Tax Act, which is generally effective for tax years beginning on January 1, 2018, makes broad and
complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate
from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum tax (AMT); (3) bonus depreciation that will
allow for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) the repeal of the
domestic production activity deduction; (6) the creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) a
general elimination of U.S. federal income taxes on dividends from foreign subsidiaries and imposing a one-time repatriation tax
on deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the Transition Tax); (8) a new provision designed
to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a
deduction of up to 50 percent to offset the income tax liability (subject to some limitations); and (9) changing rules related to uses
and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017.

Shortly after enactment, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") which
provided US GAAP guidance on the accounting for the Act's impact at December 31, 2017. A reporting entity may recognize

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

provisional amounts, where the necessary information is not available, prepared or analyzed (including computations) in
reasonable detail or where additional guidance is needed from the taxing authority to determine the appropriate application of the
Act. A reporting entity's provisional impact analysis may be adjusted within the 12-month measurement period provided for under
SAB 118.

The reduction in the corporate tax rate to 21 percent due to the Tax Act is effective January 1, 2018. Consequently, the Company
has recorded a decrease related to the net deferred tax assets of approximately $1.5 million with a corresponding net adjustment
to the valuation allowance of approximately $1.5 million for the year ended September 30, 2018.

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 $365 thousand and $321 thousand during the years ended September 30, 2018 and
2017, respectively. The Company made no additional discretionary contributions during 2018 and 2017.

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. For purposes of the test, goodwill on the Company’s
books is evaluated within three separate reporting units.

The fair values of the reporting units were initially measured as of July 1, 2018, in accordance with annual testing procedures.
Goodwill related to all three reporting units, Sonic Foundry (Mediasite), Sonic Foundry International and Mediasite KK, was
found to be impaired. The Company recognized an impairment loss of $10.4 million, or the remaining balance of goodwill, as of
July 1, 2018. This non-cash loss was primarily due to the fall in the Company's stock price and the decrease of the Company's
market capitalization as well as past performance, which was deemed to have negatively impacted all three of the Company's
reporting units. As a consequence, management forecasts were revised and additional risk factors were applied. The fair value
of the three reporting units was estimated using a combination of market comparables (level 1 inputs) and expected present value
of future cash flows (level 3 inputs).

In fiscal 2017, the fair values of the reporting units were measured as of July 1, 2017, in accordance with annual testing
procedures, and were reevaluated at the end of Q4 2017 as a result of the decline in the Company's stock price during the quarter.
Goodwill related to the Sonic Foundry (Mediasite) and Sonic Foundry International reporting units was found not to be impaired,
however, the Company recognized an impairment loss of $600 thousand for goodwill related to the Mediasite KK reporting unit
as of September 30, 2017. This non-cash loss was primarily due to delays in expected growth related to partner relationships in
Japan, resulting in revenues and operating cash flows being lower than expected for the reporting unit in fiscal 2017. As a
consequence, management forecasts were revised and additional risk factors were applied. The fair value of the Mediasite KK
reporting unit was estimated using a combination of market comparables (level 1 inputs) and expected present value of future
cash flows (level 3 inputs). The Sonic Foundry (Mediasite) reporting unit, to which $7.6 million of goodwill is allocated, had a
negative carrying amount on September 30, 2017. This reporting unit is considered to be an operating segment on its own and is
not part of any other reportable segment.

See Fair Value of Financial Instruments section in Note 1 for additional discussion regarding fair value measurement of reporting
units.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

The changes in the carrying amount of goodwill for the years ended September 30, 2018 and 2017, respectively, are as follows:

Balance as of September 30, 2016
Accumulated impairment losses
Foreign currency translation adjustment
Balance as of September 30, 2017
Accumulated impairment losses
Foreign currency translation adjustment
Balance as of September 30, 2018

11,310
(600 )
(255 )
10,455
(10,423 )
(32 )
—

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 year ended September 30, 2018, it was determined that changes in circumstances were present,
primarily the decline in the Company's market capitalization during the fiscal year and past performance. For the year ended
September 30, 2018, the Company determined that intangible assets, consisting of customer relationships and product rights,
were impaired and recognized an impairment charge of $1.4 million. For the year ended September 30, 2017, it was determined
that changes in circumstances were present, primarily the decline in the Company's market capitalization during the fiscal year.
However, after performing analysis of undiscounted cash flows attributable to the Company's long-lived assets along with other
relevant factors, such as the continued use of the assets, it was determined that there was no impairment of long-lived and
intangible assets other than goodwill. Key assumptions utilized in the analysis of undiscounted cash flows for each asset or asset
group being tested included 1) whether cash flows were attributable solely to the asset or group, or to an entire reporting unit;
and 2) the useful lives of the asset or asset group. Forecasts used in the analysis were also consistent with those used in
determining fair value of reporting units during goodwill impairment testing.

The following tables present details of the Company’s total intangible assets that are being amortized at September 30, 2018 and
2017:

(in thousands)

Amortizable:

Customer relationships
Software development costs
Product rights

Total

(in thousands)

Amortizable:

Customer relationships
Software development costs

Product rights

Total

Life
(years)

Gross, Net of
Impairment

Accumulated
Amortization
at
September 30,
2018

Balance at
September 30,
2018

10 $
3
6

1,256 $
533
534
2,323 $

—
—
—
—

Life
(years)

Gross

Accumulated
Amortization
at
September 30,
2017

Balance at
September 30,
2017

10 $
3

2,495 $
533
672
3,700 $

990 $
533
411
1,934 $

1,505
—
261
1,766

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

9. Related-Party Transactions

The Company incurred fees of $212 thousand and $143 thousand during the years ended September 30, 2018 and 2017,
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 $60 thousand and $55 thousand at September 30, 2018 and 2017, respectively.

As of September 30, 2018 and 2017, the Company had a loan outstanding to an executive totaling $26 thousand. The loan is
collateralized by Company stock.

On January 19, 2018, the Company and a director entered into a Subscription Agreement (the “Subscription Agreement”).
Pursuant to the Subscription Agreement, (i) on January 19, 2018, the director purchased a 10.75% Convertible Secured
Subordinated Promissory Note for $500,000 in cash; and (ii) on February 15, 2018, the director purchased an
additional 10.75% Convertible Secured Promissory Note for $500,000 in cash (each, a “Note”, and collectively, the “Notes”).

On May 17, 2018, following approval by the stockholders of the Company of the conversion of the Notes sufficient to comply
with rules and regulations of NASDAQ, the Notes were automatically converted into 1,902 shares of Series A Preferred stock.
The
number of shares was determined by dividing the total principal and accrued interest due on each Note by $542.13 (the
“Conversion Rate”).

On April 16, 2018, the Company issued 232,558 shares of common stock to an affiliated party. The shares were issued at a price
of $2.15 per share, representing the closing price on April 13, 2018. On April 16, 2018, the closing price of the Company’s
common stock was $2.18 per share. The affiliated party also received warrants to purchase 232,558 shares of common stock at
an exercise price of $2.50 per share, respectively, which expire on April 16, 2025.

See Note 14 - Subsequent Events for additional information on subsequent transactions with a director of the Company.

Both the director of the Company and the affiliated party beneficially own more than 5% of the Company's common stock.

10. Segment Information

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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,

2018

2017

21,152 $
4,482
7,418
1,492
34,544 $

21,476
4,720
8,267
1,537
36,000

In the fiscal year ended September 30, 2018 and 2017, two distributors represented 17% and 26% of total revenue, respectively.
At September 30, 2018 and 2017, these two distributors represented 28% and 23% 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, 2018, 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, 2018 and 2017. The
operating results are not necessarily indicative of results for any future period.

Quarterly Financial Data

Q4-’18

Q3-’18

Q2-’18

Q1-’18

Q4-’17

Q3-’17

Q2-’17

Q1-’17

8,490 $
6,095
(12,900 )

8,699 $
6,395
(914 )

8,460 $
5,929
(1,259 )

(10,018 )

(1,020 )

(1,449 )

8,895 $
6,470
(966 )
320

8,300 $
6,113
(1,411 )

9,833 $
7,247
(371 )

8,560 $
6,064
(1,274 )

(1,585 )

(489 )

(1,456 )

9,307
6,709
(1,502 )

(1,509 )

(2.01 ) $

(0.23 ) $

(0.34 ) $

0.06

(0.37 ) $

(0.13 ) $

(0.33 ) $

(0.34 )

(in thousands except per share
data)
Revenue
Gross margin
Loss from operations

Net income (loss)
Basic and diluted net
income (loss) per share

14. Subsequent Events

In connection with the Loan and Security Agreement with Partners for Growth V, L.P. entered into on May 11, 2018, Tranche 2
of the Term Loan, in the amount of $500,000, was disbursed on November 8, 2018.

On November 15, 2018, 718 shares of Preferred Stock, Series A were automatically converted by the Company into 169,741
shares of common stock. The amount of shares converted represents all preferred shares issued on November 9, 2017.

Initial Notes of the February 28, 2019 Note Purchase Agreement

On January 4, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "Promissory Note") pursuant to which
the director purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash.

Interest accrued and outstanding principal on the Promissory Note is due and payable on January 4, 2020.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

The Promissory Note may be prepaid at any time without penalty.

The Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed below.

On January 31, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "January 31, 2019 Promissory Note")
pursuant to which the director purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash.

Interest accrued and outstanding principal on the January 31, 2019 Promissory Note is due and payable on January 31, 2020.

The January 31, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by
issuing common stock to the director, with each share valued at $1.30 per share.

The January 31, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed
below.

On February 14, 2019, Sonic Foundry, Inc. and a director entered into a Promissory Note (the "February 14, 2019 Promissory
Note") pursuant to which the director purchased a 9.25% Unsecured Promissory Note for $1,000,000 in cash.

Interest accrued and outstanding principal on the February 14, 2019 Promissory Note is due and payable on February 14, 2020.

The February 14, 2019 Promissory Note may be prepaid any time without penalty. The note may be paid by the Company by
issuing common stock to the director, with each share valued at $1.30 per share.

The February 14, 2019 Promissory Note was later included in the Note Purchase Agreement, dated February 28, 2019, as detailed
below.

February 28, 2019 Note Purchase Agreement

On February 28, 2019, Sonic Foundry, Inc. entered into a Note Purchase Agreement (the "Note Purchase Agreement") with Mr.
Mark Burish ("Mr. Burish").

The Note Purchase Agreement provides for subordinated secured promissory notes (the "Subordinated Promissory Notes") in an
aggregate original principal amount of up to $5,000,000. Mr. Burish will acquire from the Company (a) on the initial closing date,
the notes in an aggregate principal amount of $3,000,000 (the "Initial Notes") and (b) two additional tranches, each in the amount
of $1,000,000 and payable at any time prior to the first anniversary of the Agreement (the "Additional Notes" and together with
the Initial Notes, collectively, the "Purchase Price"). The Initial Notes were previously disbursed in January and February of 2019,
as detailed above (the Promissory Note, the January 31st, 2019 Promissory Note, and the February 14, 2019 Promissory Note,
collectively referred to as the "Initial Notes").

The Subordinated Promissory Notes accrue interest at the variable per annum rate equal to the Prime Rate (as defined) plus four
percent (4.00%). The outstanding principal balance of the Subordinated Promissory Notes, plus all unpaid accrued interest, plus
all outstanding and unpaid obligations, shall be due and payable on February 28, 2024 (the "Maturity Date"). Principal
installments of $100,000 are payable on the last day of each month end beginning with the month ending August 31, 2020, and
continuing through the Maturity Date.

The principal of the Subordinated Promissory Notes may be prepaid at any time in whole or in part, by payment of an amount
equal to the unpaid principal balance to be pre-paid, plus all unpaid interest accrued thereon through the prepayment date, plus
all outstanding and unpaid fees and expenses payable through the prepayment date.

At each anniversary of the Closing, an administration fee will be payable to Mr. Burish equal to 0.5% of the purchase price less
principal payments made.

The Subordinated Promissory Notes are collateralized by substantially all the Company's assets, including intellectual property,
subject to the rights of Partners for Growth V, L.P., which shall be senior to the Subordinated Promissory Notes.

The Note Purchase Agreement requires compliance with the following financial covenants: (i) Minimum Coverage Ratio, which
requires, as of the last day of each month on or after the closing date, the Minimum Coverage Ratio (as defined) to be equal to or
greater than (x) 0.7:1.00 for the December through May calendar months, (y) 0.9:1.00 for the June through November calendar

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

months; (ii) Minimum Qualifying Revenue (as defined), as of the last day of any calendar month, on or after December 1, 2018,
on a trailing twelve-month basis, to be less than $13,000,000.

The Note Purchase Agreement dated February 28, 2019 is subordinated to the existing PFG loan.

The Company used the proceeds from the notes issued under the Note Purchase Agreement to replace the revolving line of credit
with Silicon Valley Bank, which matured on January 31, 2019.

February 28, 2019 Warrant

Coincident with execution of the Note Purchase Agreement, the Company entered into a Warrant Agreement ("Warrant") with
Mr. Burish. Pursuant to the terms of the Warrant, the Company issued to Mr. Burish a warrant to purchase up to 728,155 shares
of common stock of the Company at an exercise price of $1.18 per share, subject to certain adjustments.

Partners for Growth V, L.P.

On March 11, 2019, Sonic Foundry, Inc. entered into a Consent, Waiver & Modification to the Loan and Security Agreement
dated May 11, 2018 (the "Modification") with Partners for Growth V, L.P. ("PFG"). Under the Modification: PFG waived the
Company's default on the Minimum EBITDA financial covenant for the quarterly reporting period ending December 31, 2018;
modified the existing financial covenants to be as follows: (i) Minimum Coverage Ratio (as defined), which requires, as of the
last day of each month on or after the closing date, to be equal to or greater than (x) 0.7: 1.00 for the December through May
calendar months, (y) 0.9:1.00 for the June through November calendar months; (ii) Minimum Qualifying Revenue (as defined),
which requires, as of the last day of each calendar month, on or after December 1, 2018, on a trailing twelve-month basis, to be
less than $13,000,000; and modified the negative covenants to be as follows: the Company (x) shall not cause or permit (a)
Japanese subsidiary indebtedness under its revolving line of credit facility to exceed at any time $1,000,000 outstanding, or (b)
aggregate subsidiary indebtedness to exceed $1,200,000 at any time.

Under the Modification, the Company is required to draw the next tranche of $1,000,000 in proceeds on the Note Purchase
Agreement (detailed above) on or before March 31, 2019 as well as the final tranche of $1,000,000 in proceeds on or before April
30, 2019.

The Modification acknowledges that Silicon Valley Bank, the named "Senior Lender" in the May 11, 2018 Loan Agreement has
been repaid and the related senior loan documents terminated.

The existing terms of the PFG loan in terms of amortization, interest rate, payment schedule and maturity date are unchanged.

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, 2018, 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). 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. Based on this evaluation, our principal executive officer

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2018.
See Management’s Report on Internal Control over Financial Reporting below related to the material weakness identified.

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.

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.

Based on this evaluation, our principal executive officer and principal financial officer concluded that our internal controls over
financial reporting were not effective as of September 30, 2018 due to an identified material weakness in internal control. The
material weakness relates to controls over identifying and performing an impairment analysis and the preparation of consolidated
financial information specific to the subsequent measurement of goodwill and long-lived and intangible assets as well as the
related impacts on the tax provision, which will be remediated in fiscal 2019.

In light of the material weakness described above, additional procedures were performed by our management to ensure that the
condensed consolidated financial statements included in this report were prepared in accordance with U.S. generally accepted
accounting principles.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent
registered public accounting firm, as allowed by the SEC.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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.

Remediation

We have made changes to our methods and processes used in evaluating the Company's goodwill and other long-lived and
intangible assets for potential impairment. The primary change in the current year will be timely preparation of the analysis
required by ASC topic 360 to analyze the Company's long-lived assets for impairment. Further, the Company has added personnel
with skills and experience in this area that will assist with the computation in future periods and will allow the Company to more
timely identify issues and resolve them prior to the calculation date. Further, technical training related to highly complex issues,
such as this, is now a requirement of personnel performing the evaluation. The Company's goodwill and the majority of the
company’s long-lived assets were fully impaired in fiscal 2018 and therefore, no longer require analysis. The only long-lived
assets remaining are property, plant and equipment items which are less subjective and complex than goodwill and intangibles.
Therefore, the ASC 350 test will no longer be performed and only the ASC 360 test will apply to the company in regard to the
property, plant and equipment long-lived assets. Additional technical training related to the tax provision (ASC 740 - Income
Taxes) is also now a requirement for personnel to ensure adequate review of the work performed by outside consultants. There
can be no assurances that we will fully remediate the weakness in controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 2018 Annual Meeting of Stockholders, which will be filed no later
than January 28, 2019 (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.

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.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2018

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 2017 and 2018 Audit Fee Summary” in the Proxy
Statement.

S O N I C F O U N D R Y . C O M

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.

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